Beyond The Commons

Aaron Wherry covers all the goings-on in and around Parliament Hill. Follow Aaron on Twitter: @aaronwherry

Categories: Beyond The Commons, Capital Read

Policy alert

by Aaron Wherry on Tuesday, March 29, 2011 10:12am - 211 Comments

Michael Ignatieff promises student aid.

The Liberal leader’s proposed “learning passport” would provide tax-free grants of $4,000 — or $1,000 a year for four years — for students across Canada to attend college or university. Students from low-income families would qualify for as much as $6,500 over four years, or up to $1,500 a year. The money would be provided through existing registered education savings plans, or RESPs, but families would not be required to make contributions. The funds would be held until the student decides to go to school.

Tags: college, election, Election 2011, learning passport, Michael Ignatieff, student aid, university

More by Aaron Wherry

noob_goldberg

Without getting into an extremely lengthy discussion, it can be summed up in a phrase: side-bets.

I was simply referencing the raw cost of sub-prime mortgages. However, these mortgages were bundled up into various securities, most notoriously Collateralized Debt Obligations. These CDO's were frequently rolled into still further Special Investment Vehicles, such as CDO^2 and CDO^3, which were basically bets upon bets upon bets. Impossible to model potential losses, which quickly became a concern during the crisis as no one knew where they stood.

CDO's, even when they were worth more than the entire sub-prime market, still probably wouldn't have taken down the financial system on their own, if it wasn't for Credit Default Swaps. These swaps basically linked all of the financial institutions together by betting on each other's financial health. Much like if I saw you smoking and took out a life insurance policy against you to benefit from your death.

When the CDO market went belly up, the CDS market had a heart attack, and suddenly there were huge liquidity concerns as everyone tried to net out their exposure to damaged financial institutions.

How's that for a short answer to a very complex question?

alfanerd

that's pretty good thanks. I was aware of CDOs, but not CDSs.

noob_goldberg

Credit Default Swaps are basically insurance policies without the nasty onerous capital reserve requirements. The main provider of CDS backing was AIG, but the company did not put up the capital necessary to fulfill their contractual obligations. This is the reason AIG was quickly taken over by the US government and required a $200 billion bailout.

alfanerd

most enlightening.

noob_goldberg

What's most disturbing is that the TARP program (and similar government bailouts) got such a rough ride in the media, but those loans were all repaid by financial institutions. The AIG Bailout, however, was a $182 billion non-repayable cash infusion into the firms that directly caused the crisis, and the media hardly raised a wimper.

I argued pretty vociferously at the time that the government should have paid out less than 50 cents on the dollar to really cause those companies pain instead of paying out 100% like they did. Or, conversely, the government should have taken over all of those financial firms and wiped out the bondholders.

As it stands, we're now at the point of moral hazard writ large in the financial community. This is why the financial crisis is far from over, but simply dormant.
alfanerd

yeah its not clear that lessons which needed to be learned got learned.

but it remains that unless banks are pushed into marketing a product of dubious value like sub-prime mortgages, they wont do it, and even based on your explanation, the very root of the collapse was the subprime mortgages – it did not need to be as big a collapse as it was, but ultimately that is what caused it.

im sure you've heard of NINJA mortgages. these would never be approved if there was not a legislative incentive to do so and the ability for a financial institution to hide the risk associated with it and pass it on to somebody else.
noob_goldberg

I have a hard time pointing at a specific cause, and I hope you're not getting the impression that I'm happy with the sub-prime fiasco. Far from it; it was an absolute abomination of lending standards. While various political decisions did come into play, I'd probably put a huge portion of blame on Alan Greenspan and his crazy manoeuvres with interest rates after 9/11.

By slamming down interest rates for such a long period he basically forced the banks to find a mechanism to shift some of their loans (which everyone wanted because of low interest rates) into assets, which they could then lend against. Banks, of course, have a capital requirement that they have to maintain, so if there is low savings rate and high demand for loans they can quickly get to the position where they aren't able to lend out money because they don't have the assets to back it. So they came up with fancy ways of selling off a package of loans to a buyer so they could put that down as an asset, and then use that to generate more loans.

In short, the banks used a very old financial tool–securitization–and totally abused it in the desire to increase the amount of money they could lend. Sub-prime occurred near the end of this for the simple reason that banks were running out of things to originate and lend against. And I do blame that mostly on Alan Greenspan's actions between 2000-2001.

Jenn_

That was really interesting. I'd delved into this before, but this was the first I've seen with the path going the other way. In other words, all other explanations START with Credit Default Swaps.

I think your way is easier to follow

noob_goldberg

Thanks, Jenn_! The easiest way to follow the path of destruction is to look at the order in which companies started collapsing. Bear Stearns collapsed because of their exposure to mortgage-backed securities, specifically CDO's, combined with their exposure to the short-term paper market that necessitated they roll over all of their debt on the overnight market (or at least a large portion). As soon as they started having problems, no one would participate in the debt market with them and they were dead within a week.

Lehman Brothers collapsed for similar reasons, but had less exposure to CDO's but greater exposure to more generic sub-prime Mortgage-Backed Securities, and that's why it took longer. They also had more cash available and weren't leveraged as highly as Bear Stearns.

Goldman Sachs actually bet against the CDO/MBS market, which would have put them ahead, but had so much exposure to Credit Default Swaps that no one knew if they were going to benefit or lose.

AIG collapsed because of Lehman and the capital necessary to put up against their CDS losses. The government had no choice but to bail out AIG, or the entire system would have collapsed overnight. Even with the bailout, it was touch and go for a while.

I'm still over-simplifying here; one of the best summaries I've read is Andrew Ross Sorkin's overview of the whole time period.
http://www.amazon.com/Too-Big-Fail-Washington-Sys…

WDM

Will be interesting to see the impact of this. While younger Canadians are much less likely to vote than those older, they can be an important demographic when they're clustered on University campuses. However, most will be back in their home ridings by May 2nd. Not necessarily thinking about how this impacts big schools, but it would be interesting too see the impact in places like Peterborough.
noob_goldberg

Without a doubt, one of my favourite movies of all time. :)
http://halooverride.blogspot.com/ Halo_Override

There are good students in management and the sciences, but mostly they are full of emotionally-stunted dollar-chasers without the imagination or skills to deal with life in its entirety and who prefer to hide in their little self-important niches pretending to contribute something non-ephemeral.

I could do this all day! Such fun.

alfanerd

I actually agree with your assessment of the majority of management and science students.

But it does not matter, unlike those other arts grad, these emotionally stunted dollar chasers contribute to society.

http://halooverride.blogspot.com/ Halo_Override

I suppose you could be right, given that there are many different and subjective, and sometimes dangerously myopic, ways to define "society".

I wonder what kind of post-secondary educational faculty one would have to enroll in to research and discuss those different definitions? No matter, there's probably not much cash in it.

Thwim

Sure they have to take responsibility. But remember that an election is a comparison. What they've presented so far, and that once it's had a chance to be critiqued they actually adjust based on the content of those critiques, is a good thing.

Certainly far better than the "ignore, obfuscate, deny & full steam ahead" approach we've seen from the CPC.

http://secondthots.blogspot.com Dennis_F

It's one thing to get feedback on policy, it's another not having done basic homework. Amazing how so many of you are quick to dismiss incompetence simply because your side is doing it. Meanwhile, look at all the vicious accusations you make at Harper. This makes for good approach to governing, does it? We can do anything we want, the other guys are complete idiots. This is what passes for political dialogue around these parts, I guess.

alfanerd

fact that I was stealth-Godwinning you for humorous effect.

Touché.
Lizz

Healthy educated people are the backbone of a nation : a good step in the right direction from Mr. Ignatieff.
FVerhoeven

At work, one of my co-workers is an eighteen year old girl who wants to go on to SAIT after highschool.

But she was telling me the other day, that during social classes, and when learning about the Canadian political system, the teachers/instructors would sometimes openly declare Harper's Conservatives to be bad for this country.

I found that unbelievable. But I don't find my co-worker to be a lier. In fact, I told her the other day that for her age she is a very competent worker and if I were to run my own business I would have no problem hiring her.

And so, if anything, I found her remark about teaching techniques a bit disheartening.
Jan

Geezus I thought you were already at the bottom of the barrel.