Giant Pool of Money

In: Business and Management

Submitted By jayrefer1
Words 898
Pages 4
The Giant Pool of Money
The individuals in the radio story fell prey to the confirmation bias/heuristic and availability bias/heuristic. The confirmation bias refers to “The tendency to search for or interpret information in a way that confirms Preconceptions”.

The giant pool of money, which refers the subset of global savings allocated for fixed income securities, amounted to $70 trillion in 2006. In this case, the central banker held fed interest rate to a low level of 1%. The global army of investment managers, who managed the $70 trillion giant pool of money, wanted a low-risk high-return investment as the US treasury bonds didn’t look attractive at 1% interest. These investment managers invested in mortgage backed-securities (MBS) via big investment firms at Wall Street. Mike Francis, executive director at Morgan Stanley on the residential mortgage trading desk, sold financial instrument MBS to the global pool of money. To meet the high demands of global pool of money for MBS, Mike Francis needed to buy as many mortgages as possible to make MBS. Mike bought mortgages from mortgage banks and repacked them to MBS. People like Mike Francis were link to the global of money.

Mike Garner, an employee at Silver State Mortgage, the largest private mortgage bank in Nevada, bought the individual mortgages and bundled 200 or 300 of them together, and then sold them up the chain to Wall Street investment banks, to guys like Mike Francis. The pool of money demand for these bundled mortgages was increasing. Mike Garner’s bank had to lend to people who would not qualify for traditional loans. Many of these people had no income and no assets. Mike Garner’s bank lowered the standards to issue as many as mortgages. People didn’t have to show W-2 to get loan approval from Mike Garner’s bank. Mike Garner approved more and more risky loans as he and other employee were paid…...

Similar Documents

Bankruptcy of a Retail Giant

...Bankruptcy of a Retail Giant Blunders by former Chairman Charles Conaway and President Mark Schwartz led Kmart into bankruptcy. The retailer had to close 284 stores, including this one in Novi, and lay off 22,000 workers. They lived the good life of gated estates, a 47-foot yacht, corporate jets at their beck and call, and multiple pay hikes, perks, bonuses and loans. But even as Kmart Corp. struggled for survival, its chairman, Charles Conaway, and president, Mark Schwartz, wanted more, renegotiating employment contracts that would ultimately net them a combined $34 million in less than two years. Conaway and Schwartz, the leaders of the $37-billion-a-year retail giant that lost $3.9 billion in its past five quarters and laid off 22,000 workers this year, were the central figures in the company's demise. Their management blunders led Kmart into bankruptcy, and questions abound as to whether they hid the company's financial condition from its board of directors, employees and shareholders. But one thing is clear: As Kmart spiraled downward, Conaway and Schwartz grew richer. With Kmart mired in bankruptcy, the payouts to Conaway and Schwartz came under scrutiny in a federal criminal investigation of accounting practices. Federal investigators zeroed in on the personal finances and compensation deals struck by Conaway, Schwartz and other former Kmart executives in the months leading up to the company's Jan. 22 bankruptcy filing in Chicago. The Kmart......

Words: 726 - Pages: 3

Giant Pool of Money

...The Giant Pool of Money 1) Drawing on what you learned in Session 1 and the readings that are assigned for Session 2, identify two psychological processes or biases exemplified by the individuals in the radio story that contributed to the subprime mortgage crisis. (At least one of the two processes that you write about should be taken from the Bazerman and Moore reading from Session 1. 2) Ignoring the actual regulatory context of the industry, design an institutional repair that might help prevent one of the processes you identified in part 1. The mortgage crisis triggered a severe global economic recession in 2008. It resulted in the collapse of the housing market, failure of key businesses, and a decline in consumer wealth. The crisis was caused because of the widespread use of financial products such as Mortgage-backed securities (MBS) and Collateralized Debt Obligations (CDO) without accurate evaluation of the risk of the underlying mortgages they represented. As the “Giant Pool of Money” shows, one major bias exemplified by the individuals was “confirmation trap”. Credit rating agencies rated MBS as “AAA” implying they were as safe as US Treasury Bonds which were the traditional investment choice of the global pool of money. The data used for this rating was based on relatively recent history of mortgages with low foreclosure rates. However this data did not apply to the new kinds of mortgages that were being issued. [1] The use of irrelevant data caused......

Words: 929 - Pages: 4

Pool and Spartin

...and take-up Case 3-3: Pool Inc. and Spartin Ltd. Objectives of the Case This case is intended to illustrate some of the different ways in which a business combination can be effected, and the fact that the form of the combination does not affect the substance of the transaction. The financial reporting for the transaction should follow the substance rather than the form. Analysis of Alternatives Prior to the combination, Pool has 1,600,000 common shares outstanding at a market price of $33 per share. Spartin has 1,200,000 common shares outstanding with a market price of $20 per share. In the combination, whatever the form, new shares will be issued in the ratio of two Spartin shares to one Pool share. The alternative exchanges would have the following results: Alternative 1: Pool will issue 600,000 new shares in exchange for Spartin’s shares. Pool will then have 2,200,000 shares outstanding, of which 1,600,000 (73%) will be held by the original shareholders of Pool and 600,000 (27%) will be held by the former shareholders of Spartin. Spartin will still have 1,200,000 shares outstanding, all of which will be owned by Pool Inc. Pool is the legal acquirer, and also is the acquirer in substance. Alternative 2: Spartin will issue 3,200,000 new common shares in exchange for Pool’s shares. After the exchange, Spartin will have 4,400,000 common shares outstanding, of which 3,200,000 (73%) will be held by the former shareholders of Pool and 1,200,000 (27%) will...

Words: 722 - Pages: 3

Giant Pool of Money

...Giant Pool of Money Analysis The awful subprime lending crisis is truly one of the most convoluted, wreaking messes conjured by the financial industries in the 20th century. There are so many layers of bad choices and megalomaniacal errors intertwined into this ugly event that picking out just two biases/heuristics to analyze and discuss will surely fail from being a complete analysis. Nonetheless, this is a the task at hand and, though we will not but scratch the surface of this behemoth, teasing out a couple biases will make for a viable illustration and application of the concepts and issues we have discussed thus far in class. The bias that caused the most havoc in this lending crisis scenario was articulated beautifully by Bazarman and Moore as The Confirmation Trap. The Confirmation Trap boils down to whether or not a person merely searches for data that supports the decision they wish to make rather than looking for proper, empirical data to prove the assumption correct. In other words, does a person looking to make a decision actually look to prove their assumption incorrect. Sadly, at nearly every stage and at every level of the subprime lending fiasco there is evidence that all the players fell victim to The Confirmation Trap. Wason writes, “ . . . that obtaining the correct solution necessitates a willingness to attempt to falsify hypotheses, and thus to test those intuitive ideas which so often carry the feeling of certitude.” None of the characters in......

Words: 1419 - Pages: 6

Pool

...Swimsuit The text swimsuit is a short story written by Jasmin Cargil. In the beginning of the story you can read about the main character Darla, who is at a pool party. A couple named Trevor and Mandy is hosting the pool party, and she was there with her boyfriend Jon. She is not wearing a swimsuit, and when Trevor tells her to join them in the pool, she would not do it. She lies and tells him that she did bring a swimsuit, and that she will join them later, but afterwards she thinks loudly that she did not bring any swimsuit because she hates to show her own body. She has a low self-esteem at that point, and I personally think that is has something to do with her relationship with her boyfriend Jon. He is not a sensitive guy, and she dose not take their relationship seriously: “Darla had realized earlier in the car that, if her relationship with Jon was not going to last, she would not really care much” she is ice cold, and she is tries to hide all of her feelings, by holding them back. When she finely tries to open up at the end of the story, she does it in an awkward way, by doing the exact opposite of what of what she do not like, and it was that she showed her naked body to the host Trevor. Darla, as mentioned earlier, is a very cold hearted person who does not really care about her boyfriend Jon that much, but he is not different from her. At the first page line 21 is the first example of their cold hearted relationship. Darla went to the bathroom the take an......

Words: 877 - Pages: 4

Giant Pool of Money

...Giant Pool of Money In this radio story about the events leading up to the subprime mortgage crisis, it’s clearly demonstrated that a few psychological biases and heuristics were present and played important roles in forming the crisis. The most critical ones I’ve identified are the confirmation bias and the social proof phenomenon in the development of the crisis. Confirmation Bias Mainly two types of confirmation bias were observed in the subprime crisis: the confirmation trap as well as anchoring heuristics. Anchoring caused the banks to miscalculate real risks of the mortgages and related MBS/CDO, while the confirmation trap caused most people in the industry to ignore potential risks and keep playing the dangerous game. Bazerman and Moore defined the anchoring heuristic as “Individuals make estimates for values based on an initial value (derived from past events…), and typically make insufficient adjustments from that anchor when establishing a final value.” And the Wall Street banks made exactly this mistake leading up to the mortgage crisis. When estimating the default rate for subprime mortgage products, Wall Street banks used historical data which indicated an average default rate of 2%, then extrapolated to estimate the absolute worst-case scenario to be at worst 10% to 12%. However, such anchoring is misleading because most of the data were years old were based on loans with strict income, asset and credit requirements. On the contrary, the subprime loans on......

Words: 1006 - Pages: 5

The Giant Pool of Money

...Brooklyn, I went to a completely different kind of gathering. It was not black tie. It was put on by the Neighborhood Assistance Corporation of America. It was people on the opposite side of the mortgage crisis, people facing foreclosure, trying to figure out how to keep their homes. I met this one guy, Richard. He's a marine. He's this big guy, over six feet tall. And when he came back from Iraq a few years ago, he bought one of these fancy new mortgages with an adjustable rate. Recently his rate reset. It has gone up by more than $2,000 a month. And he has fallen behind on his payments. Richard It got to the point where-- one point, my son had $7,000 in a CD. And I had to break it. And I mean that really hurt, because I was saving that money for his college. I mean, I put $2,000 back. But it's like you can't have a future. They put you in a situation where, after a while, you're going to fail. It's hard. Adam Davidson Now, it's clear that these two groups are connected, Jim at his black tie dinner and Richard the marine. The sub-prime crisis has connected them. Ira Glass Right, and I know that, basically, this is what sent you and one of the producers of our show, Alex Blumberg, on a big reporting mission these past few months. You saw that, that there is this long chain of people that starts with these Wall Street guys and ends with people who stand to lose their houses. And all along that chain there were bankers, and brokers, and investors, and homeowners. And......

Words: 10454 - Pages: 42

Slaying the Giants

...Lyn Bell Dr. John Warren Spiritual Warfare Slaying the Giants in Your Life What are the giants in your life? David Jeremiah reminds us that we have giants in our lives like David, Moses, Abraham and others. The giants in our lives have different names of fear, loneliness, doubt, discouragement, failure, jealousy, worry, anger, guilt, and procrastination. Just like the biblical ancients overcame their giants, we too must overcome our giants. In doing so we must allow God to help us in the process in knowing that He is with us and will empower us in overcoming. Fear Fear is a major problem in the land of the giants. This giant comes in so many forms. Fear has gripped us all at some point in our lives. Thousands are affected daily in some type of fear or another. But fear is a common part of the fabric of living. Fear gives us burst of strength and speed when we need and is a good thing in a survival instinct situation. When fear becomes negative it then becomes a phobia. This is when fear and reason does match up. When fear becomes ill rational, it becomes a shackle that bind us and put us into bondage. This bondage will keep us from the routine things in life of working, playing, living and serving God. There are so many varieties of fears. This is a listing of six general categories that we face in fear: poverty, criticism, loss of love, illness, old age and death. When we read the bible we can see that those living in biblical times often......

Words: 6806 - Pages: 28

Giant Pool of Money - Review

...The Issues The radio program draws an overall picture of the subprime mortgage crisis, how the subprime market was created, how the crisis happened, what were the result and its impact. (See appendix A - my summary of the case) The primary issues in this case are: why did the Wall Street bankers blindly trust that the risky mortgages were good assets to invest into? And why did everyone involved allow the whole thing to go this far? The Analysis The Wall Street bankers ignored the fact that the mortgages were risky is mainly due to the confirmation bias, specifically, the Anchoring Heuristic. Bazerman and Moore’s (2009) defines the Anchoring Heuristic as “Individuals make estimates for values based upon an initial value (derived from past events, random assignment, or whatever information is available) and typically make insufficient adjustments from that anchor when establishing a final value”. It was exactly what Mike Francis did when he made the decision to invest in the mortgages-backed securities. Facing the pressure to find new types of investment for the investors, he looked into the historical data of mortgages, and concluded that because the no income loans existed so far performed well, they would not have much risk in the future. His reasoning was flawed. The historical data set him the wrong perception and it anchored in his mind. Bazerman and Moore further argue that people tend to think that the subsequent information is in consistency with the preexisted......

Words: 319 - Pages: 2

Pool

...Pool "Pool" is a short story written by Corey Campbell in 2009, about the young woman Darla at a pool party. Darla is a woman, I suppose, in her twenties. Her appearance is not described, it has all been left to your imagination, but when she puts on the swimsuit, we hear that the gold rings meet her collarbones, and that it doesn't fit her, so her body must be fit. Her relationship to getting married and settle down is a bit tense."I'd be horrible at it. I'd probably start drinking. I know I would (..) I don't know how you do it" L. 80, p. 10 and l. 176, p. 12. Every time they talk about having kids and getting married, whether it's to Mandy or Trevor, the couple they are visiting, she gets a bit defensive, thinking it sounds impossible and especially in such a young age. Darla and her boyfriend had a accident with a broken condom, where they bought a morning-after pill. She was nearly being drawn into the universe that she takes so much distance from. Darla has made up her mind that having kids and getting married, isn't her thing, and she has many prejudice about it. Darla's boyfriend is Jon, they have been together just under a year. Darla and Jon's relationship seems good on the outside, but on the inside, Darla knows that the relationship won't last, which actually is the thing she likes the most about him. Jon touch her in a gentle way, and ask her if she is okay. This makes him look like a good partner, but he also pushes her to do things she doesn't want to,...

Words: 718 - Pages: 3

Pool

...Essay about "Pool" by Corey Campbell We've all tried to be in that kind of relationship which didn't really fitted us, growth us or made us happy. Where the relationship was going okay, but never really was enough. The insecurity in the relationship affects the persons in it, and truly gives a lower self-esteem. It makes the person insecure and at the same time it brings a lot of frustration, and the relationship is never really able to make anybody happy. In the short story "Pool" from 2009, we here about a young couple named Darla and Jon, who is at pool party at their friends' house named Mandy and Trevor. The day before Darla and Jon had a accident in bed and out of fear they went to the pharmacy to get a morning-after pill. Even though they chose not to talk about it, the whole episode affects Darla's experience of their visit at Mandy and Trevor's. Darla is acting irritated at Jon, and it seems like Jon doesn't take the accident yesterday seriously. Darla finds out the two couples live totally different lifestyles and that she would have a tough time living like Mandy, only focusing on being a mommy. The others in the pool try hard to get Darla in there with them, but she uses the excuse that she hasn't brought any swimsuit. At last she's borrowing a swimsuit from Mandy. Here Trevor tells Darla that he knows about the morning-after pill and he makes approach to Darla. They talk about his marriage and that it's not all love and harmony, and afterwards Darla......

Words: 1143 - Pages: 5

Giant Pool of Money

...The Giant Pool of Money Analysis The housing crisis that occurred less than a decade ago is a great example, and has become an extensively covered case study, of how dangerous certain biases and heuristics can become if left unchecked on a massive scale. Alex Blumberg and Adam Davidson, in collaboration with NPR News, put together a special program titled “The Giant Pool of Money,” where they explore just how the phenomenon occurred and the underlying factors that contributed through sound bites of those directly involved, affected, or simply aware of the situation as it unfolded. Based on descriptions of various biases and heuristics in Judgment in Managerial Decision Making (Bazerman, 2009), the two biases that prolonged and strengthened the housing crisis in a significant manner can be seen in the “Ease of recall” bias stemming from the “Availability Heuristic,” as well as the “Anchoring” bias coming from the “Confirmation Heuristic.” Bazerman and Moore define the “ease of recall” bias as one where “individuals judge events that are more easily recalled from memory, based on vividness or recency, to be more numerous than events of equal frequency whose instances are less easily recalled.” The housing market and real estate had been doing quite well since the “Dot-com” boom and bust had rattled markets in the late 1990’s. Housing prices were continually increasing, and “lots of people in the mortgage industry had this faith that housing prices in the US simply never go......

Words: 1034 - Pages: 5

A Caffiene Giant

...A Caffeine Giant: The Growth of Starbucks Abstract This paper examines Starbucks’ plan for rapid and thoroughly aggressive expansion in order to become the premier coffee ship in the United States and further, the World. Building upon a brand name that is recognizable worldwide, Starbucks continues to defy expectations, as it claims the title of the fastest growing fast-food company in the world (Horovitz, 2015). This paper provides a comprehensive analysis of Starbucks 7-year plan for growth (Tobey, 2014), and compares it to Quelch’s periodical on the demise of Starbucks (2008); suggesting that Quelch’s assessment that Starbucks growth destroyed its brand is misguided and inaccurate, while the opposite is then true. A Caffeine Giant: The Growth of Starbucks As the premier marketer of coffee and coffee products in the United States, Starbucks, an American corporation founded in 1971, is reaching new peaks as a global powerhouse, a seemingly unprecedented achievement following a slump in sales from 2008 to 2009. What makes this climb more magnificent is that it does so while competing against fast food giants such as McDonalds, Subway, and Burger King (Horovitz, 2014), dominating its competitors within its respective industry. John Quelch surmised that the slump Starbucks faced in 2008 was due to over expansion and a turn away from those consumers who wanted premium coffee with a personal experience (2008), when in......

Words: 1084 - Pages: 5

Float Pool

...Float Pool Nurses The health care environment is evolving and organizations are working to adapt to the changing needs of their patients (Larson, N, et al 2012).One area on which many hospitals are focusing is the creation and use of flexible resources (Larson, N, et al 2012). The Hospital I work at, also adopted that idea and started expanding on the Nursing Float Pool to help with the staffing needs. When I came to the position of managing the Nursing Float Pool, there were only 7 Nurse that floated between certain units. Currently we are at 60 nurses that are able to float to 20 different units. Flexible resources such as float pool nurses help hospital leaders, staff units effectively while also allowing adjustment to the changing needs of the patient population (Larson, N, et al 2012) Additionally, as hospitals face continuing economic and regulatory restraints, nursing leaders are being challenged to maintain safe nurse-to-patient ratios, decrease patient length of stay, and manage increasing patient acuity (Larson, N, et al 2012). ). In California we have a nursing ratio and it is important that we make sure we stay within ratio to provide safe patient care. This article that I have found on CINAHL is a study that was done on the bases that Float Pool nurses receive difficult assignments compared to regular staff nurses. Although results of this study were not statistically significant, a trend was shown of float pool nurses receiving more difficult assignments......

Words: 463 - Pages: 2

Motel Pool

...I have decided to analyze Motel Pool by: P.K Page. This poem relates to me the best because the topic is about summer and paints a picture about the season through the use of words. This poems imagery, metaphors etc. successful create and illustrate an interesting story for this poem. The author’s choice of words is interesting when describing the image of summer. This sentence “The plump good-natured children play in the blue pool: roll and plop, plop and roll;” sticks to me the most with imagery. It points out that kids are like plump shaped; meaning the kids have a rounded form assuming that they are out of shape since she is referring to them “as otters”. In an overall look at this poem it has strong words that helps me paint a picture; another example of that would be “Not beautiful, but suddenly limned with light; their elliptical wet flesh in a flash reflects it” this sentence uses words like, “limned” (depiction) of the light helps to see the “elliptical” (round) wet “flesh”, assuming its mentioning the obese kids earlier having fun in the summer weather. And finally the last sentence in the poem relating to summer: “and it greens the green grass, greens the hanging leaf; greens Adam and Eden, greens little Eve.” Mentioning green grass and the Adam and Eden reference creates and depicts a beautiful vivid picture about the feel. The poem does a good job of creating imagery, metaphors, etc. to help create a stunning poem about summer....

Words: 257 - Pages: 2