Stevielyn's Page

   Insights From Outsiders

There are always outsiders in any society, whether it be communist or capitalist. They always exist.  These people don’t have the “normal” traits and personalities as the rest of society and are outcasted for it.  Even though these outsiders are casted into isolation by others, they can offer the greatest insights and are significant to the growth of society.

An illustration of an outsider in society

Outsiders are significant because they usually have different characteristics than the vast majority of society and, in turn, offer different insights and perspectives on certain aspects or ideas in life.  Outsiders have the ability to easily think outside of the box and bring new ideas to the table; ideas beyond others’ imaginations.  With new ideas, comes change, and with that comes growth.  

To some, outsiders are considered to be more of a threat than an asset. Those who feel threatened are the “normal” people who are afraid of change and who fear their established systems will be corrupted by the ideas of outsiders. Although these ideas may be great and resourceful, they are often rejected solely because they come from a threat, the outsiders.

In the book, “The Big Short” by Michael Lewis, one of the main characters, Steve Eisman was an outsider, even though his parents were both brokers at Oppenheimer Securities.  Steve Eisman studied law at Harvard before he realized he hated it and got involved with Wall Street instead as “an equity analyst, working for the people who shaped public opinion about public companies”(Lewis).  His parents were forced to pay his salary for a whole year until the higher ups of the company decided if he was worth hiring.  He was an outsider because he did things the way he wanted and had no filter on what he said. In the newly competitive subprime mortgage market, Steve Eisman began to question and criticize Goldman Sachs and other financial institutions which was almost unheard of. He hired an accountant named Vincent Daniel to help him expose these companies and their use of subprime mortgage loans, regardless of what others thought.  

Although there are a great number of people who are threatened by the ideas that come from outsiders, there are others who encourage and embrace them. For example, Dr Hans Prinzhorn and Dr Walter Morgenthaler were the first to publish serious studies of psychiatric works among their patients.  To conduct a study like this was definitely unheard of and risky, but they continued anyway.   “Outsider Art emerged from the work of a few enlightened psychiatrists in the mid and late nineteenth century. Gradually it became clear that some psychiatric patients were spontaneously producing artworks - often on found scraps of paper - of unusual quality and power”(Raw Vision).  

This is one of Adolf Wolfli's works.

Dr Walter Moregenthaler’s first published study consisted of works created by one of his patients named Adolf Wölfli, who lived most of his life in a Swiss asylum called Waldau.  Adolf spent 30 years creating hundreds works of art that depicted “ a whole alternative reality from his tragic life” (Raw Vision).  Even though Adolf had undergone a rough life he was still able to see the good in life itself which is also another threatening quality of an outsider; to be able to see the greater good in not only people but life as well.  Although no one else in the society at the time saw any purpose of these mentally ill patients, except for Dr Prinzhorn and Dr Morgenthaler, one man named Jean Dubuffet did. He realized that these extremely creative works were not only among the mentally ill but other outsiders as well.  Jean Dubuffet “strove to seek out and collect works of extreme individuality and inventiveness by creators who were not only untrained artists but often had little concept of an art gallery or even any other forms of art other than their own. None were professional artists or had contact with the art world and all were completely untrained. They included mediums, isolates and fierce individualists as well as psychiatric patients”(Raw Vision). 

By searching for unusual art and unique talents among outsiders, Dubuffet created an art genre that was first known as ‘Art Brut’ (meaning uncooked by culture), which later lead to the introduction of the term “Outsider Art”.  This lead to a great movement and growth in art and today “Outsider Art has now established itself as a vibrant component of contemporary art and large collections can be visited in Europe and the United States where exhibitions of Outsider Art are held regularly in major art museums”(Raw Vision). All it takes is one outsider to express their ideas to start a movement of growth.  The outsiders’ drawings started on little scraps of papers and has now been exhibited in major art museums across the world, and to think that these artists were discredited by so many because they were outsiders. They were judged not by their abilities or their artistry but on their social statuses/acceptance. Outsiders are so versatile in their ideas and that is one of the main reasons why are society had progressed so immensely, but many fail to acknowledge this.  When you really think about it these artists continued their works, and the psychiatrists continued there studies disregarding others’ views, as did Eisman, and, in the end, were rewarded.   

http://www.youtube.com/watch?v=Jk0PndXxSoQThis video elaborates more on outsider art.

              As I mentioned before, outsiders see the greater good in life and in people as well.  I once knew I girl many years ago who may have been an outsider but was one of the greatest and most optimistic people I have ever met.  Many did not like her but I always did.  Her name was Maya    and was a student in a special education program at my middle school and was always ridiculed for not only her appearance but for her troubled speech too. But regardless of all the negative commentary the “normal” kids threw at her she always found a way to pay them a compliment in exchange. She never bad mouthed them but only wished them prosperity in anything they did.  For example,  I remember one afternoon Maya had asked my science teacher, Mrs. Antoniu, a question, “Mrssss. A-aa-ntonn-uu, caa-an you pp-pple-aase expla-aain the laa-aab again?”  The teacher gladly explained herself once more for Maya, but during the process, an immature 13-year old boy named Billy who was sitting next to me, began imitating Maya’s slurred speech.  I scowled at him to stop, but he continued.  Maya was definitely aware of Billy’s mocking, but did not let it affect her one bit.  In fact, when Billy was lost and had a question about the lab, Maya willingly offered to help him, and saved him from failing that day’s worth of work.  Just like Eisman in “The Big Short,” Maya never payed attention to what others thought of her actions  and just pursued them anyway.  She never held people to their wrongdoings but always found the greater good in people, which I truly admire.  Most of the “normal” people today, can not forgive those who trespass against them, let alone help them genuinely.  Many of these “normal” people are naive and hold meaningless grudges with people over petty arguments or disagreements.  Now I realized why everyone outcasted her, not only because they were ignorant, but because she achieved something unfathomable to them, total forgiveness.

Outsiders offer great insights that are useful to society’s growth and, in addition, are great people who see the greater good in life.  Outsiders are outcasted because people fail to realize how much of an asset they are to technological growth, advancements, and in humanity as well.      “There are people who are generic. They make generic responses and they expect generic answers. They live inside a box and they think people who don't fit into their box are weird. But I'll tell you what, generic people are the weird people. They are like genetically-manipulated plants growing inside a laboratory, like indistinguishable faces, like droids. Like ignorance.”(C. Joybell. C).  Just as Joybell, the author of The Sun is Snowing, has said in this quote,  “normal” or generic people outcast those who think differently and outside of the box.  They do this out of ignorance, and in my opinion, jealously too.  Generic people envy because these outsiders bring better, more innovative ideas to the table than they can.  Us, as a society, need to stop outcasting these people and start recognizing them and their great insights.  We need to disregard our ignorant ways, and embrace these outsiders as the equals they truly are.

Works Cited

"C. JoyBell C. Quotes." C. JoyBell C. Quotes (Author of The Sun Is Snowing). N.p., n.d. Web. 13 Dec. 2013. <http://www.goodreads.com/author/quotes/4114218.C_JoyBell_C_>.

Website

I used this website to find quotes about outsider to tie into my concluding paragraph.

"Dont Call Me Crazy: How We Fell in Love With Outsider Art." YouTube. YouTube, 31 Mar. 2010. Web. 13 Dec. 2013. <http://www.youtube.com/watch?v=Jk0PndXxSoQ>.

This video is great and full of information.  It really goes into depth about outsider art, and shares the views of those who really appreciate it. 

Gaskell, Adi. "When Being an Outcast Can Be a Positive Thing." Adi Gaskell on Social Business When Being an Outcast Can Be a    Positive Thing Comments. N.p., n.d. Web. 13 Dec. 2013.<http://www.adigaskell.org/blog/2012/09/15/when-being-an-outcast-can-be-positive-thing/>.

I used this website to help give me a better look on reasons why actually being an outsider is benefical and not just looked at as a negative thing. 

Lewis, Michael. The Big Short: Inside the Doomsday Machine. New York: W.W. Norton, 2010. Print.

This is the novel we read and the theme of the whole essay is derived from this book.

"What Is Outsider Art?" Latest News. N.p., n.d. Web. 11 Dec. 2013. <http:// www.rawvision.com/what-outsider-art>.

This website taught me all about outsider art, how it began, where it is today, and the process along the way.  

Michael's Page

 

The Consequences of Greed

            In Life, many take action and to every action there is a reaction. When someone partakes in an action they must understand that there is a consequence to that action. In Michael Lewis’ book the Big Short, this theme comes into play many times.  However, the actions in the book are far more costly than an action that an average individual like you or me would make. One wrong move and a company could lose everything. Michael Lewis tells of many corporate leaders and how their greed is what led us to the use of Subprime mortgage loans that caused the U.S. Financial Crisis in 2008.

            The Subprime mortgage loan was the beginning of the end. These were loans that tricked lower middle and lower class Americans into signing into these loans in order to get out of their debts from credit cards, or auto loans, by making all of the payments under one payment through refinancing. According to Michael Lewis, in his book The Big Short, they did so by promising them a fixed rate of 7% which lenders called a “teaser rate.” This rate was in place only to get the borrower interested in getting these loans. However, these lenders knew these borrowers could not afford these loans let alone pay them back. They soon began to bet on the loans defaulting (or not being paid back) they would then sell these ‘bets” as bonds to be discussed later.  Steve Eismen was the first to begin to realize what these lenders were doing. He began to see how big time lenders were packaging these subprime loans and making them into a single bond of several hundred loans and selling them to larger lending companies and banks. According to an article by Gerald P. Dwyer, the lending companies developed these things called tranches, in lighter terms they were 3 levels of lending “floors.” The top tranche was to be repaid their loans first with lower risk and interest rate. The buyers of the middle tranche were to get repaid second with a slightly higher risk and interest rate than the first tranche. The bottom tranche was supposed to be repaid last with a much more interest risk and a higher interest rate. All three tranches faced a risk of losing money, if these loans defaulted.

Informational video on Tranches and Financial Crash

             Michael Lewis states that lenders wanted to be repaid when the lender wanted to, not prematurely or when the borrower wanted to pay the loan back. This ensured that they would make a profit of the loans they sent out. So by purchasing the bottom tranche a lender took a tremendous risk due to the fact that they had a high chance of being repaid prematurely. That is why they were offered the higher interest rate to ensure they made a profit. The same goes for the middle tranche. The top tranche however, had a very low risk since they were to be repaid first they knew they could still make a profit. Now for a greedy executive these tranches sounded like a good way to make money. However they did not realize that most of these loans would default, meaning the borrowers were not paying them back. So the bond buyers on the bottom and middle tranches began to start losing money on their investments. The top tranche however had huge gains due to the fact they got repaid first. This is the first time we see that there is consequences to corporate greed, not only did some executives lose money on this deal but so did hundreds of Americans who were tricked into signing these loans.

            Since these types of loans were so new, they were not regulated by any type of Administration. Therefore these Executives felt they could do this without having to answer to anyone. In comes Michael Burry, he was a very greedy individual who was always into investing. Burry began to ask himself how he could make more money off of these bonds. Before developing one of the most diabolical systems and introducing it to the World Trade Market. According to Michael Lewis’ description Burry had worked with credit default swaps (CDS) for the majority of his career. A Credit Default Swap (CDS) is just a policy where if a borrower fails to pay their debt the lender will still receive some sort of compensation from whatever company the lender purchased the CDS from. This would in theory guarantee that his investors would receive money for their investments, thus cheating bigger banks out of money that should have never been lent out in the first place.

 

Diagram of how Credit Default swaps work

 Knowing of how this process works and how often these Subprime mortgage loans defaulted Burry created the Credit Default Swap on Subprime mortgage loans. Burry successfully got his investors to purchase these Credit Default Swaps. However he was not as successful at making sure his investors would stay and continue investing in them. Since he was unable to guarantee a major return on their money his investors wanted out. According to the article Executive Summary, Credit Default Swaps became a tangled web that dragged the financial market down due to sellers purchasing CDS policies on the CDS policies they already had in place. In other words these lenders were purchasing insurance policies on their insurance policies. Michael Burry made millions off of this, by purchasing over 60 million dollars’ worth of these bonds from Deutsche Bank. Again according to the article Executive Summary, the use of CMO’s; which is a version of a Subprime mortgage loan, and the use of CDS’ lead to the collapse to the private credit markets. Again we see a consequence to the actions of greedy individuals. Had the CDS policies had not been purchased on other CDS policies we may not have seen such a collapse.

This collapse had adverse effects on more than just the mortgage market. Due to the fact that these lenders also provided money for non-financial companies, we began to see negative effects within the entire economy. In comes John Paulson, an investor with large amount of money to invest. His sole purpose for investing was to purchase Credit Default swaps on subprime mortgage loans. John was much more successful in bringing in investors than Burry. By guaranteeing his investors would receive compensation on their investments despite the high risk of defaulting loans. John was able to guarantee this  by purchasing the CDS policies on other CDS policies. This was yet another consequence to what seemed to be a small problem in the beginning but led to catastrophe in the lending and mortgage market. With the Economy already spiraling down due to the CDS policies, John Paulson only accelerated the financial collapse.

According to Michael Lewis’ book The Big Short, Howie Hubler was yet another player in the CDS scheme. However his form of Credit Default Swap was far more diabolical than that of Michael Burry or John Paulson. Hubler’s version triggered immediate pay off when the subprime mortgage market dropped 4%. Subprime Mortgage Loans were already lower than that before the stock market began to crash. Hubler sold these bonds to anyone who would buy them, mostly foreign investors. That year Hubler made over 25 million off of the bets that his subprime loans would default. It wasn’t until Deutsche bank saw its loans to start to fail and demanded that their CDS be paid for by Morgan Stanley (a major bank in the stock market, also the bank that Howie Hubler worked for), that Hubler began to see some hardships from his plans. Deutsche demanded 1.2 billion dollars from Morgan Stanley. Since Deutsche Bank had purchased CDS’ through Morgan Stanley, Morgan Stanley was supposed to pay Deutsch back what it had initially lost. Deutsche only received about half the amount. According to The Big Short, Deutsche gave Morgan Stanley an ultimatum, either pay the 1.2 billion, or buy some of their bonds. Morgan Stanley attempted to leave its deal with Deutsche costing them over 3.7 billion dollars and Howie Hubler his job.

Corporate Executives such as Michael Burry, John Paulson, and Howie Hubler made millions on CDS and Subprime mortgage loan schemes. The development of Credit Default Swaps, Subprime Mortgage Loans, and CDS on Subprime Mortgage Loans were what caused the Financial Crash. All three of these developments were developed through sheer greed of corporate executives just looking to fill their pockets. Had these executives been exposed earlier the crash may have never happened. I believe this crash to have been an eye opener not only for corporate executives and the United States government, but for the everyday Americans who faced the hardships of defaulting on a loan.

Art Depicting a Greedy Executive

Joveen's Page

The Big Claim

            The financial crisis of 2008 was one of the worst financial crisis’s the United States had ever faced. Comparable to the great depression, the consequences of the financial crisis were widespread as it caused millions of homes to be foreclosed on and set record levels of unemployment in the years following. The collapse of financial markets in the United States was caused by the predatory lending practices of loan originators who willfully disregarded risk through lowered lending standards in an effort to yield higher profits.

            The collapse of the housing market in 2008 would have been an avoidable catastrophe if loan originators had not remained willfully ignorant to their fraudulent practices.  The subprime mortgage market began to grow rapidly in the years preceding the crash. Subprime loans are typically packaged and sold off to people with bad credit and reduced payment capacity whom would in turn have a greater risk of defaulting on their loans, so how could such a loan eventually become a multi-trillion dollar market? The answer was simple: foreclosure.

When borrowers were unable to refinance their loans from adjustable to fixed rates they defaulted on their loans. Investment banks and other loan originators would take control of the homes of the borrowers through foreclosure and hope to resell the properties at a profit. This became the goal of the subprime mortgage loan. The subprime mortgage industry did not grow because of demand from the borrower’s side but rather through an increase in supply on the lender’s side. As other financial institutions began to see the potential of such a market they eagerly joined in an effort to reap profit for themselves.

An increase in the number of firms participating in subprime lending creating increased competition within the market. With the increased competition, loan originators needed new ways to sell their subprime loans which lead to a sharp increase in predatory lending practices. Subprime loans were being packaged into loans with “teaser” periods and adjustable rates where borrowers would only pay the interest on the loans for the first two years. After the first two years monthly payments would double or even triple and borrowers would be unable to keep up with payments leading to widespread defaults. With the subprime mortgage market growing rapidly between 2005 and 2007 a ticking time bomb was set in place. Once the teaser periods ended, waves of loan defaults hit the market starting in the third and fourth quarters of 2008 as borrowers failed to make payments on their loans that now had higher interest rates and higher monthly payments leading to the collapse of the housing market.

A detailed diagram listing the causes behind the financial crash of 2008

 The greed of loan originators became its own end. As they sought increased profits through intentionally targeting the uneducated and poorer part of America, they ignored the risks involved in lending and had to pay the consequences. The big plan to profit off the foreclosure of homes in a time when housing prices were at an all-time high backfired. Thousands of small firms filed for bankruptcy across the nation as the shadow banking system they operated on collapsed.

The shadow banking system was where most of the funding for subprime loans came from. Under the shadow banking system these firms did not take direct deposits and were therefore subject to less regulation so larger banking institutions that were subject to greater regulation would fund the shadow banking market in an effort to profit off the subprime mortgage market. Non-bank financial institutions on the shadow banking market, those operating on off-balance sheets to hide their fraudulent practices from regulators, began “repo-runs” on their repurchasing agreements in efforts to regain their short term borrowed collateral. These repo runs became widespread across the shadow banking system, which made up 25-30% of the entire financial system, leading to the failure of many financial institutions. Ultimately the G-20, a group of finance ministers and central bank governors from 20 major economies, summed up the crisis best by stating that “market participants sought higher yields without an adequate appreciation of the risks and failed to execute proper due diligence”. When financial institutions rank profit ahead of risk disaster in eminent.

The "Domino Effect" caused by bankrupting financial institutions.

The collapse of the housing market lead to the creation of a new market. Credit Default Swaps (CDS) because extremely popular in the years just before the financial crash as some speculators caught wind of the inevitable defaulting of subprime mortgage loans and aimed to profit off the default of these loans. When the waves of defaults started rolling in the volume outstanding CDS grew extremely rapidly, growing nearly 100 fold of what it was in early 1999. This created a large betting game played by speculators who tried to figure out which firms were going to be required to pay to cover mortgage defaults. Being lightly regulated, there was no central clearing house (where financial settlements are determined) to honor these CDS in the event that the party to a CDS could not honor their contracts. This lead to widespread CDS losses as large firms such as AIG, Lehman Brothers, and Merrill Lynch were unable to pay the CDS insurance as more of their loans defaulted. Eventually government bailouts were initiated in order to prevent the recession from growing as some of these firms were deemed “too big to fail”.

            The effects of the financial crash and collapse of the housing market were disastrous. According to The Aftermath of the Financial Crises written by Carmen Reinhart and Kenneth Rogoff, the crash not only affected the United States but global markets as well. Between June 2007 and November of 2008 Americans lost nearly a quarter of their net worth. The IMF (International Monetary Fund) estimated that US and European banks lost over 2.5 trillion in toxic loans between 2007 and 2010. Stock market prices fell 57% from their peak in October of 2008.  In every quarter following the 2008 crash hundreds of thousands of jobs were lost and thousands of homes were being foreclosed on. Unemployment levels skyrocketed to over 10% in late 2009 as 8.5 million Americans remained out of work, nearly 6% of the entire workforce. Real GDP growth in the United States was negative starting in the third quarter of 2008 and did not return to growth until the first quarter of 2010.

A diagram listing the effects of the collapse of the housing market.

            With the evidence stacked against them, major corporate leaders such as Howie Hubler were being flamed and held accountable for their roles in the financial crisis. They sought to defend themselves and their actions by claiming that creative destruction was at work. They argued that capitalistic economic development would arise out of the destruction of the previous economic system, one of the key arguments behind the defense of creative destruction. To make such a statement after their own practices lead to the destruction of the previous economic system makes it very difficult to understand their argument of creative destruction, as Robert Skidelsky writes in his NewStatemen article about the role creative destruction played in the crisis of 2008.

New economic growth and development maybe come from the destruction of a previous system but if that previous system was rigged to encourage fraudulent trading only to be intentionally driven into the ground for profit… how can we be so sure that the same will not be repeated in a new system? Sure, there may have been ineffective use of regulatory power by regulators and ineffective crisis management capability by the Federal Reserve when it did not stem the tide of toxic mortgages… but these are the exact changes that can and will be made in the new economic system. There will always been risk involved in trading but if it is acknowledged crisis can be avoided. Altering the system is not as hard as altering the people that run the system. Regulatory legislation can be passed to ensure that all trading done is safe and fair but if the system continues to be manipulated like it had been by the financial institutions then nothing will ultimately change.

As the dust settled in the years following the financial crash of 2008 fingers were being pointed and many questions were being left unanswered. It became clear that the collapse of financial institutions and the housing market was an avoidable catastrophe. The fate of the economic systems in place were unfortunately in the hands of yield seeking Wall Street leaders who willfully disregarded the risks of their actions and chose profit over prosperity.

                           

A video of senator Levin ripping into Goldman Sach's CEO Lloyd Blankfein for his company's practices of selling securities and then buying insurance on those securities knowing that they will fail.