Monday, December 8, 2008

Credit Derivative Monopoly

Thanks to my online friend Jay at Soob, I've discovered this guy: TDAXP.

TDAXP's posts are good, but what's really interesting is this explanation, buried deep in the comment fields, of a variation of the Monopoly board game called "Credit Derivative Monopoly". Here's an excerpt:

Credit Derivative Monopoly uses financial engineering, however, to create Housing-Backed Securities. Say a player owns Boardwalk and Park Place, but does not have any cash left.

Likewise, another player has no monopolies, but perhaps $400 in extra cash. Credit Derivative Monopoly allows transfer that extra capital in exchange for the asset of, say, half the rental income on those two houses. So if a third player lands on Boardwalk, half goes to the property owner and half goes to the player who purchased those housing-backed securities.

.....In our two games of play, the instruments got increasingly complex. In one, the price for purchasing 8 houses was half the rent, plus forgiveness on all rent owed by the purchasing player to the selling player for the next three landings, plus the rent owed by the purchasing player to a named third-payer player for three landings.

My head hurts just thinking about it.

Mortgage meltdown picture from Ocean.flynn Cool photostream there, BTW.


NickM said...

There is no game ever devised more viciously cut-throat and more likely to lead to a fist-fight than Monopoly. People will do almost anything to win. I have seen the most absurd deals.

Flee said...

PBS Now had a show a few weeks back called Credit and Credibility
that outlined how the credit derivative system worked. Inovation, something for nothing, and greed was a good discription of what they were allowed to get away with. The real money was made in all the fees they charged not in the actual performance of anyone or actual production of any product. An ordinary person like myself trying to sell this crap would have been laughed at then locked away for fraud. Important people who were smarter than the rest of us had complex formulas that calculated the risk and pushed derivatives like a finacial cocain. The only variable they forgot to factor in to their formulas was human nature.

Dr Ralph said...

I usually avoid commenting on economic posts (I'm waaaay out of my league) but Saturday's Dilbert had an excellent, succinct explanation of how mortgage-backed securities work.