We are facing economic meltdown. They will print an unlimited number of bills or create the ultimate fund to TRY and stop the tsunami. In the beginning they tried using an umbrella. It didn't work.
The govts biggest fear right now is a collapse of housing prices. If thousands upon thousands walk away, they cannot burn the houses down, they must be sold, but the only buyers will be at greatly reduced prices causing a panic in the economy.
They will do ANYTHING to figure out how to keep John/Jane Q Public wanting to pay their inflated mortgage. Even at 0% interest, the myth is kept alive by the high principal balance.
What is best for the public is not what is best for the govt.
People walking away and buying a similar house in the future for 50% less than they owe today is good for the public.
What the govt wants is to keep people from losing their homes so the system doesn't collapse and staying in debt.
If the homes were "worth" more than people owed, the govt wouldn't be so concerned.
$100bn is a good number to start. They will create more $ if they need to.
The situation is giving a new definition to the word CRISIS.
Submitted by patientrenter on October 13, 2007 - 4:17pm.
HLS is spot-on. Keeping home prices high is what most voters want, and making the majority of voters feel good is what politicians and their government employees will try to do, at almost any cost, especially in an election year.
Can the pols succeed? Probably not 100%, because there's a lot of water to hold back. But whereas prices in Southern California probably should drop by at least 50% in a free market, they might drop by only 20-25% with concerted government action. And I predict that govt actions will progressively increase in scale and ferocity as prices go down another 5, 10, 15, 20, 25%.
This is a moment when I will temporarily go along with all the doomsayers on moral hazard, dollar exchange rates, and inflation. I hope a Chinese central banker makes a few warning bond sales that nip all these rescue programs in the bud, but I don't see that as likely.
Submitted by bsrsharma on October 13, 2007 - 5:37pm.
Citigroup has proposed the creation of a "superconduit" that would issue short-term debt and buy assets currently held by SIVs affiliated with the participating banks, the Journal reported.
So replacing SIVs with a SuperConduit will solve liquidity problem? If they can't sell SIV bonds, how can they sell Superconduit bonds? Pig in a Poke, anyone?
Importantly, none of these Ponzi tricks can solve the Fundamental problem, which is:
Between 2006 to 2010, the National "Wealth" is going to decrease by 50%. Yes, you read it right, because most of the national "Wealth" is equity in homes. How can this huge "destruction" of wealth be made invisible? I have put quotes to show that this bulking up of wealth was illusory and the loss is also illusory. But the effects of the loss can't be hidden anymore than the effects of gains were hidden.
This is a really interesting development. A couple of issues/observations:
(1) If all of the institutions involved (and others more indirectly involved in this rolling disaster) had to mark these positions to observed market values there would be a MAJOR fiasco. Otherwise, they wouldn't be going through all of these machinations and pledging all of this capital TO AVOID THE REAL ISSUE: PRICE DISCOVERY. This is an admission of huge underlying problems.
(2) The assumption behind the establishment of this "super fund" (this description is so rich in unintentional irony I can hardly stand it) is that current market values for this sludge are not a true reflection of economic values. In other words, the issue is liquidity rather than these securities' true cash flows. This may or may not be the case. No one knows the answer here. It would take a team of knowledgeable professionals weeks to analyze just a handful of these securities properly, which would involve all sorts of Monte Carlo simulations regarding default rates, prepayment rates, etc. Bottom line: Even the institutions that own this crap don't really know what it's worth. This super fund is all about buying time in the hope that things will improve. From these institutions' standpoint there's no downside to delaying price discovery. Who knows... maybe the securities will ultimately be worth more than their current market values. And if they're not, then they're sunk anyway. So why not delay things?
(3)It will be fascinating to see how the market reacts to this news. The bears will say, "A ha! There are major problems out there that haven't been acknowledged to the public. Stocks should go down." But the bulls will say, "Party on, dudes! It's all under control. The institutions are going to form a totally rad super fund that will make these pesky liquidity issues go away. Buuuuuuuuyyyyyyyyy, Winthorpe, Buuuuuuuyyyyyyyy!!" I have no clue who wins this tug of war.
(4) I suspect that things are much worse than the large institutions are letting on. The real problem - the one that won't go away merely by delaying price discovery - is that these securities are backed by mortgages that a lot of people aren't paying on, and the collateral values are plummeting. And the situation is getting worse and will continue to get worse for at least a couple of years. Nothing - and specifically not this super fund - will change this fact. As I like to say when discussing this issue with colleagues: "The loans have been made. You can't put the genie back in the bottle. In the short term it's about perception. But in the long term these are just a whole boatload of really ugly mortgages and securities. And nothing will change that fact."
In summary: This reeks of rearranging the deck chairs in the hopes that a big whale will come along and plug the hole in the ship until help arrives. The problem is that, ultimately, I don't think help arrives for most of these securities. The loans have already been made...
Submitted by gandalf on October 14, 2007 - 1:30am.
DaveLJ,
Funny coincidence with name, I used to work at DLJ in a former lifetime, secondary mortgage market, MBS desk, whole loan analyst. Good job, interesting work for a while. Loved the math, yield curve, loan characteristics, pricing mechanics. RTC cleanup was mild compared to the 'junk' out there today.
I think you're exactly correct, BTW. Both in your read of the situation, and predicting the outcome. Superfund will help to shore up cash flow deficiencies, defer re-marking the securities. But at the end of the day, it's an awful lot of bad paper.
Submitted by 4plexowner on October 14, 2007 - 5:42am.
there is about $20 trillion in derivative paper sitting on top of subprime mortgages
there is another $400+ trillion in derivative paper based on interest rates, price of energy, price of gold, etc ($700 trillion is the highest number I have seen)
this worthless paper trash has been sold to an unsuspecting body of investors who are now waking up to this fact:
ALL OF THIS PAPER IS WORTHLESS TRASH!!!
the trick now is to monetize this paper without making it obvious to the public
I personally don't think it is possible - there is just too much of this toxic crap floating around - but the bankers are going to try to do it - they will do it in little pieces here and there in the hopes that the sheeple don't notice
this is what it will look like: $100 Bil for a new subprime fund, expand Freddie and Fannie's loan limits and portfolio size limit, lower the standards for mortgages that Freddie and Fannie can buy, lower the standards for the paper that the Fed will accept in its repurchase agreements, create 'rescue' plans for F'd home-debtors, lots more to come and lots more being done behind the curtains
we humans continue to repeat the fiat currency mistake and it bites us in the ass every time - welcome to the latest ass-biting
"one of the ways for a central bank to stave off credit contraction and deflation is to directly monetize paper assets - in simplified terms this means using printing press money to buy worthless paper assets instead of letting those assets meet the price discovery process in an open market"
On this subject, a few quotes from friends of Bill Fleckenstein that were included in Bill's market update today:
"How anyone can look at the creation of this fund as anything other than a cynical way of moving an existing pile of crap from one place to another is beyond me. The fact that no one seems to think there is anything wrong with it (and I include the regulators) tells you just how 'fixed' the markets' problems are. The level of terror that must exist in the boardrooms of the banks and regulators that peered into Pandora's box this summer must be extreme. They set up the conduits to skirt balance-sheet constraints, investors realized they were getting paid no risk premium to buy the paper and fled. The answer? Do it again, in the same way, but call it something different."
"Meanwhile, in the background, Moody's is telling us in no uncertain terms that massive downgrades of subprime-laden CDOs are coming. To be sure, the ABX has been telling us for many months what the market thinks about the value of these things [and the top of the stack was pounded again today], but until the actual downgrade comes, an investor isn't necessarily obliged to sell. The IRS is also investigating accounting for mortgage-backed securities. Thus, the situation has become quite dicey."
One thing I think we forget on this board (not pointed at you, but in generaL): Just as wealth is not actually created with layers upon layers of financial complexity, neither is it destroyed. It is true that there was a lot of risky lending going on and that defaults are going to get worse. That said, the losses are really only as big as the defaults and expenses to process defaults (think REO) and the folks ultimately owning those losses.
All the leverage piled on top is really a "this hedge fund wins, that one loses scenario". I'm a huge housing bear, but I really do believe much of this is a liquidity issue as anything else.
I'd say bears and bulls are both correct. Bears are right in pointing out that this is much bigger than people think. Bulls are correct in that this isn't an economy shattering event.
Where things really go south is there you add the housing market to the LBO craze to the madness going on in emerging markets investments to the unsustainable consumer spending in this country, and all the other derivatives of these problems...That is a crisis, but it takes a much broader perspective than the impact of SIV losses to get there.
I think there is some overexaggerating going on here - the market is not efficient as we'd like it, but not nearly as bad as you guys are writing about. MBS or any ABSs for that matter are tied to assets. Those assets don't just vanish - we're not talking about worthless bonds that are issues - they are backed -hence their name. The value of those assets may decrease, but they do not go to 0 as a collective. If they go to 0, the world is ending and we all have a lot more to worry about. Homes do not just become worthless - the question as someone else pointed out is liquidity and speculation. There are always 2 sides to every market - you can bet its going to go up or down. And make money on both sides - its about picking correctly. CDSs are the same - someone is betting on the likelihood of default, or perhaps hedging their underlying position.
The institutional market will be just fine as whoever lost their pants in this subprime mess means another player also made a shitload of money. Goldman for instance made all those risky - yet very profitable and correct wagers.
The valuation question - its whatever people will pay. Debt gets pooled all the time and sold off - its not a newly created financial vehicle. From big companies who issue AAA rated bonds to little guys, or any type of debt you can think of - gets pooled. Are the pools difficult to evalute, yes, but is there a market price at the end of the day, yes. Its like complaining that Google at 600 is overpriced. Perhaps yes, but someone is willing to buy it at 600. That's the beauty of the financial markets.
Submitted by bsrsharma on October 16, 2007 - 11:02am.
They are surely not worthless; but a realistic pricing based on underlying assets should deflate them by at least 50%. That can have unimaginable chain reaction in the leveraged and derivative markets resulting in end result that is not hugely different from repricing to zero.
Submitted by gandalf on October 16, 2007 - 11:23am.
Exactly correct. Even a 25% nominal repricing, as we are currently experiencing (50% real?), is going to have significant consequences.
True, there are upsides to 'play', but losses in 'paper' wealth are still losses in a 'paper' economy, and the consequences are going to be overwhelming negative for the vast majority of stakeholders.
Submitted by Raybyrnes on October 16, 2007 - 11:24am.
Gandalf,
Seems that the last 10 years would have been a tidal wave of MBS being sold. I could not imagine a better place to be. Why not make the jump to Credit Suisse when they merged? I believe the Managind Director at the time was Gordon Murray. Pretty nice guy. I believe he left and the new MD is Eric Smith.
This is assuming any 1 player is 100% leveraged in any 1 direction - not true. None of the big boys are. And are we talking about stakeholders as in Wall St boys losing their money, or stakeholders meaning pension funds and retirement systems, etc? If its Wall St, its the nature of the beast - institutional guys lose money, make money all day long. If its the latter - if you can self direct, put your money somewhere else.
Isn't this like a bunch of neighbors getting together to buy each other's houses to keep the market from tanking? How long can they do that? Sounds like market manipulation to me.
Government bailout / meddling and big banks looking to make more money. Why is anyone shocked? LTCM was bailed out because they made stupid bets. No ones wants to see foreigners owning too much of America.
Whether its right or wrong, if it presents a wide spread economic impact by doing nothing - read recession - then would you rather they get together and prop each other up so that good ol Americans don't lose their jobs?
Submitted by bsrsharma on October 16, 2007 - 12:07pm.
Isn't this like a bunch of neighbors getting together to buy each other's houses to keep the market from tanking?
The way I understand this (superficially), it is like this: you want to make some money by making burgers in your backyard and selling them. Just happens that people hesitate to buy from you. Now, you go to your friendly neighbor who works at McDonalds and get him to wrap your burgers in McD wrapper and sell them as BigMacs. Now, since McDonald corp was not really robbed of any monetary asset (if you ignore the cost of wrappers), they may never come to know about this. But you have fooled people into paying BigMac prices for your backyard burger and made money.
Submitted by bsrsharma on October 16, 2007 - 12:14pm.
why this isn't an antitrust violation?
What antitrust violation when the U.S. Treasury goads unwilling bankers into collusion to prevent monetary collapse? This is more like the actions of a Banana republic where one honcho controls everything rather than free market capitalism.
Submitted by gandalf on October 16, 2007 - 12:20pm.
Career in MBS? Wow! Long-time ago, no wife, no kids. RTC days... I enjoyed working on Wall Street though. Most of the work I was doing back then was on the machine (computers) -- assisting the traders, analyzing loan pools, programming, crunching statistics, developing reports, etc. Enjoyed the machine so much, that's what I do for a living now, software engineer, building systems.
Developed a property and facilities information system about 10 years ago, important for institutional clients. Evolved into running a business (CEO), so things are good. It's interesting work we enjoy (most days), solving real-world problems (no leverage) for good people (higher ed).
All these years though, I'm still an Econ-nerd at heart. I watch and try to understand what's happening. Truthfully, I'm amazed at how things have unfolded the past 10 years, it's challenged my assumptions and understanding about the economy. Have to add that I'm fairly concerned about the general direction of things these days (and not just on the economics side).
The current thread is fascinating material. There's an assumption in asset-backed securities that the if the expected revenue stream fails due to higher percentages delinquencies and foreclosures, the underlying assets provide this kind of backstop of value for the investor. Kind of like an insurance policy.
Not true anymore. The revenue streams are failing, housing values have depreciated and it's likely to continue along these lines for a couple more years. Meantime, a huge number of financial streams, balance sheets and price points in our 'paper' economy have been 'marked' to these values. The repercussions of the correction are likely to be, as we say in software, 'non-trivial'. As much as I would wish otherwise.
Submitted by bsrsharma on October 16, 2007 - 12:20pm.
May be at first, but the hope is eventually, you will end up eating it, after all the trading. They may even serve it with free (authentic) McD fries to fool you into believing the burgers are McD's. { This is the basis of CDOs, where they add some flavoring of good debt to floor sweepings and sell them as "hotdogs" }
Submitted by 4plexowner on October 16, 2007 - 12:21pm.
History shows that the most prosperous societies are the ones with the least government meddling and interference
(in our modern financial world the line between 'government' and the banking cartel has become very blurred because of the political nature of central banking - the $100 bil fund being set up by banks (in collusion with the Fed) might as well be direct govt intervention IMO)
History also shows that ALL fiat monetary systems end in failure and economic collapse
At some point all of the current intervention will fail and we will have the 2nd Great Depression
The next depression is needed to teach the world once again that THERE IS NO FREE LUNCH
Why not go ahead and let it start now?
That way my children can enter their adult lives in a healthy, vibrant economy that doesn't have $450+ trillion dollars worth of Monopoly money floating around the board looking for a bubble to inflate
"If something is about to fall off a cliff, it deserves to be pushed." -Friedrich Nietzsche
Submitted by Raybyrnes on October 16, 2007 - 12:23pm.
gandalf
That's interesting. The people I know are on the institutional sales side. I think it is going to be a tough year for them but there fortunes have been made ina short period of time.
Would like you opinion. Credit cards, car financing, and lots of other industries are collateralizing their debt. Why have we heard little of no rumblings about these offerings. I would thing they have even higher risk thatn MBS?
I wonder what the people at the World Bank are thinking these days? Don't they keep on telling emerging economies to keep their hands off and let the (foreign) sharks pounce on their assets?
Shouldn't we practice what we preach, allow some banks to fail, and let CITIC or other foreign banks pounce on our assets? After all, bad decisions should not be rewarded.
Submitted by gandalf on October 16, 2007 - 1:15pm.
Great observation. Here are my thoughts:
Housing, as an asset class, saw tremendous appreciation from 1998-2005. The appreciation was quite frothy. It was enabled by excess liquidity in our monetary system, loose practices in the lending industry and unrealistic expectations for long-term growth in real property markets.
Other classes of assets, cars, credit cards, etc., I don't think we saw these kinds of conditions, growth expectations, behavior, etc. I can't be sure if this is the explanation because I don't work in the industry anymore, but this would be my outsider's guess.
Curious, what's your POV?
What's your POV on the impacts of all this? In particular, how about the larger question of what happens to leveraged positions when asset values fall and revenue streams are diminished?
golfgal (and perhaps a few others), I think you misunderstand how some of these securities work. Yes, you're correct, that most of them are not worthless because, yes, there is some collateral protection. (And, in fact, some of the securities in question may very well be worth more than the valuation the market is placing on them currently.) Having said that, THERE ARE ABSOLUTELY QUITE A FEW WORTHLESS MBS - "GOOSE EGGS," IN TECHNICAL TERMS - OUT THERE.
Allow me to explain.
Let's say I own two different portions of a single subprime mortgage securitization. One portion is rated AAA; the other is rated CCC. And let's say that this securitization, as a whole, ends up with a 20% default rate and losses that total 10% of face value. Well, considering it's going to take one of the initial loss positions for the whole securitization, guess how much that CCC piece is probably going to be worth? You got it: somewhere around zero.
Now, the AAA piece is rated AAA because it's protected by all the pieces rated AA and below which are, in descending order, going to take on the securitization's losses (to varying degrees). (These losses will be assigned by formulas outlined in the offering documents.) As the losses mount, they wipe out most, and in some cases all, of the value of the "Z tranches" and start moving up the ratings scale. So, let's be clear here: There are some MBS that are, literally, worthless. There are others that are merely impaired. The question is what is the difference between the market value and the economic value of these various securities. Regardless of all of these shenanigans we're going to find out the true answer over the next couple of years. I'm skeptical that the market has it completely wrong, although there's likely some variance due to illiquidity and behavioral issues.
golfgal, you said, "The valuation question - its whatever people will pay." We're in complete agreement here. According to your statement, there's no need for this "super fund" at all. These institutions should just sell this dreck into the market and find out what the market thinks its worth. Let's just say that I'm not going to hold my breath on that one...
Submitted by Raybyrnes on October 16, 2007 - 2:33pm.
I think all of this is political and that wiht an election year coming up and the Republicans trying to hold on to power you are going to see the Fed accomodate. Therefore they are going to help prop up the markets. The platform is going to sidestep the issue of the war by asking American "are you better off now than you were 8 years ago?"
We are facing economic meltdown. They will print an unlimited number of bills or create the ultimate fund to TRY and stop the tsunami. In the beginning they tried using an umbrella. It didn't work.
The govts biggest fear right now is a collapse of housing prices. If thousands upon thousands walk away, they cannot burn the houses down, they must be sold, but the only buyers will be at greatly reduced prices causing a panic in the economy.
They will do ANYTHING to figure out how to keep John/Jane Q Public wanting to pay their inflated mortgage. Even at 0% interest, the myth is kept alive by the high principal balance.
What is best for the public is not what is best for the govt.
People walking away and buying a similar house in the future for 50% less than they owe today is good for the public.
What the govt wants is to keep people from losing their homes so the system doesn't collapse and staying in debt.
If the homes were "worth" more than people owed, the govt wouldn't be so concerned.
$100bn is a good number to start. They will create more $ if they need to.
The situation is giving a new definition to the word CRISIS.
HLS is spot-on. Keeping home prices high is what most voters want, and making the majority of voters feel good is what politicians and their government employees will try to do, at almost any cost, especially in an election year.
Can the pols succeed? Probably not 100%, because there's a lot of water to hold back. But whereas prices in Southern California probably should drop by at least 50% in a free market, they might drop by only 20-25% with concerted government action. And I predict that govt actions will progressively increase in scale and ferocity as prices go down another 5, 10, 15, 20, 25%.
This is a moment when I will temporarily go along with all the doomsayers on moral hazard, dollar exchange rates, and inflation. I hope a Chinese central banker makes a few warning bond sales that nip all these rescue programs in the bud, but I don't see that as likely.
Patient renter in OC
Citigroup has proposed the creation of a "superconduit" that would issue short-term debt and buy assets currently held by SIVs affiliated with the participating banks, the Journal reported.
So replacing SIVs with a SuperConduit will solve liquidity problem? If they can't sell SIV bonds, how can they sell Superconduit bonds? Pig in a Poke, anyone?
Importantly, none of these Ponzi tricks can solve the Fundamental problem, which is:
Between 2006 to 2010, the National "Wealth" is going to decrease by 50%. Yes, you read it right, because most of the national "Wealth" is equity in homes. How can this huge "destruction" of wealth be made invisible? I have put quotes to show that this bulking up of wealth was illusory and the loss is also illusory. But the effects of the loss can't be hidden anymore than the effects of gains were hidden.
This is a really interesting development. A couple of issues/observations:
(1) If all of the institutions involved (and others more indirectly involved in this rolling disaster) had to mark these positions to observed market values there would be a MAJOR fiasco. Otherwise, they wouldn't be going through all of these machinations and pledging all of this capital TO AVOID THE REAL ISSUE: PRICE DISCOVERY. This is an admission of huge underlying problems.
(2) The assumption behind the establishment of this "super fund" (this description is so rich in unintentional irony I can hardly stand it) is that current market values for this sludge are not a true reflection of economic values. In other words, the issue is liquidity rather than these securities' true cash flows. This may or may not be the case. No one knows the answer here. It would take a team of knowledgeable professionals weeks to analyze just a handful of these securities properly, which would involve all sorts of Monte Carlo simulations regarding default rates, prepayment rates, etc. Bottom line: Even the institutions that own this crap don't really know what it's worth. This super fund is all about buying time in the hope that things will improve. From these institutions' standpoint there's no downside to delaying price discovery. Who knows... maybe the securities will ultimately be worth more than their current market values. And if they're not, then they're sunk anyway. So why not delay things?
(3)It will be fascinating to see how the market reacts to this news. The bears will say, "A ha! There are major problems out there that haven't been acknowledged to the public. Stocks should go down." But the bulls will say, "Party on, dudes! It's all under control. The institutions are going to form a totally rad super fund that will make these pesky liquidity issues go away. Buuuuuuuuyyyyyyyyy, Winthorpe, Buuuuuuuyyyyyyyy!!" I have no clue who wins this tug of war.
(4) I suspect that things are much worse than the large institutions are letting on. The real problem - the one that won't go away merely by delaying price discovery - is that these securities are backed by mortgages that a lot of people aren't paying on, and the collateral values are plummeting. And the situation is getting worse and will continue to get worse for at least a couple of years. Nothing - and specifically not this super fund - will change this fact. As I like to say when discussing this issue with colleagues: "The loans have been made. You can't put the genie back in the bottle. In the short term it's about perception. But in the long term these are just a whole boatload of really ugly mortgages and securities. And nothing will change that fact."
In summary: This reeks of rearranging the deck chairs in the hopes that a big whale will come along and plug the hole in the ship until help arrives. The problem is that, ultimately, I don't think help arrives for most of these securities. The loans have already been made...
DaveLJ,
Funny coincidence with name, I used to work at DLJ in a former lifetime, secondary mortgage market, MBS desk, whole loan analyst. Good job, interesting work for a while. Loved the math, yield curve, loan characteristics, pricing mechanics. RTC cleanup was mild compared to the 'junk' out there today.
I think you're exactly correct, BTW. Both in your read of the situation, and predicting the outcome. Superfund will help to shore up cash flow deficiencies, defer re-marking the securities. But at the end of the day, it's an awful lot of bad paper.
there is about $20 trillion in derivative paper sitting on top of subprime mortgages
there is another $400+ trillion in derivative paper based on interest rates, price of energy, price of gold, etc ($700 trillion is the highest number I have seen)
this worthless paper trash has been sold to an unsuspecting body of investors who are now waking up to this fact:
ALL OF THIS PAPER IS WORTHLESS TRASH!!!
the trick now is to monetize this paper without making it obvious to the public
I personally don't think it is possible - there is just too much of this toxic crap floating around - but the bankers are going to try to do it - they will do it in little pieces here and there in the hopes that the sheeple don't notice
this is what it will look like: $100 Bil for a new subprime fund, expand Freddie and Fannie's loan limits and portfolio size limit, lower the standards for mortgages that Freddie and Fannie can buy, lower the standards for the paper that the Fed will accept in its repurchase agreements, create 'rescue' plans for F'd home-debtors, lots more to come and lots more being done behind the curtains
we humans continue to repeat the fiat currency mistake and it bites us in the ass every time - welcome to the latest ass-biting
~
http://piggington.com/fed_monetizing_fan...
"one of the ways for a central bank to stave off credit contraction and deflation is to directly monetize paper assets - in simplified terms this means using printing press money to buy worthless paper assets instead of letting those assets meet the price discovery process in an open market"
On this subject, a few quotes from friends of Bill Fleckenstein that were included in Bill's market update today:
"How anyone can look at the creation of this fund as anything other than a cynical way of moving an existing pile of crap from one place to another is beyond me. The fact that no one seems to think there is anything wrong with it (and I include the regulators) tells you just how 'fixed' the markets' problems are. The level of terror that must exist in the boardrooms of the banks and regulators that peered into Pandora's box this summer must be extreme. They set up the conduits to skirt balance-sheet constraints, investors realized they were getting paid no risk premium to buy the paper and fled. The answer? Do it again, in the same way, but call it something different."
"Meanwhile, in the background, Moody's is telling us in no uncertain terms that massive downgrades of subprime-laden CDOs are coming. To be sure, the ABX has been telling us for many months what the market thinks about the value of these things [and the top of the stack was pounded again today], but until the actual downgrade comes, an investor isn't necessarily obliged to sell. The IRS is also investigating accounting for mortgage-backed securities. Thus, the situation has become quite dicey."
I can't improve much on this synopsis.
Great analysis, Dave...largely agree.
One thing I think we forget on this board (not pointed at you, but in generaL): Just as wealth is not actually created with layers upon layers of financial complexity, neither is it destroyed. It is true that there was a lot of risky lending going on and that defaults are going to get worse. That said, the losses are really only as big as the defaults and expenses to process defaults (think REO) and the folks ultimately owning those losses.
All the leverage piled on top is really a "this hedge fund wins, that one loses scenario". I'm a huge housing bear, but I really do believe much of this is a liquidity issue as anything else.
I'd say bears and bulls are both correct. Bears are right in pointing out that this is much bigger than people think. Bulls are correct in that this isn't an economy shattering event.
Where things really go south is there you add the housing market to the LBO craze to the madness going on in emerging markets investments to the unsustainable consumer spending in this country, and all the other derivatives of these problems...That is a crisis, but it takes a much broader perspective than the impact of SIV losses to get there.
Stan
Actually, ALL of the issues can be summed up in two words:
FIAT CURRENCY
I think there is some overexaggerating going on here - the market is not efficient as we'd like it, but not nearly as bad as you guys are writing about. MBS or any ABSs for that matter are tied to assets. Those assets don't just vanish - we're not talking about worthless bonds that are issues - they are backed -hence their name. The value of those assets may decrease, but they do not go to 0 as a collective. If they go to 0, the world is ending and we all have a lot more to worry about. Homes do not just become worthless - the question as someone else pointed out is liquidity and speculation. There are always 2 sides to every market - you can bet its going to go up or down. And make money on both sides - its about picking correctly. CDSs are the same - someone is betting on the likelihood of default, or perhaps hedging their underlying position.
The institutional market will be just fine as whoever lost their pants in this subprime mess means another player also made a shitload of money. Goldman for instance made all those risky - yet very profitable and correct wagers.
The valuation question - its whatever people will pay. Debt gets pooled all the time and sold off - its not a newly created financial vehicle. From big companies who issue AAA rated bonds to little guys, or any type of debt you can think of - gets pooled. Are the pools difficult to evalute, yes, but is there a market price at the end of the day, yes. Its like complaining that Google at 600 is overpriced. Perhaps yes, but someone is willing to buy it at 600. That's the beauty of the financial markets.
They are surely not worthless; but a realistic pricing based on underlying assets should deflate them by at least 50%. That can have unimaginable chain reaction in the leveraged and derivative markets resulting in end result that is not hugely different from repricing to zero.
Exactly correct. Even a 25% nominal repricing, as we are currently experiencing (50% real?), is going to have significant consequences.
True, there are upsides to 'play', but losses in 'paper' wealth are still losses in a 'paper' economy, and the consequences are going to be overwhelming negative for the vast majority of stakeholders.
Gandalf,
Seems that the last 10 years would have been a tidal wave of MBS being sold. I could not imagine a better place to be. Why not make the jump to Credit Suisse when they merged? I believe the Managind Director at the time was Gordon Murray. Pretty nice guy. I believe he left and the new MD is Eric Smith.
This is assuming any 1 player is 100% leveraged in any 1 direction - not true. None of the big boys are. And are we talking about stakeholders as in Wall St boys losing their money, or stakeholders meaning pension funds and retirement systems, etc? If its Wall St, its the nature of the beast - institutional guys lose money, make money all day long. If its the latter - if you can self direct, put your money somewhere else.
Isn't this like a bunch of neighbors getting together to buy each other's houses to keep the market from tanking? How long can they do that? Sounds like market manipulation to me.
Can someone explain why this isn't an antitrust violation?
Government bailout / meddling and big banks looking to make more money. Why is anyone shocked? LTCM was bailed out because they made stupid bets. No ones wants to see foreigners owning too much of America.
Whether its right or wrong, if it presents a wide spread economic impact by doing nothing - read recession - then would you rather they get together and prop each other up so that good ol Americans don't lose their jobs?
Isn't this like a bunch of neighbors getting together to buy each other's houses to keep the market from tanking?
The way I understand this (superficially), it is like this: you want to make some money by making burgers in your backyard and selling them. Just happens that people hesitate to buy from you. Now, you go to your friendly neighbor who works at McDonalds and get him to wrap your burgers in McD wrapper and sell them as BigMacs. Now, since McDonald corp was not really robbed of any monetary asset (if you ignore the cost of wrappers), they may never come to know about this. But you have fooled people into paying BigMac prices for your backyard burger and made money.
The people selling backyard wrapped McD burgers are trying to sell them to Burger King employees - this is not a naive group we're talking about here.
why this isn't an antitrust violation?
What antitrust violation when the U.S. Treasury goads unwilling bankers into collusion to prevent monetary collapse? This is more like the actions of a Banana republic where one honcho controls everything rather than free market capitalism.
Career in MBS? Wow! Long-time ago, no wife, no kids. RTC days... I enjoyed working on Wall Street though. Most of the work I was doing back then was on the machine (computers) -- assisting the traders, analyzing loan pools, programming, crunching statistics, developing reports, etc. Enjoyed the machine so much, that's what I do for a living now, software engineer, building systems.
Developed a property and facilities information system about 10 years ago, important for institutional clients. Evolved into running a business (CEO), so things are good. It's interesting work we enjoy (most days), solving real-world problems (no leverage) for good people (higher ed).
All these years though, I'm still an Econ-nerd at heart. I watch and try to understand what's happening. Truthfully, I'm amazed at how things have unfolded the past 10 years, it's challenged my assumptions and understanding about the economy. Have to add that I'm fairly concerned about the general direction of things these days (and not just on the economics side).
The current thread is fascinating material. There's an assumption in asset-backed securities that the if the expected revenue stream fails due to higher percentages delinquencies and foreclosures, the underlying assets provide this kind of backstop of value for the investor. Kind of like an insurance policy.
Not true anymore. The revenue streams are failing, housing values have depreciated and it's likely to continue along these lines for a couple more years. Meantime, a huge number of financial streams, balance sheets and price points in our 'paper' economy have been 'marked' to these values. The repercussions of the correction are likely to be, as we say in software, 'non-trivial'. As much as I would wish otherwise.
Best!
May be at first, but the hope is eventually, you will end up eating it, after all the trading. They may even serve it with free (authentic) McD fries to fool you into believing the burgers are McD's. { This is the basis of CDOs, where they add some flavoring of good debt to floor sweepings and sell them as "hotdogs" }
History shows that the most prosperous societies are the ones with the least government meddling and interference
(in our modern financial world the line between 'government' and the banking cartel has become very blurred because of the political nature of central banking - the $100 bil fund being set up by banks (in collusion with the Fed) might as well be direct govt intervention IMO)
History also shows that ALL fiat monetary systems end in failure and economic collapse
At some point all of the current intervention will fail and we will have the 2nd Great Depression
The next depression is needed to teach the world once again that THERE IS NO FREE LUNCH
Why not go ahead and let it start now?
That way my children can enter their adult lives in a healthy, vibrant economy that doesn't have $450+ trillion dollars worth of Monopoly money floating around the board looking for a bubble to inflate
"If something is about to fall off a cliff, it deserves to be pushed." -Friedrich Nietzsche
gandalf
That's interesting. The people I know are on the institutional sales side. I think it is going to be a tough year for them but there fortunes have been made ina short period of time.
Would like you opinion. Credit cards, car financing, and lots of other industries are collateralizing their debt. Why have we heard little of no rumblings about these offerings. I would thing they have even higher risk thatn MBS?
Why not go ahead and let it start now?
I wonder what the people at the World Bank are thinking these days? Don't they keep on telling emerging economies to keep their hands off and let the (foreign) sharks pounce on their assets?
Shouldn't we practice what we preach, allow some banks to fail, and let CITIC or other foreign banks pounce on our assets? After all, bad decisions should not be rewarded.
Great observation. Here are my thoughts:
Housing, as an asset class, saw tremendous appreciation from 1998-2005. The appreciation was quite frothy. It was enabled by excess liquidity in our monetary system, loose practices in the lending industry and unrealistic expectations for long-term growth in real property markets.
Other classes of assets, cars, credit cards, etc., I don't think we saw these kinds of conditions, growth expectations, behavior, etc. I can't be sure if this is the explanation because I don't work in the industry anymore, but this would be my outsider's guess.
Curious, what's your POV?
What's your POV on the impacts of all this? In particular, how about the larger question of what happens to leveraged positions when asset values fall and revenue streams are diminished?
Japan survived their housing bubble, no reason I think we shouldn't as well.
Especially given that our society allows debt forgiveness.
I'll agree, however, that those that had fingers in the pie be burned. Its in everyones best interest.
kewp - don't forget that 'debt forgiveness' has been radically modified in the last year or so
credit card debt can no longer be erased via bankruptcy
golfgal (and perhaps a few others), I think you misunderstand how some of these securities work. Yes, you're correct, that most of them are not worthless because, yes, there is some collateral protection. (And, in fact, some of the securities in question may very well be worth more than the valuation the market is placing on them currently.) Having said that, THERE ARE ABSOLUTELY QUITE A FEW WORTHLESS MBS - "GOOSE EGGS," IN TECHNICAL TERMS - OUT THERE.
Allow me to explain.
Let's say I own two different portions of a single subprime mortgage securitization. One portion is rated AAA; the other is rated CCC. And let's say that this securitization, as a whole, ends up with a 20% default rate and losses that total 10% of face value. Well, considering it's going to take one of the initial loss positions for the whole securitization, guess how much that CCC piece is probably going to be worth? You got it: somewhere around zero.
Now, the AAA piece is rated AAA because it's protected by all the pieces rated AA and below which are, in descending order, going to take on the securitization's losses (to varying degrees). (These losses will be assigned by formulas outlined in the offering documents.) As the losses mount, they wipe out most, and in some cases all, of the value of the "Z tranches" and start moving up the ratings scale. So, let's be clear here: There are some MBS that are, literally, worthless. There are others that are merely impaired. The question is what is the difference between the market value and the economic value of these various securities. Regardless of all of these shenanigans we're going to find out the true answer over the next couple of years. I'm skeptical that the market has it completely wrong, although there's likely some variance due to illiquidity and behavioral issues.
golfgal, you said, "The valuation question - its whatever people will pay." We're in complete agreement here. According to your statement, there's no need for this "super fund" at all. These institutions should just sell this dreck into the market and find out what the market thinks its worth. Let's just say that I'm not going to hold my breath on that one...
I think all of this is political and that wiht an election year coming up and the Republicans trying to hold on to power you are going to see the Fed accomodate. Therefore they are going to help prop up the markets. The platform is going to sidestep the issue of the war by asking American "are you better off now than you were 8 years ago?"
Greenspan Put