100 Billion dollar subprime Fund

[The OC Scam]

Is this a bailout plan for the banks? I don’t understand who is going to pay for this fund? Is it so obvious …

http://www.marketwatch.com/news/story/big-banks-treasury-talks-alleviate/story.aspx?guid=%7B25C497CF%2D79C8%2D4FF0%2D8DA0%2D39D90DA65796%7D

[HLS]

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]

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.

[patientrenter]

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

[bsrsharma]

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.

 

[bsrsharma]

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.

 

[davelj]

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…

[gandalf]

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.

[gandalf]

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.

[stansd]

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

[4plexowner]

Actually, ALL of the issues can be summed up in two words:

FIAT CURRENCY

[zzz]

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.

[bsrsharma]

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.

[gandalf]

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.

[Raybyrnes]

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.

[Raybyrnes]

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.

[zzz]

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.

[patientlywaiting]

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.

[bsrsharma]

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.

[zzz]

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.

[bsrsharma]

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” }

[bsrsharma]

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” }

[zzz]

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.

[bsrsharma]

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.

[patientlywaiting]

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.

[zzz]

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.

[gandalf]

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.

[bsrsharma]

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.

[davelj]

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…

[zzz]

davelj – i understand how these securities work and i agree that some of these securities can become worthless at least temporarily – in the case of a fire sale or in instances of a liquidity crisis – but as a collective portfolio – for any bank / hedge fund, its not likely that their entire portfolio will become worthless. so sorry i didn’t get into specifics, i was merely speaking about valuations in general and porfolios whether they be long or short. i’m in the industry and how these securities get valued is up for a lot of debate, by everyone from regulators to those that holds these securities. how do you value a security that rarely trades for instance or when many of the benchmarks are indices comprised of synthetic securities? how do you determine a street value? i’m well aware of the difficulties – i’m merely saying that there are 2 sides to every transaction- something a lot of people seem to miss. and that someone is profiting off of this, and unlike many other security types, there are assets backed by these issuances.

traders are bidding to lose these days – there are a lot of investors who aren’t willing to buy up anymore subprime debt, but things quickly change, so my point is not whether a superfund is needed, its what the market perceives as the ability for upside, temporary or not. and there is always someone willing to buy. if the government steps in, there will probably be a few takers who will bet on the market stabiliziing – at least temporarily.

[zzz]

davelj – i understand how these securities work and i agree that some of these securities can become worthless at least temporarily – in the case of a fire sale or in instances of a liquidity crisis – but as a collective portfolio – for any bank / hedge fund, its not likely that their entire portfolio will become worthless. so sorry i didn’t get into specifics, i was merely speaking about valuations in general and porfolios whether they be long or short. i’m in the industry and how these securities get valued is up for a lot of debate, by everyone from regulators to those that holds these securities. how do you value a security that rarely trades for instance or when many of the benchmarks are indices comprised of synthetic securities? how do you determine a street value? i’m well aware of the difficulties – i’m merely saying that there are 2 sides to every transaction- something a lot of people seem to miss. and that someone is profiting off of this, and unlike many other security types, there are assets backed by these issuances.

traders are bidding to lose these days – there are a lot of investors who aren’t willing to buy up anymore subprime debt, but things quickly change, so my point is not whether a superfund is needed, its what the market perceives as the ability for upside, temporary or not. and there is always someone willing to buy. if the government steps in, there will probably be a few takers who will bet on the market stabiliziing – at least temporarily.

[davelj]

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…

[davelj]

golfgal, I think the confusion lies in the following from your previous post:

“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…”

Your statement might lead one to believe that you were trying to convince someone that there aren’t any MBS or ABS that are truly worthless. Obviously, this is incorrect, as I pointed out in my response to your previous post. Also, in the case of some Z tranches, actually, yes, “the assets just vanish,” for all intents and purposes.

Now, I think what you’re trying to say is that PORTFOLIOS comprised of VARIOUS tranches of MBS and ABS will not be worthless due to the presence of real collateral. I agree with you there. (But that’s patently obvious. In the same vein, I will point out that stocks won’t go to zero because there are real companies that underly their values.) But that’s not the point you made – unwittingly or not – in your previous post. Nevertheless, I think we’re on the same page now.

[zzz]

hi dave, yes you’re absolutely correct, not having the time to go back and read all the posts, i think i was writing in reference to people’s comments about the whole lot of MBSs becoming worthless, and therefore the 100B fund being a total scam.

[gandalf]

I don’t know, golfgal, I have to politely disagree. The notion that there are two sides, that positives offset the negatives, a buyer for every seller — I think this is a little bit of a misguided understanding of what’s occurring right now.

It’s not balanced. If a large enough amount of an available commodity in a given market were to exchange hands on a given day, then it’s arguable that pricing would be perfectly efficient and wealth would be transferred not lost. It doesn’t happen that way. Prices decrease in low transaction environments. Asset values are falling, revenue streams are diminishing, securities aren’t performing, and wealth is disappearing — in the absence of transactions.

This is especially true for market positions based on leverage and restructuring. The gains were amplified through financial engineering, the losses are so on the downside. Funds that were valuable yesterday are worth pennies on the dollar today, not because of transactions in the main, but because market performance and investor perceptions have changed. A tremendous amount of wealth created in the past few years is going away in the near-term future. There is no getting around this.

Meantime, significant aspects of the ‘real’ economy have been marked to market against unsustainably high real estate prices and secondary finance instruments. ‘Real-world’ pain is going to occur as the economy adjusts. Pension funds, University endowments, Joe and Jane Homeowner, Main Street Bank, Mortgage Brokers, Home/Furniture/Retail, etc. The impacts of the changes ahead are overwhelmingly negative. Why else would banks be setting up a $100B ‘superfund’ to plug the leaks?

My view, they’ll continue to work the margins, looking to stretch the ‘cycle’, monetize the bad paper, deflating existing obligations, etc. and otherwise defer needed market adjustments — until after the elections I would assume, as Raybyrnes suggested. I agree with him, it’s a ‘Greenspan Put’ for the rest of 2007-08, otherwise known as stick it to the Dems. (Notions of civic responsibility, as well as a healthy fear of risk, do seem lost on the baby boomer set.)

[zzz]

Never suggested positives offset the negatives. Never suggested people in the market don’t do damaging things. My point is Wall St is in many respects a closed community – the average joe does not buy CDSs, MBSs, unless you are misfortunate enough to hold a fund that does. The mass public in general has no understanding or influence over institutional deals and trades. I am however suggesting that in all this madness, someone is for certain making money, even when others are losing big time. And there is no dispute that there are 2 sides to a trade – a trade would be impossible if there was not a buyer and a seller. You cannot buy an option contract unless someone is willing to write it.

I think its interesting that so many people believe wealth is just simply lost. Where do you think the money goes? Is there a vacuum I’m unaware of that sucks dollars out of the world? All while someone is buying MSFT or CSCO, there is another person shorting it. So if the price of MSFT goes down, certainly the person betting long loses money, but the person who shorted it makes money. People trade CDSs, credit default swaps because there are 2 sides – someone is betting their will be no default, whilst another is betting there will be. Someone profits from that trade.

[gandalf]

Wealth is created and destroyed all the time without transactions or exchanges occurring to mark the value of every asset. The value in a market is set by its most recent transactions, and it is usually a small percentage of an asset or commodity class that trades hands that marks the changes in price.

Consider the home-equity refinance picture these past few years. A long-time homeowner, for example, might find they have additional equity in their home to borrow against. They have not bought or sold. There was no exchange between buyer and seller marking the appreciation. Their asset ownership occurs against a backdrop of appreciating housing prices. Voila, wealth creation. If prices decline, wealth is destroyed.

Again, if a large percentage of an available commodity in a given market exchanges hands on a given day, then pricing might approach perfect efficiency and wealth would generally be transferred not lost. Yet that is not what occurs, even in relatively liquid markets such as stock. The effects are amplified in markets such as housing.

Some additional aspects to consider are (a) on the finance side, the impact of leverage on asset values, revenue streams and nominal wealth creation, and (b) the impact of the cost of borrowing and monetary policy these past few years, the net effect of which has been to increase nominal wealth at the expense of the currency itself.

[gandalf]

Wealth is created and destroyed all the time without transactions or exchanges occurring to mark the value of every asset. The value in a market is set by its most recent transactions, and it is usually a small percentage of an asset or commodity class that trades hands that marks the changes in price.

Consider the home-equity refinance picture these past few years. A long-time homeowner, for example, might find they have additional equity in their home to borrow against. They have not bought or sold. There was no exchange between buyer and seller marking the appreciation. Their asset ownership occurs against a backdrop of appreciating housing prices. Voila, wealth creation. If prices decline, wealth is destroyed.

Again, if a large percentage of an available commodity in a given market exchanges hands on a given day, then pricing might approach perfect efficiency and wealth would generally be transferred not lost. Yet that is not what occurs, even in relatively liquid markets such as stock. The effects are amplified in markets such as housing.

Some additional aspects to consider are (a) on the finance side, the impact of leverage on asset values, revenue streams and nominal wealth creation, and (b) the impact of the cost of borrowing and monetary policy these past few years, the net effect of which has been to increase nominal wealth at the expense of the currency itself.

[davelj]

golfgal… I don’t mean to be overly critical (or maybe I do)… but for someone who’s in the financial services industry you have a woeful misunderstanding of how the world works. In your previous post you wrote:

“I think its interesting that so many people believe wealth is just simply lost. Where do you think the money goes? Is there a vacuum I’m unaware of that sucks dollars out of the world? All while someone is buying MSFT or CSCO, there is another person shorting it. So if the price of MSFT goes down, certainly the person betting long loses money, but the person who shorted it makes money.”

I’ve got news for you: LOTS and LOTS of times wealth “is just simply lost.” To use but one simple example, let’s say I’ve got a publicly-traded mortgage company that’s valued at $1 billion dollars and $100 million of that market capitalization is sold short. And let’s say the next day before trading the company announces it’s going BK and the market cap goes to zero (just to simplify things) on the first trade. Well, the shorts doubled their money, so the “shorts’ wealth” increased to $200 million. But the longs just lost $1 billion. So the NET LOSS to overall global wealth was $800 million. That $800 million… poof… disappeared. Considering that less than 5% of all the shares of S&P 500 companies are sold short at any given time, when stock prices increase, wealth increases (in the short term) and when stock prices decrease, wealth decreases (in the short term). The world is always long stocks by a HUGE margin. (This is why economists talk about “the wealth effect” in conjunction with rising and falling asset prices.)

To use an even clearer example, let’s say I own an apartment building worth $10 million. And to simplify things let’s say that I have no mortgage and self-insure the property. And let’s say that an earthquake reduces the building to rubble the next day. What happened to my $10 million? It’s gone; it disappeared. The economic utility and financial rents went *poof* into thin air. Indeed, you could think of it as disappearing into a vacuum if you like.

The bottom line: Wealth absolutely disappears and “is just simply lost.” It happens all the time. Conversely, wealth is also created via innovation, etc. Fortunately, over the long term, more wealth is created in aggregate than is destroyed due to increases in productivity. But with any given security or asset, wealth can absolutely be destroyed, and often permanently. To be quite frank, that you’re in the financial industry and don’t realize this is somewhat… well… disturbing.

[patientrenter]

davelj, I agree with your post’s content, but I wish you had expressed yourself differently about golfgal. She seems a good sort, whether we agree with her or not. I’ve responded in blogs differently than I would face to face, and in the long run I regret letting myself do that.

Patient renter in OC

[davelj]

pr, I can be pretty lenient where completely idiotic posts are concerned so long as the poster doesn’t (a) hold themselves up as some kind of expert in the field (as golfgal has) and (b) belittle a particular idea when, in fact, the complete opposite is true (as golfgal did). If she wants us to believe that she holds some degree of expertise in the world of finance and that her opinions should be taken seriously then she shouldn’t post ideas that are 100% completely at odds with reality. As I’ve reiterated on occasion since I started posting here a couple of years ago, I’m often an unrepentant prick. But, then again, I’ve never had any interest in winning popularity contests.

[zzz]

I love people who never pause to take what they are reading and their response into context of someone else’s vantage point. People who take very micro perspectives and use absolute examples – therefore statements like wealth is lost must be true in every sense. My point that wealth doesn’t just get sucked into a vacuum is something you can choose to take literally as well and apply it to everything. The world is not black and white all the time, perhaps you need to learn to see the gray. I’m not an idiot that doesn’t understand people lose money – and to the person losing money, that wealth is indeed lost and could possibly never be regained. It also doesn’t mean there are not others who profit from a person’s loss. Its an INCREDIBLY narrow perspective when looking at the BROADER marketplace. Like I said in my last post, this is not about 1 =1 or positives replace negatives. I give examples that someone’s loss “could” be someone else’s gain. The example of a home crumbling into dust – people profit off of others devastation. I hear traders talk ALL the time about how hurricanes, natural disasters, etc….although highly unpleasant to people suffering extensive tragedy, is actually great for trading and the market – volatility means opportunities for profit taking. Is this a horrible concept from a moral perspective, certainly, but does this mean profit taking stops? No. There are no absolute examples. My point is that wealth is often transferred, temporarily or not. You can take a very micro perspective about economics, or you can choose to take a macro one. This thread discusses the losses that are occurring in the subprime market. My examples point to the fact that unless the fund manager is a complete idiot, there aren’t too many funds or institutional investors that are long or short entirely in 1 position, 1 direction. YES – people are absolutely losing their pants in the subprime market, but there are also people out there making a killing. It does not equate 1 to 1 – I feel like I need to repeat myself because clearly my point is lost. People too often overlook the ability to make money betting the bears.

This is a forum where people post comments and their opinions – an opportunity for discussion. If we all had all the answers, we wouldn’t be here would we? I understand that this isn’t meant to be a novel or dissertation on perception of how the marketplace functions. I think in the future I’ll have to make sure I write DISCLAIMERS about my posts so that I don’t get attacked on comments taken so literally. I don’t write and explain everything in detail – sorry I don’t have that much time. The points I make are not necessarily my personal beliefs or opinions – they are perspectives.

I tend to find that people who call others idiots should apply the idiot test to themselves.

[cr]

So anyway, back on topic here-

I believe someone on this site, either in this post or another commented from “mullet-head’s” analysis that this is just another form or repackaging toxic mortgages and selling them off to uninformed “investors” all under a new name.

After 3 days of drops, and down again today I think money managers will be a little more cautious, and I certainly hope they will run from anything associated with sub-prime.

It’s still got a long way to go.

[Arraya]

http://www.marketoracle.co.uk/Article2481.html

The banks are presently holding hundreds of billions of dollars in mortgage-backed securities (MBSs) that they cannot sell—because there are no buyers —and don’t want to take back on their balance sheets because they’ll be forced to increase their capital reserves. So they’ve decided to launch a public relations campaign to promote some goofy-sounding fund, called the “Master-Liquidity Enhancement Conduit” or M-LEC, which will allow the banks to place their unwanted bonds in Limbo until some future date when the public appetite for garbage CDOs improves.

“The banks are being crushed by a debt-load they generated through “securitization”. They need to accept responsibility for their poor judgment (or greed?) and report their losses. The Super-Conduit is just a dodge to put off the unavoidable day of reckoning. The whole wretched plan should be scrapped. No amount of financial chicanery will eradicate billions of dollars in bad bets. It’s time for the banks to face the hangman.”

[gandalf]

On-topic here and I’m actually keeping it fairly civil. This notion that massive amounts of wealth can be created and destroyed simply through changes in perceptions is central to the concept of economic bubbles, the current housing bubble, this website, these forums, etc. Wealth was created during the housing run-up, now it is being destroyed.

Countrywide is currently running an ad campaign that illustrates this perfectly. I was in Oakland the other day and saw one of their mini-billboards in the lobby of a downtown office building. I’m paraphrasing here, but it goes along the lines of “In times of great change, wealth doesn’t simply disappear. It changes hands. The key is to understand where the transfers are occurring and to be a part of it.”

Think CW has an interest in shaping perceptions?

You bet. The perma-bulls and bubble players would have us believe that changes in perceptions about housing value and unsustainable expectations related to residential property appreciation have resulted in real gains in wealth this past decade. To be sure, some of these gains were real. But we’re now entering into a phase where much of these gains will be erased as perceptions adjust to reality.

And true, there are some, particularly on Wall Street, who will ‘make a killing’ on the ride down. But the impacts of this phase are going to be overwhelmingly negative on balance, for Main Street as well as Wall Street. I think it’s going to be a very challenging time.

Am I critical? Hell yes! I’m a business owner who values economic stability and sound fiscal and monetary policy. The last ten years have been shamefully irresponsible. It’s a disgusting mess we’re inheriting. No amount of ‘shorting’ the property market can mask this larger truth.

[gandalf]

I believe it’s quite a bit more than billions! The superfund is $100B alone. The drop is going to consist of depreciation of housing itself, plus markdown all of the structured and leveraged financial instruments that depend on housing assets and related revenue streams, plus a negative multiplier that retards wealth-creation in the greater US economy, as well as further impacts on the global economy.

My guess, The amount of unwinding is going to be on the order of tens of trillions of dollars when it’s all finished. Others have suggested hundreds of trillions. Not close enough to the details to know the answer. Definitely more than billions though.

To put these numbers in perspective, 2006 USA GDP was $13.3 trillion. The federal debt is $9 trillion, and that’s just the market for treasuries. There is so much paper out there, it makes your head swim. The puppet masters are doing their part to keep the show going, thus the ‘Greenspan Put’. Soft landing is really the best outcome we can hope for, with a gradual unwinding over the next decade.

[gandalf]

I believe it’s quite a bit more than billions! The superfund is $100B alone. The drop is going to consist of depreciation of housing itself, plus markdown all of the structured and leveraged financial instruments that depend on housing assets and related revenue streams, plus a negative multiplier that retards wealth-creation in the greater US economy, as well as further impacts on the global economy.

My guess, The amount of unwinding is going to be on the order of tens of trillions of dollars when it’s all finished. Others have suggested hundreds of trillions. Not close enough to the details to know the answer. Definitely more than billions though.

To put these numbers in perspective, 2006 USA GDP was $13.3 trillion. The federal debt is $9 trillion, and that’s just the market for treasuries. There is so much paper out there, it makes your head swim. The puppet masters are doing their part to keep the show going, thus the ‘Greenspan Put’. Soft landing is really the best outcome we can hope for, with a gradual unwinding over the next decade.

[gandalf]

On-topic here and I’m actually keeping it fairly civil. This notion that massive amounts of wealth can be created and destroyed simply through changes in perceptions is central to the concept of economic bubbles, the current housing bubble, this website, these forums, etc. Wealth was created during the housing run-up, now it is being destroyed.

Countrywide is currently running an ad campaign that illustrates this perfectly. I was in Oakland the other day and saw one of their mini-billboards in the lobby of a downtown office building. I’m paraphrasing here, but it goes along the lines of “In times of great change, wealth doesn’t simply disappear. It changes hands. The key is to understand where the transfers are occurring and to be a part of it.”

Think CW has an interest in shaping perceptions?

You bet. The perma-bulls and bubble players would have us believe that changes in perceptions about housing value and unsustainable expectations related to residential property appreciation have resulted in real gains in wealth this past decade. To be sure, some of these gains were real. But we’re now entering into a phase where much of these gains will be erased as perceptions adjust to reality.

And true, there are some, particularly on Wall Street, who will ‘make a killing’ on the ride down. But the impacts of this phase are going to be overwhelmingly negative on balance, for Main Street as well as Wall Street. I think it’s going to be a very challenging time.

Am I critical? Hell yes! I’m a business owner who values economic stability and sound fiscal and monetary policy. The last ten years have been shamefully irresponsible. It’s a disgusting mess we’re inheriting. No amount of ‘shorting’ the property market can mask this larger truth.

[Arraya]

http://www.marketoracle.co.uk/Article2481.html

The banks are presently holding hundreds of billions of dollars in mortgage-backed securities (MBSs) that they cannot sell—because there are no buyers —and don’t want to take back on their balance sheets because they’ll be forced to increase their capital reserves. So they’ve decided to launch a public relations campaign to promote some goofy-sounding fund, called the “Master-Liquidity Enhancement Conduit” or M-LEC, which will allow the banks to place their unwanted bonds in Limbo until some future date when the public appetite for garbage CDOs improves.

“The banks are being crushed by a debt-load they generated through “securitization”. They need to accept responsibility for their poor judgment (or greed?) and report their losses. The Super-Conduit is just a dodge to put off the unavoidable day of reckoning. The whole wretched plan should be scrapped. No amount of financial chicanery will eradicate billions of dollars in bad bets. It’s time for the banks to face the hangman.”

[cr]

So anyway, back on topic here-

I believe someone on this site, either in this post or another commented from “mullet-head’s” analysis that this is just another form or repackaging toxic mortgages and selling them off to uninformed “investors” all under a new name.

After 3 days of drops, and down again today I think money managers will be a little more cautious, and I certainly hope they will run from anything associated with sub-prime.

It’s still got a long way to go.

[davelj]

golfgal, first off, I didn’t call you an idiot. I said that what you wrote was idiotic. Which it is, as I’ve explained in very clear terms. You may be a genius for all I know. But that doesn’t change the fact that there are some pretty big holes in your understanding of economics.

Secondly, your previous post is a text book example of what is known as the Straw Man Fallacy. You didn’t address the point of my post directly – that net/net wealth is often destroyed (which in your previous post you suggested was a ridiculous notion). Instead you addressed a straw man argument of your own invention – that wealth isn’t destroyed “1=1” (unit for unit, I assume) – an idea that I NEVER suggested at all in my post. In fact, I made a specific point in my BK mortgage company example of how there would generally be some (positive wealth) offset even when an asset value tanked. So to address your straw man argument directly, yeah, of course wealth destruction events aren’t 1 for 1. That’s offering up a blinding glimpse of the obvious. You’re trying to divert attention away from my response to the point that you DID make by re-characterizing my response into something I DIDN’T say. Again, classic Straw Man response.

I don’t think you need to write disclaimers, golfgal (although I often do for clarity’s sake). I just think you need to write more clearly and, more importantly, just admit when you’re wrong. I don’t have a problem with either. Somehow I manage to write more clearly than you do while at the same time using fewer words. And anyone who’s read a lot of my posts here knows that I’ve often ended posts with the following (or some derivation of it): “But I could be wrong; it wouldn’t be the first time.” Words to live by, in my opinion.

[drunkle]

“admit when you’re wrong”

hey… i think you made a wrong turn somewhere. you’re on the internet… where admission of error is scarcer than an honest politician…

[zzz]

This is going to be my last post on this as I don’t think anything I write will illuminate my points to davelj nor do I care to. First off, I never said wealth cannot be destroyed, never wrote it in my last posts. I simply said I love it when people make that statement and I question if it goes into a vacuum. Like I said, looking at a singular instance, yes, it can be destroyed. I have not and am not talking about me, you and your neighbor. I’m not talking about individual specifics, I’m looking at this from a MACRO view.

Wealth is lost is even subjective – are we talking about paper wealth or real money? If someone bought a security at X, it then went to 5X, but the person cashed in at 2X, was wealth destroyed or did they simply fail to capitalize on their gain? $10M building destroyed in an earthquake, how much did this person pay for it? Is the land still commercially viable and if so, what is it worth immediately post earthquake versus in 1 year? If the land must be sold, is this an opportunity for someone else to buy it for cents on the dollar and wait for a recovery, to which a different person will make a significant amount? Davelj – is this your straw man example without all the details?

I have said and will say it again, at a MACRO level, wealth can and does get transferred. I don’t give straw man examples, I give simplified examples because unless you are an insider, no one really understands the implications, nor can it necessarily be measured looking at short term effects verus long term. An investment banks headquarters was destroyed on 9/11 and they lost much of their staff, including entire teams that were decimated. There were people that day who lost wealth- no argument there. The bank – helped along by its clients and competitors rebuilt their lost staff and came back and 5 years later, had multiplied in revenue from their pre 9/11 time, and had gone public. Net, this bank and its effect on the economy is clear. If you look only at 9/11 as a singular event, wealth in parts- was definitely destroyed that day, but what happened to that wealth that remained over time? There were many companies who were insured, their insurers paid, but many of those insurers were re-insured. How the re-insurers were further hedged, I don’t know all those details as each instance would be different. If you have the time to go chase down ALL the details and all the dependancies, links, hedges, go for it -maybe you can then build what you call – not a straw man argument. So one could argue that wealth was destroyed, others could argue that a year later, for some it had not – they had recovered. There are many ways to measure the net effect of this wealth, at different points in time. I challenge people to take a deeper look and evaluate whether people are losing wealth, temporarily or not, real or not, or whether people are failing to capitalize, failing to make the correct market bets, when others are finding opportunity amongst what is chacterized as all this wealth destruction.

There are economists who believe wealth is indeed not destroyed, but rather its transferred- macroeconomics is not a perfect science – that is why there are theories and many economists. If there is only 1 view on economics, why are there multiple theories and economists who evaluate the marketplace? There are many factors and until you evaluate all the factors, or are even privvy to all the factors – my argument is that WE (the public)are not privvy to all the factors of complex institutional transactions. I’m not here to say which theories are right and which are wrong, I merely am providing examples of a different vantage point. Decide for yourself, but the point is, in complex transations and macroeconomics, there is never just 1 view of any situation – even the world’s renowned experts will argue and come up with different analysis.

[davelj]

golfgal, if there were an award given for verbosity en route to unintelligible gibberish, I would nominate you. And, believe me, there’s plenty of competition here on the internet.

Despite all of the obfuscation in your recent posts, this issue is really simple. You made a point. It’s patently clear to anyone at a high school reading level the point you were trying to make. When I clearly revealed that your point was ridiculous, you then proceeded to backpedal and re-characterize what you originally said as something different (and less ridiculous). This, as opposed to just admitting, “Oh, I guess I was wrong.”

No amount of econo-babble is going to change this fact. But in a perverse way, I’m enjoying reading as you expand the hole you’re digging for yourself in various directions. Don’t stop now.

[davelj]

golfgal, if there were an award given for verbosity en route to unintelligible gibberish, I would nominate you. And, believe me, there’s plenty of competition here on the internet.

Despite all of the obfuscation in your recent posts, this issue is really simple. You made a point. It’s patently clear to anyone at a high school reading level the point you were trying to make. When I clearly revealed that your point was ridiculous, you then proceeded to backpedal and re-characterize what you originally said as something different (and less ridiculous). This, as opposed to just admitting, “Oh, I guess I was wrong.”

No amount of econo-babble is going to change this fact. But in a perverse way, I’m enjoying reading as you expand the hole you’re digging for yourself in various directions. Don’t stop now.

[zzz]

This is going to be my last post on this as I don’t think anything I write will illuminate my points to davelj nor do I care to. First off, I never said wealth cannot be destroyed, never wrote it in my last posts. I simply said I love it when people make that statement and I question if it goes into a vacuum. Like I said, looking at a singular instance, yes, it can be destroyed. I have not and am not talking about me, you and your neighbor. I’m not talking about individual specifics, I’m looking at this from a MACRO view.

Wealth is lost is even subjective – are we talking about paper wealth or real money? If someone bought a security at X, it then went to 5X, but the person cashed in at 2X, was wealth destroyed or did they simply fail to capitalize on their gain? $10M building destroyed in an earthquake, how much did this person pay for it? Is the land still commercially viable and if so, what is it worth immediately post earthquake versus in 1 year? If the land must be sold, is this an opportunity for someone else to buy it for cents on the dollar and wait for a recovery, to which a different person will make a significant amount? Davelj – is this your straw man example without all the details?

I have said and will say it again, at a MACRO level, wealth can and does get transferred. I don’t give straw man examples, I give simplified examples because unless you are an insider, no one really understands the implications, nor can it necessarily be measured looking at short term effects verus long term. An investment banks headquarters was destroyed on 9/11 and they lost much of their staff, including entire teams that were decimated. There were people that day who lost wealth- no argument there. The bank – helped along by its clients and competitors rebuilt their lost staff and came back and 5 years later, had multiplied in revenue from their pre 9/11 time, and had gone public. Net, this bank and its effect on the economy is clear. If you look only at 9/11 as a singular event, wealth in parts- was definitely destroyed that day, but what happened to that wealth that remained over time? There were many companies who were insured, their insurers paid, but many of those insurers were re-insured. How the re-insurers were further hedged, I don’t know all those details as each instance would be different. If you have the time to go chase down ALL the details and all the dependancies, links, hedges, go for it -maybe you can then build what you call – not a straw man argument. So one could argue that wealth was destroyed, others could argue that a year later, for some it had not – they had recovered. There are many ways to measure the net effect of this wealth, at different points in time. I challenge people to take a deeper look and evaluate whether people are losing wealth, temporarily or not, real or not, or whether people are failing to capitalize, failing to make the correct market bets, when others are finding opportunity amongst what is chacterized as all this wealth destruction.

There are economists who believe wealth is indeed not destroyed, but rather its transferred- macroeconomics is not a perfect science – that is why there are theories and many economists. If there is only 1 view on economics, why are there multiple theories and economists who evaluate the marketplace? There are many factors and until you evaluate all the factors, or are even privvy to all the factors – my argument is that WE (the public)are not privvy to all the factors of complex institutional transactions. I’m not here to say which theories are right and which are wrong, I merely am providing examples of a different vantage point. Decide for yourself, but the point is, in complex transations and macroeconomics, there is never just 1 view of any situation – even the world’s renowned experts will argue and come up with different analysis.

[drunkle]

“admit when you’re wrong”

hey… i think you made a wrong turn somewhere. you’re on the internet… where admission of error is scarcer than an honest politician…

[davelj]

golfgal, first off, I didn’t call you an idiot. I said that what you wrote was idiotic. Which it is, as I’ve explained in very clear terms. You may be a genius for all I know. But that doesn’t change the fact that there are some pretty big holes in your understanding of economics.

Secondly, your previous post is a text book example of what is known as the Straw Man Fallacy. You didn’t address the point of my post directly – that net/net wealth is often destroyed (which in your previous post you suggested was a ridiculous notion). Instead you addressed a straw man argument of your own invention – that wealth isn’t destroyed “1=1” (unit for unit, I assume) – an idea that I NEVER suggested at all in my post. In fact, I made a specific point in my BK mortgage company example of how there would generally be some (positive wealth) offset even when an asset value tanked. So to address your straw man argument directly, yeah, of course wealth destruction events aren’t 1 for 1. That’s offering up a blinding glimpse of the obvious. You’re trying to divert attention away from my response to the point that you DID make by re-characterizing my response into something I DIDN’T say. Again, classic Straw Man response.

I don’t think you need to write disclaimers, golfgal (although I often do for clarity’s sake). I just think you need to write more clearly and, more importantly, just admit when you’re wrong. I don’t have a problem with either. Somehow I manage to write more clearly than you do while at the same time using fewer words. And anyone who’s read a lot of my posts here knows that I’ve often ended posts with the following (or some derivation of it): “But I could be wrong; it wouldn’t be the first time.” Words to live by, in my opinion.

[zzz]

I love people who never pause to take what they are reading and their response into context of someone else’s vantage point. People who take very micro perspectives and use absolute examples – therefore statements like wealth is lost must be true in every sense. My point that wealth doesn’t just get sucked into a vacuum is something you can choose to take literally as well and apply it to everything. The world is not black and white all the time, perhaps you need to learn to see the gray. I’m not an idiot that doesn’t understand people lose money – and to the person losing money, that wealth is indeed lost and could possibly never be regained. It also doesn’t mean there are not others who profit from a person’s loss. Its an INCREDIBLY narrow perspective when looking at the BROADER marketplace. Like I said in my last post, this is not about 1 =1 or positives replace negatives. I give examples that someone’s loss “could” be someone else’s gain. The example of a home crumbling into dust – people profit off of others devastation. I hear traders talk ALL the time about how hurricanes, natural disasters, etc….although highly unpleasant to people suffering extensive tragedy, is actually great for trading and the market – volatility means opportunities for profit taking. Is this a horrible concept from a moral perspective, certainly, but does this mean profit taking stops? No. There are no absolute examples. My point is that wealth is often transferred, temporarily or not. You can take a very micro perspective about economics, or you can choose to take a macro one. This thread discusses the losses that are occurring in the subprime market. My examples point to the fact that unless the fund manager is a complete idiot, there aren’t too many funds or institutional investors that are long or short entirely in 1 position, 1 direction. YES – people are absolutely losing their pants in the subprime market, but there are also people out there making a killing. It does not equate 1 to 1 – I feel like I need to repeat myself because clearly my point is lost. People too often overlook the ability to make money betting the bears.

This is a forum where people post comments and their opinions – an opportunity for discussion. If we all had all the answers, we wouldn’t be here would we? I understand that this isn’t meant to be a novel or dissertation on perception of how the marketplace functions. I think in the future I’ll have to make sure I write DISCLAIMERS about my posts so that I don’t get attacked on comments taken so literally. I don’t write and explain everything in detail – sorry I don’t have that much time. The points I make are not necessarily my personal beliefs or opinions – they are perspectives.

I tend to find that people who call others idiots should apply the idiot test to themselves.

[davelj]

pr, I can be pretty lenient where completely idiotic posts are concerned so long as the poster doesn’t (a) hold themselves up as some kind of expert in the field (as golfgal has) and (b) belittle a particular idea when, in fact, the complete opposite is true (as golfgal did). If she wants us to believe that she holds some degree of expertise in the world of finance and that her opinions should be taken seriously then she shouldn’t post ideas that are 100% completely at odds with reality. As I’ve reiterated on occasion since I started posting here a couple of years ago, I’m often an unrepentant prick. But, then again, I’ve never had any interest in winning popularity contests.

[patientrenter]

davelj, I agree with your post’s content, but I wish you had expressed yourself differently about golfgal. She seems a good sort, whether we agree with her or not. I’ve responded in blogs differently than I would face to face, and in the long run I regret letting myself do that.

Patient renter in OC

[davelj]

golfgal… I don’t mean to be overly critical (or maybe I do)… but for someone who’s in the financial services industry you have a woeful misunderstanding of how the world works. In your previous post you wrote:

“I think its interesting that so many people believe wealth is just simply lost. Where do you think the money goes? Is there a vacuum I’m unaware of that sucks dollars out of the world? All while someone is buying MSFT or CSCO, there is another person shorting it. So if the price of MSFT goes down, certainly the person betting long loses money, but the person who shorted it makes money.”

I’ve got news for you: LOTS and LOTS of times wealth “is just simply lost.” To use but one simple example, let’s say I’ve got a publicly-traded mortgage company that’s valued at $1 billion dollars and $100 million of that market capitalization is sold short. And let’s say the next day before trading the company announces it’s going BK and the market cap goes to zero (just to simplify things) on the first trade. Well, the shorts doubled their money, so the “shorts’ wealth” increased to $200 million. But the longs just lost $1 billion. So the NET LOSS to overall global wealth was $800 million. That $800 million… poof… disappeared. Considering that less than 5% of all the shares of S&P 500 companies are sold short at any given time, when stock prices increase, wealth increases (in the short term) and when stock prices decrease, wealth decreases (in the short term). The world is always long stocks by a HUGE margin. (This is why economists talk about “the wealth effect” in conjunction with rising and falling asset prices.)

To use an even clearer example, let’s say I own an apartment building worth $10 million. And to simplify things let’s say that I have no mortgage and self-insure the property. And let’s say that an earthquake reduces the building to rubble the next day. What happened to my $10 million? It’s gone; it disappeared. The economic utility and financial rents went *poof* into thin air. Indeed, you could think of it as disappearing into a vacuum if you like.

The bottom line: Wealth absolutely disappears and “is just simply lost.” It happens all the time. Conversely, wealth is also created via innovation, etc. Fortunately, over the long term, more wealth is created in aggregate than is destroyed due to increases in productivity. But with any given security or asset, wealth can absolutely be destroyed, and often permanently. To be quite frank, that you’re in the financial industry and don’t realize this is somewhat… well… disturbing.

[zzz]

Never suggested positives offset the negatives. Never suggested people in the market don’t do damaging things. My point is Wall St is in many respects a closed community – the average joe does not buy CDSs, MBSs, unless you are misfortunate enough to hold a fund that does. The mass public in general has no understanding or influence over institutional deals and trades. I am however suggesting that in all this madness, someone is for certain making money, even when others are losing big time. And there is no dispute that there are 2 sides to a trade – a trade would be impossible if there was not a buyer and a seller. You cannot buy an option contract unless someone is willing to write it.

I think its interesting that so many people believe wealth is just simply lost. Where do you think the money goes? Is there a vacuum I’m unaware of that sucks dollars out of the world? All while someone is buying MSFT or CSCO, there is another person shorting it. So if the price of MSFT goes down, certainly the person betting long loses money, but the person who shorted it makes money. People trade CDSs, credit default swaps because there are 2 sides – someone is betting their will be no default, whilst another is betting there will be. Someone profits from that trade.

[gandalf]

I don’t know, golfgal, I have to politely disagree. The notion that there are two sides, that positives offset the negatives, a buyer for every seller — I think this is a little bit of a misguided understanding of what’s occurring right now.

It’s not balanced. If a large enough amount of an available commodity in a given market were to exchange hands on a given day, then it’s arguable that pricing would be perfectly efficient and wealth would be transferred not lost. It doesn’t happen that way. Prices decrease in low transaction environments. Asset values are falling, revenue streams are diminishing, securities aren’t performing, and wealth is disappearing — in the absence of transactions.

This is especially true for market positions based on leverage and restructuring. The gains were amplified through financial engineering, the losses are so on the downside. Funds that were valuable yesterday are worth pennies on the dollar today, not because of transactions in the main, but because market performance and investor perceptions have changed. A tremendous amount of wealth created in the past few years is going away in the near-term future. There is no getting around this.

Meantime, significant aspects of the ‘real’ economy have been marked to market against unsustainably high real estate prices and secondary finance instruments. ‘Real-world’ pain is going to occur as the economy adjusts. Pension funds, University endowments, Joe and Jane Homeowner, Main Street Bank, Mortgage Brokers, Home/Furniture/Retail, etc. The impacts of the changes ahead are overwhelmingly negative. Why else would banks be setting up a $100B ‘superfund’ to plug the leaks?

My view, they’ll continue to work the margins, looking to stretch the ‘cycle’, monetize the bad paper, deflating existing obligations, etc. and otherwise defer needed market adjustments — until after the elections I would assume, as Raybyrnes suggested. I agree with him, it’s a ‘Greenspan Put’ for the rest of 2007-08, otherwise known as stick it to the Dems. (Notions of civic responsibility, as well as a healthy fear of risk, do seem lost on the baby boomer set.)

[zzz]

hi dave, yes you’re absolutely correct, not having the time to go back and read all the posts, i think i was writing in reference to people’s comments about the whole lot of MBSs becoming worthless, and therefore the 100B fund being a total scam.

[davelj]

golfgal, I think the confusion lies in the following from your previous post:

“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…”

Your statement might lead one to believe that you were trying to convince someone that there aren’t any MBS or ABS that are truly worthless. Obviously, this is incorrect, as I pointed out in my response to your previous post. Also, in the case of some Z tranches, actually, yes, “the assets just vanish,” for all intents and purposes.

Now, I think what you’re trying to say is that PORTFOLIOS comprised of VARIOUS tranches of MBS and ABS will not be worthless due to the presence of real collateral. I agree with you there. (But that’s patently obvious. In the same vein, I will point out that stocks won’t go to zero because there are real companies that underly their values.) But that’s not the point you made – unwittingly or not – in your previous post. Nevertheless, I think we’re on the same page now.

[zzz]

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.

[4plexowner]

Actually, ALL of the issues can be summed up in two words:

FIAT CURRENCY

[stansd]

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

[davelj]

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…

[patientrenter]

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

[4plexowner]

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_fannie_and_freddie

“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”

[davelj]

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.

[davelj]

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.

[4plexowner]

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_fannie_and_freddie

“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”

[4runner]

Can someone explain why this isn’t an antitrust violation?

[zzz]

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?

[4plexowner]

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

[4plexowner]

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

[zzz]

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?

[bsrsharma]

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.

[bsrsharma]

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.

[gandalf]

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!

[Raybyrnes]

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?

[patientlywaiting]

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.  

 

[patientlywaiting]

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.  

 

[gandalf]

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?

[kewp]

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.

[4plexowner]

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

[kewp]

don’t forget that ‘debt forgiveness’ has been radically modified in the last year or so

At least the concept is still alive. In Japan ‘debt forgiveness’ is lighting the charcoal grill with all the windows shut.

[kewp]

don’t forget that ‘debt forgiveness’ has been radically modified in the last year or so

At least the concept is still alive. In Japan ‘debt forgiveness’ is lighting the charcoal grill with all the windows shut.

[4plexowner]

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

[kewp]

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.

[Raybyrnes]

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

[Raybyrnes]

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

[gandalf]

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?

[Raybyrnes]

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?

[gandalf]

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!

[4runner]

Can someone explain why this isn’t an antitrust violation?

[Arraya]

Very interesting thread…

Much of this talk is over my state school-history major-brain. However, it seems to me that the current prosperity of the US is the same prosperity seen in a person with a large home loan, a large car loan, and a mountain of credit card debt. He’s living lavishly and living at the mercy of his creditors. The US is VERY affluent and has a LOT of debt. And taking the Machiavellian view, the US likes spending other people’s money and has no wish to balance its accounts if it can borrow without genuinely repaying.

Also I would presume that the rest of the world is becoming concerned that our currency (and ability to purchase goods or repay debt) could collapse catastrophicaly.

Throw $120 bbl oil in the mix and we have interesting times ahead, indeed…

[Arraya]

Very interesting thread…

Much of this talk is over my state school-history major-brain. However, it seems to me that the current prosperity of the US is the same prosperity seen in a person with a large home loan, a large car loan, and a mountain of credit card debt. He’s living lavishly and living at the mercy of his creditors. The US is VERY affluent and has a LOT of debt. And taking the Machiavellian view, the US likes spending other people’s money and has no wish to balance its accounts if it can borrow without genuinely repaying.

Also I would presume that the rest of the world is becoming concerned that our currency (and ability to purchase goods or repay debt) could collapse catastrophicaly.

Throw $120 bbl oil in the mix and we have interesting times ahead, indeed…

[Author]

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