100 Billion dollar subprime Fund

[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

[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.

[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, 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.

[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.

[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.)

[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.

[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.

[Author]

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