100 Billion dollar subprime Fund

[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.

[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

[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

[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…

[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.

[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.

[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.

[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.”

[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.

[Author]

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