Observations from a friend deep inside the maelstrom

[davelj]

I’ve been traveling for a week, but I spoke to my friend again yesterday. (He’s the head of securitizations for the mortgage subsidiary of a major investment bank.) For what they’re worth, his observations are as follows (obviously, I’m paraphrasing):

“There are way too many folks out there that don’t understand what they own in the mortgage sector. For the first time I was asked to lead a conference call with our firm’s traders (traders!) – recall that I work for a subsidiary, not for the broker itself – because they realize that they need to get a better understanding of what they’re trading and what’s on the books in inventory. It was surreal. These guys were asking me questions like, ‘I don’t understand why my AAAs are falling so much.’ I responded, ‘Well, that’s because you have last month’s AAAs, which today are just As and tomorrow might be BBBs.’ Anyhow, it’s clear that there’s total chaos and a large part of it is that the marginal trader/”investor” doesn’t know what exactly they own. This is becoming apparent to the market. Also a lot of these LBO bridges have turned into piers and the holders are freaking out. Right now every CEO of every sizable bank and brokerage has sent the message out to ‘REDUCE BALANCE SHEET RISK IMMEDIATELY,’ including ours. So everyone’s trying to sell risk and get liquid… at the same time. What a lot of folks don’t understand is that the rating agencies are just getting started in the downgrade process. These agencies don’t have enough manpower to sort through this mess all at once, so we’ll be seeing more and more downgrades in unexpected places for several months. I expect this to get A LOT uglier before the situation starts to stabilize.”

Well, at least it’ll be interesting…

[lindismith]

Amazing.

I haven’t posted in a while, but have been reading. I just shake my head when I see what’s going on.

What’s next?

[lindismith]

Amazing.

I haven’t posted in a while, but have been reading. I just shake my head when I see what’s going on.

What’s next?

[HLS]

You don’t want to know…

You think Katrina was bad ??

Will FEMA be available to help us 😉

[HLS]

You don’t want to know…

You think Katrina was bad ??

Will FEMA be available to help us 😉

[LA_Renter]

“Right now every CEO of every sizable bank and brokerage has sent the message out to ‘REDUCE BALANCE SHEET RISK IMMEDIATELY,'”

That is pretty much what happened to Japan.

[LA_Renter]

“Right now every CEO of every sizable bank and brokerage has sent the message out to ‘REDUCE BALANCE SHEET RISK IMMEDIATELY,'”

That is pretty much what happened to Japan.

[HereWeGo]

It will be interesting to see if the Fed is as deliberate as the BOJ.

[HereWeGo]

It will be interesting to see if the Fed is as deliberate as the BOJ.

[sdduuuude]

A really intersting post davelj – thanks.

[sdduuuude]

A really intersting post davelj – thanks.

[lindismith]

a tid-bit from todays Market Beat column in the WSJ online:

August 2, 2007, 10:02 am
Reading: Scanning the Books
Posted by Joanna Ossinger

In today’s Journal, David Reilly and Karen Richardson talk about how hard it is to find subprime-mortgage-related losses in financial companies’ statements. They quote a hedge-fund manager as saying that “We’ve been looking for financials that show losses from these securities on their books, and they’ve been very tough to find” because “it’s very opaque.” They write that some ways to value assets “can allow a firm to take an unrealistically optimistic view that overlooks potential losses,” particularly in securities that are thinly traded. They say that coming accounting-rule changes could help, but likely not for a year or more.

Roddy Boyd writes in today’s New York Post about some of the hedge funds that are suffering, taking “their sharpest losses in years” in the wake of the market’s recent turmoil. “Among the big names slammed were hedge-fund guru Paul Tudor Jones II, who had two funds take a hit yesterday, and billionaire Steve Cohen,” he says, and “Already, two funds run by Bear Stearns Asset Management have gone bankrupt and Sowood Management, a hedge fund created with great fanfare by a former executive of Harvard University’s $30 billion endowment, has collapsed.”

*******

SCARY.

[lindismith]

a tid-bit from todays Market Beat column in the WSJ online:

August 2, 2007, 10:02 am
Reading: Scanning the Books
Posted by Joanna Ossinger

In today’s Journal, David Reilly and Karen Richardson talk about how hard it is to find subprime-mortgage-related losses in financial companies’ statements. They quote a hedge-fund manager as saying that “We’ve been looking for financials that show losses from these securities on their books, and they’ve been very tough to find” because “it’s very opaque.” They write that some ways to value assets “can allow a firm to take an unrealistically optimistic view that overlooks potential losses,” particularly in securities that are thinly traded. They say that coming accounting-rule changes could help, but likely not for a year or more.

Roddy Boyd writes in today’s New York Post about some of the hedge funds that are suffering, taking “their sharpest losses in years” in the wake of the market’s recent turmoil. “Among the big names slammed were hedge-fund guru Paul Tudor Jones II, who had two funds take a hit yesterday, and billionaire Steve Cohen,” he says, and “Already, two funds run by Bear Stearns Asset Management have gone bankrupt and Sowood Management, a hedge fund created with great fanfare by a former executive of Harvard University’s $30 billion endowment, has collapsed.”

*******

SCARY.

[Author]

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