This BS fund had $140 million in commercial mortgage backs in contract before the end of the day Wednesday (One bond was even contacted at a 4bp premium). Maybe that is what the WSJ means when it says they sold 'some' of the higher-quality assets.
This reminds me of Japanese office buildings in the 90's when nobody knew the current value because no transactions had taken place for years for fear of establishing a market price that would destroy the collateral value on the books.
The irony is that as financial messes go, the mortgage mess barely rates. My guess is it could be resolved for what the Mexican peso crisis cost. The problems arise because there is no leadership, especially in Washington but neither on Wall Street. And now, as you hint, it could turn into a vicious cycle of contracting credit.
By VIKAS BAJAJ and JULIE CRESWELL
Published: June 21, 2007
The high-stakes game of brinksmanship began early yesterday on Wall Street, and continued throughout the day. .....The day ended with deals that appeared to have forestalled a meltdown. But questions remained about how successful they were and whether they had merely delayed the inevitable....
.....
The deal that JP Morgan Chase reached with Bear Stearns Asset Management allowed it to sell $400 million collateral back to the hedge funds for cash, according to people briefed on the matter. It was not clear what price the two banks agreed to.
Goldman Sachs and Bank of America reached similar deals, though details remained unclear. Also unclear is what price the assets will eventually fetch for the Bear funds and what types of losses investors, who have been unable to redeem their investments since May, will face.
........
In fact, rather than aggressively selling the assets it has seized, Merrill is quietly showing it to a small group of potential buyers, according to a person briefed on the process.
Such an approach helps to keep the pricing of the securities under wraps, allowing Wall Street firms to avoid marking down their own stakes. Keeping the sales price quiet also means that the firms may not have to add collateral immediately to shore up their portfolios.
At the end of the day, Merrill sold only a small portion of the $850 million in assets it had seized from the Bear funds as collateral. Traders said what did sell was the less risky, well-collateralized securities and that those sold near or at par in many cases. It is unclear whether Merrill intends to hold onto the remaining securities or whether it will try to sell them again down the road.
.....
One industry executive, who asked not to be named because of the delicacy of the subject, said the banks involved in the Bear funds could collectively lose $1 billion on their lendings to the Bear funds. While the amount is not itself significant given the size of these banks, it suggests the potential for bigger losses down the road.
as financial messes go, the mortgage mess barely rates
Not so. The coming 30% decline in home prices is going to vaporize about $6 trillion in illusory wealth in the US (the current nominal value of the US housing stock is nearly $20 trillion).
A very significant fraction of the population has been counting on funding retirement by selling their homes for much more than they owe -- and are going to find themselves in the exactly opposite situation of owing more than they can sell for. At the same time, government and private pension funds are going to sustain significant losses due to having invested in hedge funds and real estate; and these will be on top of the $6 trillion decline in nominal home values.
This is going to force the US savings rate to return to (and probably overshoot) its traditional level of 8%. The resulting decline in consumption will have far-reaching impacts.
All of this are early warning signs of stress in mortgage and structured finance. They can't even price some of the Bear CDOs. How do they carry it on their books? What are the real values of many investment portfolios that are stuffed with these types of securities and levered to the gills?
Maybe there is no day of reckoning and the squall passes and the seas become calm and the fund managers keep getting new investors and their nice fat fees. I doubt it however. The extent and scale of the repackaging of poor mortgage credits into higher rated securities has been unprecedented. There is real stress at the margins from a clear slowdown in MEW, ARM resets and the subprime meltdown. And its not getting better. As each levered bet turns south someone's asset is getting burned. The question is when do investors in these securities decide its time to bail - before or after the shutdown of the redemption window?
"What a mess" is a polite way of putting it. It's turning out worse than I thought it would. Everyone, principally Merrill, seems to be trying to handle all of this as quietly as possible, and I don't expect them to publish any settlement prices. Undoubtedly, the Fed has made some "suggestions" in this regard.
At the end of the day, this thing can still go out of control. And you won't hear it coming.
Personally, I'm convinced that Bear Stearns's days as a major player are numbered. This mess has severely damaged their reputation and it will ultimately cost them a lot of respectable business. If the situation does go out of control, I think they'll ultimately be viewed as the cause of it and become a pariah on the Street.
This is a good time to find a foxhole to crawl into it until everything calms down.
One final note. I'm somewhat amused by some of the observations here concerning the 'trivial' amount of money involved given the 'big picture'.
Frankly, those are the kind of comments I would expect to see near the end of an easy money cycle. Money no longer means anything because it's so easy to come by. Well, let me assure you, a $20 billion portfolio is still one hell of a lot of money and can do major damage at the margins if its liquidation is forced.
Don't forget, all of us-even Warren Buffet-work at the margins.
"NEW YORK (AP) -- A surge in Treasury yields rattled Wall Street Wednesday, forcing stocks to give up early gains and drive down the Dow Jones industrial average more than 140 points."
God I hate liars.
Guys, the 10 hit its peak for the day at 12:30 CT today, at 5.142%. It closed at 5.123%.
But the plunge in stocks did not happen until nearly an hour later, starting just after 1:00 PM CT, or 2:00 PM ET. I was at my trading terminal at the time!
So what really happened here?
I'll tell you what I think - although I can't prove it. I think the market reacted to the impending implosion of the Bear Stearns funds, deciding that it had enough of the obfuscation, and as a result we saw a selloff.
And who else thinks that might have had something to do with it? Bloomberg. The only straight-shooters in the room."
Mostly nonsense. The idea that this somehow makes Bear less of a major player is just dumb. The First Boston-Ohio Mattress situation in the 1980's was one thing. The Salomon Bros Treasury scandal was another real threat. This? An embarrassment, but not a financial big deal to Bear. They simply don't have enough capital at risk and are still being readily funded by the markets. That's the key to these sorts of firms. As for becoming a pariah? Stop it. They ain't Drexel. As for the scale of the event? See my prior list of things that were far bigger deals than this. What is going to happen here? Same thing that happened in 1990 when the Feds blew up the junk market. Some very smart, savvy guys (in that case Leon Black) will step in, buy at a huge discount from a panicked seller and come out the other end making enormous returns. I'd be Dave Tepper of Apaloosa is in the room as are the guys from Cerberus. But those are simply educated guesses.
This is a $20 billion portfolio and $250 billion of new debt is being sold IN THE NEXT TWO MONTHS. Think about that. As for that $250 billion, whatever portion is investment grade, we'd need far bigger problems before that couldn't get sold. Offering an addtional 25 basis points on an IG deal is an enormous incentive. Now the high quality corporate issuers tend to be opportunistic and therefore may wait, but they could certainly issue. The junk stuff? A tougher call. As always, we'll see. For now? Not only isn't the sky falling, I'm not even sure it is misty yet. Maybe misty.
Yup. It happens EVERY DAY in the markets. Somebody somewhere gets drilled. This is a large drilling for the investors, but not a large one by market standards. Understand the structure here. Bear is the fund manager and a minority investor. That's it. For these purposes, think of it like Fidelity. When one or another of their myriad funds get slammed, nobody thinks Fidelity is going under, right? Or when RJR got into trouble, nobody thought KKR's days were at an end. What has ended, at least for a while, is investors willingness to allow Bear to manage funds in this asset class. (Though Jon Meriwether's new firm has a couple of billion under management).But this is a minor part of Bear's overall business. But if you want to claim the sky is falling in some way that doesn't happen with regularity in the capital markets, go ahead.
1987 Crash
1990 Junk market dies
1991 Gulf War
1992 Soros breaks Bank of England
Bi-annual emerging market crash
1997 mini-crash
1998 LTCM
Nasdaq bubble (that was a real one)
9/11 aftermath
ENRON, Adelphia, Worldcom
Sub-prime mess
All along this time period is also the junkification of US auto bonds, the destruction of US steel bonds, rtae hikes, rate reductions
I could keep going. My only point is that the markets have a history of absorbing these things, not getting sidetracked for very long. Now LTCM and the dot.com are counterarguments, but IMO we are nowhere near that with this situation.
If there are no major concerns. Why is the Dow Jones family and Blackstone all of a sudden in a big hurry to get their deals done? Maybe the cheap money is going to end sooner rather than later. They need to hurry up and find some suckers. Also, how are the investors who are really holding the bag on these bonds going to react?
These CDO's and CDO^2 are hard to value. Why? Because to estimate future losses, you have to gauge the cross-default correlation. In other words, if there's a subprime default in Ohio that hits BBB, what's the probability that California AAA is affected? The geeks at these hedge funds (the ones that set the price on the margins) use contingent probability "Guassian copula" models. These models were originally used by actuaries to determine the probability of someone dying following the death of a spouse -- the so called "broken heart" phenomenon.
So here's the problem, IMO: the models have already shown they are worthless. The cross correlations on defaults are already outside the expected ranges produced by the models, and they are likely still rising. So the geeks are walking into the morning investment meetings and saying, "don't look at me boss, I can't value the thing." Not a good thing for the geek's bosses to hear.
Here's a good geek blog post (includes a WSJ article) on how these models work:
btw, for all you geeks out there, its not meant as a pejorative:). Geeks don't kill markets, hedge fund bosses who use them to pile on leverage kill markets.
Hard to get real information on what's going on, Bloomberg is reporting that the fund is toast, in direct contradiction with the NY TImes story cited above:
It's hard for me to imagine that the fall out from the mortgage bond problems will not get worse from here. Surely, smart money will try to get rid of CDO's etc. and mortgage standards will continue tightening. Both the REITs and the home builders are seriously breaking resistance and bond spreads appear to have put in a double bottom in Feb/April.
The bond spread fund AFBIX was up 0.77% yesterday, which is a fairly large move. I have been buying more SRS (up 4% yesterday)and puts on GGP are approaching a 200% gain. For better or worse I am going on vacation tomorrow and will have only limited internet access-- The direction of these investments and related RE and Finance markets now seems pretty clear--the question is how fast will the crisis escalate?
U.S. Securities and Exchange Commission Chairman Christopher Cox said yesterday that the agency's division of market regulation is tracking the turmoil at the Bear Stearns fund.
``Our concerns are with any potential systemic fallout,'' Cox said in an interview.
Seems strange to me that if you were worried about a wider crisis that you would be going around talking to journalists about being worried about a wider crisis.
if Paulsen is publically stating that they are monitoring for systemic fallout then we have the potential for widespread problems.
The ratings agencies are behind the curve, no question, they have arguably been complicit in the ability to show overvalued assets, report minimized losses, allow the hedge funds to bill on these inflated assets, and report exaggerated returns.
The argument that this is contained is bullhucky, the argument by banker that this does not matter is worse. In any sense, the wide reaching ramifications are that the credit cycle is turning further and tightening. This, posing problems for all of the HY that needs to find a home, the housing market, and the default rate going forward.
People should be angry, this will indirectly affect everyone.
While we await the "greater fool theory" as the morons invested in these hedge funds pray for the ability to redeem.
From RMAHQ.org
(quote)
Philadelphia, Pa. (June 11, 2007) The Risk Management Association (RMA), in alliance with Automated Financial Systems, Inc. (AFS), this week released its commercial benchmarking data updated through first quarter 2007. Results show risk ratings in the broader middle market remaining relatively unchanged, with signs of credit weakness continuing in the construction sector and emerging in other sectors.
Nonaccruals in the middle market have increased more than 17% in the period spanning the last quarter of 2006 and the first quarter of 2007. Nonaccrual levels in the construction industry have increased more than 100% over the same six-month period. Also within the construction industry, loans past due 30 to 89 days have increased 5.8% from third-quarter levels.
Given that growth in construction lending has comprised a substantial share of total loan growth at many organizations for the past several years, these trends continue to warrant close attention, said Maurice H. Hartigan II, RMA president and CEO.
In addition, the real estate and rental & leasing sector shows emerging credit quality deterioration. Nonaccruals have risen more than 38% over the six-month period, with loans past due 30 to 89 days rising nearly 22%.
(end quote)
"So here's the problem, IMO: the models have already shown they are worthless. The cross correlations on defaults are already outside the expected ranges produced by the models, and they are likely still rising."
Nerd alert:
I've been wondering about this - the uncertainty term is probably larger than many market participants are expecting. But what happens when you do second, third and fourth derivations (CDOs, CDO^2, CDO^3 etc).
Been a long time since econometrics - does the uncertainty grow at each step? More interestingly, do these structures change the uncertainty term on the underlying (e.g. growth of CDO^2 affect the uncertainty term in CDOs). I imagine it does, because you have more leverage at each step - so greater chances of systemic events.
I think what Banker fails to notice is that the short lived hiccups he mentioned where short lived shocks to the systems, except for say Nasdaq 2000 which is more similar to what we are seeing here, except that what is driving this is a different kind of overinvestment. The residential housing bubble is very slow to unwind, we are really just starting the process, which we know because prices are only starting to move the other way, and no big hit to consumers yet - but that latter part is clearly starting. So, if prices go where they inevitably must (up? hahahaaha) basically the trouble we are seeing now just continues to get worse, and efforts to paper over it get that much harder. Sure, we may well pass this bye for another day, week, month, without any trouble of the sort that worries Banker (stock mkt crash) but we will see damage to the driver of the problem that will eventual come to matter in a way that affects markets. Lots and lots of unwinding to do, and it wont happen quickly, but it is a very difficult argument to make that housing has already hit bottom.
"Investors: If you can't tell who is having the catharsis, you're the catharsis."
HA! Tanta, you are more than eloquent.
On the less humorous side, it annoys me terribly that the fund managers have made a mint off of nothing more than gambling and losing with OPM. If that affected them and only them, I'd be okay with that. But unfortuately, it affects every conservative and rational investor and homeowner out there, who wouldn't have dreamed of taking such ludicrous risk.
The current bubble (real-estate, LBO, credit, CDOs) is in some part a result of how the 2000-2002 bubbles were solved.
How will this bubble be solved ? a Dollar crisis ?
By massive elimination of most of the debt via total and widespread bankruptcy wave.
Millions of people will declare bankruptcy and start the life anew, without credit history.
Old corporations will be eliminated and assets will be sold to new corporations, which will do the same business but will have clean books.
This thing happens every 50-60 years. It's just a market cycle, nothing special, that's how the things work. We already had 3 Great Depressions, that will be the 4th one. In 60 years we'll have the 5th one, and so one. You just have to adjust your brain to understand that the Great Depression happens on regular basis and is just a way to clean-up the enormous debt levels, accumulated during the 50 years since the previous Great Depression.
The $64,000 question is really: when will all the GREATER FOOLS who are piling the billions of $$ into these smoke n' mirror ponzi schemes GET tired of getting screwed by the Wall Street Scam Artists AND PICK UP THEIR MARBLES AND GO HOME! That is the moment we are waiting for. I for one have pulled all my investments into cash holding or safer bonds -- it's time for all the rest to respond similarly. CalPERS do you hear me!???
This thing happens every 50-60 years. It's just a market cycle, nothing special, that's how the things work. We already had 3 Great Depressions, that will be the 4th one. In 60 years we'll have the 5th one, and so one. You just have to adjust your brain to understand that the Great Depression happens on regular basis and is just a way to clean-up the enormous debt levels, accumulated during the 50 years since the previous Great Depression.
On a macro level, I think depressions occur when economies hit the wall of trying to achieve depth instead of breadth. When breadth becomes possible we have these great periods of expansion, when we get close to the natural limits of depth in a market, that's when things go boom.
The BRIC's have provided a lot of loft under our wings, but they'll have a hiccup soon and things will go boom. After that correction, India will probably will be the driving force for expansion over the next 30 years because of demographics, while Cina will be less so.
Just away for a bit. Back now because I've lived through similar situations, watched how they worked out and find them fascinating.
Jim A,
Both difficult and unpleasant.
Yal,
I disagree with your presupposition that these are all bubbles. This is all stuff that we have seen before and markets swing all the time. Permitted leverage levels are always changing and yes, with more leverage comes more volatility in outcome (that's kind of its purpose). My best guesses? No recession, no collapse in the markets etc unless we see a major exogenous shock (oil is always the place to look).
Geoff,
The length of the unwind in housing is precisley why I think the economy will weather the storm. Give the US economy years to adjust to a new situation and not merely months? Then the creativity and flexibility of companies and employees has plenty of time to kick in. BTW a stock market crash isn't what worries me. What worries me are real threats to a capitalist economy, overregulation, confiscatory tax levels, protectionism and in our case specifically medicare.
The fact that JP pulled their proposed sale off the block just before does not inspire confidence
When rocket scientists can't easily figure out what anything in these pigs-in-pokes is worth, that's when fear really has a shot to take over.
This BS fund had $140 million in commercial mortgage backs in contract before the end of the day Wednesday (One bond was even contacted at a 4bp premium). Maybe that is what the WSJ means when it says they sold 'some' of the higher-quality assets.
This reminds me of Japanese office buildings in the 90's when nobody knew the current value because no transactions had taken place for years for fear of establishing a market price that would destroy the collateral value on the books.
When rocket scientists can't easily figure out what anything in these pigs-in-pokes is worth, ...
We've been bitching about the O-rings forever around here.
Hey CR-
Only 9 hours away from 3,000,000 hits. Way to go!
The irony is that as financial messes go, the mortgage mess barely rates. My guess is it could be resolved for what the Mexican peso crisis cost. The problems arise because there is no leadership, especially in Washington but neither on Wall Street. And now, as you hint, it could turn into a vicious cycle of contracting credit.
Bear Stearns Staves Off Collapse of 2 Hedge Funds - NY Times
Bear Stearns Staves Off Collapse of 2 Hedge Funds
By VIKAS BAJAJ and JULIE CRESWELL
Published: June 21, 2007
The high-stakes game of brinksmanship began early yesterday on Wall Street, and continued throughout the day. .....The day ended with deals that appeared to have forestalled a meltdown. But questions remained about how successful they were and whether they had merely delayed the inevitable....
.....
The deal that JP Morgan Chase reached with Bear Stearns Asset Management allowed it to sell $400 million collateral back to the hedge funds for cash, according to people briefed on the matter. It was not clear what price the two banks agreed to.
Goldman Sachs and Bank of America reached similar deals, though details remained unclear. Also unclear is what price the assets will eventually fetch for the Bear funds and what types of losses investors, who have been unable to redeem their investments since May, will face.
........
In fact, rather than aggressively selling the assets it has seized, Merrill is quietly showing it to a small group of potential buyers, according to a person briefed on the process.
Such an approach helps to keep the pricing of the securities under wraps, allowing Wall Street firms to avoid marking down their own stakes. Keeping the sales price quiet also means that the firms may not have to add collateral immediately to shore up their portfolios.
At the end of the day, Merrill sold only a small portion of the $850 million in assets it had seized from the Bear funds as collateral. Traders said what did sell was the less risky, well-collateralized securities and that those sold near or at par in many cases. It is unclear whether Merrill intends to hold onto the remaining securities or whether it will try to sell them again down the road.
.....
One industry executive, who asked not to be named because of the delicacy of the subject, said the banks involved in the Bear funds could collectively lose $1 billion on their lendings to the Bear funds. While the amount is not itself significant given the size of these banks, it suggests the potential for bigger losses down the road.
...
as financial messes go, the mortgage mess barely rates
Not so. The coming 30% decline in home prices is going to vaporize about $6 trillion in illusory wealth in the US (the current nominal value of the US housing stock is nearly $20 trillion).
A very significant fraction of the population has been counting on funding retirement by selling their homes for much more than they owe -- and are going to find themselves in the exactly opposite situation of owing more than they can sell for. At the same time, government and private pension funds are going to sustain significant losses due to having invested in hedge funds and real estate; and these will be on top of the $6 trillion decline in nominal home values.
This is going to force the US savings rate to return to (and probably overshoot) its traditional level of 8%. The resulting decline in consumption will have far-reaching impacts.
for those who think about commercial R/E look at JOE.
FD: I am short JOE and SPG. Long SRS.
All of this are early warning signs of stress in mortgage and structured finance. They can't even price some of the Bear CDOs. How do they carry it on their books? What are the real values of many investment portfolios that are stuffed with these types of securities and levered to the gills?
Maybe there is no day of reckoning and the squall passes and the seas become calm and the fund managers keep getting new investors and their nice fat fees. I doubt it however. The extent and scale of the repackaging of poor mortgage credits into higher rated securities has been unprecedented. There is real stress at the margins from a clear slowdown in MEW, ARM resets and the subprime meltdown. And its not getting better. As each levered bet turns south someone's asset is getting burned. The question is when do investors in these securities decide its time to bail - before or after the shutdown of the redemption window?
"What a mess" is a polite way of putting it. It's turning out worse than I thought it would. Everyone, principally Merrill, seems to be trying to handle all of this as quietly as possible, and I don't expect them to publish any settlement prices. Undoubtedly, the Fed has made some "suggestions" in this regard.
At the end of the day, this thing can still go out of control. And you won't hear it coming.
Personally, I'm convinced that Bear Stearns's days as a major player are numbered. This mess has severely damaged their reputation and it will ultimately cost them a lot of respectable business. If the situation does go out of control, I think they'll ultimately be viewed as the cause of it and become a pariah on the Street.
This is a good time to find a foxhole to crawl into it until everything calms down.
One final note. I'm somewhat amused by some of the observations here concerning the 'trivial' amount of money involved given the 'big picture'.
Frankly, those are the kind of comments I would expect to see near the end of an easy money cycle. Money no longer means anything because it's so easy to come by. Well, let me assure you, a $20 billion portfolio is still one hell of a lot of money and can do major damage at the margins if its liquidation is forced.
Don't forget, all of us-even Warren Buffet-work at the margins.
quote fm The Market Ticker
:
"And look at how the press spun this:
"NEW YORK (AP) -- A surge in Treasury yields rattled Wall Street Wednesday, forcing stocks to give up early gains and drive down the Dow Jones industrial average more than 140 points."
God I hate liars.
Guys, the 10 hit its peak for the day at 12:30 CT today, at 5.142%. It closed at 5.123%.
But the plunge in stocks did not happen until nearly an hour later, starting just after 1:00 PM CT, or 2:00 PM ET. I was at my trading terminal at the time!
So what really happened here?
I'll tell you what I think - although I can't prove it. I think the market reacted to the impending implosion of the Bear Stearns funds, deciding that it had enough of the obfuscation, and as a result we saw a selloff.
And who else thinks that might have had something to do with it? Bloomberg. The only straight-shooters in the room."
Yal, I agree with you. The market was spooked.
Mp,
Mostly nonsense. The idea that this somehow makes Bear less of a major player is just dumb. The First Boston-Ohio Mattress situation in the 1980's was one thing. The Salomon Bros Treasury scandal was another real threat. This? An embarrassment, but not a financial big deal to Bear. They simply don't have enough capital at risk and are still being readily funded by the markets. That's the key to these sorts of firms. As for becoming a pariah? Stop it. They ain't Drexel. As for the scale of the event? See my prior list of things that were far bigger deals than this. What is going to happen here? Same thing that happened in 1990 when the Feds blew up the junk market. Some very smart, savvy guys (in that case Leon Black) will step in, buy at a huge discount from a panicked seller and come out the other end making enormous returns. I'd be Dave Tepper of Apaloosa is in the room as are the guys from Cerberus. But those are simply educated guesses.
Banker, that's your opinion and I respect it. I have mine. We'll see how it turns out.
On other matters...
This is a $20 billion portfolio and $250 billion of new debt is being sold IN THE NEXT TWO MONTHS. Think about that. As for that $250 billion, whatever portion is investment grade, we'd need far bigger problems before that couldn't get sold. Offering an addtional 25 basis points on an IG deal is an enormous incentive. Now the high quality corporate issuers tend to be opportunistic and therefore may wait, but they could certainly issue. The junk stuff? A tougher call. As always, we'll see. For now? Not only isn't the sky falling, I'm not even sure it is misty yet. Maybe misty.
MP,
We'll see how it turns out.
As always. That's kind of what I am seeking here, is simply a little wait and see before we call for the falling sky again.
Well, the sky sure as hell fell on something that had the Bear Stearns name on it, didn't it?
MP,
Yup. It happens EVERY DAY in the markets. Somebody somewhere gets drilled. This is a large drilling for the investors, but not a large one by market standards. Understand the structure here. Bear is the fund manager and a minority investor. That's it. For these purposes, think of it like Fidelity. When one or another of their myriad funds get slammed, nobody thinks Fidelity is going under, right? Or when RJR got into trouble, nobody thought KKR's days were at an end. What has ended, at least for a while, is investors willingness to allow Bear to manage funds in this asset class. (Though Jon Meriwether's new firm has a couple of billion under management).But this is a minor part of Bear's overall business. But if you want to claim the sky is falling in some way that doesn't happen with regularity in the capital markets, go ahead.
1987 Crash
1990 Junk market dies
1991 Gulf War
1992 Soros breaks Bank of England
Bi-annual emerging market crash
1997 mini-crash
1998 LTCM
Nasdaq bubble (that was a real one)
9/11 aftermath
ENRON, Adelphia, Worldcom
Sub-prime mess
All along this time period is also the junkification of US auto bonds, the destruction of US steel bonds, rtae hikes, rate reductions
I could keep going. My only point is that the markets have a history of absorbing these things, not getting sidetracked for very long. Now LTCM and the dot.com are counterarguments, but IMO we are nowhere near that with this situation.
Banker
Sounds like you are worried to me. Where you been lately? Why return now?
Other civilized countries have savings rates of 15%.
It's a long way to go, but as Banker points out, the US is different.
This is more interesting than the NFL and Major League Baseball combined.
I'm loving it.
"First, the ratings agencies are not doing their jobs."
CNBC TV Play-by-Play - CNBC
It is hard to force "mark to market" when the market is a fire sale (although prices are always set at the margin)
But the rating agnecies can be forced to bring about "mark to a realistic model" taking into account the surge in defaults.
Banker,
The current bubble (real-estate, LBO, credit, CDOs) is in some part a result of how the 2000-2002 bubbles were solved.
How will this bubble be solved ? a Dollar crisis ?
If there are no major concerns. Why is the Dow Jones family and Blackstone all of a sudden in a big hurry to get their deals done? Maybe the cheap money is going to end sooner rather than later. They need to hurry up and find some suckers. Also, how are the investors who are really holding the bag on these bonds going to react?
Topher,
Please don't forget that the Clinton's are out of the market. So that's Dow Jones, Blackstone, and the Clinton's.
Sebastian and Banker, those are some pretty savvy customers who are gone. Just sayin'.
Yal,
This was the intended outcome of Greenspan's actions. His intent was to produce a prolonged (tens of years) of high interest rates in the US.
He wanted "assets" to crash.
In order to prove that statement wrong, you have to invoke as a premise that Greenspan is an idiot. He isn't.
These CDO's and CDO^2 are hard to value. Why? Because to estimate future losses, you have to gauge the cross-default correlation. In other words, if there's a subprime default in Ohio that hits BBB, what's the probability that California AAA is affected? The geeks at these hedge funds (the ones that set the price on the margins) use contingent probability "Guassian copula" models. These models were originally used by actuaries to determine the probability of someone dying following the death of a spouse -- the so called "broken heart" phenomenon.
So here's the problem, IMO: the models have already shown they are worthless. The cross correlations on defaults are already outside the expected ranges produced by the models, and they are likely still rising. So the geeks are walking into the morning investment meetings and saying, "don't look at me boss, I can't value the thing." Not a good thing for the geek's bosses to hear.
Here's a good geek blog post (includes a WSJ article) on how these models work:
Information Processing: Gaussian copula and credit derivatives
btw, for all you geeks out there, its not meant as a pejorative:). Geeks don't kill markets, hedge fund bosses who use them to pile on leverage kill markets.
Hard to get real information on what's going on, Bloomberg is reporting that the fund is toast, in direct contradiction with the NY TImes story cited above:
Bear Stearns Fund Collapse Sends Shock Through CDOs (Update2) - Bloomberg.com
It's hard for me to imagine that the fall out from the mortgage bond problems will not get worse from here. Surely, smart money will try to get rid of CDO's etc. and mortgage standards will continue tightening. Both the REITs and the home builders are seriously breaking resistance and bond spreads appear to have put in a double bottom in Feb/April.
The bond spread fund AFBIX was up 0.77% yesterday, which is a fairly large move. I have been buying more SRS (up 4% yesterday)and puts on GGP are approaching a 200% gain. For better or worse I am going on vacation tomorrow and will have only limited internet access-- The direction of these investments and related RE and Finance markets now seems pretty clear--the question is how fast will the crisis escalate?
MSM starting to notice:
Bear Stearns Fund Collapse Sends Shock Through CDOs (Update2) - Bloomberg.com
U.S. Securities and Exchange Commission Chairman Christopher Cox said yesterday that the agency's division of market regulation is tracking the turmoil at the Bear Stearns fund.
``Our concerns are with any potential systemic fallout,'' Cox said in an interview.
Seems strange to me that if you were worried about a wider crisis that you would be going around talking to journalists about being worried about a wider crisis.
ot just ABx. look at
CMBX-NA-BB 3
CMBX-NA-BB 2
(they are reversed from ABX. High = poor credit quality)
It is hard to force "mark to market" when the market is a fire sale (although prices are always set at the margin)
Is it difficult or merely unpleasent?
Yal-
if Paulsen is publically stating that they are monitoring for systemic fallout then we have the potential for widespread problems.
The ratings agencies are behind the curve, no question, they have arguably been complicit in the ability to show overvalued assets, report minimized losses, allow the hedge funds to bill on these inflated assets, and report exaggerated returns.
The argument that this is contained is bullhucky, the argument by banker that this does not matter is worse. In any sense, the wide reaching ramifications are that the credit cycle is turning further and tightening. This, posing problems for all of the HY that needs to find a home, the housing market, and the default rate going forward.
People should be angry, this will indirectly affect everyone.
While we await the "greater fool theory" as the morons invested in these hedge funds pray for the ability to redeem.
RC, Banker:
I think all the finacial engineering from 2001 to now was a non linear system.
It funaction very well on the way up. I absorbed minor down turn but at the margin on the down side it will greatly amplify the down turn.
Where is the "knee" on this graph - I don't know but I think we are about to find outr when this knee kick in our face.
Yal-
you are 100% correct with this statement!
"It funaction very well on the way up. I absorbed minor down turn but at the margin on the down side it will greatly amplify the down turn."
It is exactly why you are where you are and exactly why the road down will be very difficult.
Orderly unwind is what we wish for, unfortunately, this has the makings of the exact opposite.
Yal-
you are 100% correct with this statement!
"It funaction very well on the way up. I absorbed minor down turn but at the margin on the down side it will greatly amplify the down turn."
It is exactly why you are where you are and exactly why the road down will be very difficult.
Orderly unwind is what we wish for, unfortunately, this has the makings of the exact opposite.
From RMAHQ.org
(quote)
Philadelphia, Pa. (June 11, 2007) The Risk Management Association (RMA), in alliance with Automated Financial Systems, Inc. (AFS), this week released its commercial benchmarking data updated through first quarter 2007. Results show risk ratings in the broader middle market remaining relatively unchanged, with signs of credit weakness continuing in the construction sector and emerging in other sectors.
Nonaccruals in the middle market have increased more than 17% in the period spanning the last quarter of 2006 and the first quarter of 2007. Nonaccrual levels in the construction industry have increased more than 100% over the same six-month period. Also within the construction industry, loans past due 30 to 89 days have increased 5.8% from third-quarter levels.
Given that growth in construction lending has comprised a substantial share of total loan growth at many organizations for the past several years, these trends continue to warrant close attention, said Maurice H. Hartigan II, RMA president and CEO.
In addition, the real estate and rental & leasing sector shows emerging credit quality deterioration. Nonaccruals have risen more than 38% over the six-month period, with loans past due 30 to 89 days rising nearly 22%.
(end quote)
Nothing to see here, move along, move along..
Yal-
I hope you are watching the 2's and 10's further flattening on the way to inversion.
You will see an inverted curve in the near-term as I stated previously, spreads will widen, and recession risk forecast 75%.
"So here's the problem, IMO: the models have already shown they are worthless. The cross correlations on defaults are already outside the expected ranges produced by the models, and they are likely still rising."
Nerd alert:
I've been wondering about this - the uncertainty term is probably larger than many market participants are expecting. But what happens when you do second, third and fourth derivations (CDOs, CDO^2, CDO^3 etc).
Been a long time since econometrics - does the uncertainty grow at each step? More interestingly, do these structures change the uncertainty term on the underlying (e.g. growth of CDO^2 affect the uncertainty term in CDOs). I imagine it does, because you have more leverage at each step - so greater chances of systemic events.
I think what Banker fails to notice is that the short lived hiccups he mentioned where short lived shocks to the systems, except for say Nasdaq 2000 which is more similar to what we are seeing here, except that what is driving this is a different kind of overinvestment. The residential housing bubble is very slow to unwind, we are really just starting the process, which we know because prices are only starting to move the other way, and no big hit to consumers yet - but that latter part is clearly starting. So, if prices go where they inevitably must (up? hahahaaha) basically the trouble we are seeing now just continues to get worse, and efforts to paper over it get that much harder. Sure, we may well pass this bye for another day, week, month, without any trouble of the sort that worries Banker (stock mkt crash) but we will see damage to the driver of the problem that will eventual come to matter in a way that affects markets. Lots and lots of unwinding to do, and it wont happen quickly, but it is a very difficult argument to make that housing has already hit bottom.
"Investors: If you can't tell who is having the catharsis, you're the catharsis."
HA! Tanta, you are more than eloquent.
On the less humorous side, it annoys me terribly that the fund managers have made a mint off of nothing more than gambling and losing with OPM. If that affected them and only them, I'd be okay with that. But unfortuately, it affects every conservative and rational investor and homeowner out there, who wouldn't have dreamed of taking such ludicrous risk.
Oops - posted on the wrong thread. I don't know why that keeps happening...
By massive elimination of most of the debt via total and widespread bankruptcy wave.
Millions of people will declare bankruptcy and start the life anew, without credit history.
Old corporations will be eliminated and assets will be sold to new corporations, which will do the same business but will have clean books.
This thing happens every 50-60 years. It's just a market cycle, nothing special, that's how the things work. We already had 3 Great Depressions, that will be the 4th one. In 60 years we'll have the 5th one, and so one. You just have to adjust your brain to understand that the Great Depression happens on regular basis and is just a way to clean-up the enormous debt levels, accumulated during the 50 years since the previous Great Depression.
The $64,000 question is really: when will all the GREATER FOOLS who are piling the billions of $$ into these smoke n' mirror ponzi schemes GET tired of getting screwed by the Wall Street Scam Artists AND PICK UP THEIR MARBLES AND GO HOME! That is the moment we are waiting for. I for one have pulled all my investments into cash holding or safer bonds -- it's time for all the rest to respond similarly. CalPERS do you hear me!???
This thing happens every 50-60 years. It's just a market cycle, nothing special, that's how the things work. We already had 3 Great Depressions, that will be the 4th one. In 60 years we'll have the 5th one, and so one. You just have to adjust your brain to understand that the Great Depression happens on regular basis and is just a way to clean-up the enormous debt levels, accumulated during the 50 years since the previous Great Depression.
On a macro level, I think depressions occur when economies hit the wall of trying to achieve depth instead of breadth. When breadth becomes possible we have these great periods of expansion, when we get close to the natural limits of depth in a market, that's when things go boom.
The BRIC's have provided a lot of loft under our wings, but they'll have a hiccup soon and things will go boom. After that correction, India will probably will be the driving force for expansion over the next 30 years because of demographics, while Cina will be less so.
Worried,
Just away for a bit. Back now because I've lived through similar situations, watched how they worked out and find them fascinating.
Jim A,
Both difficult and unpleasant.
Yal,
I disagree with your presupposition that these are all bubbles. This is all stuff that we have seen before and markets swing all the time. Permitted leverage levels are always changing and yes, with more leverage comes more volatility in outcome (that's kind of its purpose). My best guesses? No recession, no collapse in the markets etc unless we see a major exogenous shock (oil is always the place to look).
Geoff,
The length of the unwind in housing is precisley why I think the economy will weather the storm. Give the US economy years to adjust to a new situation and not merely months? Then the creativity and flexibility of companies and employees has plenty of time to kick in. BTW a stock market crash isn't what worries me. What worries me are real threats to a capitalist economy, overregulation, confiscatory tax levels, protectionism and in our case specifically medicare.