Is the loss rate so low because assumptions are being made that REOs will be able to sell at relatively high levels? This could be a problem. These agencies keep saying they are waiting for results from foreclosure auctions so they can evaluate the true value of the collateral....
China on Tuesday executed the former head of its food and drug watchdog who had become a symbol of the country's wide-ranging problems on product safety.,
Is the loss rate so low because assumptions are being made that REOs will be able to sell at relatively high levels?
No, the low loss rate they're talking about is actual, not projected losses. In other words, there's this great big honkin' pipeline of losses on the way, but only a very little bit of them (0.3%) have actually been realized yet.
Whilst I have been largely full of contempt all day for S&P, I will say I liked Moody's approach to estimating severity not just by reference to local market indices but also to general originator quality. That's smart: since higher than average delinquencies for a given originator correlate with crappy to fraudulent appraisals, it's wise to jack up the severity estimates there.
Ratings changes ``are going to force a lot more people to come to Jesus,'' said Christopher Whalen, an analyst at Institutional Risk Analytics in Hawthorne, California.
OK, so Moody's and S&P just downgraded all of these bonds. I think I read in a comment on the last thread that they will now look at the CDOs that hold these securities and start downgrading those as well. Is that correct?
In other words, where are we going next?
also, dryfly, I belatedly replied to you on the old thread. 100% agree that money shouldn't be thrown away on boondoggles. But there are plenty of ways the gov't could stimulate the economy with investment that also achieves positive ends: high-speed rail, mass transit, and wind/solar energy installations.
Our current relienace on oil & coal is almost as unsustainable as David Lereah's magical housing demand.
I have a question about forced selling. There has been a lot of references to this being bandied about, especially with these downgrades. However, from what I can tell, no AAA or AA rated stuff was downgraded, and only a smidgen of A. Correct me if I am wrong, but aren't funds that are restricted to owning stuff of a certain grade usually restricted to just AAA paper? So downgrading a bunch of junk, which everyone knew already was junk, shouldnt result in much forced liquidation in the immediate term, just some possible losses for funds when they state their results end of the month or quarter. I think the bigger story will be if they reevaluate all the "lipstick on a pig" CDO's. Downgrades to AAA CDO's would result in a ton of forced liquidations of those and possibly other assets if leverage is involved. But the immediate effects can be obfuscated into the background. Regardless, should be one interesting week.
You are right. I think I didn't get my point across correctly. I meant to word it like you did.
THERE IS A LOT IN THE PIPELINE to come...I think this is just the tip of the iceburg.
downgrades of Moodys for $5.2 billion and S&P for a possible $12 billion. There could be hundreds of billions here that could be eventually downgraded.
Many clients or funds (with clients in them) have different mandates relating to all different types of credit quality. Some clients (or funds) will hold B and above, some only 15% of assets in CCC and below, some 100% BBB- and above, etc...so forced selling can happen anytime anything moves.
Correct me if I am wrong, but aren't funds that are restricted to owning stuff of a certain grade usually restricted to just AAA paper?
Well . . . a lot of depositories are kind of de facto forced to hold only AAA, but that's because of capital requirements. The short answer is that instutitions have to hold significantly more risk-based capital against investments with less than AAA ratings.
Otherwise, most institutional investors have to hold only "investment grade," which goes down to BBB (S&P and Fitch) or Baa (Moody's). It's the stuff in the A to BBB range that is most likely to force selling just because of the rating change (on the assumption that nobody wants to risk not meeting the capital requirements).
I'd guess, even absent forced liquidations due to holding requirements, these downgrades will lead to more margin calls of the type Bear Stearns' funds ran into last week?
OK, someone get some plactic bags...
let's start talking containment...
If were to believe that the problems are much bigger than were being led to believe, then someone had to see this coming, and have already planned for it's complications...
what are those plans.
i hate to dive into conspiracy bs, and I know mr. Cote does'nt want to either, nonetheless, it needs discussing...
the first thing i thought of was a Net attack/virus...
It can be VERY effective - that effectiveness just comes with side-effects. Some will prefer the Rx others the disease but to say it won't have effects is incorrect.
Well, the fed won't really act until it absolutely has to- in other words until bunches and bunches of hedge funds are lying around in the wreckage of New Haven megamansions. I note that Steven A. Cohen had predicted a summer swoon late last year. I can't help but wonder if he has positioned himself to bury a whole lot of his competition.
Accredited investors are supposed to be sophisticated enough to guage the risks;-} So they can take big lumps and bumps, now can't they, and their bankers are such understanding folks providing that all so friendly leverage and clearing facilities.
Zombies traipsing off into the sunset better describe anyone who isn't raising cash like a madman in the equities market to cover their mark to model/market losses in the abx sphere. In other words who ever sheds their longs fastest lives longest, and anyone who can't get out fast enough is screwed and will have to wait until the workouts.
Thanks Tanta...and war....I get it, so many funds will be forced to liquidate stuff marked down from investment grade to junk, I get it.
When more and more high net worth individuals with half a brain in their skulls start requesting redemptions from these overleveraged hedgies....especially one without a big corporate parent like BSC to bail them out...then we could really see the true meaning of "forced liquidations".
Moody's Investors Service took various rating actions on $1.6 billion of securities backed by subprime second lien mortgage loans on Tuesday.
Moody's cut the ratings of 52 securities totaling $393 million while keeping 27 of those securities under review for further downgrade. It also placed an additional 23 securities, approximately $148 million, on review for possible downgrade.
Moody's also upgraded 52 securities backed by second lien RMBS.
bluff,
the only thing that can be done is the same thing that is always done, monetize the problem. only this time its not going to happen until the whole thing is a smoking ruin, which in the worst (best?) case could be in a week or a year. i'm still thinking this is going to unwind a lot faster than anyone is currently appreciating. i can claim no originality on this one, but i've heard it said today that this is 1987 for the credit market. in some sense the dynamics are the same.
it won't take very much here for the little snowflake to fall on its neighbor and the two of them to fall on the next and for the whole pile to pick up speed.
one of the more interesting things in the equity markets today was that CBOE equity put call ratio looked like an up day. there has been a lot of conditioning to buy the dips.
as i blather away i see that the yen is up better that 200. its not going to be a good morning for the japanese housewife speculator.
of course i'm talking my book, but things look about ripe for an event.
d
allen,
there ain't no megamansions in new haven. yale's kind of nice, but the rest of the city ain't so grand.
your mansion stuff doesn't get started heading southwest until westport and peak insanity is greenwich.
d
"Moody's has noted a persistent negative trend in severe delinquencies for first lien subprime mortgage loans securitized in 2006. For example, the 90+ day delinquency rate for loans securitized in 2006 has increased from 7.9% in March 2007 to 10.8% in May 2007. However, losses have remained relatively low, with the May cumulative loss rate reaching only 0.30%"
Considering that losses for 1st liens, assuming it is the 2-28s that have the most potential risk based on what I understand, I think it might be a little premature to celebrate losses at 0.3%. These loans for '06 haven't even reset once yet. That means these chumps can't even keep up with the teasers.
A lot of ratings revisions left for these guys to perform...
Oooops, David I admit I hit brainlock on New Haven, was talking to somebody about visiting Yale yesterday, so crossed my wires with Greenwich, where I have only driven through once.
I await the markets response- this should be interesting. I never thought S&P would drop such a big bomb all at once, I thought they would water torture us with gradual statements to keep the shock minimal.
This literally means the entire mortgage finance system in the US over the last two years is built on a sandspit that is rapidly being eaten away by lower prices.
"So when do we start hearing about 'derivatives' and 'swaps'?"
that's what I was thinking too, as soon as I saw the latest "we're not exposed to subprime" blurb. You think many of these banks are using swaps to "reduce" their exposure, which naturally assumes solvency of the counterparties of those swaps
After the S&P and Moody's moves today, I was expecting much more rumbling here in the comments. It's quiet . . . too quiet.
Anyway AllenM, though that may be a big bomb, I think it is only the beginning, and the water torture is still coming down the pike . . . it's just that they're dropping buckets, not drops.
Ratings changes ``are going to force a lot more people to come to Jesus,'' said Christopher Whalen, an analyst at Institutional Risk Analytics in Hawthorne, California.
"So when do we start hearing about 'derivatives' and 'swaps'?"
Dryfly,
I'm pretty curious about that one too. The regular readers of CR and Tanta seem to have a fair handle on how this all goes down for the RMBS/CMO/CDO world -- but how will the swaps impact things? This strikes me as a particularly dificult problem to assess since some of the swaps players are effectively making side bets (not really engaged in the insurance aspect of swaps but in the arbitrage aspect). I realize that the notional value of the swaps, which is in the $trillions, is no where near the value at risk (at least as of yesterday) but that can change very quickly.
I wonder if there are any regulars here that can enlighten us a bit?
The conjure bag is becoming increasingly unsettled. It smelled blood on the street today. It's whispering, "sell-off, mp, sell-off." It's still insisting that BSC will test 130 and says the financials will be bitch-slapped tomorrow.
IMHO, a meaningful correction and lasting correction of the stock market is now impossible.
It is in the best interest of hedge fund managers to take on as much as risk as possible while investing other people's money.
In the past 6 years, markets around the world have boomed as hedge funds have aggressively leveraged to buy anything and everything.
If the market drops a few percent, big deal. The hedgies will just leverage more to buy more driving the market back up.
IMHO, this behavior will only stop when the money completely runs out. That will only happen when hedge funds of all types lose the majority of their capital in a matter of days: ala Amarnath and the recent collapse of the Bear funds. Anything less than total collapse can be rescued with more leveraging.
In summary, I think this market will stumble and hiccup and then rise, stumble, then rise.
Ok, if the hedge funds start to fold, who will they take down with them? Who has been providing them "leverage," and who is underwriting these "swaps"?
The hedgies will just leverage more to buy more driving the market back up.
How the hell will they leverage more when the banks are calling in loans? And they will need to call in more and more loans as their bottom-lines get hit more and more.
I can see the stumble, hiccup, stumble; but the rises are nowhere to be seen.
Allen, I agree with you on Madame Yen, particularly as there was an article linked here a couple of threads ago (from bloomberg?) that made it sound like Japan, Inc. was envisioning all sunshine and light while it was gearing up to service the coming demand from the US business-lead "recovery". Shocks are generally not received well. Then again, as dryfly was mentioning, Japan may be perfectly willing to destroy the Yen to save the dollar.
That will only happen when hedge funds of all types lose the majority of their capital in a matter of days: ala Amarnath and the recent collapse of the Bear funds.
Hmmmmm... that's plausible. So when will that be, Thurdsay maybe? Want to be sure to get it all in before the weekend - you know, shorter summer hours and all. Plus its a bitch rescheduling tee times over the weekend.
Beachguy, I agree with dot. There's a limit to the amount one can leverage up to and service the payments, even if the lender and interest rates are insane. Each new drop in interest frees up less and less cash flow and the lenders get more and more skittish (borrowers will also probably want to take on less and less leverage in uncertain conditions). Last I checked, most lenders do like to at least get their principle back. If they don't, well odds are they're the government or the Fed flooding the market with cash and we'll have other things to worry about than unpaid loans. The current loose lending market is an aberration, which is probably in the ugly process of correcting itself.
And let's not forget, 20% of all originations in 2006 were subprime, and another 20% were ALT-A. The downgrades are just beginning. We're not in the first inning of nine, we're in the first minute of a 90 minute soccer match.
Another thought - for the ratings agencies to act like this they must actually be afraid of getting sued. No matter how vague your disclaimers are, nothing will withstand the onslaught of a witch hunt that occurs after some teachers or firefighters pension fund gets shellacked.
Wow - two thoughts today. Think I better go crack open some pinot noir and stop this already.
Rather than being amazed by how low US interest rates are, given how little the US saves, we would now be shocked if interest rates returned to more normal levels.
It sometimes used to be said that American farmers were far better at farming Washington than at farming. That comment stung because it had a grain of truth. The scale of US agricultural subsidies is now dwarfed by the subsidies that Beijing, Moscow, Brasilia, New Dehli and others now offer to parts of the US financial sector ...
Good point, dryfly. The fire brigade responding doesn't have to be from the local firehouse. However, makes me wonder if the locals are getting cranky about them continuously putting out the controlled burns they want to have in order to prevent a bigger fire.
I would still argue that even the BRIC's want at least SOME of their principle back in the end. Many of them seem to have changed over to buying assets with their dollar reserves. Is this anticipating dollar inflation or just settling in for the long haul as the Japanese did in the 80's?
I would still argue that even the BRIC's want at least SOME of their principle back in the end. Many of them seem to have changed over to buying assets with their dollar reserves.
Ya they should sleep a lot better buying into our stock markets... no way they can lose any principal there.
S&P says they expect housing prices to fall another 8% this year.
Based on what - Shiller? OFHEO? I haven't read all the fine print. An 8% decline nationwide based on OFHEO will be a big drop, one we will all notice, even me in flyover.
He [Chuck Prince] also denied that Citigroup, one of the biggest providers of finance to private equity deals, was pulling back, in spite of problems with some financings. "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing,"...
mp - if this was Saturday... there would be only ONE thing Tanta could post after a quote like that...
"I await the markets response- this should be interesting. I never thought S&P would drop such a big bomb all at once, I thought they would water torture us with gradual statements to keep the shock minimal." -AllenM
AllenM, that was the gradual statement. As the next few weeks pass we're likely to see statements that start with "due to continued deterioration of the market..." IE, they know how bad it is.
The fall in housing prices will be a lot more than 8%. Real wages are stagnent to falling in the face of inflation, yet housing prices have doubled to tripled in many places. That cannot be sustained. We will return to historic levels of affordability. The only alternatives are some sort of Greater Depression, where nobody knows how it ends, or massive wage inflation, which simply will not be permitted to happen.
Is the loss rate so low because assumptions are being made that REOs will be able to sell at relatively high levels? This could be a problem. These agencies keep saying they are waiting for results from foreclosure auctions so they can evaluate the true value of the collateral....
50% for those who have quite a few problem loans?
This is the end! We had better start bombing Iran fast to hide these losses under a tidal wave of BB drops.
He had better hit my house first dangit.
The war may be ending, starting today!
China on Tuesday executed the former head of its food and drug watchdog who had become a symbol of the country's wide-ranging problems on product safety.,
China rocks...
Can we develop a list here?
And so it begins. Should be a good day in the markets tomorrow!
Is the loss rate so low because assumptions are being made that REOs will be able to sell at relatively high levels?
No, the low loss rate they're talking about is actual, not projected losses. In other words, there's this great big honkin' pipeline of losses on the way, but only a very little bit of them (0.3%) have actually been realized yet.
Whilst I have been largely full of contempt all day for S&P, I will say I liked Moody's approach to estimating severity not just by reference to local market indices but also to general originator quality. That's smart: since higher than average delinquencies for a given originator correlate with crappy to fraudulent appraisals, it's wise to jack up the severity estimates there.
TGIF!!!
Oh wait..
Dryfly,
Don't forget TGIF is Friday the 13th...
Game over.
All that's left is the blame-placing and the clean-up. No bailouts!!
-- Judge Smales
"You'll get nothing and like it."
Moody's Lowers Ratings on Subprime Bonds, S&P May Cut (Update1) - Bloomberg.com
Ratings changes ``are going to force a lot more people to come to Jesus,'' said Christopher Whalen, an analyst at Institutional Risk Analytics in Hawthorne, California.
It is not TGIF, but SHTF (s*** hitting the fan).
He had better hit my house first dangit.
Damn right Allen - if you're at the tail end of the sortie BB's bombs will be worth a helluva lot less.
OK, so Moody's and S&P just downgraded all of these bonds. I think I read in a comment on the last thread that they will now look at the CDOs that hold these securities and start downgrading those as well. Is that correct?
In other words, where are we going next?
also, dryfly, I belatedly replied to you on the old thread. 100% agree that money shouldn't be thrown away on boondoggles. But there are plenty of ways the gov't could stimulate the economy with investment that also achieves positive ends: high-speed rail, mass transit, and wind/solar energy installations.
Our current relienace on oil & coal is almost as unsustainable as David Lereah's magical housing demand.
I have a question about forced selling. There has been a lot of references to this being bandied about, especially with these downgrades. However, from what I can tell, no AAA or AA rated stuff was downgraded, and only a smidgen of A. Correct me if I am wrong, but aren't funds that are restricted to owning stuff of a certain grade usually restricted to just AAA paper? So downgrading a bunch of junk, which everyone knew already was junk, shouldnt result in much forced liquidation in the immediate term, just some possible losses for funds when they state their results end of the month or quarter. I think the bigger story will be if they reevaluate all the "lipstick on a pig" CDO's. Downgrades to AAA CDO's would result in a ton of forced liquidations of those and possibly other assets if leverage is involved. But the immediate effects can be obfuscated into the background. Regardless, should be one interesting week.
Tanta,
You are right. I think I didn't get my point across correctly. I meant to word it like you did.
THERE IS A LOT IN THE PIPELINE to come...I think this is just the tip of the iceburg.
downgrades of Moodys for $5.2 billion and S&P for a possible $12 billion. There could be hundreds of billions here that could be eventually downgraded.
I would love to read the article uninterrupted but the loud popping sounds are really distracting!
Gary - I agree saw the other thread. If we see deflation we'll need stimulus & not all is a bridge to nowhere.
Greek,
Many clients or funds (with clients in them) have different mandates relating to all different types of credit quality. Some clients (or funds) will hold B and above, some only 15% of assets in CCC and below, some 100% BBB- and above, etc...so forced selling can happen anytime anything moves.
Correct me if I am wrong, but aren't funds that are restricted to owning stuff of a certain grade usually restricted to just AAA paper?
Well . . . a lot of depositories are kind of de facto forced to hold only AAA, but that's because of capital requirements. The short answer is that instutitions have to hold significantly more risk-based capital against investments with less than AAA ratings.
Otherwise, most institutional investors have to hold only "investment grade," which goes down to BBB (S&P and Fitch) or Baa (Moody's). It's the stuff in the A to BBB range that is most likely to force selling just because of the rating change (on the assumption that nobody wants to risk not meeting the capital requirements).
Don't forget TGIF is Friday the 13th...
Might be a good day to stay deep down in the damp bear cave & clip coupons.
The snowball, it is a rollin'.
I'd guess, even absent forced liquidations due to holding requirements, these downgrades will lead to more margin calls of the type Bear Stearns' funds ran into last week?
OK, someone get some plactic bags...
let's start talking containment...
If were to believe that the problems are much bigger than were being led to believe, then someone had to see this coming, and have already planned for it's complications...
what are those plans.
i hate to dive into conspiracy bs, and I know mr. Cote does'nt want to either, nonetheless, it needs discussing...
the first thing i thought of was a Net attack/virus...
we know stimulus will be ineffective.
what's on the agenda
we know stimulus will be ineffective.
Define 'ineffective'.
It can be VERY effective - that effectiveness just comes with side-effects. Some will prefer the Rx others the disease but to say it won't have effects is incorrect.
Well, the fed won't really act until it absolutely has to- in other words until bunches and bunches of hedge funds are lying around in the wreckage of New Haven megamansions. I note that Steven A. Cohen had predicted a summer swoon late last year. I can't help but wonder if he has positioned himself to bury a whole lot of his competition.
Accredited investors are supposed to be sophisticated enough to guage the risks;-} So they can take big lumps and bumps, now can't they, and their bankers are such understanding folks providing that all so friendly leverage and clearing facilities.
Zombies traipsing off into the sunset better describe anyone who isn't raising cash like a madman in the equities market to cover their mark to model/market losses in the abx sphere. In other words who ever sheds their longs fastest lives longest, and anyone who can't get out fast enough is screwed and will have to wait until the workouts.
Fast will make some cash, last will be trash.
Someday this war's gonna end...
Thanks Tanta...and war....I get it, so many funds will be forced to liquidate stuff marked down from investment grade to junk, I get it.
When more and more high net worth individuals with half a brain in their skulls start requesting redemptions from these overleveraged hedgies....especially one without a big corporate parent like BSC to bail them out...then we could really see the true meaning of "forced liquidations".
Fast will make some cash, last will be trash.
My guess is fast is past and last is all that's left.
Don't forget the seconds!
Business & Financial News, Breaking US & International News | Reuters.com
Moody's cuts second-lien subprime RMBS, raises others
Moody's Investors Service took various rating actions on $1.6 billion of securities backed by subprime second lien mortgage loans on Tuesday.
Moody's cut the ratings of 52 securities totaling $393 million while keeping 27 of those securities under review for further downgrade. It also placed an additional 23 securities, approximately $148 million, on review for possible downgrade.
Moody's also upgraded 52 securities backed by second lien RMBS.
bluff,
the only thing that can be done is the same thing that is always done, monetize the problem. only this time its not going to happen until the whole thing is a smoking ruin, which in the worst (best?) case could be in a week or a year. i'm still thinking this is going to unwind a lot faster than anyone is currently appreciating. i can claim no originality on this one, but i've heard it said today that this is 1987 for the credit market. in some sense the dynamics are the same.
it won't take very much here for the little snowflake to fall on its neighbor and the two of them to fall on the next and for the whole pile to pick up speed.
one of the more interesting things in the equity markets today was that CBOE equity put call ratio looked like an up day. there has been a lot of conditioning to buy the dips.
as i blather away i see that the yen is up better that 200. its not going to be a good morning for the japanese housewife speculator.
of course i'm talking my book, but things look about ripe for an event.
d
allen,
there ain't no megamansions in new haven. yale's kind of nice, but the rest of the city ain't so grand.
your mansion stuff doesn't get started heading southwest until westport and peak insanity is greenwich.
d
Speaking of conspiracy theories.
Clintons=all cash....say no more.
o bailouts!
CIBC Denies Large Subprime Exposure
404 Error, No such article | Chron.com - Houston Chronicle
CIBC say's ain't no ticks on me. We'll see.
"Moody's has noted a persistent negative trend in severe delinquencies for first lien subprime mortgage loans securitized in 2006. For example, the 90+ day delinquency rate for loans securitized in 2006 has increased from 7.9% in March 2007 to 10.8% in May 2007. However, losses have remained relatively low, with the May cumulative loss rate reaching only 0.30%"
Considering that losses for 1st liens, assuming it is the 2-28s that have the most potential risk based on what I understand, I think it might be a little premature to celebrate losses at 0.3%. These loans for '06 haven't even reset once yet. That means these chumps can't even keep up with the teasers.
A lot of ratings revisions left for these guys to perform...
So when do we start hearing about 'derivatives' and 'swaps'?
A lot of ratings revisions left for these guys to perform...
We aren't even to training camp, there are still two-a-days coming up...
Oooops, David I admit I hit brainlock on New Haven, was talking to somebody about visiting Yale yesterday, so crossed my wires with Greenwich, where I have only driven through once.
I await the markets response- this should be interesting. I never thought S&P would drop such a big bomb all at once, I thought they would water torture us with gradual statements to keep the shock minimal.
This literally means the entire mortgage finance system in the US over the last two years is built on a sandspit that is rapidly being eaten away by lower prices.
So long and thanks for all the fish!
Someday this war's gonna end...
The war may be ending, starting today!
The BS war may be ending, but the real war has not yet begun.
"So when do we start hearing about 'derivatives' and 'swaps'?"
that's what I was thinking too, as soon as I saw the latest "we're not exposed to subprime" blurb. You think many of these banks are using swaps to "reduce" their exposure, which naturally assumes solvency of the counterparties of those swaps
And we all know what happens when you assume.
After the S&P and Moody's moves today, I was expecting much more rumbling here in the comments. It's quiet . . . too quiet.
Anyway AllenM, though that may be a big bomb, I think it is only the beginning, and the water torture is still coming down the pike . . . it's just that they're dropping buckets, not drops.
Ratings changes ``are going to force a lot more people to come to Jesus,'' said Christopher Whalen, an analyst at Institutional Risk Analytics in Hawthorne, California.
Can I get an Amen??!!
AMEN!!
David Lereah's magical housing demand.
Yep, that and the Bear Stearns-funded Bob Toll kool-aid and you're just asking for a flashback.
1929, anyone?
allen,
another non-original thought:
this war is not going to end until there are a lot of Greenwich REO's..
what's on the agenda
Called_Bluff
I hate to feed the flame, but.....uh...
Officials worry of summer terror attack
dot, terrorism would be a relief- yet another excuse to buy without thought.
I think by the time this settles out we may wish that was all we had to worry about.
In a couple of hours Asia will be open for business, and Madam Yen Carry Trade is going to be mighty upset with her margin calls.
Someday this war's gonna end...
"So when do we start hearing about 'derivatives' and 'swaps'?"
Dryfly,
I'm pretty curious about that one too. The regular readers of CR and Tanta seem to have a fair handle on how this all goes down for the RMBS/CMO/CDO world -- but how will the swaps impact things? This strikes me as a particularly dificult problem to assess since some of the swaps players are effectively making side bets (not really engaged in the insurance aspect of swaps but in the arbitrage aspect). I realize that the notional value of the swaps, which is in the $trillions, is no where near the value at risk (at least as of yesterday) but that can change very quickly.
I wonder if there are any regulars here that can enlighten us a bit?
which naturally assumes solvency of the counterparties of those swaps
Ha, good one, greek!
The conjure bag is becoming increasingly unsettled. It smelled blood on the street today. It's whispering, "sell-off, mp, sell-off." It's still insisting that BSC will test 130 and says the financials will be bitch-slapped tomorrow.
IMHO, a meaningful correction and lasting correction of the stock market is now impossible.
It is in the best interest of hedge fund managers to take on as much as risk as possible while investing other people's money.
In the past 6 years, markets around the world have boomed as hedge funds have aggressively leveraged to buy anything and everything.
If the market drops a few percent, big deal. The hedgies will just leverage more to buy more driving the market back up.
IMHO, this behavior will only stop when the money completely runs out. That will only happen when hedge funds of all types lose the majority of their capital in a matter of days: ala Amarnath and the recent collapse of the Bear funds. Anything less than total collapse can be rescued with more leveraging.
In summary, I think this market will stumble and hiccup and then rise, stumble, then rise.
dot, terrorism would be a relief- yet another excuse to buy without thought.
Yes, Allen, that's precisely my point. (That, and the timing of the article was too much to resist.)
Ok, if the hedge funds start to fold, who will they take down with them? Who has been providing them "leverage," and who is underwriting these "swaps"?
The hedgies will just leverage more to buy more driving the market back up.
How the hell will they leverage more when the banks are calling in loans? And they will need to call in more and more loans as their bottom-lines get hit more and more.
I can see the stumble, hiccup, stumble; but the rises are nowhere to be seen.
Allen, I agree with you on Madame Yen, particularly as there was an article linked here a couple of threads ago (from bloomberg?) that made it sound like Japan, Inc. was envisioning all sunshine and light while it was gearing up to service the coming demand from the US business-lead "recovery". Shocks are generally not received well. Then again, as dryfly was mentioning, Japan may be perfectly willing to destroy the Yen to save the dollar.
That will only happen when hedge funds of all types lose the majority of their capital in a matter of days: ala Amarnath and the recent collapse of the Bear funds.
Hmmmmm... that's plausible. So when will that be, Thurdsay maybe? Want to be sure to get it all in before the weekend - you know, shorter summer hours and all. Plus its a bitch rescheduling tee times over the weekend.
Ok, if the hedge funds start to fold, who will they take down with them? - Nil
Probably a better question is 'who will be left standing'? At least after the derivatives are all reconciled.
I expect Bear, Goldman, Lehman and Merrill to have a joint prayer breakfast tomorrow morning. Early.
Beachguy, I agree with dot. There's a limit to the amount one can leverage up to and service the payments, even if the lender and interest rates are insane. Each new drop in interest frees up less and less cash flow and the lenders get more and more skittish (borrowers will also probably want to take on less and less leverage in uncertain conditions). Last I checked, most lenders do like to at least get their principle back. If they don't, well odds are they're the government or the Fed flooding the market with cash and we'll have other things to worry about than unpaid loans. The current loose lending market is an aberration, which is probably in the ugly process of correcting itself.
I expect Bear, Goldman, Lehman and Merrill to have a joint prayer breakfast tomorrow morning. Early.
Come on mp, they aren't sweating - its already stabilized. Been hours since the last downgrade & nothin's happened - completely contained.
And let's not forget, 20% of all originations in 2006 were subprime, and another 20% were ALT-A. The downgrades are just beginning. We're not in the first inning of nine, we're in the first minute of a 90 minute soccer match.
Another thought - for the ratings agencies to act like this they must actually be afraid of getting sued. No matter how vague your disclaimers are, nothing will withstand the onslaught of a witch hunt that occurs after some teachers or firefighters pension fund gets shellacked.
Wow - two thoughts today. Think I better go crack open some pinot noir and stop this already.
If they don't, well odds are they're the government or the Fed flooding the market with cash...
Funny you should mention gov'ts...
So is this the biggest. downgrade. ever?
S&P says they expect housing prices to fall another 8% this year.
Good point, dryfly. The fire brigade responding doesn't have to be from the local firehouse. However, makes me wonder if the locals are getting cranky about them continuously putting out the controlled burns they want to have in order to prevent a bigger fire.
I would still argue that even the BRIC's want at least SOME of their principle back in the end. Many of them seem to have changed over to buying assets with their dollar reserves. Is this anticipating dollar inflation or just settling in for the long haul as the Japanese did in the 80's?
I would still argue that even the BRIC's want at least SOME of their principle back in the end. Many of them seem to have changed over to buying assets with their dollar reserves.
Ya they should sleep a lot better buying into our stock markets... no way they can lose any principal there.
S&P says they expect housing prices to fall another 8% this year.
Based on what - Shiller? OFHEO? I haven't read all the fine print. An 8% decline nationwide based on OFHEO will be a big drop, one we will all notice, even me in flyover.
Chuck Prince says that, as long as the music is still playing, you've got to get up and dance.
FT.com / UK - Bullish Citigroup is 'still dancing' to the beat of the buy-out boom
I showed this to my conjure bag and it started to tremble with fear.
I showed this to my conjure bag and it started to tremble with fear.
Are you sure it was 'fear'?
dryfly, the video interview is on Bloomberg, front page. He said prices had already fallen 2%, so I assume he's talking about OFHEO.
dryfly- Are you sure it was 'fear'?
Whenever Citigroup gets really bullish, the conjure bag wants to rest in a dark corner.
No, that can't be right. He must be referring to the Shiller index.
He [Chuck Prince] also denied that Citigroup, one of the biggest providers of finance to private equity deals, was pulling back, in spite of problems with some financings. "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing,"...
mp - if this was Saturday... there would be only ONE thing Tanta could post after a quote like that...
YouTube - Gene Gene, the Dancing Machine
MBIA is dropping loads in their shorts tonight. It's started.
I would love to read the article uninterrupted but the loud popping sounds are really distracting!
ROTFLMAO
Stuart said:
MBIA is dropping loads in their shorts tonight. It's started.
Yep. Its started.
After reading every comment... I think the most prophetic was to note that this Friday is Friday the 13th.
We've already had Black Friday...
Freddie Kruger Friday?
Got popcorn?
Neil
S&P said 8% decline in pricing from 2006 - 2008, not this year.
MOM- S&P said 8% decline in pricing from 2006 - 2008, not this year.
Oops! Well, at least I got part of right.
S&P said 8% decline in pricing from 2006 - 2008, not this year.
In other words, more BS fantasy.
"I await the markets response- this should be interesting. I never thought S&P would drop such a big bomb all at once, I thought they would water torture us with gradual statements to keep the shock minimal." -AllenM
AllenM, that was the gradual statement. As the next few weeks pass we're likely to see statements that start with "due to continued deterioration of the market..." IE, they know how bad it is.
mp: YouTube -
The fall in housing prices will be a lot more than 8%. Real wages are stagnent to falling in the face of inflation, yet housing prices have doubled to tripled in many places. That cannot be sustained. We will return to historic levels of affordability. The only alternatives are some sort of Greater Depression, where nobody knows how it ends, or massive wage inflation, which simply will not be permitted to happen.