MarketWatch: New S&P Methodology is "Death Warrant" for Subprime Industry
Submitted by
CalculatedRisk on Tue, 07/10/2007 - 12:08pm (33 comments)
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Is this the "biggy":
16:12 Moody's cuts 399 subprime RMBS issued in 2006; 32 additional securities placed on review for possible cut - DJ
Dow Jones reported just before the close that Moody's Investors Service has downgraded 399 residential mortgage-backed securities and placed an additional 32 RMBS under review for possible downgrade. The transactions were issued in 2006 and are backed primarily by first lien adjustable- and fixed-rate subprime mortgage loans. The ratings were placed under review and downgraded based on higher than anticipated rates of delinquency in the underlying collateral compared to current credit enhancement levels.
Yup, I am right- back to the old days of real estate being for use instead of abuse. So many folks are not going to have a chair now, the fed had better open the window to the banks and prepare to do a land office business.
I believe an orderly sale of everything will result in 20% off of the stock market alone, let alone the damage elsewhere.
Dean Wormer dropped the bomb.
Naked ABX puts are toast. AA now down 5% in two days....Incredible behind the scenes damage is being wrought as we type...
but...
Someday this war's gonna end...
I have been saying for months that I expect there to be panic in the housing market by October, and now we have a "Death Warrent for Subprime". That Subprime mortgage reset chart by Credit Suisse is now looking like it will be the answer to our worst nightmare. What will happen to the real estate market when the mortgage reset wave peaks in October and the CDO market is burnt toast? I don't think the housing market will recover for over ten years.
I like that, harpooning the whale after it is already floating belly-up.
Kinda like calling roadkill your hunting spoils.
Must make S&P feel like big men, killing a dead beast.
The ABX market
is flashing red today. Even AAA tranches got hammered. All the recent series are record low. Many older, too. It seems the market agrees with Rex Nutting.
A little noticed indicator:
USD-JPY 121.8750 -1.5350 -1.24%
is this the great unwind ?
if so (and if not) I can not figure out how Bonds are up today by almost 30/32 ????
So many folks are not going to have a chair now, the fed had better open the window to the banks and prepare to do a land office business.
But no windows say higher than the third floor...
Oh I get it - not THOSE windows, teller windows. Sheesh silly me.
Yep BBB down to 50, and I wouldn't touch it with a bargepole.
Its actually not worth anything.
Hey is it Friday already? Did I miss the rest of the week?
Calculated Risk and Tanta
Thanks for all your hard work and insight. I think what we are about to see play out will be unlike anything we have seen in our lifetimes. You have been a great resource and helped me better understand what is coming our way.
Even grimmer, the discount window- yeah that funny artifact;-}
Scared? You should be! Why are treasuries going up? Um, how many idjiots shorted them to provide funds to buy those funny abx critters?
Gold, yen, treasuries, all have been shorted in immense amounts to provide "liquidity" to wall street's darlings. Now the creditors want their instruments back, because they have lost their credare in the debtors.
someday this war's gonna end....
I think we need to see few things take place now:
am I going too far ?
Second what YS Wayne said about thanking CR & Tanta... but with an added bit of caution... my guess is this is still pre-season football. The REAL unwind occurs when we get into the CLOs & PE LBOs and start sucking wealth out of everyone all the way from pensions to SWFs... that's gonna be the Super Bowl.
If that happens though - you'll be right, it won't be like anything we've seen before. We won't like it either. None of us, even those who think they are 'prepared'. You can't fully prepare for that kinda crappy.
Hope the bulls are mostly right & only a little wrong and that we are mostly all wrong... Then later bears and bulls can all laugh about how silly we were. Being a bear and being wrong is not usually a bad thing.
I have not listened to the S&P replay, but noone I know of in the subprime industry has ever thought that loan severities were 33% on average.
They also underestimated the speed of defaults going through the delinquency process. Looks like another massive missive is in order by the Tantameister...Going over to the Moody's site to see if they 'fess up to anything.
Anyone willing to venture a guess on when hedge fund investors will actually receive hard or electronic reports for the end of the quarter June 30th ?
From Bill Fleckenstein:
An even bigger deal was pointed out to me ...: the fact that S&P will be reviewing the ratings on the CDOs that contain these mortgages. That, he notes, is a first. He thinks that the impact of all of this will be massive. In his words: "It's exactly what everyone had hoped wouldn't happen now."
Nothing like putting out a fire with gasoline.
Anyone willing to venture a guess on when hedge fund investors will actually receive hard or electronic reports for the end of the quarter June 30th ?
Clyde - I don't know for sure but my guess is they don't just send out electronic form statements to folks who have say a couple million or more in 'your fund'. Electronic form letters go to the accountants & financial advisers but not the clients.
My guess is there will be some face-to-face hand holding & 'counseling' in a nice walnut paneled office somewhere when they break the news... That has probably already been going on for sometime - in preparation of the release of the final numbers.
The biggest reason they will do this is to try and keep people from bolting... it will be one helluva sales job too. That and a subtle threat that if they attempt to bolt - the redemption window shuts for all... there is no escape except for a 'work out'... that will be the line (maybe a lie but it will be the line).
I would pay serious money to be the fly on the wall at one of those meetings. I can only imagine.
Maybe I'm wrong but if I was a MD of a major fund with high net worth clients & funds I sure as hell wouldn't send them a form letter with news like this, not until I talked to them first.
For a long time now we've seen mortgage rates be closely related to the 10Year T-bill. But, given what's going on in the ABX indices and the S&P downgrades, could it be that we'll see mortgage rates (even for "prime" loans) decouple from the 10 and go way up on their own?
It would seem that the lowering rate on the 10-year TBill today was probably a flight to quality, no?
From Bill Fleckenstein:
An even bigger deal was pointed out to me ...: the fact that S&P will be reviewing the ratings on the CDOs that contain these mortgages. That, he notes, is a first. He thinks that the impact of all of this will be massive. In his words: "It's exactly what everyone had hoped wouldn't happen now."
BODACIOUS! Squirtin' through silk.
bofiz - exactly right. Flight to quality.
dryfly
I have been worried about pensions being filled with with this toxic waste for several months. I know of several that may soon have a big problem, General Motors, Chrysler, Ford, New Mexico, Calpers, and I think the California teachers union. I am sure the list is large, but I can' t think of any others.
The thing that really worries me is the amount of leverage these clowns were using for some of these products. Huge debt bombs are imbedded in a lot of pensions and they won't be visible until they blowup.
Y. S. Wayne -
Did you say New Mexico?
Oh! Sh**
-- Hiding in NM
Hiding in NM
Yes, New Mexico's employee pension program. That pension will take a hit, but the one to look out for is General Motors. GM sold their finance division awhile back, but because of the way the sale was structured they have already suffered a hit because of subprime. They will soon suffer a massive hit from subprime that will sink the company.
From a contrarian perspective it can only go up further as the sentiment is so pervadingly negative.
For sure, we are in the later stage of an extended bull market and economic expansion. But when has such a positive economic backdrop ever been accompanied by such a negative sentiment? Bearish blogs florish, perma-bears attract large crowds expecting the next Great Depression any day and all stock market sentiment measurements are going more and more negative since early 2004 - in this bull market.
We may see a couple corrections in the market and come close to economic stagnation this year as the expansionary phase since 2002 is becoming overextended, but that will probably be it. It would be the first economic depression largely anticipated by the crowd - and that never seems to happen.
With the rampant pessimism on the housing market as of these days, we are also close to the bottom. It may be too early this year, but next year may not only be a good time to be in stocks, but also to buy RE.
Joe
What positive economic backdrop? You have record indebtness with a slowing economy and rising debt defaults.
The economic backdrop could HARDLY be WORSE. It's one of the 2-3 worst scenarios the world has ever seen in the last century.
Joe, it's not about pessimism. It's about paying debt. Pessimism or optimism doesn't bring down the debt.
Bringing down the debt means consuming less. And that is apocaliptic, in the sense that lower consumption would mean lower debt carrying capacity. It would start a chain reaction.
Maybe you're thinking about unemployment and all that "other economic backdrop". It so happens that unemployment was even lower right at the start of the 1929 debacle. And then the debt chain reaction brought unemployment from 3% to 25% in just 4 years.
Joe I bet there are some folks at Bear Stearns that would like to talk to you - rumor has it they got some stuff they'd like to sell at steep discount... one helluva a great contrarian play.
Some of that ABX stuff looks pretty tasty too - again from a contrarian point of view, couldn't go TOO much lower, considering how low it is now, right?
And it is only sentiment - no fundamentals involved... well except for the rosy economic back drop and all.
Go for it & let us know how it goes. No risk no reward as the saying goes.
When you are creating $2 trillion per year in new debt, and that new debt gets created to BUY stuff, you can easily understand the problem.
What if debt creation goes to 0? (it happens). In a $12 trillion economy (well, actually, less, there is some smoke in those $12 trillion), what happens?
Joe, what you have to remember is that there are literally millions and millions of people who have never heard of bearish sentiments, and have no idea what most of the discussion is here. Millions, now a couple of hundred folks actively read and comment on this site and a few thousand more actually read it and comprehend and you extrapolate it to bearishness being common? All of Wall Street is committed to the bull camp, and they far outweigh the volunteer efforts of a tiny blog.
Even if we all try to call it like we see it. Which CR and Tanta do a great job of presenting a view that isn't dependent on Wall Street management's view of what need to be sold today to make our bonuses.
I actually post because I like to be a bit of a gadfly, sitting on the sidelines of a growing debacle following truly insane buying. I also post to remind myself that I was villified by so many in the real estate complex as "not getting it", and hope they understood how well I really got it, while they obliviously levered up to go for it.
Mention forex trading and the yen carry trade to Joe (Sixpack) and you will get a blank stare, mention it here and you will get some folks who might be able to adequately explain it- for free mind you.
So what more do you want? Bullish stock picks? Try Cramer.
Someday this war's gonna end...
Joe
I will be a bear as long as we have people in high places who believe that they can make their own reality. I believe that many bulls will wakeup very soon to a new reality, that they have been played. Carl Schmitt, and Leo Strauss have painted a new world where only a select few know the rules. Henry Paulson has made it very clear over the last few days that he understands how to make money in this new reality.
All of Wall Street is committed to the bull camp
IMHO, the smart money is waiting for the retail investor to pile into this market so they can get out. So they are as "committed" as it takes to pass the bag to the next optimist.
Not a death warrant but the funeral bell tolling.
For those that are left originating subprime (and its not many based on the yearly subprime production numbers out just a week or so ago) its over. Now we just wait for the lawsuits, investigations, state attorneys general and loan buybacks to percolate through the system over the next 2 to 3 years as the 2006 vintage continues to stink up the economy.