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Ok, so after I posted this I noticed you all had been discussing Mauldin in an earlier thread. I'm sorry I wasn't paying attention, I have been busy listening to Beverly Sills, trying to figure out how to deal with Blogger's latest problem, and deleting some very weird comment spam. The usual Saturday, in other words.
Tanta please give us your thoughts on CDS risk when you get a chance and Mauldin's accuracy. I have found over the past 3-4 years that he is fairly accurate and realistic, but I would love to hear what you think.....Thnx
Hey, there's more than one bad guy in the plot. That is un-American.
The usual Saturday, in other words.
No its not the 'usual' Saturday... its 'Lucky Number Seven' Saturday.
07/07/07
Too bad the markets aren't open - we'd have made a killing. Oh well, maybe next century.
Meanwhile, I guess I'll have to settle for sitting on the porch and drinking seven drinks. Make mine seven BIG G&Ts.
From the "pros" (ratings agencies, I-banks, fund managers, etc) down to the "schmoes" (Jack & Jill Depot, Main St) a cascading series of small, seemingly rational decisions that, collectively, created a huge, dysfunctional ball-o-shit.
What did you expect Tanta, it's Caterday
http://thumbsnap.com/v/cO7R9nzS.jpg
Make mine seven BIG G&Ts.
Now I know why you are dryfly...and I thought it had something to do with the wagon
Here, here. I'll be toasting... with an extra-dry martini.
07/07/07 - National dryfly Day!
Miguela, I'm not an expert on CDS or CDOs. I'm just a mortgage punk, and I do know a thing or two about mortgage-backed securities. Actually, one of the reasons I'm so pissy all the time about the mainstream reporting on this issue is that people are being encouraged to think that a CDO is just like an MBS.
It makes me nervous to read any generalization about "CDOs." It's like talking about "snakes." There's your harmless little garter snake out in the back yard, and then there's your rattler or your python. There are lots of CDOs, only some of which are structured like an MBS or that hold mostly mortgage-related securities. So I do disagree with the guy in the Herald article who makes them sound less risky and, frankly, easier to understand than they really are.
I think Mauldin's point, that using the same ratings (AAA-BBB, etc.) for CDOs as for corporate or guaranteed bonds was a mistake on the agencies' part, is a good one. And his point about lack of operational due diligence is spot on; I honestly don't think there are many if any analysts at the rating agencies who could recognize the difference between a respectable operation and a boiler room if they walked into one unannounced. That's just not what they do with mortgage-related bonds. They've only just recently (I mean in the last six months) started figuring out their models don't capture enough of the right loan-level details. How'd they figure that out? Somebody finally started doing some due diligence reviews on the EPDs and repurchases and other horrors, and the agencies figured out that their models couldn't adjust for the results of those reviews because they didn't capture the relevant data. Here they have these complex, high-powered mathematically brilliant models, but they can't tell if a loan's down payment comes from borrowed money or not half the time.
People say nasty things about the GSEs, but they will stop doing business with you if you fork up too badly, and they use the near-monopoly power they have in some respects to enforce some discipline. Have the rating agencies announced that they won't rate any more MBS from some of these pathetic REITs and subprime shops until they clean up their acts? Of course not. They'd get some more slack from me if they'd use the leverage they have, but they're apparently too worried about losing the fees.
I have found over the past 3-4 years that he is fairly accurate and realistic, but I would love to hear what you think.....Thnx
Miguela - not Tanta but like everyone I too have an opinion I sit on.
My only complaint with Maudlin is he was an early champion of 'dark matter' and the 'platform' business model. Both of which were (are) sketchy at best.
Dark matter has mostly been debunked - really little more than corporate 'tax avodance' via transfer pricing. See Setser's older postings if you can get access.
The 'platform model' (via Gavekal) is still all the rage - Apple is the poster child for this model. Design & market everything - make nothing.
It works great when you are the only practitioner... the question is what happens when everyone does it (and no one makes anything anymore)?
Also what happens when the economy goes in a funk & folks don't buy the wiz bang? Do they have real assets to carry them over to the recovery or only 'virtual assets'?
Plus what happens if you don't control REAL the IP anymore? Making & thinking are more closely coupled than the Gavekal folks realize (I been there as a plant engineer coupled to process design teams - feeds off each other).
Maudlin is pretty clever - I read him too - but those were examples where I think if he were a little more skeptical of the 'hype' & dug deeper he wouldn't have bit as hard on the 'conventional wisdom' bait. I wonder if he is doing the same thing here.
But I too would like to see what Tanta has to say about Maudlin's take on this topic - I'm far less comfortable poking holes in his predictions stemming from sub-prime than his past reads on dark matter or platforms.
See Tanta answered as our posts passed like ships in the night - thanks Tanta.
dryfly, I haven't actually allowed gin to pass my lips since an unfortunate event in mid-1989 involving a bottle of Tanqueray, a quart or two of grapefruit juice, and the worst hangover the world has ever seen. There is nothing, nothing, worse than a gin hangover. I was invited to a dinner party a couple of years ago and served a casseroled pork loin with a few juniper berries in it. I caught that gin smell as the hostess took the lid off the casserole and I almost threw up.
So karmic balance being what it is, you will have to drink my share of the G&Ts. I'm sticking to iced Irish coffee today.
Once again it comes down to creative destruction. Schumpeter called this stage of advanced capitalism decades ago.
Business cycle downturns exist as natural cleansers of economies as they develop. When we undermine and dilute their effects, we cause economic and asset bubbles and more severe pullbacks when the cycle finally does come to an end.
The last time we used leverage to this degree, we blew ourselves into the Great Depression. Back then it was 10x margin on stocks and unregulated investment companies.
This time it's 20x to infinite leverage in overpriced houses for the consumer, combined with 10x to 50x leverage for the unregulated hedgies.
Fundamentals (rents, incomes) have never been so out of whack for RE. Stated incomes have become a lever in and of themselves in that you can take a much bigger loan on a much smaller income thx to the wink, wink design.
Stock market PEs are only slightly high based on historical terms, but very high if you consider that they are based on Es that could contract significantly if a big recession does come.
Interest rates are STILL historically low. The Fed sits ready to tighten or loosen as the inflation "stats" allow.
And then there's the question of how the global currencies will react to a US economic pullback and how subsequent foreign investment flows will affect our interest rates.
As a result of leverage and monetization, we've managed to mute the business cycle for quite some time. We haven't had a legit pullback since '82. The early 90s and '01 were relatively tame. Seems time for creative destruction.
But try to keep your heads up... This is the most dynamic economy and country ever and it will survive this round of CD to become even stronger and more prosperous.
All in due time, my friends. It's just the natural way of capitalism playing itself out again.
"This is the most dynamic economy and country ever and it will survive this round of CD to become even stronger and more prosperous."
This country is in severe need of an enema to clean out the old pipes politically, economically and socially make it a double.
"I think it is disingenuous for a rating agency to explain the difference in paragraphs 457-503 in 7-point type and dense legalese in their disclosure document. Investors had (and should have) a certain level of expectation when the designation "AAA" is used. GE and Exxon types of expectations."
Every player involved in manufacturing this toxic caca knew exactly what they were doing putting the AAA rating on them. That was the whole point.
Tanta, Any drink named after a fast dog should lead one to consider whether drinking a lot of them is prudent. That is why I avoid the Rusty Nail. Don't want lock jaw.
i love when the comments descend into discussions about drinking. that's when you know you're readin a good blog.
Hold up with the lynching season for a moment.
What fraction of a pool (in priority) was rated AAA in real life, and in general? I thought it was more like 45-50% or so.
This would mean that the pool, assuming it is paid in priority of tranches and without any other funny business, would have to have total losses of say 50% before AAA tranche has a missed payment.
That seems to be "great depression" or "nuclear war", or even "Detroit" level bad. Imagine a 50% default and foreclosure rate, and every single one the affected properties being burned to the ground, and the land salted with toxic waste so that even it has no residual value. After that, with one more loss, the AAA tranche takes a hit.
Is that something that a pension fund should be barred from buying?
Now the hedge funds were levered 5 or 10:1 and buying lower grade stuff, so of course their risk was like jugs of fresh nitroglycerin.
Has there yet been any significant loss on A or better rated MBS securities recently?
DrChaos, When I look at the ABX I see prices for the A rated indexes all well below 100. Most in the 80s. That sounds like the expectations are for real losses.
dryfly, Tanta is right. Gin is bad news.
or even "Detroit" level bad.
LOL!
Dr Chaos: in many cases the AAA tranches didn't get their rating due to having rock solid safe mortagages. Intead they get the top rating due to being "protected" by the lower-rated tranches. You get that part. But what happens when the lower tranches burn up? They don't exist any more--now the "AAA" tranches have less, or no protection.
Without the protection, the AAA tranche loses value immediately, regardless of whether or not one of the mortgages in that tranche has missed a payment. Or rather, they would lose value immediately if various Wall Street entities weren't turning triple backflips in the attempt to avoid actually pricing any of this stuff.
Has there yet been any significant loss on A or better rated MBS securities recently?
Of course not. By the time they start taking losses, they've generally been downgraded.
Are there securities out there that started out A or better and are now in deepshitville? Certainly there are second lien and mixed first/second securities in exactly this situation. I saw the other day that a First Franklin deal--I think it was from 2005--actually has an AA tranche on watch negative.
I agree that principal losses on first-lien mortgage senior tranches are not likely. But those ABS full of HELOCs and second liens from those piggyback purchases? Money will be lost there for sure.
Add one more to the list...Rich Marin, CEO of BSAM. Mr. Big new better and he should take a big hit like the investors.
Six Percent Solution - you are correct that once the set asides of overcollateralization, etc, are burned through that the higher-rated tranches become more risky.
But please understand that the higher end tranches aren't backed by different mortgages than the lower-end tranches. What differentiates tranches are the payment rights and terms of each individual tranches. The pool operates as a whole, and when the pool pays off every month the principal and interest payments are split up among the tranches according to the original formula. Tanta wrote a great explanation of how this works a while ago. I wish she'd put in on the sidebar as a link.
it's not the deleveraging, it's the de-nial
Tanta, I hear what you are saying and after reading your posts I now understand your frustration better....I guess what really has me concerned (and obviously Mauldin) is the level of insurance (CDS) out there and I am glad someone is starting to recognize it. I guess the way I am seeing the whole situation is similar to a pyramid - the top few layers are the consumers, the layers below are the MBS packages dependent on the consumer, then the CDOs under it reliant upon the MBSs, then finally the layer of swaps dispersing it further. Each layer is dependent on the one above, some more so than others due to the leverage and then at the bottom is this gargantuan pool of swaps, that quite possibly could be equivalent to an economic Chernobyl. The connectivity and dependence on each instrument is mindboggling really. The thing we don't know is the size of each layer...and that is, in my opinion is the fundamental issue.
woops I was done writin' too fast
This recent affinity for the tech sector could be a bullish longer-term omen for the overall stock market, notes technical analyst Katie Townshend of MKM Partners, "particularly because it is occurring at the expense of more defensive sectors such as pharmaceuticals and consumer staples."
she's a hot-totty, she must be right
This country is in severe need of an enema to clean out the old pipes politically, economically and socially make it a double.
Kevin | 07.07.07 - 5:43 pm | #
Go see Teena in Harlem-she'll clean you out real good
The parsing in these threads is what it must have been like deep within the bowels of 'Titanic' on that April night in 1912.
The electricians were probably standing in front of the main circuit breaker panel arguing about which one would blow first, kind of like shut-in children looking out of a window on a rainy day, arguing about which raindrop would be the first to reach the bottom of the pane.
We have a reasonable idea of what's going to happen here, haven't we? So, why can't we take the lead here? My question is: what should the geniuses on the plunge team do to fix it?
All of the Sturm und Drang is wearing me down.
We still have the love scene to get through.
When do we get to see Kate Winslet nude?
Asa, there is no Kate in this production, just a bunch of ugly bankers.
Total Commercial Paper surged $25.4bn last week to a record $2.168 TN, with a y-t-d gain of $193bn (18.9% annualized). CP has increased $384bn, or 21.5%, over the past 52 weeks.
In isolation, what does this mean?
Tanta
I hope that you will answer a couple of questions for me. As I understand it, the ratings of many of these CDOs will have to be rerated sometime this fall. Is that true? I also wonder how much leverage was used in some of these CDOs? When I read how much leverage was used in one instance by Bear Stearns I was stunned.
To be honest with you I did not think Mauldin was as concerned as Fleckenstein.
CP has increased $384bn, or 21.5%, over the past 52 weeks.
vs
sp 500 yearly earnings?
hmmmm
nothing shady here folks...
the sun shines on wall street twice a day...9:29 and 4:01, and never inbetwee
YSW,
Fleck's a bear, whereas Mauldin's sort of in between camps. Call him an extremely cautious, eyes wide open optimist. His work is really good, but I find his data is more bearish than he wants to admit. Hmmmmm... reminds me of CR.
couple of thoughts.
first, the biggest aspect of the sub-prime failure is not going to be the absolute dollar value of the losses but what it will do to pricing of future paper. the big impact will be on leverage. after the banks got a taste for how quickly these kinds of securities could go 'no bid' they will quickly revise lower the amount of leverage which can sit upon these kinds of instruments. that, in and of itself is enough to lower prices for all sorts of risky credit. the feedback of this re-rating will make it much more difficult at the margin to get any kind of credit. i fully expect before the summer is up that one of the big private equity deals is going to go bust because the debt is not going to be salable at a price that the deal can handle.
i was struck by two articles today that both seem to look at the data and draw the same conclusion. one was from david tice at prudent bear and the other was from barton biggs in newsweek. both looked back at the terminating phase of prior market excesses and tried to draw parallels from them. both came to the same conclusion that the markets might go into a synchronized melt up here before cratering in the fall. it strikes me that two people (one permanently bearish) the certainly aware of the case are both of the same mind and both expecting the possibility of a melt-up.
the general rule of thumb in markets is that the money flows to the least favorite idea. perhaps the idea of an imminent decline has fallen off the radar at just the time it appears the actual market data is turning towards that very outcome.
david,
Have you read Barton's "Hedgehogging"? Great read. He's definitely bullish.
If those two are saying the same thing, then there's certainly something to it.
melt -up???
10740 close 51 weeks ago
13611 friday
up 27%
what are we talking here , another 25-35%, quick like???
into the 18K's?
tj,
no i haven't read it. do you have a link?
bluff:
yeah, i was kind of thinking that maybe we have seen the melt up. since april 1
rimm +50%
aapl +40%
intc +30%
amzn +70%
ibm +15%
goog +18%
some of the small cap tech i follow is up 50 - 100 % in the same period.
all this while a lot of the less exciting stuff is going nowhere fast.
we've lost, housing, retail, finance. all that's left is pretty much energy and tech. i am most surprised with tech given that a lot of juice comes from the consumer. as evidenced by best buy and circuit city, consumer tech is not going so well.
Asa, there is no Kate in this production, just a bunch of ugly bankers.
I wonder how many of them drink gin.
what are we talking here , another 25-35%, quick like???
into the 18K's?
Maybe. I think a lot of that depends on what those crazy nouveau rich Chinese ex-communists do with their 'investment fund'... do they act like kids in a candy store... or make decisions based solely on where the RMB-USD is... or do they make careful long term 'value' based purchases.
If they do the later - my guess is we don't have a Santa Claus rally & instead see indexes reverse.
If on the other hand the Chinese buy like a bunch of crazy Mao suits at their first KMart... we might make and even pass 18K on the Dow.
BTW - I don't believe the Chinese ALONE could do that... but targeted aggressive buying into a pensive market will drive indexes higher even if overall sentiment is far less bullish.
Hell that's what's going on now with hedgies & PEs isn't it?
mp: The parsing in these threads is what it must have been like deep within the bowels of 'Titanic' on that April night in 1912.
The electricians were probably standing in front of the main circuit breaker panel arguing about which one would blow first, kind of like shut-in children looking out of a window on a rainy day, arguing about which raindrop would be the first to reach the bottom of the pane.
We have a reasonable idea of what's going to happen here, haven't we? So, why can't we take the lead here? My question is: what should the geniuses on the plunge team do to fix it?
The money has already been stolen from the future. Nothing can be done now to fix that fundamental problem. The "geniuses" will do what they always do -- socialize the risk.
Saturday Play Blogging - Dedicated to Too Big Too Fail:
Piglet
To bail or not to bail: that is the question
Whether 'tis nobler in the mind to suffer
The slings and arrows of outrageous fortune,
Or to take arms against a sea of troubles,
And by opposing end them? To die: to sleep;
No more; and by a sleep to say we end
The heart-ache and the thousand natural shocks
That flesh is heir to, 'tis a consummation
Devoutly to be wish'd. To die, to sleep;
To sleep: perchance to dream: ay, there's the rub;
For in that sleep of death what dreams may come
When we have shuffled off this mortal coil,
Must give us pause: there's the respect
That makes calamity of so long life;
For who would bear the whips and scorns of time,
The oppressor's wrong, the proud man's contumely,
The pangs of despised love, the law's delay,
The insolence of office and the spurns
That patient merit of the unworthy takes,
When he himself might his quietus make
With a bare bodkin? who would fardels bear,
To grunt and sweat under a weary life,
But that the dread of something after death,
The undiscover'd country from whose bourn
No traveller returns, puzzles the will
And makes us rather bear those ills we have
Than fly to others that we know not of?
Thus conscience does make cowards of us all;
And thus the native hue of resolution
Is sicklied o'er with the pale cast of thought,
And enterprises of great pith and moment
With this regard their currents turn awry,
And lose the name of action. - Soft you now!
The fair Ophelia! Nymph, in thy orisons
Be all my sins remember'd.
dryfly
much has been made of the chinese swf. one thing to remember is that all of the chinese money is already invested. its not llke they have suitcases full of greenbacks and they are just now deciding what to do with it. currently the biggest pile is in us bonds, bills and gse paper. if they pull it out to buy something else, the bond market is going to collapse.
i actually think, and the fed stats somewhat back this up, they have stopped channeling the cash from the trade surplus out of our bond market and into other markets throughout the world, probably not fixed income. removing a big chunk of bond market demand in the face of rising supply is probably partially behind the price changes we are seeing.
Oh I agree david - their money is in bonds & such not cash per se... though I'm told the average maturity is shorter than most of us would choose if we were doing it.
But that isn't necessarily going to stop them from moving into equities & they could care less about our interest rates - they only care about the FX... RMB-USD peg & sterilization.
In fact if our interest rates increased (making the dollar more attractive)... it makes their intervention less necessary & less costly. After all they are doing it to support the dollar.
I don't think that can go on forever... but nothing goes on forever.
Too Big Too Fail
Most government budgets cannot recognize contingent liabilities because they are on a cash basis. The revenues of government insurance programs are recognized when cash flows in from sources such as premiums. However, the cost of the government insurance program is recognized only when a cash outflow occurs to pay off an insurance claim. A cash system could accurately reflect the financial condition of the government program if the inflows and outflows of cash occur around the same time. However, the costs and outflows of an insurance program can occur at a much later date than the inflows. As a result, a cash system produces a perverse bottom line for explicit and implicit insurance programs. For example, a deposit insurance program that charges a nominal premium and does not suffer from many costly bank failures shows a profit under a cash system, even if during this same period banks make decisions that will produce enormous losses in the future.
Faulty recognition in the cash-based system leads to excessive amounts of government contingent liabilities.
...
Excessive supply of TBTF coverage would manifest itself in a number of ways, including an absence of limits on coverage, few attempts to rein in expectations of coverage, and a paucity of reforms to limit spillovers from large bank failures, to cite just a few examples. All of these signs of excessive coverage are evident today.
-- Stern/Feldman 2004
Yep, too "sophisticated" for Glass Steagall these days.
I feel is though this question is well under the discourse level of CR, but I'll ask anyway...
RE: CDO's and pension funds. The figures I've seen are not large, i.e., 1% or so CDO's as a percentage of the total pension fund portfolios. And I'm assuming the pension funds are not highly leveraged like the hedgies. So is the danger not that the bond losses, but from the collateral damage caused by credit contraction and it's negative impact on the stock market?
The money has already been stolen from the future. Nothing can be done now to fix that fundamental problem. The "geniuses" will do what they always do -- socialize the risk.
Oh, Strange... they will try to fix it, you gotta know that much. Whether they keep the play running for a few more weeks is a whole other thing... but you know they are gonna try.
And if that doesn't work... say they got no more fixes... well that's the time to socialize the risk (or rather socialize the COST... since risk is potential cost and by that time we'll all know the 'potential'... probability 1.
.
But never fear, it will be for the good of the country. For the children.
david,
Hedgehogging is a book on the hedge fund industry. Just Google it and you'll get the Amazon link.
Yup Haley - I think you got it. CDO, CLO and such are not huge problems by themselves... but if they fail you have two primary effects:
(1) general credit tightening at the collateral level (loans to homeowners & companies)...
And...
(2) leverage... even if the initial damage is small if the damaged goods are leveraged into many other places then the negative effects multiply by the leverage factor... and if reports are correct, the leverage factors in hedgies are quite high.
But no one really knows... that's why we all come here to read, post & learn. Not much else we munchkins can do except wait for the houses to start falling from the sky.
Things go on until the meet the point of failure- then they stop, usually causing that nasty collateral damage stuff.
Oh well, I find that nothing much will happen until the Black Swan appears at Broad and Wall and trumpets a new era, and the leverage comes tumbling down. Then of course we shall all awaken to find that we are actually much poorer than we thought. But until then- More Poonas!!! To steal a line from Moon over Parador reminds me that Raul Julia is gone....
However,
Someday this war's gonna end....
Oh well, I find that nothing much will happen until the Black Swan appears at Broad and Wall and trumpets a new era, and the leverage comes tumbling down.
And man - I've seen Swans... they are big fricking birds. Mean as hell plus they shit all over. Those bankers are going to be in for one big surprise.
DrChaos,
The AAA tranches are initially usually about 80% of the total for securities backed by first liens and about 65% for those backed by the second liens. The lowest tranches are very thin. The whole structure is supported by excess cash flow more than just by the initial overcollaterization. But when the excess cash flow is gone (due to high delinquencies), the tranches are being consumed by losses very quickly. Currently, in the worst shape are (as Tanta wrote above) securities backed by second liens. I'm pretty sure there will be partial losses for some of these papers for even initially AAA tranches without any additional worsening of the market. No nuclear war, no Detroit, no depression, not even recession. Just the current subprime credit crunch so the distressed borrowers cannot refinance. The funniest thing about these securities is that the models that rating agency used probably did not predict that currently the owners default on second liens without a blink of the eye. It seems that people default on second liens much sooner than on the first (is it true that you cannot be foreclosed on the second if the first is current? It is tempting because second liens have higher interest rates). And losses on second liens are usually 100%. Suddenly, these 10-11% interest rates are not enough to compensate for the losses.
It seems that people default on second liens much sooner than on the first (is it true that you cannot be foreclosed on the second if the first is current?
Poszi - I believe the seconds CAN foreclose but they then have to assume the fist lien as well if they want remedy. In a declining market with increasing severity its usually tactically smarter to just let the second liens go & move on.
At least that is how I believe it was explained by Tanta in a previous ubernerdtorial.
And if that doesn't work... say they got no more fixes... well that's the time to socialize the risk (or rather socialize the COST... since risk is potential cost and by that time we'll all know the 'potential'... probability 1.
.
Justice would be distributing the bailout cost to the players in the game. Create a speculation tax on bank profits (Glass Steagall Version 2) or something similar to fund a bailout fund. That way the cost impact can be distributed over time. While the tax rate determined by the previous bailout would probably not be sufficient to fully fund the next bailout it would still provide a drag on speculation that might help reduce the overall magnitude of the peak. If only those "genius" financial engineers would put a little effort into sustainability. Instead, they are using a lot of math for what might turn out to be nothing more than stealing from the public at large.
david in ct
i am most surprised with tech given that a lot of juice comes from the consumer. as evidenced by best buy and circuit city, consumer tech is not going so well.
this comment in today's barron's 'the trader'
This recent affinity for the tech sector could be a bullish longer-term omen for the overall stock market, notes technical analyst Katie Townshend of MKM Partners, "particularly because it is occurring at the expense of more defensive sectors such as pharmaceuticals and consumer staples."
does'nt square , does it
Justice would be distributing the bailout cost to the players in the game.
Ya I know... and my kids always wanted a pony too.
I think the 'socializing risk' thing you posted earlier has a higher probability... you know, if I had to place a bet on one or the other.
dryfly,
Now I remember. I guess it was this ubernerditorial. Technically they can foreclose but usually it is cheaper to just make a write-off.
Doesn't it imply that second-lien mortgages are practically unsecured in a non-appreciating market?
does'nt square , does it
So Called Bluff & david... what you are really saying (without actually saying it)... is that maybe these techies are the better 'short' candidates and not the already heavily shorted HBs?
Man, that would take balls right now.
which banks have most of the 2nd lean ?
Doesn't it imply that second-lien mortgages are practically unsecured in a non-appreciating market?
Yes but I think the key word is 'practically'... they are secured but not in 'top' priority position (first lien is). If the second wants to bump up to top priority they then need to buy out the first lien position... and usually that is NOT cost effective.
That is how I understand it. Which is why they want a higher interest rate - greater risk of losing all or most all should the property foreclose.
GMAC
Come down under Tanta. We will show you many ways in which we are smart. Clean safe cities, an appreciating currency and literate kids.....Check out our superanuation scheme. Our version of social security. Good for citizens but forces sane investments (we dont have SS we invest in the market and the account is portable, and you get it back tax free at age 60).
its too much regulation that is causing the IBs/hedgies/lenders/etc problems.
Yal, Strangely enough, it looks as though BofA sits on top of the 2nd lien heap and has for a while. Add it up...
National Mortgage News - Free Data
I think the 'socializing risk' thing you posted earlier has a higher probability... you know, if I had to place a bet on one or the other.
Collectively, we always vote for the greedy, easiest-next-step way out.
Greedy algorithm - Wikipedia, the free encyclopedia
If it weren't for jaguars falling from the sky and the end of times in 2012, this might be Bloomberg:
YouTube - President Reagan
let wall street handle it:
"The damage to S&L operations led Congress to act, passing a bill in September 1981 allowing S&Ls to sell their mortgage loans and use the cash generated to seek better returns; the losses created by the sales were to be amortised over the life of the loan and any losses could also be offset against taxes paid over the preceding ten years. This all made S&Ls eager to sell their loans. The buyers - major Wall Street firms - were quick to take advantage of the S&Ls lack of expertise, buying at 60-90% of value and then transforming the loans by bundling them as, effectively, government backed bonds (by virtue of Ginnie Mae,Freddie Mac, or Fannie Mae guarantees). S&Ls were one group buying these bonds, holding $150bn by 1986, and being charged substantial fees for the transactions."
Savings and loan crisis - Wikipedia, the free encyclopedia
This all made S&Ls eager to sell their loans. The buyers - major Wall Street firms - were quick to take advantage of the S&Ls lack of expertise, buying at 60-90% of value and then transforming the loans by bundling them as, effectively, government backed bonds (by virtue of Ginnie Mae,Freddie Mac, or Fannie Mae guarantees). S&Ls were one group buying these bonds, holding $150bn by 1986, and being charged substantial fees for the transactions.
Efficient Allocation of Capital
All this deleveraging sure is going to be an Efficient Destruction of Capital.
We may not have SS as such in Australia, but there is an unfunded safety-net pension for over-65's set to a precentage of national average weekly earnings (I am fairly sure that means median). For a single then pension is currently about $240 a week.
There has been a lot of "creative" financial structuring over the years to allow relatively wealthy people to access that pension. The most popular scam for a long time was (surprise, surprise!!) to fold almost all assets into an expensive principal residence, then live on the old-age pension.
These days there is both an assets test and an income test, and both of the main political parties are quite open about expecting the bulk of the population going forward to support their retirement from their superannuation (which attracts generous tax treatment as mentioned above).
I will accept one argument of the 'owning is best' group here. There is a huge difference between living on the pension as an unmortgaged owner, and living on the same pension as a renter.
John Mauldin is a good guy. He advises a Fund of Funds called Altegris, and he likely knows lots of hedgies. He asked them, "what's the hedge fund exposure to subprime?"
"No one here but us chickens," they replied.
Let's review. What's been the most successful hedge fund strategy of all time? Vol-selling. Vol-sellers are not optimists; they don't care if things get "better". They are "anti-pessimists"; they bet that things won't get A LOT worse.
Here's a list of vol-selling strategies:
-selling deep out of the money equity puts
-buying ABS and shorting t-bills
-buying junk bonds and shorting t-bills
-buying emerging mkt bonds and shorting t-bills
-buying CDO's
-selling/issuing CDS
-shorting VIX futures
All of the above can be levered, usually with low-rate Japanese Yen debt, so that there's hefty currency risk along for the ride.
Now, can Mauldin's friends really expect us to believe that they passed up on one of the biggest instruments for vol-selling (subprime ABS/CDO/CDS)? Why would they do such a thing? What did they vol-sell instead out of the $8tr mortgage market? Plain vanilla agency-guaranteed MBS? No mortgages at all? Please.
At the end of the day we'll be surprised where the levered vol-selling "emerges". Even PIMCO's bond funds have been known to sell out of the money puts on T-bonds -- betting that interest rates will never spike on inflation fears.
barely, BoA's second liens are to prime borrowers though - they got out of the subprime business altogether back in 2000 (?I think, could +- 2 years). Actually, National Mortgage News numbers all look a little low, I would guess (based on inhaling subprime fumes, but no hard data in front of me) that Countrywide, Wells, GMAC, and WAMU were at the top of the heap in terms of subprime second liens.
They should change "too big to fail" to "too much leverage to fail". Seems a more appropriate term for our times...
Increasing Rate Of Foreclosures Upsets Atlanta - NY Times
as per NYT story:
house 25 miles south of atlanta. bought 2004 330k 0%down, sold at foreclosure auction for 134k.
these are not happy numbers to plug into the old CDO valuation model..
Hey Australians, you've at least got Peter Garrett, former Midnight Oil frontman working in your parliament
Peter Garrett
Let's reminisce a little "Short Memory" (Midnight Oil, 1983)
Short Memory [pun included for free]
Conquistador of Mexico
the Zulu and the Navajo
The Belgians in the Congo
short memory
Plantation in Virginia
the Raj in British India
The deadline in South Africa
short memory
The story of El Salvador
the silence of Hiroshima
Destruction of Cambodia
short memory
Short memory
must have a
short memory
The sight of hotels by the Nile
the designated Hilton style
With running water specially bought
short memory
A smallish man Afghanistan
a watch dog in a nervous land
They're only there to lend a hand
short memory
The friendly five a dusty smile
Wake up in sweat at dead of night
And in the tents new rifles
hey short memory
If you read the history books
you'll see the same things happen again and again
Repeat repeat short memory they've all got it
When are we going to play it again
Got a short, got a short, got a short, got a short
They've got a short must have a short they've got a short aah
Short memory, they've got a
Here's a couple more great Peter Garrett lines from "Maralinga"
The pigs will have to come to ground
we've got to make it happen now
It's not really that new
try and make it happen now
What are we to do
maybe there's a chance for you