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"Psychologically, separating people from their money is generally considered to be a hostile way to behave," said Ron Geffner, a partner at New York law firm Sadis & Goldberg.
A hostile way to behave? If the young fellow on the streetcorner does it, it is called a felony.
I think the burden of wisdom here is that Buffy isn't used to being "separated from her money." Bubba, on the other hand, gets ripped off all the time.
Maybe they should take their losses from the hordes hoards instead of from the taxpayer all the time.
Big time short squeeze in the HBs today. They saw how much can be made when that BZH rumor ran. They need to scoop up money...
Banker,
You have said LTCM was much bigger- uh what
LTCM was a $4 billion fund with $100 billion of exposure.
Compare this to the Mortgage Market via hedge funds and it is actually pretty small.
Perhaps, "Hordes of formerly well-heeled investors."?
Ahhhh! Not the LTCM confusion again.
While LTCM had around $100 billion under management (on $4billion of invested capital), they had entered into derivatives contracts using that $100 billion. These derivative contracts had more potential exposure.. but people just assumed that the numbers on the paper wouldn't move outside a certain range.. so that potential exposure was not considered real.
Totally off thread but a very funny segment on the Daily Show where Jon Stewart and "Senior Black Correspondent" Larry Wilmore discuss subprime ("the N-word of finance").
The Daily Show with Jon Stewart Official Website | Current Events & Pop Culture, Comedy & Fake News
Non-prime mortgage sector is $1.5 trillio
Yes, and the estimates of LTCM's exposure to swaps and other interest rate derivatives to have been over $1 Trillion.
Problem is.. we can only estimate.. I haven't seen their positions.
Anyhow, the swaps will do a lot of murdering this time around as well.. I would guess.
It's seems hard for people to see that the underlying isn't the big deal.. it's the effing swaps man! IT'S TEH SWAPS!
Yeah and lets not forget 100 Billion is much less today than in 1998. While the derivatives notional amount outstanding has mushroomed to some ungodly multiple of what it was then.
I'm sure the same funds have also suspended collection of their own fees during this time of stress, correct?
Yeah, but these are, uh, subprime hedge funds. With tentacles yet.
There are two aspects to this entire "mortgage mess".
I think investors and the market tend to pick one aspect or the other and make investment decisions based on that alone.
Right now, much of the market is looking at the impact of real losses of this credit crunch. And as I heard on TV, like Paulson et el., many are explaining that since the losses are confined to "well-heeled hedge funds", and thus there won't be a run on banks, or that foreign investors will take the losses, or that retirment funds that won't be accessed for years will take the brunt...or that it will be dispersed among many investors....or that the LTCM was worse....blah blah blah, may in fact mean that the direct impact of subprime on the market may be absorbable.
However, those who think this way tend to concentrate on this only and forget the indirect impact of the collapse of the lending industry or the home building industry. This means of gettng "money to the masses" has been shut down. The problems of empty homes, lack of MEW, lack of affordable credit or willingness to borrow, etc are all still here.
Example: If the only store in town shuts down. Well, it's one thing to say that the owner will be fine because he shut down before losses got too great, or the losses will be spread over many investors, or he's in trouble because he's overleveraged and he waited too long and he's in deep financial doodoo, blah blah blah.
None of this changes the fact that the store is closed, and the problem of where people are going to buy their goods is wholly a seperate issue with seperate problems that will reverberate throughout the community and have impacts that cannot be determined by looking at the financial health of those who took direct losses from the closed business.
I think CR and Tanta are doing a wonderful job at reminding us of both sides of the issue.
My two cent's worth.
Mainly, LTCM's leverage was effectively around 250:1.
Here's a link to a good examination of the case.
As itsallgreektome mentioned.. the swap market today dwarfs what it was in the late '90s. Can anyone even guess what it is? I have no idea.. I'm sure there are just random estimates.
I'm sure the same funds have also suspended collection of their own fees during this time of stress, correct?
Ha! If that ever happens, I'll be stocking up my own little DaveCave with canned food and ammunition. Hedge funds not charging fees is a definite bullish indicator for the end of the world.
OT, but here is a note sent this morning from WaMu regarding upcoming guideline changes. Specifically, take note that the cost of stated income is RISING.
"As you all know since March, the market of funds and avialable lenders offering various products has been shrinking. Im sure you are aware of the increased events in the last few days.........with that said..I am not aware of exact details, BUT.........
"I would advise EVERYONE to E SUBMIT at a MINIMUM ALL loans going to WAMU by Friday Aug 3rd. Although I feel the major changes "should in the area of Stated Income," I am not aware of all changes. EFFECTIVE MONDAY and there will be NO EXCEPTIONS come Monday! If it were me at this unknown time, I would also protect my pipeline by at a minumum e-submitting and LOCKING by Friday..NO EXCEPTONS come Monday. It is also important that these loans be submitted accurately in regards to loan amounts and ltv's as if they need to go back to underwritting and be re decisioned after that time, i am not aware of what our policy will be...therefore, I am advised EVERYONE TO PROTECT THIER PIPELINE NOW BY FRIDAY DEADLINE AT 5 PM!!"
Wells and WaMu are leading the charge into the brave new world of no stated income. Watch this trend closely as liar loans have been a significant support to housing valuations over the last few years. Take them away and look out below.
It is starting to seem like August rhymes with February. I'm hearing of loan programs being discontinued at more lenders today - IndayMac, Wachovia - in addition to the programs cut at National City and Wells Fargo over the last couple of days.
I see Mathew Padilla at the O.C. Register has an article on Wells Fargo.
I received this on Wachovia (not confirmed):
ALT- A Product Offering Suspended
Effective immediately 8/2/07, Wachovia Mortgage will temporarily suspend accepting new loan registrations and/or locks on our Alt-A suite of products through the Wholesale channel.
In February standards started to be tightened for many subprime products - or the products were eliminated completely. Now the same appears to be happening for Alt-A.
Best to all.
Eli said,
Mainly, LTCM's leverage was effectively around 250:1
Not- LTCM was about 25 to 1, Hedge funds currently estimated at about 15 or 20 to 1
Well, this is going to be very interesting over the next few months. How long until Washington rides to the rescue of the poor deceived borrower. Especially those prime brokers who provided the eternal money machines for everybody who wanted to gear up into the madness.
Deleverage. A new word for a an old concept;-} I wonder if the velocity of money is declining?
Someday this war's gonna end...
How many hedge fund managers would fail a psych exam?
Side note:
I've been telling my wife (who is about as concerned about this housing thing as she is about jock itch), that "pretty soon it will be like when we got a home loan in '95." (i.e. 10% down on an 8% interest rate, strict review of all docs, my retirement as collateral, by the skin of our teeth on a $178,000 house with a family income of $85,000, no debt, in government jobs--ie. can't be fired....thats less than 3X income!!! remember those days? (God I wish they had funny money back then! when it made sense, but anyway.....)
When I claim this to my wife, she responds...."yeah right, that will never happen again. If it ever went back to that the whole housing market would collapse....they won't let it happen". (Then she goes back to concerning herself with things that are actually within our "circle of influence"...like rasing our child and enjoying our lives!).
But, the point is...she gets it....even if she doesn't know it.
Things that are inconceivable now, will be totally expected and common sense later....
Econ 101: when supply rises (current foreclosures, REOs and a huge wave of upcoming rate resets) and demand falls (mortgage credit SEVERELY tightening), equilibrium prices head in one - and only one - direction.
The big question is as home prices fall dramatically over the next two years, what does that do to the highly levered world of Wall St that is in a large part supported by this declining collateral base?
Downward spiral is how I see it unless the Fed is able to reflate the monetary base. But then the USD crashes, right? Or am I off in that assumption?
slowmo, LTCM had nominal contracts in excess of $1.2 trillion on about
$4 billion capital. That is effective leverage of about 250:1
eli is right. The problem now is not that there is another LTCM out there, but that there are dozens of sub-LTCMs maybe 1/10 their overall size. If 10 are doing the same trades, it adds up. If 20 are doing the same trades, oops.
I'll bet it's actually larger and the oops is reality.
Let's hope our Minneapolis affiliates are okay, dryfly hasn't been seen since.
How many hedge fund managers would fail a psych exam?
It depends. If the exam was to determine the level of sociopathology, I'm sure they'd all pass with flying colors.
sloooowwwwwmotion,
I'll draw the picture for you.
$4 billion from investors
$125 billion in loans
$1,000 billion in notional value for the interest rate swaps.
Read the case study I linked to above.
That's why derivatives (swaps in particular) are very important to all of this... you have to understand.
Some large entity can enter into a bazillion different Swap contracts with a bank or whoever... the bank says, "ah, well.. no biggie.. all these interest rates aren't too correlated so you don't need to have too much on margin."
What if something happens pushing all the rates in one direction? What if the notional value of the swaps has been allowed to grow to some astronomical level.. since well, everyone assumes that volatility is dead.. so it can't move that much.
A similar example would be.. if you start with $10,000, go out and borrow $100,000 from one bank, and then take that to a brokerage firm and opened an account that let you use margin. So, the broker extends you a certain amount of margin since they figure the stocks you trade won't move too much in a short time period.. Your effective leverage would be more than 10:1.
The risk all revolves around the belief that certain movements are simply impossible.. what if those movements are possible?
Average Joe-
Your wife is entirely correct. If people are sitting on the sidelines waiting for a ten-cap, they will be waiting a very, very long time. And if and when it does happen they will need a 12-gauge to go along with that ten-cap. This country will implode if rates ever get that high.
Needless to say, you should be impressed with your wife's logic. I would venture to say that nine out of ten Americans are completely clueless about what has happened and is currently happening.
slooowwww,
You misunderstand me...or I write badly...let's go with the former for now.
When I say LTCM was "bigger" I am not comparing size of the funds or borrowings relative to today. That's impossible to do, we haven't enough information. It is/was bigger in the impact it had on the markets around it and the perceived threat it posed at the time. It did that for a couple of reasons:
1) It was the first big fund using quantitative programs as its core device;
2) They were viewed as THE guys. If Meriwether, Merton, Scholes and Larry Hilibrand had gone belly, THAT was scary. It was as if Derek Jeter struck out in every at bat in the playoffs;
3) Nobody has seen it before, folks at lending banks knew their systems were inadequate to measure the possibilities so banks were scared crapless.
One reason this isn't as big as LTCM is because we have seen LTCM, improved systems, seen the system survive etc so the psychological impact and tremors aren't yet as big.
Anyone want to hazard a WAG on the volatility in EUR and JPY today?
I have heard the 'arbo-trage' theory about Yen carry and the market (which do seem to move together ATM), what about the Euro? Besides Trichet doing what a central banker is supposed to do?
Slow Mo your example is excellent for a small scale demo.Joe Trader could lose the money, get a margin call, get sold out and still have money to payments to the bank although he will probably never make enough to pay the loan off.
It could take the bank a considerable time to figure out the majority of the loan would not be repaid.
I think this is what we have on a vast scale and the powers that be are well aware of this and are doing everything possible to keep this CONTAINED, at least for a time.
Just a note here.
Since the Federal Government has to sell bonds a rate cut by the FED will drive borrowing rates up. Foriegn investors will be spooked about holding devaluing treasuries.
The rate on treasuries will set the mortgage rate.
A FED rate cut (at this time) will only help out investment banks. However, they are going to be forced to account for risk as their models have been shown to be inaccurate.
So all the pressure is for rates to rise without reguards to the FED position.
The FED has almost zero reason to lower rates. Zero. The market tanked because there is a lot of good news and no rate cut means lower inflation and lower upward pressure on stocks.
Banker:
Not as bad as LTCM? I agree mostly.
After the Tulips busted in 1637, controls were put in place and were very effective in preventing another Tulip Bubble.
So yeah the LTCM and ENRONs and past bubbles and troubles are not likely to repeat, but the human nature to create bubbles is still alive and kicking.
Dotcommunist, can't attest to dryfly's whereabouts, but as I understand it he's typically hanging around in southern Minnesota south of Minneapolis, so I doubt he's doing anything else than taking a break. However, I can see the collapsed Minneapolis bridge from my office window and walked around by it last night. One of the biggest damn messes I've seen. Every sign I've seen so far seems to point to it being a metal failure, probably due to unseen metal fatigue in the open truss frame underpinning it.
2) They were viewed as THE guys. If Meriwether, Merton, Scholes and Larry Hilibrand had gone belly, THAT was scary. It was as if Derek Jeter struck out in every at bat in the playoffs;
So, you're saying that the LTCM collapse was a good thing?
From the unwashed mass thanks for the comment that was great. Oh and Buffy was for the little people who couldn't defend themselves from the well heeled (vampires of our time).
jo6pac
Hope to hear more on how do they plan to regulate it.