Paulson Announces Super-SIV Failure Already Mish's Global etc. I guess CR it't up for grabs. The word fetch can also describe distance. In this case the fetch between level one and level three will soon be revealed.
I attended another extended family get together. A younger cousin's wife tells me two of their friends have been foreclosed on, and two relatives from her side have also - all are twenty somethings. Recession is when you "know" people who have been impacted, right? Meanwhile, this cousin (who I'm closest with -- he lost his Dad to cancer during his high school years, is perhaps overly trusting of his mortgage broker friend, has little experience nor natural ability with mortgage math -- became a mechanic straight out of High School) and his wife still own two homes, with a second kid on the way. They attempted to move up, but didn't sell the first one first, so they've scrounged up a friend to rent the smaller first house (1000 sq ft? really small). They apparently have a $600K+ loan on the new home (some large part of which is IO) and $440K on the second, which is apparently also most or completely IO. If I had to guess, I'd say they might make $80K+-$20K between the two of them, so $1M worth of loans would probably HAVE TO be interest only even at teaser rates. I don't think they have any of their own capital in either home at this point - just many interest only payments. They are worried, and trying to keep current on both, and the lowball offers they are getting for the first home would require cash at closing, which they don't have but are trying to save up for. Essentially they are trying to save while prices are still declining. I suggested that today's low ball price might look awfully good in a year or two, especially if they weren't prepared to hold both for a long time (5-10 years). Not sure if they took it to heart or not.
Who gives two youngsters like that $1M worth of loans? Even on an appreciating asset, that's an insane amount of leverage for these two with their income.
Now I don't excuse them for what's happened, since they signed up for all this, but I don't see a sign of a responsible adult anywhere along the chain of that lent $1M.
My guess is they'll end up as they started, renting, and it seems any
help offered at this point is throwing
good money after bad.
So I just watch, and shake my head,
and wonder how it could get this messed up.
CR - thanks. I did suggest they call their lender to work something out, but I forgot to mention the "short sale" option. I'll give them a call tomorrow -- great idea for getting them back down to a single home -- thanks!
Those banks must have many very unhappy customers now about to lose nearly- or every-thing invested in SIV's.
The list of those customers will cast light on why the banks are paddling so furiously to do something!
If I were a customer who bought "high grade" ABCP and now find it untradeable, I'd freak and shop for another major who will protect me completely.
Think about who's stuck, worldwide. Big Louie! in the form of world banks, major funds, governments, the prime customers who were admitted into this private room where profits were just a bit headier than what was out there on the street.
The SIV hosts just shot themselves with a shotgun, in their chests; they're bleeding and they're using the Treasury and Fed Res as their patsies. It's simple. Crowbar whatever SIV asset garbage they can get away with into the SuperScrewYouJ6P on the threat of going under, and give that money back to their prime customers who will otherwise sue them at best, and leave them at worst.
"Nobody knows what lies under the Level 3 rock
Wall Street between a rock and a hard place
New US accounting rules mean Level 3 tier of assets must be valued at market prices - not according to 'make-believe' models."
Ahh, re my above post. I see it is FAS 157, and already anticipated on this board, which is streets ahead.
I don't know why people generally are so shocked about what is happening when the course of events has been so widely anticipated and trumpeted (this blog and others) for so long now. It is really a case of deciding which story to believe, but unfortunately most people want to believe the lies and fairy tales that have been coming out of the mouths of Wall Street and government.
Among the many investors you mention, Gaudia Ray, you may also include charitable remainder unit trusts - on whose good or bad fortunes rest the incomes of many thousands of individuals and support for charitable and cultural institutions.
I doubt irresponsible borrowers, regulators and lenders pay attention to the extent or the severity of damage they are causing and will not be sorry to see them share in the consequences.
I feel the same IRT the current administration's fiscal excesses. At a time when someone like Ron Paul is closer to addressing realities than are his colleagues, Congress begins to look like a very thin, insubstantial affair.
Postponing things hoping they will get better has to be set against the possibility that during that time they might get worse, so if one can liquidate with a 30-40% loss now, I'd take that option rather than waiting.
This wishful thinking about an SIV reminds me of the "organized support" everyone was counting on following the 1929 crash. (Not that I was there; I read about it in Galbraith's history.)
question: Do most CDO's use internal leverage? It's amazing to find that the SIV's were geared 14-15 times. Even if the underlying assets hadn't deteriorated, they could have gotten into trouble with imperfect hedging against flatter yield curves or spread widening. So my question is, are the CDO's, such as Carina, the one State Street liquidated last week leveraged as well, and if so, what form is that leverage in?
"Easter Islanders utilized big levers to lift those big statues. What happened to them."
They starved or had to flee because they destroyed their island just like we are destroying the planet except we don't have a place to flee, guess that leaves the other alternative.
If CR is correct (and I have no reason to doubt it) and the fall of one SIV would have a depressive effect on the NAV of other SIVs, there is another item to note:
The AVERAGE leverage is 14 times. So, some could be leveraged even more than that, and their NAV would be the first to drown and start the dominoes falling. So, this could all happen even sooner than one might expect.
By the time the NAV of an "average-leveraged" SIV drops below 50%, the entire SIV ship is well on its way to being submerged.
What is very, very disturbing is that events are playing out exactly the way they were foreseen in this blog months ago.
"Months" as in "three"?
Sorry but I call B.S. Months ago CR was all about how the housing crash would affect MEW and consumer spending. Prove me wrong and post a link, any link, that even mentions ABCP or SIVs or bank solvency or any such thing before the crisis began in August. Just one link to this blog; it should be easy!
I am forced to say that this is going to make 1929 look like a pre-school picnic.
Someone make the case I am wrong. Please.
GDP growing at almost 4%. Consumer spending slowing but frankly not that bad. Trade deficit closing faster than anybody predicted. Unemployment below 5%. Long bond rates below 5%, too.
Anecdotal: I and everyone I know are not only employed, but are getting regular calls from headhunters. But then I am a software engineer in Silicon Valley...
I am not saying everything is going to be fine. But you asked for the optimistic case, and there it is. The probability of a recession (never mind a depression) is still slightly less than 50%. Bottom line: It's complicated and nobody knows.
The important thing about the M-LEC is, as I understand, that it will be a new company. I'm sure the thinking was to form this new company as quietly as possible, and then find a way to transfer assets to it at current market or model prices. Knowing full well, of course, that over time, i.e. as more mortgage holders defaulted and the economy worsened, these asset values would decline further. But by then the original holders would have washed their hands of that paper.
I'm sure it was also envisioned that the Fed or Treasury or maybe a GSE or two would also be involved to lend some credibility to the whole rather sleazy affair. Maybe even some sort of guarantee -- e.g. the Fed would monetize this paper and then cause it to disappear.
So my question is, are the CDO's, such as Carina, the one State Street liquidated last week leveraged as well, and if so, what form is that leverage in?
speaking of Carina.. anyone got a link to how that turned out .. or is the liquidation still in progress ?
"Sorry but I call B.S. Months ago CR was all about how the housing crash would affect MEW and consumer spending. Prove me wrong and post a link, any link, that even mentions ABCP or SIVs or bank solvency or any such thing before the crisis began in August. Just one link to this blog; it should be easy!"
The blog posts written by CR and Tanta are only the start of the discussion. It is partly the comments on this board , leading on from those posts, that have been so enlightening for me. I have been aware for years now that SOMETHING bad was going to happen in WHATEVER areas have been pumped up by the credit bubble. It has all been plain to see for those who had the intelligence to look.
The backup fund will not purchase the most distressed assets in the SIVs. Bank organizers agreed that it would not accept any subprime mortgage-related assets and only certain types of risky complex instruments like collateralized debt obligations.
This makes no sense, but I think it's just plain lying. This story keeps changing by the minute though.
It may just all be head-fake, while FHLB continues to buy the dreck.
Actually, what it says is, "the bulk of SIV assets are still fetching between 97 cents and 98 cents on the dollar." So, the majority, not the average.
I think it's safe to assume, the rest are fetching something lower. If its in subprime or CDO bonds, even AAA, we know they are generally worth less than 80 cents on the dollar. If these were just 10% of assets, with 14 times leverage, NAV is down to 48%.
sorry posted this is in the wrong thread before...
not the best source but wiki says "The key innovation behind the introduction of Brady Bonds was to allow the commercial banks to exchange their claims on developing countries into tradable instruments, allowing them to get the debt off their balance sheets. This reduced the concentration risk to these banks."
the idea here is the same but today's version appears to be missing one key element - the true guarantee. the brady's were collateralized by zero coupon bonds and other securities held by the Fed.
today's version also appears to be missing another key step in that there has been no structured negotiations between creditors and debtors, unless you count citi negotitating the the SIV to determine the value of what they're contributing to the fund. - the proverbial hair cut.
the bottom line though is that this is the same situation all over again.
this has happened through ALL TIME and HISTORY
banks make loans
loans go bad
banks have problems
banks figure out a way to fix
fix happens
banks make more loans
credit cycles and business cycles are as old as time. there is no reason to think things wont get worked out this time as well
just ask the banks who funded Bolivar's wars in South America or the South Sea Trading Companies or Bridges to No Where in Panama or IO NEG AM mortgages to Tom Dick and Harry
Nemo, as I recall, this blog started primarily as a discussion of housing issues, but there was plenty of talk, even early on, about all the risky loans being sold off and what the consequences might be -- granted, there weren't a lot of specifics back then, because, to paraphrase an oft-mentioned quote in CR's early threads, the tide hadn't gone out yet, and no one could see whose pants were down.
CR and his contributors had more foresight than many other blogs, and definitely more than the rest of the media, because they were at least pondering the risks of the market instead of blindly cheerleading the boom.
P.S. on the B.S. -- before you embarrass yourself by calling it, you ought to second-guess yourself with Google.
It took me about 7 seconds to disprove your assertion -- For example, I give you malabar from October 2005 -- (do a "find" search on thread for CDOs):
Given the average NAV decay rate from the plot in CR's earlier post, it looked to eyeball out at ~12.5%/month. As I recall, that was a mid-September 76% so a straightline out on that rate puts the average at 50% mid-November...with a boatload of caveats on that it still looks like the lower quartile of that (the bottom two or three of the seven rated SIV's?) are terminal before Christmas. Ho ho ho!
There were a couple of other relevant articles that week, which is the only one I looked at. Energycon has found a much older link. If anyone was bothered, I'm sure there are tens of other relevant posts in between, both by CR and Tanta, and on the comments.
The situation in SIVs is just what homebuilders faced about 18 months ago: recognizing that disaster lies ahead, how do you handle the 'prisoner's dilemma'?
The first to sell will suffer the least losses. To the extent that a super-SIV postpones a crash, it represents a hunt for bagholders.
I think somebody will break ranks before any organized super-SIV is in place.
For weeks now I've been trying to figure out what the game is for the EXternal Liquidity Augmenting Conduit Structure (or Super SIV, or M-LEC). I wonder if I finally have it (and I wonder is someone has beaten me to the punch weeks ago, while I'm wondering).
If you sell an asset into the Ex-LACS at market price, you lose, and there was no point to the Ex-LACS. If you sell above market price, why would the Ex-LACS buy it with equity, or who would loan to it to buy it with debt? How about this scenario.
The Ex-LACS buys assets at above market price. It uses debt to finance the purchase. The debt is guaranteed, for an insurance premium that is absurdly low, by the banks that benefit by selling the assets into the Ex-LACS at absurdly high prices. Because the banks are jointly and severally guaranteeing the debt, and not the price of any one asset, it counts as a legitimate sale under accounting rules. But the losses come in slowly over time, as the banks have to pay out for the guarantees on the debt, instead of all at once. You've turned an immediate balance sheet hit into a long term income statement hit. Could that be the game?
one important clarification for your suggested series of events: replace "banks figure out a way to fix", with "banks get bailed out by the gov (tax payers) or the fed (tax payers via inflation)".
Everyone misses the point on this Super-SIV. It is designed to be too big to fail ... and when the inevitable bailout arrives, Citi, BoA, etc. can deny that they have been bailed out, as the bailout will go to this third-party entity. Politically, it is much easier to bailout 1 Super-SIV down the road than dozens of banks today.
"It is designed to be too big to fail ... and when the inevitable bailout arrives, Citi, BoA, etc. can deny that they have been bailed out, as the bailout will go to this third-party entity. Politically, it is much easier to bailout 1 Super-SIV down the road than dozens of banks today."
This is a challenging time for the financial services industry. Bad news in the credit, housing, and stock markets continues to dominate and E*TRADE is not immune to these market conditions.
However, you, our customers, should know that we continue to be well capitalized by regulatory standards. As a matter of fact, we could absorb an immediate write down in excess of $1 billion and still remain well capitalized. Nobody knows for certain what the ultimate impact will be from these markets, but it is our expectation that news in the market will get worse before it gets better and, armed with these expectations, we are taking prudent measures to effectively manage the company's balance sheet.
We will continue to earn your confidence, providing state-of-the-art asset protection, including ETRADE's Complete Protection Guarantee, SIPC Protection for ETRADE Securities customers and FDIC Insurance for E*TRADE Bank customers.
The problems in CC and auto debt are going to add another layer of misery to the SIVs. They aren't big proportions, but they are going to produce a sudden worsening from the data I see.
A bit OT, but perhaps not in the light of the bagholder discussions going on.
They're not saying anything, but I wonder what the Chinese are thinking about Paulson very publicly urging them to buy more RE paper when he was last over there (only a few months back IIRC). I could well imagine their believing that this was a deliberate attempt to set them up as the patsies.
dc1000-
Remember that a lot of these types of crises "work themselves out" with bankruptcies and defaults.
A lot of wealth gets destroyed in the process. Sometimes, people get fired.
So will some of the affected parties emerge relatively ok? Sure.
Will someone take a tumble? Sure. But which ones? And how big a tumble? It's still early in the game to say.
i've got 1 pound sterling for any bank any bank at all bring it on. lol
anotherraj:
sure, thats going to happen. the brady bonds were backed by a special zero coupon treasury bond. that was a nice play to go long one and short the other depending on your outlook.
i cut my teeth trading (well ok, working directly for the PM of a large brady bond fund located within Brady's firm, Darby) these assets and understanding the process. i also have written a series of papers (in grad school) on manias crashes and the fixes.
i'm not saying there isnt a huge problem. i'm just saying this isn't something spectacularly new and it will get worked out with even with lots of dead bodies on the road side.
i believe it was russia '30's that made the firm fifty gajillion dollars. that and Brazilian C Bonds. somebody somewhere right now is setting up this same kind of fund and will make a killing either shorting these new assets or going long or some combination.
Nemo, we've been through this before. You called everyone out and then many posters showed you where you were wrong.
There have been plenty of people posting about the coming credit crunch.
From September 2006 (yes, 14 months ago) Fleckenstein wrote an article in moneycentral.msn.com about CDO and CDS problems and also about coming problems with the ABX.
If you read Grant's Interest Rate Observer the info on this goes back even further.
Mike Shedlock has also (more vaguely) discussed about credit derivitave problems for at least a year.
many didn't mention SIVs because it's not really the SIV that is the problem. The SIV is just where the financial players HID the problem.
The list of those customers will cast light on why the banks are paddling so furiously to do something!
If I were a customer who bought "high grade" ABCP and now find it untradeable, I'd freak and shop for another major who will protect me completely. - Gaudia Ray
Oh and we all know those high net worth types are VERY understanding, right? They don't carry a grudge... never. 'Forgiving' and 'understanding' are the first two words that come to mind when one thinks 'high net worth'...
Ya it explains a lot of the Super - SIV hopeless paddling. Don't just stand there - DO SOMETHING!
Reminds me of a story a buddy told me about a lawyer he sat next to on a plane trip to Shanghai... they both were pretty drunk.
The lawyer was going over there to 'oversee progress' on an IP lawsuit. Seems one of our big MNCs offshored some product then quickly discovered all the secrets offshored with it... under pressure from the BOD management of the MNC initiated a 'lawsuit' over there to recover damages and it was going nowhere so they sent their top corporate lawyers over to 'bust heads'. He was one of the support team going over - probably one of the ones they'd eventually blame & fire for lack of progress. He wasn't too happy.
Anyway... everyone, the managers, th Chinese, the lawyers, even the BOD knew it was all hopeless - but mgmt needed 'cover' to take back to the investors to 'explain' what they were doing to make it all better. Seems a lot of money was going to be lost.
The most important part of that legal entourage's mission was to just string it all out longer - keep the hopeless lawsuit visibly active so as to buy time for management & the board to think of something... so they can show those understanding & compassionate HNW individuals & fund managers who control the biggest blocks of stock something was being done... meanwhile maybe the investors will forget or move on.
Somehow SIV is sounding more and more like this I must agree...
Further writedowns or downgrades of derivatives could lead to a deterioration in Tier 1 capital, especially if one takes into consideration that despite the many downgrades of 2006 CDOs for instance, none of the AAA rated paper has been downgraded yet. While 92% of 2006 vintage RMBS backed by 1st lien subprime mortgages have been downgraded by Moodys already, only 13% of the total value has been, and none of the AA and AAA grades have been downgraded yet.
this is how IBs have managed to keep writedowns minimal in comparison to the scope of the problem thusfar. they've received exceptional deference from the ratings houses. but it can't last.
I can only assume that as the last Easter Islanders ran out of insects to eat, they probably ate each other, starting with the very people who warned them not to cut down all the trees. That's the way humanity works: ignore the people who are speaking the truth, and then blame them for the problems when they eventually happen. Just like how the REIC blames the media and blogs like this one for the housing collapse.
Paulson Announces Super-SIV Failure Already Mish's Global etc.
I guess CR it't up for grabs. The word fetch can also describe distance. In this case the fetch between level one and level three will soon be revealed.
bigchubasco, I just wanted to make it clear that 97 cents on the dollar is close to an enforcement event. As you note, it might be much worse.
There seems to be universal agreement about the eventual demise of many of these SIVs.
This week should be interesting - I expect more announcements of writedowns.
Best Wishes.
CR - the second link is goofed.
Thanks for the post.
Weekend update:
I attended another extended family get together. A younger cousin's wife tells me two of their friends have been foreclosed on, and two relatives from her side have also - all are twenty somethings. Recession is when you "know" people who have been impacted, right? Meanwhile, this cousin (who I'm closest with -- he lost his Dad to cancer during his high school years, is perhaps overly trusting of his mortgage broker friend, has little experience nor natural ability with mortgage math -- became a mechanic straight out of High School) and his wife still own two homes, with a second kid on the way. They attempted to move up, but didn't sell the first one first, so they've scrounged up a friend to rent the smaller first house (1000 sq ft? really small). They apparently have a $600K+ loan on the new home (some large part of which is IO) and $440K on the second, which is apparently also most or completely IO. If I had to guess, I'd say they might make $80K+-$20K between the two of them, so $1M worth of loans would probably HAVE TO be interest only even at teaser rates. I don't think they have any of their own capital in either home at this point - just many interest only payments. They are worried, and trying to keep current on both, and the lowball offers they are getting for the first home would require cash at closing, which they don't have but are trying to save up for. Essentially they are trying to save while prices are still declining. I suggested that today's low ball price might look awfully good in a year or two, especially if they weren't prepared to hold both for a long time (5-10 years). Not sure if they took it to heart or not.
Who gives two youngsters like that $1M worth of loans? Even on an appreciating asset, that's an insane amount of leverage for these two with their income.
Now I don't excuse them for what's happened, since they signed up for all this, but I don't see a sign of a responsible adult anywhere along the chain of that lent $1M.
My guess is they'll end up as they started, renting, and it seems any
help offered at this point is throwing
good money after bad.
So I just watch, and shake my head,
and wonder how it could get this messed up.
F. Frederson, Fixed. Thanks!
KnotRP, have them call their lender - maybe they can work out a short sale. It's hard to negotiate, but their situation sounds grim.
Best Wishes.
Basic article on defeasance, enforcement, and insolvency events in SIVs (scroll down): The page cannot be found
CR - thanks. I did suggest they call their lender to work something out, but I forgot to mention the "short sale" option. I'll give them a call tomorrow -- great idea for getting them back down to a single home -- thanks!
Those banks must have many very unhappy customers now about to lose nearly- or every-thing invested in SIV's.
The list of those customers will cast light on why the banks are paddling so furiously to do something!
If I were a customer who bought "high grade" ABCP and now find it untradeable, I'd freak and shop for another major who will protect me completely.
Think about who's stuck, worldwide. Big Louie! in the form of world banks, major funds, governments, the prime customers who were admitted into this private room where profits were just a bit headier than what was out there on the street.
The SIV hosts just shot themselves with a shotgun, in their chests; they're bleeding and they're using the Treasury and Fed Res as their patsies. It's simple. Crowbar whatever SIV asset garbage they can get away with into the SuperScrewYouJ6P on the threat of going under, and give that money back to their prime customers who will otherwise sue them at best, and leave them at worst.
This week should be interesting - I expect more announcements of writedowns.
Especially with FAS 157 dead ahead.
A lot of people (here and elsewhere) are expecting a bounce, but the bad news just doesn't seem to be letting up.
In that vein... CR, did you see that link barely posted on the last thread?
UPDATE 1-RESEARCH ALERT-CIBC downgrades large-cap US bank sector
| Reuters
CR, Just musing. Easter Islanders utilized big levers to lift those big statues. What happened to them. Was that a start of a trend.
Is this important? It seems very important to me.
Rule change sounds alarm on Wall Street - Telegraph
"Nobody knows what lies under the Level 3 rock
Wall Street between a rock and a hard place
New US accounting rules mean Level 3 tier of assets must be valued at market prices - not according to 'make-believe' models."
What is very, very disturbing is that events are playing out exactly the way they were foreseen in this blog months ago.
Going forward, that is a ghastly sign.
I am forced to say that this is going to make 1929 look like a pre-school picnic.
Someone make the case I am wrong. Please.
um, it's different now?
Ahh, re my above post. I see it is FAS 157, and already anticipated on this board, which is streets ahead.
I don't know why people generally are so shocked about what is happening when the course of events has been so widely anticipated and trumpeted (this blog and others) for so long now. It is really a case of deciding which story to believe, but unfortunately most people want to believe the lies and fairy tales that have been coming out of the mouths of Wall Street and government.
Personally, I see an almost complete dichotomy between the mainstream media and blogs like CR.
I know of several very large CDO's that were liquidated about 1 month ago when the AAA assets traded down to 97 cents.
Equity tranches were completely destroyed.
Many more are on the rocks. Good times!
Among the many investors you mention, Gaudia Ray, you may also include charitable remainder unit trusts - on whose good or bad fortunes rest the incomes of many thousands of individuals and support for charitable and cultural institutions.
I doubt irresponsible borrowers, regulators and lenders pay attention to the extent or the severity of damage they are causing and will not be sorry to see them share in the consequences.
I feel the same IRT the current administration's fiscal excesses. At a time when someone like Ron Paul is closer to addressing realities than are his colleagues, Congress begins to look like a very thin, insubstantial affair.
(/rant)
Postponing things hoping they will get better has to be set against the possibility that during that time they might get worse, so if one can liquidate with a 30-40% loss now, I'd take that option rather than waiting.
This wishful thinking about an SIV reminds me of the "organized support" everyone was counting on following the 1929 crash. (Not that I was there; I read about it in Galbraith's history.)
question: Do most CDO's use internal leverage? It's amazing to find that the SIV's were geared 14-15 times. Even if the underlying assets hadn't deteriorated, they could have gotten into trouble with imperfect hedging against flatter yield curves or spread widening. So my question is, are the CDO's, such as Carina, the one State Street liquidated last week leveraged as well, and if so, what form is that leverage in?
TIA, Mbartv
"all are twenty somethings"
Young and stupid thanks to our half ass schools.
"Easter Islanders utilized big levers to lift those big statues. What happened to them."
They starved or had to flee because they destroyed their island just like we are destroying the planet except we don't have a place to flee, guess that leaves the other alternative.
If CR is correct (and I have no reason to doubt it) and the fall of one SIV would have a depressive effect on the NAV of other SIVs, there is another item to note:
The AVERAGE leverage is 14 times. So, some could be leveraged even more than that, and their NAV would be the first to drown and start the dominoes falling. So, this could all happen even sooner than one might expect.
By the time the NAV of an "average-leveraged" SIV drops below 50%, the entire SIV ship is well on its way to being submerged.
arbogast writes --
What is very, very disturbing is that events are playing out exactly the way they were foreseen in this blog months ago.
"Months" as in "three"?
Sorry but I call B.S. Months ago CR was all about how the housing crash would affect MEW and consumer spending. Prove me wrong and post a link, any link, that even mentions ABCP or SIVs or bank solvency or any such thing before the crisis began in August. Just one link to this blog; it should be easy!
I am forced to say that this is going to make 1929 look like a pre-school picnic.
Someone make the case I am wrong. Please.
GDP growing at almost 4%. Consumer spending slowing but frankly not that bad. Trade deficit closing faster than anybody predicted. Unemployment below 5%. Long bond rates below 5%, too.
Anecdotal: I and everyone I know are not only employed, but are getting regular calls from headhunters. But then I am a software engineer in Silicon Valley...
I am not saying everything is going to be fine. But you asked for the optimistic case, and there it is. The probability of a recession (never mind a depression) is still slightly less than 50%. Bottom line: It's complicated and nobody knows.
Kay Ryan, Poet
"Your chickens are coming home to roost."
"The chickens are circling and blotting out the day.
The sun is bright, but the chickens are in the way.
Yes, the sky is dark with chickens, dense with them.
They turn, and then they turn again.
These are the chickens you let loose one at a time and small, various breeds.
Now they have come home to roost, all the same kind at the same speed."
The important thing about the M-LEC is, as I understand, that it will be a new company. I'm sure the thinking was to form this new company as quietly as possible, and then find a way to transfer assets to it at current market or model prices. Knowing full well, of course, that over time, i.e. as more mortgage holders defaulted and the economy worsened, these asset values would decline further. But by then the original holders would have washed their hands of that paper.
I'm sure it was also envisioned that the Fed or Treasury or maybe a GSE or two would also be involved to lend some credibility to the whole rather sleazy affair. Maybe even some sort of guarantee -- e.g. the Fed would monetize this paper and then cause it to disappear.
Something like this may still happen.
So my question is, are the CDO's, such as Carina, the one State Street liquidated last week leveraged as well, and if so, what form is that leverage in?
speaking of Carina.. anyone got a link to how that turned out .. or is the liquidation still in progress ?
"Sorry but I call B.S. Months ago CR was all about how the housing crash would affect MEW and consumer spending. Prove me wrong and post a link, any link, that even mentions ABCP or SIVs or bank solvency or any such thing before the crisis began in August. Just one link to this blog; it should be easy!"
The blog posts written by CR and Tanta are only the start of the discussion. It is partly the comments on this board , leading on from those posts, that have been so enlightening for me. I have been aware for years now that SOMETHING bad was going to happen in WHATEVER areas have been pumped up by the credit bubble. It has all been plain to see for those who had the intelligence to look.
The backup fund will not purchase the most distressed assets in the SIVs. Bank organizers agreed that it would not accept any subprime mortgage-related assets and only certain types of risky complex instruments like collateralized debt obligations.
This makes no sense, but I think it's just plain lying. This story keeps changing by the minute though.
It may just all be head-fake, while FHLB continues to buy the dreck.
CR,
Actually, what it says is, "the bulk of SIV assets are still fetching between 97 cents and 98 cents on the dollar." So, the majority, not the average.
I think it's safe to assume, the rest are fetching something lower. If its in subprime or CDO bonds, even AAA, we know they are generally worth less than 80 cents on the dollar. If these were just 10% of assets, with 14 times leverage, NAV is down to 48%.
Nemo, June 28:
Calculated Risk: Subprime and CDOs: Illiquifying the Liquified
OT:
On the question of levers and Easter Island, I highly recommend Jared Diamond's book, "Collapse".
The basic question of the book was: "What was the last Easter Islander thinking as he cut down the last tree on Easter Island?"
Tree Trunks formed the basis of their marine economy and without them replacement canoes could not be built.
sorry posted this is in the wrong thread before...
not the best source but wiki says "The key innovation behind the introduction of Brady Bonds was to allow the commercial banks to exchange their claims on developing countries into tradable instruments, allowing them to get the debt off their balance sheets. This reduced the concentration risk to these banks."
the idea here is the same but today's version appears to be missing one key element - the true guarantee. the brady's were collateralized by zero coupon bonds and other securities held by the Fed.
today's version also appears to be missing another key step in that there has been no structured negotiations between creditors and debtors, unless you count citi negotitating the the SIV to determine the value of what they're contributing to the fund. - the proverbial hair cut.
the bottom line though is that this is the same situation all over again.
this has happened through ALL TIME and HISTORY
banks make loans
loans go bad
banks have problems
banks figure out a way to fix
fix happens
banks make more loans
credit cycles and business cycles are as old as time. there is no reason to think things wont get worked out this time as well
just ask the banks who funded Bolivar's wars in South America or the South Sea Trading Companies or Bridges to No Where in Panama or IO NEG AM mortgages to Tom Dick and Harry
29 June:
Calculated Risk: Bloomberg's Numbers
Nemo, as I recall, this blog started primarily as a discussion of housing issues, but there was plenty of talk, even early on, about all the risky loans being sold off and what the consequences might be -- granted, there weren't a lot of specifics back then, because, to paraphrase an oft-mentioned quote in CR's early threads, the tide hadn't gone out yet, and no one could see whose pants were down.
CR and his contributors had more foresight than many other blogs, and definitely more than the rest of the media, because they were at least pondering the risks of the market instead of blindly cheerleading the boom.
P.S. on the B.S. -- before you embarrass yourself by calling it, you ought to second-guess yourself with Google.
It took me about 7 seconds to disprove your assertion -- For example, I give you malabar from October 2005 -- (do a "find" search on thread for CDOs):
HaloScan.com - Comments
Plenty more where that came from.
Bob,
Given the average NAV decay rate from the plot in CR's earlier post, it looked to eyeball out at ~12.5%/month. As I recall, that was a mid-September 76% so a straightline out on that rate puts the average at 50% mid-November...with a boatload of caveats on that it still looks like the lower quartile of that (the bottom two or three of the seven rated SIV's?) are terminal before Christmas. Ho ho ho!
June 26:
Calculated Risk: JPMorgan: Planned CDO Sales Dry Up Amid Bailout
There were a couple of other relevant articles that week, which is the only one I looked at. Energycon has found a much older link. If anyone was bothered, I'm sure there are tens of other relevant posts in between, both by CR and Tanta, and on the comments.
I have a few charts of the Fed Funds Rate vs. 3 Month Treasury Bills if anyone is interested.
Greenspan's Age of Turbulence theory seems to be doing just fine (he ought to know, he helped get us here in my opinion).
The situation in SIVs is just what homebuilders faced about 18 months ago: recognizing that disaster lies ahead, how do you handle the 'prisoner's dilemma'?
The first to sell will suffer the least losses. To the extent that a super-SIV postpones a crash, it represents a hunt for bagholders.
I think somebody will break ranks before any organized super-SIV is in place.
For weeks now I've been trying to figure out what the game is for the EXternal Liquidity Augmenting Conduit Structure (or Super SIV, or M-LEC). I wonder if I finally have it (and I wonder is someone has beaten me to the punch weeks ago, while I'm wondering).
If you sell an asset into the Ex-LACS at market price, you lose, and there was no point to the Ex-LACS. If you sell above market price, why would the Ex-LACS buy it with equity, or who would loan to it to buy it with debt? How about this scenario.
The Ex-LACS buys assets at above market price. It uses debt to finance the purchase. The debt is guaranteed, for an insurance premium that is absurdly low, by the banks that benefit by selling the assets into the Ex-LACS at absurdly high prices. Because the banks are jointly and severally guaranteeing the debt, and not the price of any one asset, it counts as a legitimate sale under accounting rules. But the losses come in slowly over time, as the banks have to pay out for the guarantees on the debt, instead of all at once. You've turned an immediate balance sheet hit into a long term income statement hit. Could that be the game?
mort,
And if one of the major banks can not make good on guarantees when the day comes, then what...?
What was the last Easter Islander thinking as he cut down the last tree on Easter Island?"
i'm going to have the biggest statue on this side of the island... wooo hoooooo
dc1000,
one important clarification for your suggested series of events: replace "banks figure out a way to fix", with "banks get bailed out by the gov (tax payers) or the fed (tax payers via inflation)".
Everyone misses the point on this Super-SIV. It is designed to be too big to fail ... and when the inevitable bailout arrives, Citi, BoA, etc. can deny that they have been bailed out, as the bailout will go to this third-party entity. Politically, it is much easier to bailout 1 Super-SIV down the road than dozens of banks today.
wally - that's in the future. I don't think they are worried about anything beyond the present.
"It is designed to be too big to fail ... and when the inevitable bailout arrives, Citi, BoA, etc. can deny that they have been bailed out, as the bailout will go to this third-party entity. Politically, it is much easier to bailout 1 Super-SIV down the road than dozens of banks today."
Yup
The MLEC is a way for the big banks to be able to write off the worst bits of debt and cap their losses @ $75b
The vultures don't care if the bonds get liquidated and see an arbitrage opp.
Perhaps the mortgages get reconstituted in CDO's that truly are AAA, instead of mostly AA with a little BBB thrown in.
OT, are the underwriters dipping into Blackstone's green shoe with a bucket at this point?
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The problems in CC and auto debt are going to add another layer of misery to the SIVs. They aren't big proportions, but they are going to produce a sudden worsening from the data I see.
A bit OT, but perhaps not in the light of the bagholder discussions going on.
They're not saying anything, but I wonder what the Chinese are thinking about Paulson very publicly urging them to buy more RE paper when he was last over there (only a few months back IIRC). I could well imagine their believing that this was a deliberate attempt to set them up as the patsies.
dc1000-
Remember that a lot of these types of crises "work themselves out" with bankruptcies and defaults.
A lot of wealth gets destroyed in the process. Sometimes, people get fired.
So will some of the affected parties emerge relatively ok? Sure.
Will someone take a tumble? Sure. But which ones? And how big a tumble? It's still early in the game to say.
"Banks" in general survive; but whither Barings?
The basic question of the book was: "What was the last Easter Islander thinking as he cut down the last tree on Easter Island?"
When the boats were gone, the people of Easter Island switched from eating fish to chicken. Then, from chicken to rats. And from rats to insects.
Hedonic substitution....
Bottom line: It's complicated and nobody knows.
Bet on Murphy
threetorches -
i've got 1 pound sterling for any bank any bank at all bring it on. lol
anotherraj:
sure, thats going to happen. the brady bonds were backed by a special zero coupon treasury bond. that was a nice play to go long one and short the other depending on your outlook.
i cut my teeth trading (well ok, working directly for the PM of a large brady bond fund located within Brady's firm, Darby) these assets and understanding the process. i also have written a series of papers (in grad school) on manias crashes and the fixes.
i'm not saying there isnt a huge problem. i'm just saying this isn't something spectacularly new and it will get worked out with even with lots of dead bodies on the road side.
i believe it was russia '30's that made the firm fifty gajillion dollars. that and Brazilian C Bonds. somebody somewhere right now is setting up this same kind of fund and will make a killing either shorting these new assets or going long or some combination.
hell, this is what i should be doing
Nemo, we've been through this before. You called everyone out and then many posters showed you where you were wrong.
There have been plenty of people posting about the coming credit crunch.
From September 2006 (yes, 14 months ago) Fleckenstein wrote an article in moneycentral.msn.com about CDO and CDS problems and also about coming problems with the ABX.
If you read Grant's Interest Rate Observer the info on this goes back even further.
Mike Shedlock has also (more vaguely) discussed about credit derivitave problems for at least a year.
many didn't mention SIVs because it's not really the SIV that is the problem. The SIV is just where the financial players HID the problem.
The list of those customers will cast light on why the banks are paddling so furiously to do something!
If I were a customer who bought "high grade" ABCP and now find it untradeable, I'd freak and shop for another major who will protect me completely. - Gaudia Ray
Oh and we all know those high net worth types are VERY understanding, right? They don't carry a grudge... never. 'Forgiving' and 'understanding' are the first two words that come to mind when one thinks 'high net worth'...
Ya it explains a lot of the Super - SIV hopeless paddling. Don't just stand there - DO SOMETHING!
Reminds me of a story a buddy told me about a lawyer he sat next to on a plane trip to Shanghai... they both were pretty drunk.
The lawyer was going over there to 'oversee progress' on an IP lawsuit. Seems one of our big MNCs offshored some product then quickly discovered all the secrets offshored with it... under pressure from the BOD management of the MNC initiated a 'lawsuit' over there to recover damages and it was going nowhere so they sent their top corporate lawyers over to 'bust heads'. He was one of the support team going over - probably one of the ones they'd eventually blame & fire for lack of progress. He wasn't too happy.
Anyway... everyone, the managers, th Chinese, the lawyers, even the BOD knew it was all hopeless - but mgmt needed 'cover' to take back to the investors to 'explain' what they were doing to make it all better. Seems a lot of money was going to be lost.
The most important part of that legal entourage's mission was to just string it all out longer - keep the hopeless lawsuit visibly active so as to buy time for management & the board to think of something... so they can show those understanding & compassionate HNW individuals & fund managers who control the biggest blocks of stock something was being done... meanwhile maybe the investors will forget or move on.
Somehow SIV is sounding more and more like this I must agree...
twenty somethings - Young and stupid thanks to our half ass schools.
The schools made them 'young'? Hell I'm going back to school!
i found extremely interesting the reversal of morgan's chief euro bull and his observation of the state of ratings in the rmbs and cdo world:
Further writedowns or downgrades of derivatives could lead to a deterioration in Tier 1 capital, especially if one takes into consideration that despite the many downgrades of 2006 CDOs for instance, none of the AAA rated paper has been downgraded yet. While 92% of 2006 vintage RMBS backed by 1st lien subprime mortgages have been downgraded by Moodys already, only 13% of the total value has been, and none of the AA and AAA grades have been downgraded yet.
this is how IBs have managed to keep writedowns minimal in comparison to the scope of the problem thusfar. they've received exceptional deference from the ratings houses. but it can't last.
I can only assume that as the last Easter Islanders ran out of insects to eat, they probably ate each other, starting with the very people who warned them not to cut down all the trees. That's the way humanity works: ignore the people who are speaking the truth, and then blame them for the problems when they eventually happen. Just like how the REIC blames the media and blogs like this one for the housing collapse.