If Shilling is right about the overcapacity in China, and they start dumping in a panic at some point during a US recession, that alone could trigger a trade war.
I blame every literate American since 1913 when they allowed our sound money to be turned into fractional reserve crap by the conspiring elite bankers.
I doubly blame every literate American since 1973 when they let the fractional reserve crap turn to fiat garbage, so they could further bankrupt and destroy the nation.
Paying federal income taxes and accepting FRNs was one of the dumbest collective decisions ever made by any society.
Well, see, I bought some paper based on a conglomeration of RMBS. Now I cut it all up and sold bits and pieces into the market rated AAA. Now sees, I made some great fees, and no one is questioning me, so I says, this is good so let's expand the situation, so to speak. These English blokes seem to have it down:
Surge in Auto-Loan Delinquencies Is Latest Trouble for the Economy
By JEFFREY MCCRACKEN and GREGORY ZUCKERMAN
December 6, 2007
First came housing loans and the subprime-mortgage crisis.
Now, signs of stress are creeping into another key consumer area: auto loans.
Delinquencies in the auto-loan market are ticking up to their highest level in several years. Lenders are tightening terms in some cases, and interest rates have risen from the rock-bottom levels of a few years ago. About $575 billion in loans for new and used cars are made annually, according to the National Automotive Finance Association.
About 4.5% of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent as of the end of September, up from 2.9% the previous month, according to a Lehman Brothers survey of companies servicing these loans. That is the biggest one-month jump in at least eight years. Lehman says 12% of subprime borrowers, who have poorer credit records, were delinquent on their 2006 auto loans as of September. That is the highest level since 2002 and up from 11.1% the previous month.
"The numbers will get worse for auto loans," says Dan Castro of GSC Group, a New York firm that runs debt-related investment funds. "We're starting to see signs of rising losses, and delinquencies are creeping up." ...
Adams Square was a hybrid CDO, meaning it held both "real" assets (obviously, I'm using that term very loosely) and swaps positions. The losses on the "real" assets at liquidation wiped out the lower-rated tranches and didn't even leave enough cash to settle the losses on the outstanding swaps. So the trustees had to draw funds from the most senior tranche (I'm not precisely clear on how that worked). This created a $165 million loss on the CDO's AAA rated debt.
According to the notice from the trustee, the sale proceeds from the liquidation of the cash assets, along with the proceeds in the collateral principal collection account, super-senior reserve account, credit default swap (CDS) reserve account, and other sources, were not adequate to cover the required termination payments to the CDS counterparty.
Can anyone explain what that means? Were credit default swaps that they had written among their assets? My take is that they had written CDSs and are now basically defaulting on them.
This is something I've been wondering about, all these funds and firms (e.g., Goldman Sachs) booked profits from having bought CDSs on subprime debt. But who wrote all these CDSs? Could the great derivative backlog come and bit them in the butt?
Given the thorough trashing of so much AAA paper, I would have expected a flood of lawsuits by now. Perhaps there will be no deep pockets left to sue after the dust settles.
When you read SEC filings, counter party risk is always thrown in the boilerplate. I doubt if it was seriously modeled, or even if it could estimated. So it was probably ignored. Maybe a list of approved counterparties, based on their ratings.
I'm wondering if the monoline credit insurers are on any of this?
My what a pretty deal. Credit Suisse underwrote this CDO, and the CDO wrote
credit default protection to...yes, Credit Suisse. The reference obligations for the CDS were other CDO's and some ABS owned by C.S. And of course C.S. got to stuff the Adams CDO with ABS from its book. Very nice. Deutsche Bank did the same thing with its Carina CDO, which is also in liquidation. Now we know one way the ibanks ``hedged'' their exposure to subprime. I wonder who the bagholders are. The prospectus for the Adams Square CDO is online at http://www.ifsra.ie/data/in_mark_prosp/4967%20AdamsSquare.pdf
So the CDS were covered at the expense of the super-senior tranche (and wiping out ALL lower tranches)?
And mind you this is EARLY in the unwind, wonder if this will make folks reassess counter party risk as the beat goes on...how much bigger of a hit will it take to generate a CDS counter party default and what will that do to the net position assumptions?
"You're thinking of this CDO all wrong. As if they had the money back in a safe. The money's not here. Your money's in a super senior synthetic tranche hedged with a CDS on Joe's house...right next to yours. Supported by the excess spread from the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending the Orange County firemen's retirement fund the money to short builders commercial paper, and then, they're all going to pay it back to you as best they can."
Thanks for this CR. Just wondering...in Econ 101 years ago we were taught that declining demand led to weaker economies and this led to something called a recession. Now, perhaps the parameters have changed it is not declining demand but the worsening of credit instruments that undermines the economy. Fact is we live on credit and the economy breaths credit and economic growth grows from the ability to multiply credit not by gauging productivity improvments.
Interesting to note that this afternoon I went to collect a book I ordered through a local retailer...they did not want cash they would only complete my custom order by a credit card.
King Arthur: [after Arthur's cut off both of the Black Knight's arms] Look, you stupid Bastard. You've got no arms left.
Black Knight: Yes I have.
King Arthur: Look!
Black Knight: It's just a flesh wound.
In case anyone forgot the public was told by regulators not that many months ago that hedge funds did not need additional regulation. I'm sure somebody has an old link to that disinformation.
Well, obviously this Adams Square wrote the CDS for the income stream, which flowed through to the investors. When the assets on which the CDS were written hit a default event, the CDO was required to stand up to it's side of the swap, and pay the counterparty whatever was required. There probably wasn't enough capital to pay the swaps. Perhaps there was a bit of leverage, or the non-CDS assets couldn't be sold at a "reasonable" price.
Hey, here is your chance to suggest revisions to be made to the FDIC's Strategic Plan for the six year period covering 2008 through 2013. It looks like the old S plan isn't working out so well.
SUGGEST REVISIONS TO THE FDIC STRATEGIC PLAN - SEEKING INPUT FROM STAKEHOLDERS AND THE GENERAL PUBLIC: FDIC: Strategic Plan - Suggest Revisions to the FDIC Strategic
Plan
OT,
Now that we are freezing interest rates on ARMS does that mean basically everyone will start liquidating their MBS paper just in case they want to lower fixed MBS next? Not to mention would never loan to those A hole Americans again.
What next we are readjusting the interest on those T Bills to zero and we will guarantee them to .96 cents on the dollar?? This crap gets weirder by the minute.
Next will be Bushco needs to stay in power to help us through the current crisis.
Cutting ratings after a liquidation! WTF! How do these people justify their employment. Folks, over the past decade, 10 year U.S TREASURIES have out performed the S&P 500. When the government can deliver better REAL LONG term returns than wall street we have a SERIOUS problem.
Here are a few answers to some of the questions that have been posed (with the caveat that I'm not a CDO expert so if we have any in the audience feel free to chime in):
The collateral was specified as follows:
-at least 90% was RMBS (apparently first lien, subprime according to S&P) and at least 95% was ABS
-not more than 5% was CDO collateral
-not more than 5% was CRE CDOs or CMBS
-the minimum rating for 95% of the collateral was Baa3/BBB, minimum rating was BB-
-there is a long list of securities that are prohibited generally more specialized ABS , though Agency MBS were on the excluded list.
-Cash Assets were limited to 20% of the collateral (implying that the synthetic - CDS - collateral was at least 80%)and it was expected that at closing the CDS would comprise 95% of the collateral.
To answer the question about the swap and CDS in the structure - rather than go out and actually buy a bunch of bonds, Adams Square wrote a CDS with an affiliate of Credit Suisse that referenced the performance of a bunch of RMBS with the characteristics cited above. In return, Adams got a stream of payments that was equivalent to the interest on the bonds and a fee for providing the credit default insurance. (It is economically similar to being long the bonds, but doesn't require you to go out in the market and purchase them.)
Here is the description of the CDO from S&P's press release:
"Adams Square Funding I Ltd. is a hybrid CDO of ABS transaction collateralized largely by mezzanine classes of first-lien subprime RMBS transactions and other RMBS transactions. Credit Suisse Alternative Capital is the investment manager."
Today's rating actions reflect the impact of the liquidation of the collateral at depressed prices. Therefore, these rating actions are more severe than would be justified had liquidation not been ordered, in which case our rating actions would have been based on the credit deterioration of the underlying collateral.
So the rating is higher if the asset isn't sold... why have a rating at all...?
BTW, these CDO liquidations, if they become widespread, are the doomsday scenario for MBIA and Ambac. Many of the CDOs have maturity dates far off in the future, and the insurers need only make timely interest payments prior to maturity unless the controlling security holders decide to liquidate.
Oh to be a fly on the wall when the ratings committee meets to decide the fate of the AAA rating for these two. This is Enron all over again for the rating agencies.
over at bloomberg, reporter J. Weil notes in an opinion piece that Freddie is performing enron style accounting...booking future hedge fund returns as "probable" and therefore allowable under AOCI accounting procedures even though the transactions have not been executed.
Does anybody know what the trigger event was in this case ? CS don't have the documents on Adams Square at their website, S&P simply details the ratings action and none of my searches help me understand that. Something in the main article suggests that it was a CDS content of the CDO (don't say huh like I did ) that triggered the default event but its terribly unclear.
It was probably either a level of defaults or ratings downgrades or interest shortfall that tripped a trigger and allowed the senior note holders to call for a liquidation. I didn't plow through all the trigger language to figure out which one broke the camels back. The particulars aren't that important - BBB subprime RMBS from 2H 2006 aren't going to be worth very much - it was only a question of when.
Jonathan Weil has proven to be clueless about everything else involved in this mess (Tanta has taken him to the woodshed more than once), so I wouldn't give any credence to the latest 'outrage' he is reporting.
From WSJ, "First Marblehead Shares Battered By Possible Student-Loan Defaults", with apologies if this has been posted already:
Shares of First Marblehead Corp. fell 30% over two trading sessions after bond-rater Moody's Corp. indicated that worries about complex asset-backed securities have spread to a new realm: student loans.
First Marblehead, based in Boston, is a leading player in packaging student loans into structured securities. On Tuesday, Moody's put 16 notes structured by the company under review for possible downgrade -- a reaction to rising default rates in the loans underlying the notes.
Moody's added two more notes to its review yesterday, bringing the total to $935 million in issued value. Moody's also said it was considering a downgrade to the investment-grade rating of the Education Resources Institute Inc., or TERI, guarantor of almost all of the loans packaged in First Marblehead-created securities.
Thanks Brian. I scanned up to page 104 of that 259 page doc. It helped.
One thing stands out, in reference to "The Plan" - CDS' can cover interest shortfall - who's written CDS' on securities that get caught up in the plan = directly as a reference or indirectly via an index, of knockon effects ? THEY are going to get a knock on the door for payments once this gets going and they'll get mad and might want to sue - somebody, anybody ! This is really asinine...
re. the student loan defaults. Good. Maybe it'll help force college tuitions back down to earth.
Anyone here remember the good ol' days - like 20 years ago- when you could go to a perfectly good school and pay for it outright?
Affordable education and affordable houses! The old American dream, before the lenders and GSEs got involved and inflated the whole shabang to the point we're at now.
Bloomberg is reporting (no link) that $165 million of debt, originally rated AAA will not be repaid.
Meanwhile, this week on Real Fund Managers of the OC...
Street said he doesn't plan to sell the securities because "there's no need. These investments are still rated triple-A," the highest possible rating.
...
The county has been buying structured investment vehicles since at least 2001 but stepped up its purchases two years ago. Today it owns $830 million worth, or 14 percent of the pool's total assets. That's up from 5 to 10 percent two years ago, said Paul Cocking, the treasurer's chief portfolio manager.
...
"I'm concerned but not worried yet," said Chris Norby, the board's chair. "We'll be taking it up at the next meeting." Credit crunch hits county investment pool | securities, county, investment - Homepage - The Orange County Register
Mr. Stunned-but-not-surprised meet Mr. Concerned-but-not-worried. I believe you are both familiar with my friend, Ms. Complacency.
Why do we pretend that our dollars are real, let alone that they have any value? Debt as money is doomed to failure. When the public learns that their work will always be de-valued faster than the currency with the difference going to the gov't and bank interest its game over. Ben Bernanke espouses education, he will get more than he bargained for.
In the old Soviet Union, the Russian workers knew their currency was junk. They used to quip "we pretend to work, and the party (gov't) prtends to pay us." Its all starting to rhyme.
To take it to its logical conclusion, can Citi let all of its SIVs blowup without taking them onto their balance sheet, letting MBIA & ABK go down flaming?
A few points: the trigger was almost certainly tied to the overcollateralisation ratio - that's what's caused other recent events of default. Basically, you apply a stricter haircut to the underlying securities when they are downgraded. If the adjusted principal level falls below a certain amount (laid out on p. 72 of the OC), then various mechanisms kick in to protect the senior noteholders. If these mechanisms aren't sufficient, or if the overcollateralisation ratio falls below 100%, then you have an event of default, which allows the controlling creditors (usually the ones with super senior exposure) to either liquidate or carry on in the hope that the underlying securities will recover.
Brian said: " BTW, these CDO liquidations, if they become widespread, are the doomsday scenario for MBIA and Ambac. Many of the CDOs have maturity dates far off in the future, and the insurers need only make timely interest payments prior to maturity unless the controlling security holders decide to liquidate. "
In almost all cases, monolines take expsoure at the super senior level, which makes them the controlling security holders. So they get to choose whether or not to liquidate.
On the Orange County thing, it's quite worrying how complacent and ignorant the manager is.
"Street and his staff said they're convinced the assets underlying these securities are healthy.
For example, while about 15 percent of the assets are mortgages, they're outside the troubled U.S. mortgage market in places like the United Kingdom, the Netherlands and Australia, financial analyst John Byerly said."
Well, yes, but SIVs aren't credit structures. They're market value structures. And spreads on even AAA mortgage securities in Europe and Australia are now between five and eight times what they were before. It doesn't matter if every single one keeps on paying - given how leveraged SIVs are, the market value decline's certainly enough to be worried about your investment.
It's been truly eye opening for me as a securitisation journalist to find out how many investors had no clue about the most basic aspects of the securities they are buying. Given that I talk mainly to investors who do their homework - obviously, they're more useful sources - it's been really staggering.
The problem (with SIVs) wasn't complexity. It's that a lot of the people who were buying them just looked at the rating and the yield and didn't care what the actual exposure was. Apparently, even after SIVs have been in the news for months on end, this investor still doesn't understand. He should be fired right now.
Looks like they took a pool of BBB and BB rated mortgages and created a CDO. The "best" of the BBB loans were then rated AAA in the new CDO.
The BBB and BB stuff is taking the first hit in the credit crunch as you would expect. However this is the same stuff that has been repackaged as AAA in the new CDO.
In the end, you were not getting AAA rated mortgages, you were getting the AAA's of the BBB's.
The fools who bought this stuff get what they deserve.
"Looks like they took a pool of BBB and BB rated mortgages and created a CDO. The "best" of the BBB loans were then rated AAA in the new CDO. "
That's misleading. The CDO's AAA notes are exposed to the credit risk of all the underlying mortgage securities (which are indeed mainly BBB and BB tranches, but it's not a question of BBB or BB mortgages). The AAA rating came from the fact that any losses on the securities would be taken first by holders of the CDO's BB tranche, then the BBB, then the A, and so on.
Subordination is only part of the story that gives you a AAA rating out of BBB underlyings. The other part is diversification. The rating agencies assumed that holding BBB tranches from many different RMBS securitizations gave you a diversification benefit. However, when the whole subprime universe basically started tanking, the diversification benefit disappeared.
True. I left that bit out because as you say it didn't pan out, and I'm not sure why they thought it ever would. In corporate CDOs you don't get much diversification credit for having different companies within an industry sector, only different sectors. In European CDOs of ABS, they are almost always backed by a range of asset classes, not just one. For some reason they decided to make an exception for the riskiest asset class of all (except I suppose non-performing loans).
I agree that the assumptions about diversification turned out to be overly optimistic, but in a "normal" market - ie., not the one we actually have - it would have made some sense. For instance if a particular originator had unusually weak underwriting standards, holding securitizations from different originators would give you some risk-reduction benefit.
Sure, but in a downturn with a AAA probability, it's far from unlikely that a large proportion of BBB tranches will default. It was probably reasonable to assume that high grade CDOs could achieve triple-A ratings with only RMBS exposure, but single sector mezzanine CDOs make no sense to me.
"The AAA rating came from the fact that any losses on the securities would be taken first by holders of the CDO's BB tranche, then the BBB, then the A, and so on."
This makes sense if you are dealing with a diversified pool of assets where the original assets span AAA to junk.
Carving out the BBB and BB tranches and rating these AAA to junk implies diverisication which does not really exist.
When the market tanks, and the BB's and BBB's take the first hit, it is meaningless if your BB is rated AAA or BBB.
Just like in the alchemy days, you can not turn lead into gold.
That's exactly the point I was making. It's important to be clear about terminology, however - there are enough real problems without creating new ones by spreading confusion.
Dec. 6 (Bloomberg) -- U.S. mortgage assets in collateralized debt obligations have lost so much value that the top classes of the securities may be worth as little as 20 cents on the dollar in a liquidation, Barclays Plc analysts said in a report.
About 20 percent to 30 percent of principal would be covered for the ``super senior'' portions of mezzanine asset-backed bond CDOs, which mainly contain mortgage bonds and other CDOs initially assigned low investment-grade ratings, Barclays said in the report yesterday. The senior-most classes of CDOs containing highly rated asset-backed bonds would recoup 30 percent to 65 percent, it said.
I worked at Credit Suisse when some wanted to amend our Credit Support Annexes for ISDA Master Agreements to permit acceptance of CDO tranches. As a former bankruptcy lawyer I thought this was lunacy and showed the working team a WSJ article about a money manager who had to take a 98.5% write down on a BBB CBO tranche. That was enough to kill the idea of accepting this garbage as collateral at CS, but I don't know what other shops agreed to accept.
first
second!
I take it we haven't seen any real problems with junk bonds yet and related CDOs, correct?
That is a deep cut.
That's a train wreck.
In other unexpected news,
The moon is shining in the sky tonight,
Beer is still wet,
The Pope is stil very, ultra stubbornly STILL Catholic,
And it's hot and dry in SoCal tonight.
Cheers,
Whoops. That's not right:
China's Yuan Falls Most Since End of Peg After Dollar Rallies
If Shilling is right about the overcapacity in China, and they start dumping in a panic at some point during a US recession, that alone could trigger a trade war.
ac,
China benefits not from a trade war. The question is do the idiots in Congang do a Smoot and jack up tarifs. That would be really bad...
Cheers,
For me, i know it's bad when i can no longer keep track of all the really bad news.
...forget about the just plain ole' "bad"
But what was the COLLATERAL on the CDO?
I blame every literate American since 1913 when they allowed our sound money to be turned into fractional reserve crap by the conspiring elite bankers.
I doubly blame every literate American since 1973 when they let the fractional reserve crap turn to fiat garbage, so they could further bankrupt and destroy the nation.
Paying federal income taxes and accepting FRNs was one of the dumbest collective decisions ever made by any society.
Now we will pay the price. I am pissed!
China benefits not from a trade war. The question is do the idiots in Congang do a Smoot and jack up tarifs. That would be really bad...
I think we'd be more likely to start it, especially if manufacturing takes another major hit.
Ever watch Lou Dobbs?
It's an entire show dedicated to starting a trade war with China.
The sky is definitely falling for somebody Mr. Kudlow.
Can someone explain to me the role of the CDS in the transaction? What does this mean for the cds?
Can someone provide an English translation. Try as I might I can't figure out who did what to whom - only that more debt has been distroyed.
Nicholas Weaver,
"But what was the COLLATERAL on the CDO?"
Well, see, I bought some paper based on a conglomeration of RMBS. Now I cut it all up and sold bits and pieces into the market rated AAA. Now sees, I made some great fees, and no one is questioning me, so I says, this is good so let's expand the situation, so to speak. These English blokes seem to have it down:
YouTube -
Enjoy.
Cheers,
On the bright side Chairmen Bernanke and Greenspan will get much needed additional educations about depressions. This could help.
Jenga!
(Atrios has a more palatable and interesting name than The Big Shitpile).
HAAALP!!! PAULSON!!!!
Surge in Auto-Loan Delinquencies Is Latest Trouble for the Economy
By JEFFREY MCCRACKEN and GREGORY ZUCKERMAN
December 6, 2007
First came housing loans and the subprime-mortgage crisis.
Now, signs of stress are creeping into another key consumer area: auto loans.
Delinquencies in the auto-loan market are ticking up to their highest level in several years. Lenders are tightening terms in some cases, and interest rates have risen from the rock-bottom levels of a few years ago. About $575 billion in loans for new and used cars are made annually, according to the National Automotive Finance Association.
About 4.5% of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent as of the end of September, up from 2.9% the previous month, according to a Lehman Brothers survey of companies servicing these loans. That is the biggest one-month jump in at least eight years. Lehman says 12% of subprime borrowers, who have poorer credit records, were delinquent on their 2006 auto loans as of September. That is the highest level since 2002 and up from 11.1% the previous month.
"The numbers will get worse for auto loans," says Dan Castro of GSC Group, a New York firm that runs debt-related investment funds. "We're starting to see signs of rising losses, and delinquencies are creeping up." ...
Surge in Auto-Loan Delinquencies Is Latest Trouble for the Economy - WSJ.com
Here is the WSJ link dated 11/23 - Adams Square Funding I Is Forced to Liquidate (and naked capitalism has a blog out on it)
Adams Square Funding I Is Forced to Liquidate - WSJ.com
my goodness, if this is what a run-of-the-mill CDO brings in liquidation early in the crisis, citi really IS in a heap o' trouble.
"How are they?"
"Dime bid"
"No seriously, these are AAA rated. How are they?"
"Nickel bid"
"You must not understand. This is AAA rated ooops, C rated paper....Sold at a nickel"
But what was the COLLATERAL on the CDO?
and who were the investors (banks, pools or individuals) that got a military buzz-cut ?
"Can someone provide an English translation."
Adams Square was a hybrid CDO, meaning it held both "real" assets (obviously, I'm using that term very loosely) and swaps positions. The losses on the "real" assets at liquidation wiped out the lower-rated tranches and didn't even leave enough cash to settle the losses on the outstanding swaps. So the trustees had to draw funds from the most senior tranche (I'm not precisely clear on how that worked). This created a $165 million loss on the CDO's AAA rated debt.
At least that's what I got out of it.
According to the notice from the trustee, the sale proceeds from the liquidation of the cash assets, along with the proceeds in the collateral principal collection account, super-senior reserve account, credit default swap (CDS) reserve account, and other sources, were not adequate to cover the required termination payments to the CDS counterparty.
Can anyone explain what that means? Were credit default swaps that they had written among their assets? My take is that they had written CDSs and are now basically defaulting on them.
This is something I've been wondering about, all these funds and firms (e.g., Goldman Sachs) booked profits from having bought CDSs on subprime debt. But who wrote all these CDSs? Could the great derivative backlog come and bit them in the butt?
Or am I completely misreading this?
Thanks,
Given the thorough trashing of so much AAA paper, I would have expected a flood of lawsuits by now. Perhaps there will be no deep pockets left to sue after the dust settles.
When you read SEC filings, counter party risk is always thrown in the boilerplate. I doubt if it was seriously modeled, or even if it could estimated. So it was probably ignored. Maybe a list of approved counterparties, based on their ratings.
I'm wondering if the monoline credit insurers are on any of this?
My what a pretty deal. Credit Suisse underwrote this CDO, and the CDO wrote
credit default protection to...yes, Credit Suisse. The reference obligations for the CDS were other CDO's and some ABS owned by C.S. And of course C.S. got to stuff the Adams CDO with ABS from its book. Very nice. Deutsche Bank did the same thing with its Carina CDO, which is also in liquidation. Now we know one way the ibanks ``hedged'' their exposure to subprime. I wonder who the bagholders are. The prospectus for the Adams Square CDO is online at
http://www.ifsra.ie/data/in_mark_prosp/4967%20AdamsSquare.pdf
Banker dialed in on this circus yet?
BOOYAH, back up the truck baby!
Hi
I think we'd be more likely to start it, especially if manufacturing takes another major hit.
Ever watch Lou Dobbs?
It's an entire show dedicated to starting a trade war with China.
ac | 12.05.07 - 9:47 pm |
The only problem with a trade war is we don't make anything here any more besides worthless investments (wall paper)
jo6pac
So the CDS were covered at the expense of the super-senior tranche (and wiping out ALL lower tranches)?
And mind you this is EARLY in the unwind, wonder if this will make folks reassess counter party risk as the beat goes on...how much bigger of a hit will it take to generate a CDS counter party default and what will that do to the net position assumptions?
Funny, this isn't among the finance headlines on Yahoo. I see futures are up nicely, though. That's nice.
A thought, are we here again with a 'one off' fire sale that produces a price point that is similar to the E*trade pricing?
"You're thinking of this CDO all wrong. As if they had the money back in a safe. The money's not here. Your money's in a super senior synthetic tranche hedged with a CDS on Joe's house...right next to yours. Supported by the excess spread from the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending the Orange County firemen's retirement fund the money to short builders commercial paper, and then, they're all going to pay it back to you as best they can."
With apologies to Jimmy Stewart.
mort_fin sometimes gallows humor is the best medicine...that is way too funny BTW.
Tomorrow is Brown Pants Day at citibank!
The only problem with a trade war is we don't make anything here any more besides worthless investments (wall paper)
jo6pac
But if we got all that worthless paper in the hand of overseas investors there'd be no foreign economies left to compete with us.
Thanks for this CR. Just wondering...in Econ 101 years ago we were taught that declining demand led to weaker economies and this led to something called a recession. Now, perhaps the parameters have changed it is not declining demand but the worsening of credit instruments that undermines the economy. Fact is we live on credit and the economy breaths credit and economic growth grows from the ability to multiply credit not by gauging productivity improvments.
Interesting to note that this afternoon I went to collect a book I ordered through a local retailer...they did not want cash they would only complete my custom order by a credit card.
King Arthur: [after Arthur's cut off both of the Black Knight's arms] Look, you stupid Bastard. You've got no arms left.
Black Knight: Yes I have.
King Arthur: Look!
Black Knight: It's just a flesh wound.
Deep cut? Yeah, right!
In case anyone forgot the public was told by regulators not that many months ago that hedge funds did not need additional regulation. I'm sure somebody has an old link to that disinformation.
Well, obviously this Adams Square wrote the CDS for the income stream, which flowed through to the investors. When the assets on which the CDS were written hit a default event, the CDO was required to stand up to it's side of the swap, and pay the counterparty whatever was required. There probably wasn't enough capital to pay the swaps. Perhaps there was a bit of leverage, or the non-CDS assets couldn't be sold at a "reasonable" price.
Hey, here is your chance to suggest revisions to be made to the FDIC's Strategic Plan for the six year period covering 2008 through 2013. It looks like the old S plan isn't working out so well.
SUGGEST REVISIONS TO THE FDIC STRATEGIC PLAN - SEEKING INPUT FROM STAKEHOLDERS AND THE GENERAL PUBLIC:
FDIC: Strategic Plan - Suggest Revisions to the FDIC Strategic
Plan
Don't worry, Mozilo has the answer. You just have to trust him.
The only problem with a trade war is we don't make anything here any more besides worthless investments (wall paper)
I keep reminding people.. we grow quite a bit of wheat... (other primary wheat growers are Russia, Argentina, Australia and Canada).
Heavy rains forcasted for Soc Cal this weekend!!!!
This is just a 2 off event nothing to see here.
OT,
Now that we are freezing interest rates on ARMS does that mean basically everyone will start liquidating their MBS paper just in case they want to lower fixed MBS next? Not to mention would never loan to those A hole Americans again.
What next we are readjusting the interest on those T Bills to zero and we will guarantee them to .96 cents on the dollar?? This crap gets weirder by the minute.
Next will be Bushco needs to stay in power to help us through the current crisis.
Cutting ratings after a liquidation! WTF! How do these people justify their employment. Folks, over the past decade, 10 year U.S TREASURIES have out performed the S&P 500. When the government can deliver better REAL LONG term returns than wall street we have a SERIOUS problem.
Here's the story in Reuters.. though it's about the same as the CR front page.
CDO can't repay note holders after liquidation
oh.. and you can sneak into the Nov 23rd Wall Street Journal by going through Google News.
Adams Square Funding I
Is Forced to Liquidate
Here are a few answers to some of the questions that have been posed (with the caveat that I'm not a CDO expert so if we have any in the audience feel free to chime in):
The collateral was specified as follows:
-at least 90% was RMBS (apparently first lien, subprime according to S&P) and at least 95% was ABS
-not more than 5% was CDO collateral
-not more than 5% was CRE CDOs or CMBS
-the minimum rating for 95% of the collateral was Baa3/BBB, minimum rating was BB-
-there is a long list of securities that are prohibited generally more specialized ABS , though Agency MBS were on the excluded list.
-Cash Assets were limited to 20% of the collateral (implying that the synthetic - CDS - collateral was at least 80%)and it was expected that at closing the CDS would comprise 95% of the collateral.
To answer the question about the swap and CDS in the structure - rather than go out and actually buy a bunch of bonds, Adams Square wrote a CDS with an affiliate of Credit Suisse that referenced the performance of a bunch of RMBS with the characteristics cited above. In return, Adams got a stream of payments that was equivalent to the interest on the bonds and a fee for providing the credit default insurance. (It is economically similar to being long the bonds, but doesn't require you to go out in the market and purchase them.)
Here is the description of the CDO from S&P's press release:
"Adams Square Funding I Ltd. is a hybrid CDO of ABS transaction collateralized largely by mezzanine classes of first-lien subprime RMBS transactions and other RMBS transactions. Credit Suisse Alternative Capital is the investment manager."
Today's rating actions reflect the impact of the liquidation of the collateral at depressed prices. Therefore, these rating actions are more severe than would be justified had liquidation not been ordered, in which case our rating actions would have been based on the credit deterioration of the underlying collateral.
So the rating is higher if the asset isn't sold... why have a rating at all...?
BTW, these CDO liquidations, if they become widespread, are the doomsday scenario for MBIA and Ambac. Many of the CDOs have maturity dates far off in the future, and the insurers need only make timely interest payments prior to maturity unless the controlling security holders decide to liquidate.
Oh to be a fly on the wall when the ratings committee meets to decide the fate of the AAA rating for these two. This is Enron all over again for the rating agencies.
Ok... So NOW we are at the beginning of the end.
over at bloomberg, reporter J. Weil notes in an opinion piece that Freddie is performing enron style accounting...booking future hedge fund returns as "probable" and therefore allowable under AOCI accounting procedures even though the transactions have not been executed.
Freddie Mac's Accounting Evokes Shades of Enron: Jonathan Weil - Bloomberg.com
More deceptive and false practices that suggest they are piloting on a ship named the F-Mac-titanic
I recommend this for the weekend video in celebration of the The Bush / Paulson Mortgage Freeze Plan
YouTube -
Does anybody know what the trigger event was in this case ? CS don't have the documents on Adams Square at their website, S&P simply details the ratings action and none of my searches help me understand that. Something in the main article suggests that it was a CDS content of the CDO (don't say huh like I did ) that triggered the default event but its terribly unclear.
-K
sk,
It was probably either a level of defaults or ratings downgrades or interest shortfall that tripped a trigger and allowed the senior note holders to call for a liquidation. I didn't plow through all the trigger language to figure out which one broke the camels back. The particulars aren't that important - BBB subprime RMBS from 2H 2006 aren't going to be worth very much - it was only a question of when.
If you are truly curious or have insomnia - http://www.ifsra.ie/data/in_mark_prosp/4967%20AdamsSquare.pdf
mock turtle -
Jonathan Weil has proven to be clueless about everything else involved in this mess (Tanta has taken him to the woodshed more than once), so I wouldn't give any credence to the latest 'outrage' he is reporting.
YouTube - WTC 7 Free Fall Collapse
From WSJ, "First Marblehead Shares Battered By Possible Student-Loan Defaults", with apologies if this has been posted already:
Shares of First Marblehead Corp. fell 30% over two trading sessions after bond-rater Moody's Corp. indicated that worries about complex asset-backed securities have spread to a new realm: student loans.
First Marblehead, based in Boston, is a leading player in packaging student loans into structured securities. On Tuesday, Moody's put 16 notes structured by the company under review for possible downgrade -- a reaction to rising default rates in the loans underlying the notes.
Moody's added two more notes to its review yesterday, bringing the total to $935 million in issued value. Moody's also said it was considering a downgrade to the investment-grade rating of the Education Resources Institute Inc., or TERI, guarantor of almost all of the loans packaged in First Marblehead-created securities.
Full article requiring paid subscription:
First Marblehead Shares Battered By Possible Student-Loan Defaults - WSJ.com
Ok... So NOW we are at the beginning of the end.
Wolfman Got Nards | 12.06.07 - 12:42 am | #
No, no, no.
It's possibly the end of the beginning.
Thanks Brian. I scanned up to page 104 of that 259 page doc. It helped.
One thing stands out, in reference to "The Plan" - CDS' can cover interest shortfall - who's written CDS' on securities that get caught up in the plan = directly as a reference or indirectly via an index, of knockon effects ? THEY are going to get a knock on the door for payments once this gets going and they'll get mad and might want to sue - somebody, anybody ! This is really asinine...
-K
Short Courage-
re. the student loan defaults. Good. Maybe it'll help force college tuitions back down to earth.
Anyone here remember the good ol' days - like 20 years ago- when you could go to a perfectly good school and pay for it outright?
Affordable education and affordable houses! The old American dream, before the lenders and GSEs got involved and inflated the whole shabang to the point we're at now.
Step 1: Extend enormous amounts of new credit based on innovation in structured finance products.
Step 2: ?
Step 3: Profit
Oh yeah, I almost forgot...
Step 4: Stress test new financial system
Bloomberg is reporting (no link) that $165 million of debt, originally rated AAA will not be repaid.
Meanwhile, this week on Real Fund Managers of the OC...
Street said he doesn't plan to sell the securities because "there's no need. These investments are still rated triple-A," the highest possible rating.
...
The county has been buying structured investment vehicles since at least 2001 but stepped up its purchases two years ago. Today it owns $830 million worth, or 14 percent of the pool's total assets. That's up from 5 to 10 percent two years ago, said Paul Cocking, the treasurer's chief portfolio manager.
...
"I'm concerned but not worried yet," said Chris Norby, the board's chair. "We'll be taking it up at the next meeting."
Credit crunch hits county investment pool | securities, county, investment - Homepage - The Orange County Register
Mr. Stunned-but-not-surprised meet Mr. Concerned-but-not-worried. I believe you are both familiar with my friend, Ms. Complacency.
This was a January 2007 deal. From AAA to wipeout in 11 months. Well Done!
What is a CDO?
Clever interactive explanation.
Cdo - Interactive Features - Portfolio.com
Why do we pretend that our dollars are real, let alone that they have any value? Debt as money is doomed to failure. When the public learns that their work will always be de-valued faster than the currency with the difference going to the gov't and bank interest its game over. Ben Bernanke espouses education, he will get more than he bargained for.
In the old Soviet Union, the Russian workers knew their currency was junk. They used to quip "we pretend to work, and the party (gov't) prtends to pay us." Its all starting to rhyme.
So Brian & SK,
To take it to its logical conclusion, can Citi let all of its SIVs blowup without taking them onto their balance sheet, letting MBIA & ABK go down flaming?
Hahahahaha!
I can't wait to see overpriced McMansions liquided at similar rates, or even 50% off!
At least they didn't say it was liquidated at less than 25% of "market value" like they do when a house sells for far less than the wishing price!
Brian and Steve, thanks for all the info and expertise.
So Credit Suisse hedged their own CDO/ABS exposure by setting up a CDO that would write CDSs that Credit Suisse could buy...
The big unknowable right now is how much of the CDSs written out there are worth the paper they're written on?
A few points: the trigger was almost certainly tied to the overcollateralisation ratio - that's what's caused other recent events of default. Basically, you apply a stricter haircut to the underlying securities when they are downgraded. If the adjusted principal level falls below a certain amount (laid out on p. 72 of the OC), then various mechanisms kick in to protect the senior noteholders. If these mechanisms aren't sufficient, or if the overcollateralisation ratio falls below 100%, then you have an event of default, which allows the controlling creditors (usually the ones with super senior exposure) to either liquidate or carry on in the hope that the underlying securities will recover.
Brian said: " BTW, these CDO liquidations, if they become widespread, are the doomsday scenario for MBIA and Ambac. Many of the CDOs have maturity dates far off in the future, and the insurers need only make timely interest payments prior to maturity unless the controlling security holders decide to liquidate. "
In almost all cases, monolines take expsoure at the super senior level, which makes them the controlling security holders. So they get to choose whether or not to liquidate.
On the Orange County thing, it's quite worrying how complacent and ignorant the manager is.
"Street and his staff said they're convinced the assets underlying these securities are healthy.
For example, while about 15 percent of the assets are mortgages, they're outside the troubled U.S. mortgage market in places like the United Kingdom, the Netherlands and Australia, financial analyst John Byerly said."
Well, yes, but SIVs aren't credit structures. They're market value structures. And spreads on even AAA mortgage securities in Europe and Australia are now between five and eight times what they were before. It doesn't matter if every single one keeps on paying - given how leveraged SIVs are, the market value decline's certainly enough to be worried about your investment.
It's been truly eye opening for me as a securitisation journalist to find out how many investors had no clue about the most basic aspects of the securities they are buying. Given that I talk mainly to investors who do their homework - obviously, they're more useful sources - it's been really staggering.
The problem (with SIVs) wasn't complexity. It's that a lot of the people who were buying them just looked at the rating and the yield and didn't care what the actual exposure was. Apparently, even after SIVs have been in the news for months on end, this investor still doesn't understand. He should be fired right now.
...they're outside the troubled U.S. mortgage market in places like the United Kingdom, the Netherlands and Australia...
As a rather sober numbers-nerd, I find myself for the first time compelled to use the acronym ROTFLOL.
Was FAS 157 rule requiring mark to market if there was legit market prices for CDO/CMBS delayed?
Looks like they took a pool of BBB and BB rated mortgages and created a CDO. The "best" of the BBB loans were then rated AAA in the new CDO.
The BBB and BB stuff is taking the first hit in the credit crunch as you would expect. However this is the same stuff that has been repackaged as AAA in the new CDO.
In the end, you were not getting AAA rated mortgages, you were getting the AAA's of the BBB's.
The fools who bought this stuff get what they deserve.
The ultimate bagholders will be anyone who holds fiat currency.
"Looks like they took a pool of BBB and BB rated mortgages and created a CDO. The "best" of the BBB loans were then rated AAA in the new CDO. "
That's misleading. The CDO's AAA notes are exposed to the credit risk of all the underlying mortgage securities (which are indeed mainly BBB and BB tranches, but it's not a question of BBB or BB mortgages). The AAA rating came from the fact that any losses on the securities would be taken first by holders of the CDO's BB tranche, then the BBB, then the A, and so on.
Now I'm being misleading. The first tranche to be hit is the unrated equity tranche. Then the BB.
Subordination is only part of the story that gives you a AAA rating out of BBB underlyings. The other part is diversification. The rating agencies assumed that holding BBB tranches from many different RMBS securitizations gave you a diversification benefit. However, when the whole subprime universe basically started tanking, the diversification benefit disappeared.
True. I left that bit out because as you say it didn't pan out, and I'm not sure why they thought it ever would. In corporate CDOs you don't get much diversification credit for having different companies within an industry sector, only different sectors. In European CDOs of ABS, they are almost always backed by a range of asset classes, not just one. For some reason they decided to make an exception for the riskiest asset class of all (except I suppose non-performing loans).
I agree that the assumptions about diversification turned out to be overly optimistic, but in a "normal" market - ie., not the one we actually have - it would have made some sense. For instance if a particular originator had unusually weak underwriting standards, holding securitizations from different originators would give you some risk-reduction benefit.
Sure, but in a downturn with a AAA probability, it's far from unlikely that a large proportion of BBB tranches will default. It was probably reasonable to assume that high grade CDOs could achieve triple-A ratings with only RMBS exposure, but single sector mezzanine CDOs make no sense to me.
FWIW, RBS has just announced super senior write downs of 10% on its high grade portfolio and 30% on its mezzanine CDOs.
"The AAA rating came from the fact that any losses on the securities would be taken first by holders of the CDO's BB tranche, then the BBB, then the A, and so on."
This makes sense if you are dealing with a diversified pool of assets where the original assets span AAA to junk.
Carving out the BBB and BB tranches and rating these AAA to junk implies diverisication which does not really exist.
When the market tanks, and the BB's and BBB's take the first hit, it is meaningless if your BB is rated AAA or BBB.
Just like in the alchemy days, you can not turn lead into gold.
That's exactly the point I was making. It's important to be clear about terminology, however - there are enough real problems without creating new ones by spreading confusion.
Dec. 6 (Bloomberg) -- U.S. mortgage assets in collateralized debt obligations have lost so much value that the top classes of the securities may be worth as little as 20 cents on the dollar in a liquidation, Barclays Plc analysts said in a report.
About 20 percent to 30 percent of principal would be covered for the ``super senior'' portions of mezzanine asset-backed bond CDOs, which mainly contain mortgage bonds and other CDOs initially assigned low investment-grade ratings, Barclays said in the report yesterday. The senior-most classes of CDOs containing highly rated asset-backed bonds would recoup 30 percent to 65 percent, it said.
By the way, I've found out that the event of default was indeed triggered by the OC ratio falling below 100%.
I worked at Credit Suisse when some wanted to amend our Credit Support Annexes for ISDA Master Agreements to permit acceptance of CDO tranches. As a former bankruptcy lawyer I thought this was lunacy and showed the working team a WSJ article about a money manager who had to take a 98.5% write down on a BBB CBO tranche. That was enough to kill the idea of accepting this garbage as collateral at CS, but I don't know what other shops agreed to accept.