lets see... 32 times leverage means that 3.125% losses = flat busted broke, even if we don't account for interest payments on the other 96.8255% of their investment.
Yes it is affiliated with the Carlyle group. The private equity arm actually lent this company $100mm a few months ago when it first got into some trouble.
However, every one that defaults clears out another delusion loan and gets another household back into a situation in which they can hopefully start saving and rebuilding their financial life. These Alt-A issues are going to be very ugly for investors, but the flip side of the coin is that the underlying cause will pay off for the rest of the economy.
They are affiliated with the Carlyle Group...talk about pull.Both the Bush Family and the Blum's have stakes (Dianne Feinstein).There gonna be some woofing coming out of DC on this one.
I hear leveraged now, all I think of is tire irons for some reason and getting bludgoned by them - possibly in the garage by Col. Mustard. That or unfortunate accidents involving cars and slipping jacks. I think I need professional help.
Then again, seeing what the professionals have done......
You know, it occurs to me that this year might be a good opportunity to clarify that whole "implicitly guaranteed by the U.S. government" thing.
CNBC was talking about this earlier today... said the Treasury had to come out and officially deny the rumor the federal gov't will announce (soon - like today) that they are now guaranteeing the GSEs.
Here's what I understand from this--knowing I'll be corrected if I'm wrong.
Carlyle holds Fannie and Freddie MBS which, I'm guessing, are still paying the rate advertised. But because of fears (panic) in the marketplace, those mbs are worth less in that marketplace, and since they are collateral, Carlyle is getting a margin call: Put up more collateral, or else.
This doesn't mean the bonds are in default--it means that suspicious investors have driven down their market value. Same with Thornburg yesterday, no?
The mbs, and the mortgages underlying them, are still generating the return promised, but because of the perceived additional risk, the price on those mbs has gone down because buyers are demanding higher yields.
The Chairman Emeritus of Carlyle Group is Frank C. Carlucci, whose claim to fame was Deputy Secretary of Defense (1981-1982) and National Security Adviser (1987-1989). After his government stint, he headed the Sears/ Coldwell Banker scam.
The current chairman of Carlyle Group is Lou Gerstner, the former Chairman of IBM.
Sir James Baker III, Chief of Staff (1981 -85), and Secretary of Treasury (1985-89) under Reagan; and Secretary of State (1989 - 1993) under George H. W. Bush Sr., is a Senior Advisor.
Sir George Herbert Walker Bush, Director of CIA (1976-77) under Ford; Vice-President (1981-89) under Reagan; and President (1989 - 93), acts as a broker and also senior advisor.
Other name brand politicos connected to Carlyle include, former British prime minister John Major (Chairman of Carlyle Europe), Dick Darman, the former Reagan-Bush director of the Office of Management and Budget, and Arthur Levitt, former chairman of the Securities and Exchange Commission and Carlyle Senior Advisor.
CR, what are your current views on the state of things? Are we going to see the dam start to break, in terms of forcing more fire sales and having to visit the confessional, with all these forced fire sales? In other words, should we expect the slow incremental financial water torture with these bad debts and cascading defaults to continue, or should we expect a monsoon season as we reach critical mass and more institutions go belly-up?
I can't be out of money, I still have leverage left.
The money quote: All of the securities are rated Triple-A and are considered to be implicitly guaranteed by the U.S. government.
You know how good implicit guarantees are these days. "You can always refinance, real estate only goes up, the check is in the mail and I promise I won't..."
32x is more leverage than LTCM when things started to unravel there. Even "low risk" strategies can come unglued very quickly at that kind of leverage. The fixed income world is in a margin call meltdown at the moment. The spread between on the run and off the run treasuries is the widest I've ever seen it, which is usually a good proxy for the amount of forced liquidation in the market.
The market is also setting up for another negative payrolls report tomorrow, which makes sense as the economy is weak. I'd point out though that the the birth-death adjustment for Jan was -373, whereas Feb usually has an adjustment of about +100, so the actual print could well catch everyone leaning the wrong way (again).
Okay, foreclosures are at an all-time high, but all-time high means 2 percent according to a previous post. Even so, leveraging the mbs 32 times or whatever means that even small declines in the value of the mbs are disaster for the Carlyles and Thornburgs of the world. Right now, the value of these mbs is down, just because they are mbs, not because every last one of them is in default or even close to it.
But if these entities must try to sell their mbs in large quantities, that just depresses the market price further, triggering more margin calls and more forced sales...Am I getting it now?
So how do they neutralize the panic in the room? If they could do that, would the problem be, uh, contained?
Watched an old Looney Tunes w/one of my kids the other week. He's tuned in and asks periodically if we're looking at '30s or '70s...The Coyote moment over the cliff led to an interesting conversation.
I actively reassure them, but they need to understand that their world is in the process of changing dramatically.
Good to hear from you - it's been awhile, I was beginning to worry.
As to the implicit guarantee, I think that's why the term 'implicit' is used, the gov't has never explicitly gone on record saying they'd prop up the GSEs if they were to otherwise fail, so don't hold your breath waiting for such an announcement, or even them hinting at it.
Still, I don't care what Hank says - they totally would.
Basically, the way these things work is that they borrow short term, and then buy long term bonds, and earn the diff on the rates. What is happening is the short term stuff is not getting rolled. To pay it back they are sell the long term stuff.
I have a feeling that the big boys are going cheery picking, forcing liquidations of funds with decent quality LT bonds. Vultures.
7) Are FreddieNotes securities guaranteed by the federal government?
No. FreddieNotes securities are obligations of Freddie Mac only. FreddieNotes securities, including any interest on FreddieNotes securities, are not guaranteed by, and are not debts or obligations of, the United States or any agency or instrumentality of the United States other than Freddie Mac.
Fannie Mae receives no direct government funding or backing. Fannie Mae securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Fannie Mae.
Um, how does one get 32X leverage on anything? As above, it would seem the risk of loss would have to be near zero. Who would loan under those circumstances?
Could it be that these securities were all rated AAA, insured, whatever, so of course, what could possibly go wrong
(only 2% so far)"....But if these entities must try to sell their mbs in large quantities, that just depresses the market price further, triggering more margin calls and more forced sales...Am I getting it now?
So how do they neutralize the panic in the room? If they could do that, would the problem be, uh, contained?"
John Stark | 03.06.08 - 10:56 am | #
you are right on J S, and i GUESS that some form of government intervention, and or guarantees similar to but not the same as FDIC would halt the panic.
( yeah yeah yeah,i know moral hazard, but now we face a greater hazard and we can punish the lame later with tax policy)
But those in power now would have to eat their "I HATE GOVERNMENT" mantra first.
plus
they hire incompetent cronies to "run" things (yeah that's right i think paulson and his ilk are not nearly as smart as they are aggressive)
Could it be that these securities were all rated AAA, insured, whatever, so of course, what could possibly go wrong
If I understand this correctly, the securities haven't yet gone wrong. The market for them has, because the market fears that they COULD go wrong in the future as foreclosures increase.
"But if these entities must try to sell their mbs in large quantities, that just depresses the market price further, triggering more margin calls and more forced sales...Am I getting it now?"
So the NEW price for these AAA rated securities are no longer based on the model but what the MARKET will bring. Kinda like homeowners that sit and watch as their neighbors keep selling for lower and lower prices and they come to realize their
home is no longer worth what the appraiser mentioned back in 05,06,07 and soon to be 08. Fannie and Freddie are toast.
"OMG, I used to work for John Stomber. He was quite a character, and really didn't get mortgages too well (like to look at them on a current yield basis and didn't understand prepayment risk and negative convexity). Funny he was running an MBS fund...."
My contemporaries recently received their deferred comp. statements and have been lamenting their paper losses.
I'm hearing lots of discussion about switching their holdings into fixed income options and/or lowering their contributions.
These people defer 15-20K annually directly into the market. It would seem that this would have significant impact, yet you haven't yet heard mention of it.
The amazing thing is they got creamed on GSE AAA debt. That's a lot of GSE debt that will probably be picked by Bill Gross, et al., at fire sale prices.
And lets face it, the implicit guarantee is a lot more likely to become explicit than not.
How leveraged are you on your house, ronin? Do you owe more than 32x your checking account balance?
I don't believe they mean cash, but what % of the underlying value of the securities you can borrow against. I couldn't borrow 32X of the value of anything on margin.
Of course, borrowers being able to refinance 100% of their home value because, people don't default on mortgages, or equity always goes up, whatever, is ridiculous.
The point is how far the markets seem to have drifted away from reality or any concept of risk. I assume it's not their money they're lending.
Bob_in_MA writes: The amazing thing is they got creamed on GSE AAA debt. That's a lot of GSE debt that will probably be picked by Bill Gross, et al., at fire sale prices.
And lets face it, the implicit guarantee is a lot more likely to become explicit than not.
That would be my guess. Does anyone know what the yield is on these bonds at current prices? Is it even six percent?
If the big smart money buys these things today at yields of six or less, doesn't that mean they think the risk of default on these bonds is low?
How big is the real problem? Is the perceived problem--the panic--making the real problem bigger?
AT the end of the day, the real question is, How many people will actually default on their mortgages--not miss a payment and get a notice, but actually default and leave the bank with a devalued home? Enough to leave AAA mbs with a negative rate of return?
I'm shocked that you guys aren't all over this Carlyle thing. The degree of leverage shouldn't matter. It's tripla-A rated paper backed by FRE/FNM. Moreover, FRE/FNM are implicitly backed by the US Govt. Those guarantees should be rock solid and not require margin calls.
Something is very wrong here - most likely derivatives related - AND I'M SHOCKED THAT CR ISN'T MAKING MORE OF THIS
I don't believe they mean cash, but what % of the underlying value of the securities you can borrow against. I couldn't borrow 32X of the value of anything on margin.
Something is very wrong here - most likely derivatives related - AND I'M SHOCKED THAT CR ISN'T MAKING MORE OF THIS
It ain't the collateral it's the leverage. And I'm betting the market doesn't like some of the chattering coming out of Congress about weakening the FRE/FNM by stuffing every mortgage under the sun into their portfolio
Besides, as a holder of in-the-bank-cash why should I be interested in a bunch of FRE/FNM paper with a just over 5% yield when muni's were recently trading in over 5%?
John Stark, you've gotten to the root of the vicious leverage cycle, and the $10 trillion question.
There is so much leverage that any hint of failure derails the whole train and there are massive margin calls.
People will big bucks come in to scoop up the assets at fire sale prices.
The banks that had been relying on this stuff have to take huge writedowns and adjust their reserves accordingly. This means taking out a lot of liquidity (on average there is like 10x leveraging in loans compared to assets).
So the real question is what happens next. The huge decrease in the ability to loan out money can be hugely deflationary and start a spiral where businesses/people can't loan money and therefore the underlying assets DO go bad because there are lots of bankruptcies and defaults. (Solvency crisis)
Or the whole thing might blow over, and it turned out to just be a liquidity crisis and the billionaires make billions more on their vulture swooping.
Most of the time it is the latter, but oh so occasionally it's the former. Considering the amount of debt in the system this time I think it'll be the former. However, I think that we are going to be faced with short term liquidity issues that are resolved and will have a huge upside shot...until the structural problems that set off the panic are fully realized and we have a huge leg down.
ref, John Stark, 3% equity is insane unless they have a direct connection to a CB. Obviouly there positions are not marked to market.
Think about T-bonds, the price fluctuates that much on some days.
A retail investor in the stock market has to meet margin calls all the time on good stocks, although the max leverage is .5 not 33.
Looks like a great opportunity to those calling in the loans/taking over the collateral. This collateral easily qualifies for the taf window, so banks get this stuff maybe for less than it would auction for and then borrow against it at 3% while income is 6%... I'm long SKF, but the fed is helping out the banks in lots of ways...
Interesting to see results when auditors apply new fasb rules by end march...
If you're going to borrow short/lend long, best to have access to the fed window...
ARW writes:
Stark,
If 2% of loans are defaulting. What value would you assign to the MBS in a falling market? and at what rate of return?
That's what I'm asking, not telling. But I suspect that 2 percent of all loans defaulting does NOT mean that 2 percent of the loans behind these gse AAA bonds are defaulting, as of right now. The fear going forward is that defaults will lead to still further price declines and still further defaults, until even the "best" mbs comes up short for the holder. I guess that's why people are spending so much time speculating about the behavior of the underwater homeowner. If enough underwater guys keep paying, then the problem for the mbs holders may be manageable. If the mbs keep on paying the promised rate of return, the market will adjust to that and the margin calls on this stuff would stop. Obviously it's hard to envision that happening anytime soon in the current environment. But I'm beginning to understand why the bigshots keep trotting out their bailout scenarios. They are trying to stop the chain reaction. That's what they SHOULD be doing, right?
I'm not among those who thinks a systemic failure, the collapse of FNMA and FRE, etc., will be amusing.
They wish. Because those guys are the stars of the show, they all ways pullit out in the end. This is the story of Captain Craphat of the USS Abject Lesson and his all redshirt crew.
Frank C. Carlucci, whose claim to fame was Deputy Secretary of Defense (1981-1982) and National Security Adviser (1987-1989). After his government stint, he headed the Sears/ Coldwell Banker scam.
Before that he was sent to Portugal as ambassador after the 1974 revolution there threatened to put Communists in complete control. He was a spook/operator and arranged to use German labor unions as a conduit to get money to the Socialist party that was beefed up to confront and defeat the Communists. It worked and Carlucci went on from that success to bigger and better things.
this Carlyle thing is basically a de-leveraging and REPO market phenomenon. everyone knows that cycle, but the bigger "haircuts" required now require them to put up more cash...so they "unwind" positions and pretty soon everyone has to puke up securities to raise cash. No one buys their positions outright, you finance them through the broker dealer REPO desk. and they are going to require more cash as the collateral as the value of the position they are financing declines.
I don't think its really much of a reflection of the underlying safety of those bonds...they just happen to be very liquid...sell what you can. SO lets see who else has to sell because of this!
In a column posted yesterday on Salon.com, Joe Conason writes: "Preferring to avoid public scrutiny for obvious reasons, executives at the Carlyle Group usually say nothing about their firm's connections with the Bush dynasty. But last April 23, Carlyle managing director David Rubenstein spoke quite frankly about the comfy sinecure he provided to George W. Bush more than a decade ago -- and how useless Bush turned out to be. Whether he knew it or not, Rubenstein's remarks to the Los Angeles County Employees Retirement Association were recorded."
Rubenstein said, "We put [Bush] on the board and [he] spent three years. Came to all the meetings. Told a lot of jokes. Not that many clean ones. And after a while I kind of said to him, after about three years - you know, I'm not sure this is really for you. Maybe you should do something else. Because I don't think you're adding that much value to the board. You don't know that much about the company.
Rubenstein continued: "He said, well I think I'm getting out of this business anyway. And I don't really like it that much. So I'm probably going to resign from the board. And I said, thanks - didn't think I'd ever see him again. His name is George W. Bush. He became President of the United States. So you know if you said to me, name 25 million people who would maybe be President of the United States, he wouldn't have been in that category. So you never know. Anyway, I haven't been invited to the White House for any things."
A copy of the tape was obtained by freelance reporter Suzan Mazur who recently posted a partial transcript on the Progressive Review website. She also supplied Democracy Now! with a copy of the tape.
If 2% of loans are defaulting. What value would you assign to the MBS in a falling market? and at what rate of return?
Or to put it another way, if people would be content to swallow a 2 percent loss, this whole meltdown could be avoided. How many volunteers?,/i>
Somebody who understand Fannie and Freddy bonds should weigh in here. As I understand it, an overall 2 percent default rate does NOT mean a 2 percent decline in the actual return of AAA rated GSE bonds, because these bonds have higher-quality mortgages behind them.
If these bonds are being marked down, then the market things there is an increased risk that the 2 percent default rate will rise, and even the top-rated GSE bonds won't be spared.
If that fear proves justified, we'll be in a Minsky moment for sure--Great Depression stuff.
And it's not the Great Depression that scares me. My dad lived through it, and it wasn't so bad, as he tells it, once you get used to chicken feet in your soup. What came after that was a lot more unsettling for him--being on the deck of a destroyer, watching for incoming kamikazes...
Burgundy - the market is forecasting a significant chance of a high enough default rate on Fannie and Freddie's guaranteed mortgages to bring them down and cause the securities to lose some value. With the scale of equity losses we face, it's a reasonable possibility. The GSE loans are better than average but are not necessarily gold-plated. In any case, when Phoenix and Las Vegas are looking at 50% losses even the best mortgage portfolios will lose money.
"All of the securities ... are considered to be implicitly guaranteed by the U.S. government."
There may well be an implicit guarantee that they will not fail (be defaulted upon), but there certainly is no guarantee that they will not fall in value.
The word 'guarantee" is being bandied lightly here.
There may well be an implicit guarantee that they will not fail (be defaulted upon), but there certainly is no guarantee that they will not fall in value.
The word 'guarantee" is being bandied lightly here.
Perhaps Uncle Sam will have his hands full with his explicit guarantees--FDIC and so forth.
"Tom Stone writes:
They are affiliated with the Carlyle Group...talk about pull.Both the Bush Family and the Blum's have stakes (Dianne Feinstein).There gonna be some woofing coming out of DC on this one."
Fair Economist - clearly the market is assigning a much bigger risk premium to FNM/FRE debt than historically. That much is tragically obvious. BUT, FNM/FRE have an implicit backing of the US Govt AND Carlyle is an "insider" with the Bush Admin and Paulson. By virtue of that alone, there should not have been a public spectacle over this situation.
Where is the implicit backing of the full faith and credit of the US Govt?
What I am suggesting here is that there is something much more insidious going on beneath the obvious, and that "something" has to do with the massive and unavoidable derivatives disaster that is brewing.
Otherwise, Rubenstein/Carlucci/et al could have just made a few phone calls and avoided the public spectacle and embarrassment of this margin call on FNM/FRE debt.
Carlyle's financing their variable-rate agency mortgage securities at terms from 20 to 90 days. Agency spreads to treasuries were at 250 basis points recently, highest since 1986. In other words, prices for this stuff (and this stuff is the "A" not the "Alt-A")has dropped relative to Treasuries in a mejor way.
This is different from Thornburg in that Thornburg originated non-agency Jumbo mortgage loans whereas Carlyle is a buyer of "pre-originated" agency loans. This is not different from Thornburg in that we have a buyer on margin (repo) getting hit with margin calls.
What I speculate:
Foreign investors including sovereigns getting out of US debt ex-Treasury and into US Equity, ex-US currency, and commodities (with all risks therein).
A big investment bank is in big trouble and is selling aforementioned US debt to stay alive. Maybe related to non-agency debt losses. When you are in big trouble you have to sell the good stuff because the bad stuff which is killing you is...well...bad stuff.
All money-center and investment banks are pulling back hard any short term credit lines. Not new in an of itself, see auction-rate securities, ABCP, etc. The margin calls aren't necessarily new to Carlyle Capital. If they just went from 2.1B in available margin facilities to zero, that's news.
Pulled-straight-from-my-ass-bet:
Big European money-center bank blows up by Labor Day in spite of big govvie intervention.
According to their (Carlyle Capital Corp) own financial documents, they reported a liquidity cushion of over $129 million as of February 27, 2008. Eight days later and they can't come up with $37 million to cover a margin call? WTF?
Carlyle had invested 3% of the face value. The rest was loans. It should be fairly obvious to you that the loans must have lost more than 3% of their value. Coughing up any more collateral for a margin call doesn't make any sense if you think the principal balance has dropped below 97% for the foreseeable future. Better to let the collateral be taken from you and lose the 3% instead.
Carlyle did the rational thing. Why is this a surprise to you?
first!!
32 TIMES!!!
lets see... 32 times leverage means that 3.125% losses = flat busted broke, even if we don't account for interest payments on the other 96.8255% of their investment.
Are these folks affiliated with the carlyle group,if so DiFi will be holding hearings SOON.
I really can't fathom how they could take such leverage.
The big lesson I learnt from Galbraith's 'The Great Crash' was about the the perils of leverage. "Leverage, it was later to develop, works both ways".
Agencies!!
AAA fo life!
Yes it is affiliated with the Carlyle group. The private equity arm actually lent this company $100mm a few months ago when it first got into some trouble.
schadenfreude in the morning. almost as good as coffee.
10th....I hope ?
You know, it occurs to me that this year might be a good opportunity to clarify that whole "implicitly guaranteed by the U.S. government" thing.
Tanta, are you another satisfied COX cable user? Arggghhhhh.
The Alt-A really are the feeblest of the lot.
However, every one that defaults clears out another delusion loan and gets another household back into a situation in which they can hopefully start saving and rebuilding their financial life. These Alt-A issues are going to be very ugly for investors, but the flip side of the coin is that the underlying cause will pay off for the rest of the economy.
Cox > AnTsTa
They are affiliated with the Carlyle Group...talk about pull.Both the Bush Family and the Blum's have stakes (Dianne Feinstein).There gonna be some woofing coming out of DC on this one.
Nova, Tanta can't answer!
Best Wishes.
The company leverages its $670 million equity 32 times...
Lightweights.
I hear leveraged now, all I think of is tire irons for some reason and getting bludgoned by them - possibly in the garage by Col. Mustard. That or unfortunate accidents involving cars and slipping jacks. I think I need professional help.
Then again, seeing what the professionals have done......
scav, I hate the little toy tire irons that put in cars these days almost as much as I hate donought spares.
You know, it occurs to me that this year might be a good opportunity to clarify that whole "implicitly guaranteed by the U.S. government" thing.
CNBC was talking about this earlier today... said the Treasury had to come out and officially deny the rumor the federal gov't will announce (soon - like today) that they are now guaranteeing the GSEs.
Here's what I understand from this--knowing I'll be corrected if I'm wrong.
Carlyle holds Fannie and Freddie MBS which, I'm guessing, are still paying the rate advertised. But because of fears (panic) in the marketplace, those mbs are worth less in that marketplace, and since they are collateral, Carlyle is getting a margin call: Put up more collateral, or else.
This doesn't mean the bonds are in default--it means that suspicious investors have driven down their market value. Same with Thornburg yesterday, no?
The mbs, and the mortgages underlying them, are still generating the return promised, but because of the perceived additional risk, the price on those mbs has gone down because buyers are demanding higher yields.
Is that what's going on?
Tanta is fine - her ISP is down.
I can't believe she is "fine" if she can't post her thoughts on this board.
oh the humanity!
The Chairman Emeritus of Carlyle Group is Frank C. Carlucci, whose claim to fame was Deputy Secretary of Defense (1981-1982) and National Security Adviser (1987-1989). After his government stint, he headed the Sears/ Coldwell Banker scam.
The current chairman of Carlyle Group is Lou Gerstner, the former Chairman of IBM.
Sir James Baker III, Chief of Staff (1981 -85), and Secretary of Treasury (1985-89) under Reagan; and Secretary of State (1989 - 1993) under George H. W. Bush Sr., is a Senior Advisor.
Sir George Herbert Walker Bush, Director of CIA (1976-77) under Ford; Vice-President (1981-89) under Reagan; and President (1989 - 93), acts as a broker and also senior advisor.
Other name brand politicos connected to Carlyle include, former British prime minister John Major (Chairman of Carlyle Europe), Dick Darman, the former Reagan-Bush director of the Office of Management and Budget, and Arthur Levitt, former chairman of the Securities and Exchange Commission and Carlyle Senior Advisor.
Now it's a serious problem
Cash is looking good these days.
So much for Cox...just found out that the owner of a very large used car auction nearby is...Cox.
I hope that Tanta's up soon. She's like my Dick Vitale for the financial markets.
CR, what are your current views on the state of things? Are we going to see the dam start to break, in terms of forcing more fire sales and having to visit the confessional, with all these forced fire sales? In other words, should we expect the slow incremental financial water torture with these bad debts and cascading defaults to continue, or should we expect a monsoon season as we reach critical mass and more institutions go belly-up?
32x.
Keep seeing Wile E. Coyote standing on a lever with a large boulder and heaving the boulder at the other end.
Cheers,
a hedge fund manager just on CNBC said they are now shorting the REITS. its about time.
All of the securities ... are considered to be implicitly guaranteed by the U.S. government.
I think I'm going to puke.
Misean - "Keep seeing Wile E. Coyote standing on a lever with a large boulder and heaving the boulder at the other end."
Isn't that usually shortly before the boulder ends up landing back on top of him in some spectacularly predictable and gruesome manner?
I can't be out of money, I still have leverage left.
The money quote:
All of the securities are rated Triple-A and are considered to be implicitly guaranteed by the U.S. government.
You know how good implicit guarantees are these days. "You can always refinance, real estate only goes up, the check is in the mail and I promise I won't..."
32x is more leverage than LTCM when things started to unravel there. Even "low risk" strategies can come unglued very quickly at that kind of leverage. The fixed income world is in a margin call meltdown at the moment. The spread between on the run and off the run treasuries is the widest I've ever seen it, which is usually a good proxy for the amount of forced liquidation in the market.
The market is also setting up for another negative payrolls report tomorrow, which makes sense as the economy is weak. I'd point out though that the the birth-death adjustment for Jan was -373, whereas Feb usually has an adjustment of about +100, so the actual print could well catch everyone leaning the wrong way (again).
The company leverages its $670 million equity...
What equity was that again?
Okay, foreclosures are at an all-time high, but all-time high means 2 percent according to a previous post. Even so, leveraging the mbs 32 times or whatever means that even small declines in the value of the mbs are disaster for the Carlyles and Thornburgs of the world. Right now, the value of these mbs is down, just because they are mbs, not because every last one of them is in default or even close to it.
But if these entities must try to sell their mbs in large quantities, that just depresses the market price further, triggering more margin calls and more forced sales...Am I getting it now?
So how do they neutralize the panic in the room? If they could do that, would the problem be, uh, contained?
Neal, that's intensely interesting.
How many currently in the halls of power should rightly now recuse themselves when policy and regs are to be discussed or acted upon?
Did Barney Frank take some kind of hit?
Misean:
Watched an old Looney Tunes w/one of my kids the other week. He's tuned in and asks periodically if we're looking at '30s or '70s...The Coyote moment over the cliff led to an interesting conversation.
I actively reassure them, but they need to understand that their world is in the process of changing dramatically.
And yeah, we laughed at Wile E.
said like Scottie to Captain Kirk
"captain...she's gonna blow"
Maybe they should consider Equity Units.
dryfly -
Good to hear from you - it's been awhile, I was beginning to worry.
As to the implicit guarantee, I think that's why the term 'implicit' is used, the gov't has never explicitly gone on record saying they'd prop up the GSEs if they were to otherwise fail, so don't hold your breath waiting for such an announcement, or even them hinting at it.
Still, I don't care what Hank says - they totally would.
mock,
"The dilithium crystals canna take the strain!"
Andrew,
Nothing good ever comes of it.
John Stark,
Basically, the way these things work is that they borrow short term, and then buy long term bonds, and earn the diff on the rates. What is happening is the short term stuff is not getting rolled. To pay it back they are sell the long term stuff.
I have a feeling that the big boys are going cheery picking, forcing liquidations of funds with decent quality LT bonds. Vultures.
Cheers,
All of the securities are rated Triple-A and are considered to be implicitly guaranteed by the U.S. government.
What's interesting is that a lot of that GSE crap is explicitly NOT guaranteed.
From Freddie Mac FAQ
7) Are FreddieNotes securities guaranteed by the federal government?
No. FreddieNotes securities are obligations of Freddie Mac only. FreddieNotes securities, including any interest on FreddieNotes securities, are not guaranteed by, and are not debts or obligations of, the United States or any agency or instrumentality of the United States other than Freddie Mac.
Oh yeah, gimme some of that.
From Wikipedia
Fannie Mae receives no direct government funding or backing. Fannie Mae securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Fannie Mae.
Looks like the market is trying to figure out how much Freddie and Fannie shares are really worth, post-nationalization.
Anonymous | 03.06.08 - 11:06 am was me.
Cheers,
Um, how does one get 32X leverage on anything? As above, it would seem the risk of loss would have to be near zero. Who would loan under those circumstances?
Could it be that these securities were all rated AAA, insured, whatever, so of course, what could possibly go wrong
quoting John Stark
(only 2% so far)"....But if these entities must try to sell their mbs in large quantities, that just depresses the market price further, triggering more margin calls and more forced sales...Am I getting it now?
So how do they neutralize the panic in the room? If they could do that, would the problem be, uh, contained?"
John Stark | 03.06.08 - 10:56 am | #
you are right on J S, and i GUESS that some form of government intervention, and or guarantees similar to but not the same as FDIC would halt the panic.
( yeah yeah yeah,i know moral hazard, but now we face a greater hazard and we can punish the lame later with tax policy)
But those in power now would have to eat their "I HATE GOVERNMENT" mantra first.
plus
they hire incompetent cronies to "run" things (yeah that's right i think paulson and his ilk are not nearly as smart as they are aggressive)
Could it be that these securities were all rated AAA, insured, whatever, so of course, what could possibly go wrong
If I understand this correctly, the securities haven't yet gone wrong. The market for them has, because the market fears that they COULD go wrong in the future as foreclosures increase.
"But if these entities must try to sell their mbs in large quantities, that just depresses the market price further, triggering more margin calls and more forced sales...Am I getting it now?"
So the NEW price for these AAA rated securities are no longer based on the model but what the MARKET will bring. Kinda like homeowners that sit and watch as their neighbors keep selling for lower and lower prices and they come to realize their
home is no longer worth what the appraiser mentioned back in 05,06,07 and soon to be 08. Fannie and Freddie are toast.
Um, how does one get 32X leverage on anything?
How leveraged are you on your house, ronin? Do you owe more than 32x your checking account balance?
This is deep down frightening if true:
"OMG, I used to work for John Stomber. He was quite a character, and really didn't get mortgages too well (like to look at them on a current yield basis and didn't understand prepayment risk and negative convexity). Funny he was running an MBS fund...."
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John Stark writes: Okay, foreclosures are at an all-time high, but all-time high means 2 percent according to a previous post.
C'mon, that means 98% of homeowners are not being foreclosed!
Shnaps,
Bad analogy. Down payment would be better...
Cheers,
This couldn't happen to to better group of Thieves.
My contemporaries recently received their deferred comp. statements and have been lamenting their paper losses.
I'm hearing lots of discussion about switching their holdings into fixed income options and/or lowering their contributions.
These people defer 15-20K annually directly into the market. It would seem that this would have significant impact, yet you haven't yet heard mention of it.
So many confounding factors, so little time.
energyecon
The dilithium crystals in this case may be the fed funds rate!..running out of fuel...or as the bankers call it ammunition.
Schnaps:
I don't think that that's the right question re mortgage vs checking balance...
I'd prefer looking at it as how much down you have or else how much other available assets.
Hell, with the internet banking and good recordkeeping, I have to transfer money just to buy gum.
Schnaps:
I don't think that that's the right question re mortgage vs checking balance...
I'd prefer looking at it as how much down you have or else how much other available assets.
Hell, with the internet banking and good recordkeeping, I have to transfer money just to buy gum.
The amazing thing is they got creamed on GSE AAA debt. That's a lot of GSE debt that will probably be picked by Bill Gross, et al., at fire sale prices.
And lets face it, the implicit guarantee is a lot more likely to become explicit than not.
How leveraged are you on your house, ronin? Do you owe more than 32x your checking account balance?
I don't believe they mean cash, but what % of the underlying value of the securities you can borrow against. I couldn't borrow 32X of the value of anything on margin.
Of course, borrowers being able to refinance 100% of their home value because, people don't default on mortgages, or equity always goes up, whatever, is ridiculous.
The point is how far the markets seem to have drifted away from reality or any concept of risk. I assume it's not their money they're lending.
Which is why I moved a bunch of money over to PIMCO; regardless of what you think about Gross, he has a clue of what to do going forward.
June is almost here. Let's go pick cherries.
Bob_in_MA writes:
The amazing thing is they got creamed on GSE AAA debt. That's a lot of GSE debt that will probably be picked by Bill Gross, et al., at fire sale prices.
And lets face it, the implicit guarantee is a lot more likely to become explicit than not.
That would be my guess. Does anyone know what the yield is on these bonds at current prices? Is it even six percent?
If the big smart money buys these things today at yields of six or less, doesn't that mean they think the risk of default on these bonds is low?
How big is the real problem? Is the perceived problem--the panic--making the real problem bigger?
Bob_in_MA,
Margin callers are going to get first dibs, I believe.
As I and others have been saying since yesterday, the solid hedgies are gonna get devoured by their creditors.
IMHO.
Cheers,
Which is why I moved a bunch of money over to PIMCO; regardless of what you think about Gross, he has a clue of what to do going forward.
Interesting idea. Maybe I should do some research.
AT the end of the day, the real question is, How many people will actually default on their mortgages--not miss a payment and get a notice, but actually default and leave the bank with a devalued home? Enough to leave AAA mbs with a negative rate of return?
Isn't that what people are trying to guess?
I'm shocked that you guys aren't all over this Carlyle thing. The degree of leverage shouldn't matter. It's tripla-A rated paper backed by FRE/FNM. Moreover, FRE/FNM are implicitly backed by the US Govt. Those guarantees should be rock solid and not require margin calls.
Something is very wrong here - most likely derivatives related - AND I'M SHOCKED THAT CR ISN'T MAKING MORE OF THIS
I'm waiting breathlessly for the 3:00 CNBC bailout rumor.
I don't believe they mean cash, but what % of the underlying value of the securities you can borrow against. I couldn't borrow 32X of the value of anything on margin.
Fidelity will give you 99X leverage on T-Bills
Something is very wrong here - most likely derivatives related - AND I'M SHOCKED THAT CR ISN'T MAKING MORE OF THIS
It ain't the collateral it's the leverage. And I'm betting the market doesn't like some of the chattering coming out of Congress about weakening the FRE/FNM by stuffing every mortgage under the sun into their portfolio
Besides, as a holder of in-the-bank-cash why should I be interested in a bunch of FRE/FNM paper with a just over 5% yield when muni's were recently trading in over 5%?
John Stark, you've gotten to the root of the vicious leverage cycle, and the $10 trillion question.
There is so much leverage that any hint of failure derails the whole train and there are massive margin calls.
People will big bucks come in to scoop up the assets at fire sale prices.
The banks that had been relying on this stuff have to take huge writedowns and adjust their reserves accordingly. This means taking out a lot of liquidity (on average there is like 10x leveraging in loans compared to assets).
So the real question is what happens next. The huge decrease in the ability to loan out money can be hugely deflationary and start a spiral where businesses/people can't loan money and therefore the underlying assets DO go bad because there are lots of bankruptcies and defaults. (Solvency crisis)
Or the whole thing might blow over, and it turned out to just be a liquidity crisis and the billionaires make billions more on their vulture swooping.
Most of the time it is the latter, but oh so occasionally it's the former. Considering the amount of debt in the system this time I think it'll be the former. However, I think that we are going to be faced with short term liquidity issues that are resolved and will have a huge upside shot...until the structural problems that set off the panic are fully realized and we have a huge leg down.
ref, John Stark, 3% equity is insane unless they have a direct connection to a CB. Obviouly there positions are not marked to market.
Think about T-bonds, the price fluctuates that much on some days.
A retail investor in the stock market has to meet margin calls all the time on good stocks, although the max leverage is .5 not 33.
"All of the securities ... are considered to be implicitly guaranteed by the U.S. government."
I thought the Carlyle group already had all the US goverment's money.
Looks like a great opportunity to those calling in the loans/taking over the collateral. This collateral easily qualifies for the taf window, so banks get this stuff maybe for less than it would auction for and then borrow against it at 3% while income is 6%... I'm long SKF, but the fed is helping out the banks in lots of ways...
Interesting to see results when auditors apply new fasb rules by end march...
If you're going to borrow short/lend long, best to have access to the fed window...
Stark,
If 2% of loans are defaulting. What value would you assign to the MBS in a falling market? and at what rate of return?
ARW writes:
Stark,
If 2% of loans are defaulting. What value would you assign to the MBS in a falling market? and at what rate of return?
That's what I'm asking, not telling. But I suspect that 2 percent of all loans defaulting does NOT mean that 2 percent of the loans behind these gse AAA bonds are defaulting, as of right now. The fear going forward is that defaults will lead to still further price declines and still further defaults, until even the "best" mbs comes up short for the holder. I guess that's why people are spending so much time speculating about the behavior of the underwater homeowner. If enough underwater guys keep paying, then the problem for the mbs holders may be manageable. If the mbs keep on paying the promised rate of return, the market will adjust to that and the margin calls on this stuff would stop. Obviously it's hard to envision that happening anytime soon in the current environment. But I'm beginning to understand why the bigshots keep trotting out their bailout scenarios. They are trying to stop the chain reaction. That's what they SHOULD be doing, right?
I'm not among those who thinks a systemic failure, the collapse of FNMA and FRE, etc., will be amusing.
said like Scottie to Captain Kirk
"captain...she's gonna blow"
They wish. Because those guys are the stars of the show, they all ways pullit out in the end. This is the story of Captain Craphat of the USS Abject Lesson and his all redshirt crew.
If 2% of loans are defaulting. What value would you assign to the MBS in a falling market? and at what rate of return?
Or to put it another way, if people would be content to swallow a 2 percent loss, this whole meltdown could be avoided. How many volunteers?
Frank C. Carlucci, whose claim to fame was Deputy Secretary of Defense (1981-1982) and National Security Adviser (1987-1989). After his government stint, he headed the Sears/ Coldwell Banker scam.
Before that he was sent to Portugal as ambassador after the 1974 revolution there threatened to put Communists in complete control. He was a spook/operator and arranged to use German labor unions as a conduit to get money to the Socialist party that was beefed up to confront and defeat the Communists. It worked and Carlucci went on from that success to bigger and better things.
Kicker, the leverage shouldn't matter if this paper is AAA-FNM/FRE/US Govt backed AND it's sponsored by Carlyle.
And even if there is a requirement for Carlyle to pony up more capital, and there shouldn't be, it should not be in the public spotlight.
This is a total disaster and you guys can't see that yet. You will understand in time
it's derivatives, baby - you ever trade OTC derivatives using ISDA documentation? I have...
If 2% of all loans in the 4th quarter are somewhere in the default pipeline, then what is that annually? Between 2 and 8 percent?????
this Carlyle thing is basically a de-leveraging and REPO market phenomenon. everyone knows that cycle, but the bigger "haircuts" required now require them to put up more cash...so they "unwind" positions and pretty soon everyone has to puke up securities to raise cash. No one buys their positions outright, you finance them through the broker dealer REPO desk. and they are going to require more cash as the collateral as the value of the position they are financing declines.
I don't think its really much of a reflection of the underlying safety of those bonds...they just happen to be very liquid...sell what you can. SO lets see who else has to sell because of this!
Ron Burgundy...what is San Diego Spanish for?
Whoops! sorry meant Germa
Hit the Bid - "whale's vagina"
In a column posted yesterday on Salon.com, Joe Conason writes: "Preferring to avoid public scrutiny for obvious reasons, executives at the Carlyle Group usually say nothing about their firm's connections with the Bush dynasty. But last April 23, Carlyle managing director David Rubenstein spoke quite frankly about the comfy sinecure he provided to George W. Bush more than a decade ago -- and how useless Bush turned out to be. Whether he knew it or not, Rubenstein's remarks to the Los Angeles County Employees Retirement Association were recorded."
Rubenstein said, "We put [Bush] on the board and [he] spent three years. Came to all the meetings. Told a lot of jokes. Not that many clean ones. And after a while I kind of said to him, after about three years - you know, I'm not sure this is really for you. Maybe you should do something else. Because I don't think you're adding that much value to the board. You don't know that much about the company.
Rubenstein continued: "He said, well I think I'm getting out of this business anyway. And I don't really like it that much. So I'm probably going to resign from the board. And I said, thanks - didn't think I'd ever see him again. His name is George W. Bush. He became President of the United States. So you know if you said to me, name 25 million people who would maybe be President of the United States, he wouldn't have been in that category. So you never know. Anyway, I haven't been invited to the White House for any things."
A copy of the tape was obtained by freelance reporter Suzan Mazur who recently posted a partial transcript on the Progressive Review website. She also supplied Democracy Now! with a copy of the tape.
And all they needed to come up with was $37M.
EXACTLY yow, and that's why there's more here than meets the eye.
Something is VERY VERY wrong
If 2% of loans are defaulting. What value would you assign to the MBS in a falling market? and at what rate of return?
Or to put it another way, if people would be content to swallow a 2 percent loss, this whole meltdown could be avoided. How many volunteers?,/i>
Somebody who understand Fannie and Freddy bonds should weigh in here. As I understand it, an overall 2 percent default rate does NOT mean a 2 percent decline in the actual return of AAA rated GSE bonds, because these bonds have higher-quality mortgages behind them.
If these bonds are being marked down, then the market things there is an increased risk that the 2 percent default rate will rise, and even the top-rated GSE bonds won't be spared.
If that fear proves justified, we'll be in a Minsky moment for sure--Great Depression stuff.
And it's not the Great Depression that scares me. My dad lived through it, and it wasn't so bad, as he tells it, once you get used to chicken feet in your soup. What came after that was a lot more unsettling for him--being on the deck of a destroyer, watching for incoming kamikazes...
I don't understand this, last time I checked S&P and Fitch said all these bonds were AAA like Ambac and MBIA, good as gold!!! (LOL)
Burgundy - the market is forecasting a significant chance of a high enough default rate on Fannie and Freddie's guaranteed mortgages to bring them down and cause the securities to lose some value. With the scale of equity losses we face, it's a reasonable possibility. The GSE loans are better than average but are not necessarily gold-plated. In any case, when Phoenix and Las Vegas are looking at 50% losses even the best mortgage portfolios will lose money.
"All of the securities ... are considered to be implicitly guaranteed by the U.S. government."
There may well be an implicit guarantee that they will not fail (be defaulted upon), but there certainly is no guarantee that they will not fall in value.
The word 'guarantee" is being bandied lightly here.
There may well be an implicit guarantee that they will not fail (be defaulted upon), but there certainly is no guarantee that they will not fall in value.
The word 'guarantee" is being bandied lightly here.
Perhaps Uncle Sam will have his hands full with his explicit guarantees--FDIC and so forth.
"Tom Stone writes:
They are affiliated with the Carlyle Group...talk about pull.Both the Bush Family and the Blum's have stakes (Dianne Feinstein).There gonna be some woofing coming out of DC on this one."
Can you say taxpayer bailouts at full speed??
Fair Economist - clearly the market is assigning a much bigger risk premium to FNM/FRE debt than historically. That much is tragically obvious. BUT, FNM/FRE have an implicit backing of the US Govt AND Carlyle is an "insider" with the Bush Admin and Paulson. By virtue of that alone, there should not have been a public spectacle over this situation.
Where is the implicit backing of the full faith and credit of the US Govt?
What I am suggesting here is that there is something much more insidious going on beneath the obvious, and that "something" has to do with the massive and unavoidable derivatives disaster that is brewing.
Otherwise, Rubenstein/Carlucci/et al could have just made a few phone calls and avoided the public spectacle and embarrassment of this margin call on FNM/FRE debt.
We are unlevering.
The containment is spreading.
Carlyle's financing their variable-rate agency mortgage securities at terms from 20 to 90 days. Agency spreads to treasuries were at 250 basis points recently, highest since 1986. In other words, prices for this stuff (and this stuff is the "A" not the "Alt-A")has dropped relative to Treasuries in a mejor way.
This is different from Thornburg in that Thornburg originated non-agency Jumbo mortgage loans whereas Carlyle is a buyer of "pre-originated" agency loans. This is not different from Thornburg in that we have a buyer on margin (repo) getting hit with margin calls.
What I speculate:
Foreign investors including sovereigns getting out of US debt ex-Treasury and into US Equity, ex-US currency, and commodities (with all risks therein).
A big investment bank is in big trouble and is selling aforementioned US debt to stay alive. Maybe related to non-agency debt losses. When you are in big trouble you have to sell the good stuff because the bad stuff which is killing you is...well...bad stuff.
All money-center and investment banks are pulling back hard any short term credit lines. Not new in an of itself, see auction-rate securities, ABCP, etc. The margin calls aren't necessarily new to Carlyle Capital. If they just went from 2.1B in available margin facilities to zero, that's news.
Pulled-straight-from-my-ass-bet:
Big European money-center bank blows up by Labor Day in spite of big govvie intervention.
According to their (Carlyle Capital Corp) own financial documents, they reported a liquidity cushion of over $129 million as of February 27, 2008. Eight days later and they can't come up with $37 million to cover a margin call? WTF?
Ron Burgundy,
I'm not sure why you think anything is wrong.
Carlyle had invested 3% of the face value. The rest was loans. It should be fairly obvious to you that the loans must have lost more than 3% of their value. Coughing up any more collateral for a margin call doesn't make any sense if you think the principal balance has dropped below 97% for the foreseeable future. Better to let the collateral be taken from you and lose the 3% instead.
Carlyle did the rational thing. Why is this a surprise to you?