S&P Downgrades 1,713 classes of U.S. RMBS
Submitted by
CalculatedRisk on Wed, 10/17/2007 - 9:07am (72 comments)
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Off topic (unless you live in Horsham or Minny)
GMAC Financial Services said on Wednesday it would cut about 3,000 jobs, or 25 percent of the work force at its Residential Capital LLC mortgage operation
CNNMoney.com: 404 Page Not Found
"Here comes the wave!"
2003 called...
Rating Services are lagging indicators. Not what I want to base my investments on.
they should have been honest when the problem showed up and made all of the downgrades at once. Problem scope would have been at least identified by now. This continual downgrading is the ratings agencies trying to save face.
This continual downgrading is the ratings agencies trying to save face.
And what an ugly mug it is.
--
"Hits just keep on coming."
And we are only in the second inning.
Jas
U.S. Treasury
David G. Nason, Assistant Secretary for Financial Institutions - Remarks on Financial Regulation Before the Exchequer Club 10/17/07
http://www.treas.gov/press/releases/hp618.htm
If I may take a line from Noble Prize winning economist George Akerlof's, seminal paper,which was quated in a research publication recently, in this field published in 1970, titled The Market forLemons: Quality Uncertainty and the Market Mechanism.
"Drawing on the used car market (now
fashionably referred to as the pre-owned market!), Akerlof
argued that asymmetric information between buyer and seller
over the quality of a product (particularly when the seller has
more information than the buyer) can lead to either severe
price markdowns or complete market failure. The idea,
simply put, is that the buyer may assume that the seller has
greater knowledge of the cars history and quality and that the
act of offering the car for sale may suggest that the car has a
much greater chance of being a lemon than the average car.
(The correctness of his analysis is supported by innovations
such as the emergence of warranties on pre-owned vehicles
backed by dealers in an attempt to correct this asymmetrical
information problem.)
In the context of structured credit, we have buyers who, as
Bernanke suggests, have used credit ratings as a substitute for
analysis of the complex structure of the securities. Think of
this credit rating as akin to the dealer warranty on a used car
and that the public has come to mistrust the warranty.
i am stunned and surprised.
No one could have predicted this.
These indices collapsed in February, and then again in July.
Hmmm...
um... i did... so did you... do we win a nobel prize in econ???
Joke of the Day...Thornburg Mortgage, Sta Fe, NM.
Stock quote - CNNMoney.com
Share price: $10
Quarterly Loss Reported: $8.83
Thornburg Mortgage (Charts) reported a quarterly loss of $1.09 billion, or $8.83 per share...
Business, financial, personal finance news - CNNMoney.com
Growth has decelerated over past 6 weeks: Fed's Beige Book
At this point, they might as well down grade everything Subprime and Alt-A, and then selectively upgrade what little that is worth owning.
Of course, that wouldn't help Citi and the super-sewer, or S&P's future business prospects...
MarketWatch.com
Could someone explain this to me:
"Standard & Poor's has completed its review of all S&P-rated
asset-backed commercial paper (ABCP) conduits with exposure to these
transactions and confirms that the ratings on those ABCP conduits are not
adversely affected by these rating actions"
and this
"Exposure to the affected
U.S. RMBS classes will not, in and of itself, result in any adverse rating
actions with regard to these SIV and SIV-lite structures"
This is not only not contained, this is not "local".
There's not a scintilla of doubt that those without political dogs in the fight will throw in the towel and walk away.
The markets will collapse. For us to think they might, possibly, maybe, risks of...and now fail to analyze the consequences of these collapses, so we are ahead of the problem when it happens, to be of service to ourselves and the economic community of which we are all a part, would be an avoidable tragedy.
Are there discussions on the "what's next?" theme anywhere known to you, on the internet?
Disclosure: I'm long gold and silver and large inventories in my factories as USD revaluation won't be down, and IMO, the action has already started, with the all time, and final, DJIA high made last week. (based on my own esoteric chart work).
Are there those speculating on what's next???
Just like the weather, no one could have predicted it. The Laws of Quantum Finance state that the Uncertaintity Principle gives a lower bound on the product between weather and mortgages. Simply stated, the more you know about one variable, the less you know about the other. Thus, if you knew in one moment exactly what one variable was, then you would know absolutely nothing about the other variable in the next moment.
So yeah, go ahead, try and build a model!
GaudiaRay:
I, too, thought it amusing at first that TMA reported a quarterly loss just somewhat shy of their market cap. But on closer inspection, they actually beat analyst estimates for earnings! And they were trading at a price/book of 0.6. So the halving of tangible book was pretty much already in the stock.
Oddly, TMA might be the best investment opportunity in this space. Not that that's saying very much.
Are you Jas Jain of Deflation fame?
Gaudia,
You may get tricked on the 31st if Ben cuts.
O/T but interesting if follow CISCO or Tech.
'Brazillian police and tax authorities have raided US computer giant Cisco Systems, following a two-year investigation into alleged tax avoidance on products shipped from offshore havens.
The authorities have seized a commercial jet, $10 million of merchandise, 18 vehicles and the equivalent of nearly $400,000 in Brazilian and US currency.
About 650 agents executed 93 search warrants and have arrested 40 people allegedly involved in a ring to avoid import, sales and corporate taxes, which could have generated $833 million in tax revenue for the Brazilian Government, police said.
A former top Cisco executive for Brazil is among those under investigation, according to the Federal Judge involved, although no details have been made public.
IMF says dollar 'overvalued'
FT.com / Global Economy - IMF says dollar ‘overvalued’
The Beige book sounds like a Fed that's giving itself the option to cut again at the end of the month. November fed funds now have a 60% chance of that happening, up from 40% this morning.
"You may get tricked on the 31st if Ben cuts."
He said he was long gold and silver if Ben cuts the dollar is toast.
OT:
I put up five charts of the CPI if anyone is interested.
5 Views of Inflation
oil touching $90 a barrel. This is going to be fun. If gas prices don't shoot up soon we'll know that the big international oil companies are chicken.
Ben will not cut this time as everything is contained and inflation is low. If Ben cuts, the dollar drops and long term interest increases. IF Ben stays, the dollar drops less or stays even but the market drops. Either way, it is going to be a Happy Halloween to the market.
By the way, I am long in resources, international stocks, and defense stocks.
Housing starts decline to 1993 level:
Oct. 17 (Bloomberg) -- The two-year U.S. housing recession deepened in September while inflation remained in check, buttressing Federal Reserve Chairman Ben S. Bernanke's focus on real estate as the major threat to growth.
Builders broke ground at an annual rate of 1.191 million homes, a greater-than-forecast 10.2 percent decline, the Commerce Department said in Washington today. Starts were the lowest in 14 years. Consumer prices, excluding food and energy, rose 0.2 percent for a fourth month, the Labor Department said in a separate report. Treasury securities rose for a third day.
When rising gasoline prices kick in say good bye to consumer spending and the economy.
--
October 17, 2007
Paul McCulley of PIMCO on CNBC: "Equity Market Is a Call Option On No Recession"
Well, the recession is here already so no good reason to buy a call option on no recession.
Jas
CR, in case you haven't seen this yet..
From CNN/Money: "Housing depression raises recession risk - Builders slam on brakes, taking starts to 14-year low and permits to levels not seen since 1995; both readings fall short of forecasts."
Housing starts, permits plunge more than forecasts - Oct. 17, 2007
When inflation goes up to 4-5% or more what will Ben do? Throw more money on the fire or raise interest rates and crash everything?
James - I think we are already at 5-6%.
OT but interesting:
Troubled home builder Levitt and Sons has halted construction at all of its home projects across the Southeast, including one retirement community in Murrells Inlet, a spokesman for its parent company said..
TheSunNews.com - Myrtle Beach News | The Sun News
Pimco Paul said that..
ouch...
we all know about options...
most expire worthless...
oh forget that, that's the Puts'
calls are always in the money
CFC now 17.21. New tag: BoA Loves Country!
"He said he was long gold and silver if Ben cuts the dollar is toast."
Agreed, but Gaudia thinks the DOW will be in free fall in a couple of weeks. This could spook Ben. (pardon the Halloween pun) If he lowers, the shorts could get bombed.
"When rising gasoline prices kick in say good bye to consumer spending and the economy."
Actually, I see this as another minus for the housing market. Except for recreational housing, a major influence on price is the availability of work nearby. Where the price of gas increases, "nearby" shrinks. "Cheap" housing on the periphery of the metro area, 40-50 miles out, becomes just a little more unattractive to people with good jobs in the metro core.
All of these "shocked and surprised" people just prove that there's still plenty of time to make money -- lot's of money -- shorting the markets.
GaudiaRay - "Are there discussions on the "what's next?" theme anywhere known to you, on the internet?"
Sure. It's the "Planning" forum on the PeakOil.com website.
BTW, how are your charts looking as of today? How many more day's now until 'it' happens?
So where are all the, "things are looking up people"?...and the "don't over react" critics?..Looks pretty frigging gloomy to me.
So let me see if I have this right. When S&P down grades all these securities to BBB and below, doesn't that force many/most of those holding them to sell. Because most pension funds and insurance companies can not by law hold risky securities in their semi-liquid asset portfolios?
So selling into an extremely unmotivated market means what? Is there any real market when this many are forced into selling? Anyone with half a brain would only buy at pennies on the dollar because of the risk and the opportunity.. Then doesn't this set a lower market value for all the other lower class MBSs out there?
Then won't this have a ripple down effect or worse a spiraling out of control whirlwind effect in all the credit markets.. Pretty soon, there will be no faith in any value of any security as the manipulators have destroyed any and all integrity, semblance of transparity and faith in the values of anything....
What is any security or stock worth when those in control play with hidden numbers and agendas and are able to hide losses off the public records?
Am I stretching this out to far?
Brian23: I would guess that the degree of distrust is related to how desperate the buyer thinks the seller is. In short, today, when most buyers know that RE sellers are pretty desperate, the degree of distrust would be extremely high. And that in itself would reduce the number of transactions.
wow another day, another downgrade.
do you think that S&P will be one of the primary raters of the new Super-SIV?
I just can't wait to hear those conference calls...
"Uh, everything is AAA!"
"hooray"
1 year later
"uh, we have an unforeseeable downgrade of everything to BBB-"
"hooray"
Bob Dobbs: Yeah, a real spike in gas prices would finish real estate in "far ex-urbia" for the near future at least.
James - I agree. But its almost going into a chicken or the egg thing here. Did the distrust and lack of buying come from faulty loans or did the faulty lending cause distrust. HMMMMMM.
James - I think we are already at 5-6%.
Maybe. I use the tables put out by the government where the figures are calculated in a uniform manner. It puts the yearly inflation as of this September at 2.76%. It may rise rapidly soon.
Stagflationary Mark - thx for the charts
Am I stretching this out to far?
Kokopelli
yes
a real spike in gas prices would finish real estate in "far ex-urbia" for the near future at least.
Common myth. The exurbs and cenurbs are about equally exposed to energy intensity and cost of energy. The only exception being NYC which claims to use 2/3rds less per capita than anyplace else in the entire US including nearby BosWash cities and west coast equivalents like SF. For the rest of us gas/oil/natgas/electricity the burden is fairly level.
The believers in the value of US equities are experiencing psychic pain.
Look at the daily DJIA chart over the last 5 days. See the right shoulder? See the proportionate daily march down, day after day? See the violation of the bottom of the uptrend since the reversal of Aug 17?
The top IMO is in...5 days ago.
Are you not amazed the equity market has not responded to the devastating news being posted here in CR?
Is this not Kubler-Ross first stage, "denial"?
You know what follows. The next stage is anger; and when that happens, the beast will throw off its calm appearance.
IMO, the right shoulder, and the topping trade just occurring is "the end". It's MHO only.
How can companies like Thornburg face today, suspecting that next quarter will be as bad or worse? Their gorgeous offices in Downtown Santa Fe, and all the smugness that accompanied management of that money, are now their albatrosses, and they're amazed as more are being hung around their necks as they stood there "confused".
I think KR should have listed "confusion" as the first phase, followed by "denial", but that's what was happening.
Now, everyone knows the drill. No more containment BS. Yes, the UST and FR are taking some actions, but they've done nothing to alert J6P. That I think is criminal. Their buddies at GS and the entire Street know what's what; but the penny ante pensioners and 401K depositors? Mushrooms.
You can all look and see (imagine) a dive off of the 14300 top in the DJIA and watch it swan dive right through the 12500 low. The current pattern is confirming and the outcome I think will be graded a quintuple 10.
BigCharts - QuickCharts
Armageddon has just been spotted coming round the corner.
Bloomberg.com
A possible 1 million foreclosures this year!
Internal Server Error
"Current trends suggest there will be just over one million foreclosure starts this year, of which 620,000 are subprime," Mr Paulson said.
Internal Server Error
R Cote say "common myth" that gas prices would hit far ex-urbia hard. I was not referring to gas for heating, but for driving cars to work. It would sure cost more to drive into central NYC from N. New Jersey if gas cost $5 a gallon than if it cost $2.50.
--
TheSunNews.com - Myrtle Beach News | The Sun News
Posted on Tue, Oct. 16, 2007
Financial woes for builder, Inlet construction halted
By Lisa Fleisher and Jessica Foster - The Sun News
Troubled home builder Levitt and Sons has halted construction at all of its home projects across the Southeast, including one retirement community in Murrells Inlet, a spokesman for its parent company said.
Fort Lauderdale, Fla.-based Levitt and Sons, the company that built the famed Levittown project on Long Island 60 years ago, ordered builders to stop working Thursday - the same day the parent company, the Levitt Corp., announced it would write off huge losses from its home-building subsidiary.
The glitch leaves home buyers in Seasons, Levitt's planned 460-house community for people ages 55 and older in Murrells Inlet, in limbo.
...
-x-x-x-x-
BTW, some 600K of permitted homes are on hold and that should take care of all of CR's excess building. The Bottom in homebuilding is almost here. That is, if anyone here believes in 1.7M annual demand.
Jas
First time seeing this - softness in commercial and huge loan charge offs on a % basis.
Comerica set aside $45 million for loan losses, up from $15 million a year earlier, and net loan charge-offs rose to $40 million from $3 million. Nonperforming assets rose 48 percent to $291 million
The increases reflected what Chief Executive Ralph Babb called "increased stress on our commercial real estate portfolios, particularly in Michigan and California
Comerica Profit Down 10 Pct, Hurt by Soured Loans
| Reuters
"Common myth. The exurbs and cenurbs are about equally exposed to energy intensity and cost of energy"
Robert: from where do you get this information. I've heard you say this before, but it seems unfathomable.
The exurbs in general have
1. bigger homes (thus bigger heating/cooling costs)
2. bigger lawns (more to mow/landscape)
3. public transport isn't an option
4. walking isn't an option. (there aren't even sidewalks half the time)
I use considerably less energy now than I did when I lived in an exurb. And I used the least amount of energy when I lived in San Francisco.
I'm just wondering where this data comes from...
or was your point more that rising energy costs will hurt exurbia and innercities equally... as opposed to both groups use similar amounts of energy?
"Armageddon has just been spotted coming round the corner."
(link to article about Morgan Stanley selling its stake in NY Times, and newspaper stocks in general in trouble cause of declining ad revenue.)
The base problem isn't declining ad revenue, it's declining readership because of declining quality. All technology aside, newspapers have become less and less worth reading over the past 30 years as corporations bought up all the independents and staffs were slashed to maintain overly high profit margins.
Corporations liked local newspapers because they had local advertising monopolies (or dominance) and could be coaxed into high rates of return (15% plus).
Now that there's local media competition, newspapers aren't worth the premium that their corporate masters paid for them. That's the only "crisis." Put them in local hands, staff up and accept a lower profit margin, and a lot of dailies would flower. They'd have to innovate, but it could be done.
As it is now, your average corporate-owned daily runs AP stories, meeting coverage, and crime. Oh boy.
Great find James. NYT is going to 10.
GaudiaRay - "Are you not amazed the equity market has not responded to the devastating news being posted here in CR?"
Of course I'm amazed. But I'm amazed the August takedown wasn't a KO. IMO there was no justification for this second high. The writing was on the wall as plain as day to me -- I didn't see how the rest of the people in the market don't see it.
And yes Robert, I was talking gasoline costs, not other energy costs, in terms of exurbia. I don't say that an extra dollar a gallon will make current exurbanites scream and flee. But it would be another black mark against the exurbs for city dwellers who might otherwise consider moving there. A contributing factor.
As far as other extra energy costs are concerned, that's going to vary with the size of house and specific area. For example, somebody who moves from the inurbs of the SF Bay to the exurbs -- Tracy, Livermore, Modesto, Los Banos, etc. -- might well pay thousands more a year for air conditioning. Home AC is pretty much a must in those areas, but much less prevalent in the Bay Area.
New charts on Markit. Another scale-change for HE-BBB-07-2 ;')
What happens when S&P goes BK?
With the dramatic drop in biz, S&P has little to no new biz. So, they should be firing a large portion of their rater-employees, right?
With the drop in raters, there are few people to review and recategorize the bonds they hold themselves out as being not only capable to rate, but currently actively reviewing (as in "all" the bonds).
I can't imagine the delay in reclassification to be from too few competent S&P employees in the first place. Nah, notta chance. NOT.
Seriously, the ratings services are being squeezed. They've lost most of their biz, but they're yet holding themselves out as capable of tracking and evaluating the mass of bonds on which they earned their tens or hundreds of millions.
Payback time is sour because J6P is getting screwed again by their tardiness this time and by their long-standing incompetence the last go around.
BTW, I don't think passage of time does a thing to improve the credibility of their chosen ratings "deciders".
Greenspan at it again...
Greenspan sees no danger in weakening U.S. dollar
Yahoo! 404 - Page Not Found
kokopelli (and probably others) made the point that ratings downgrades will force some funds to sell, in terms of their rules. Does anyone have any data on how big this effect is?
Separate question (as far as I know): A lot of us were predicting dire consequences of redemption requests in August. To what extend did they happen?
A little OT, but has anyone else wondered about whether Cerberus might go paws up, as it were? They're up to their ears in mortgage companies and must be heavily leveraged. As well as that gem, Chrysler. Obviously they got some things very wrong, and may not be masters of the universe any more.
That's kewl, mbartv. When Cereberus goes paws up, the gates of Hell will be opened wide!
We should assume currently apace. Do we need waders or fire-safety equipment?
Isn't it time to start on ArkII?
Some of this stuff is only a few (3) months old. That is almost proactive for a rating agency.
These disclosures are fun.
Disclosure: I am short on cash and long on prayer.
GaudiaRay said: "Are you not amazed the equity market has not responded to the devastating news being posted here in CR?"
Well, the news is devastating but the facts aren't.
In no particular order: The recession probability based on the Wright Model "B" yield-curve is down to 18.6% and still falling.
The earnings yield on the SP500 Index (as of today's close) is 96 basis-points above the 10-year Treasury Index. What this means is that investors are skeptical of stocks, insisting on a risk premium above bonds, not exactly a sign of bullish speculation.
Even with today's jump in CPI-U inflation it's still below it's long-term median. CPI-U inflation would have to rise to over 4.25% (and remain there persistently) before it would cause any serious problems for the stock market or the economy.
That's just off the top of my head.
Sebastia
Seb, in spite of my BA in Econ PBK, etc, I just don't get how people who are smart can be so dependent on stat's.
Liars figure, y'a know the story.
While what you say makes sense, the fact that this dolt sittin' out here has been "lucky" in calling what could be and is now happening in the DJIA means sumpthin.
Here's what it means. The stats don't mean anything special. They're all factored into the real price. Price movement reflects the way humans are thinking, and their black box machines too.
Now if you said you saw price movement ratios and rates of change, I'd be riveted. But you're talking the way my billionaire buddy does. He's up to his eyeballs in Muni's, and he talks interest rate stuff. He's blind. He won't look at anything else. IMO, you're doing the same thing. Your doing no more than the rating services. You're using very intriguing tools; but the simple tool is measuring the pulse of the markets. It tells me if it's alive or dead and if its anxious or not. The rest, what it's seeing, doesn't amount to a hill of beans; it can be Brittany exiting a car or a nuke war. The market body responds the same way. Pulse up, anxious.
While you probably make a living from those numbers, if you can't swear to me the real probability of an outcome based on any single number sequence, your observations are not trustworthy enough to gamble store of value.
There are always opportunities. The question to me is whether I see them, understand them to my own intellectual core, have proven their outcomes before making the move, and then, and only then, I take the risk.
I'm not a salaryman. I gotta make the right decision. When it comes, I make it.
But you're offering me "tips", and what I know is to never take a tip. If it's not my own work, I won't touch it. Same for every eyeball reading this. It's your work, not mine, that you must depend on. If you don't know, don't touch it.