Quick question, Your 100% Guaranteedness. Do central banks have a set of rules to follow re. these cash injections, i.e. how much, how long for and under what terms? Or are they just making it up as they go along?

It's the last one isn't it?

All these prices you see around are "mark to model" and despite the recent huge drops, still wildly optimistic.

In reality there is no market, no price, hence no value.

Please review:

http://www.bloomberg.com/apps/news?pid=new...id=acYywk3n_iL8

Banks' writedowns include assets that they classify as level 3, an accounting category which indicates the holdings are so illiquid that they can only be priced using the firm's own valuation models.

Yes, and the derivative beast rules them all: inflate or die.

This is 100% correct, guaranted.

Citadel will buy E-Trade's $3 billion of asset-backed securities for about $800 million


http://www.marketwatch.com/news/story/e-tr...B8DAF2092CB2%7D

The important bit is the second part of the deal. E-trade had to commit to paying 12.5% yearly interest to Citadel for ten years on $1.75 billion.

Ouch! ..But then again, who knows what interest rates may be by 2011..? anyones guess really...

As Bandwagon says, you need to be more clear which type of credit derivatives you are talking about, as some are highly liquid and are market to market.

Well, Citi bank were willing to take the Abu Dhabi $7.5 billion for an eye watering 11% fixed coupon which is well above the average yield for US junk bonds. Makes you wonder about these peoples long term expectations about the rate of inflation.

Exponentially accelerating desperation for cash, despite unprecedented central bank liquidity injections.

This is the mark of the derivative beast.

http://www.bloomberg.com/apps/news?pid=206...&refer=home
One-Month Libor Soars as Banks Seek Year-End Funding

By Gavin Finch

Nov. 29 (Bloomberg) -- The cost of borrowing in euros for a month rose by a record and loans in dollars climbed the most in more than a decade as banks sought funds to cover their commitments through to the start of 2008 amid a credit squeeze.

The London interbank offered rate that banks charge each other for euro loans due after the end of the year jumped 64 basis points to 4.81 percent, the highest since May 2001, the British Bankers' Association said. The rate for dollars jumped 40 basis points to 5.23 percent, the highest since Sept. 18, when the Federal Reserve cut the target rate for overnight loans for the first time in 4 1/2 years.

Soaring bank lending rates reflect growing concern about the strength of financial institutions after more than $60 billion of writedowns this year linked to U.S. subprime-mortgage defaults. Losses may rise to $300 billion, according to the Organization for Economic Cooperation and Development.

Of course King has to state the problem is from the US. No mention of the UK sunami which is about to be unleashed on the world when the UK subprime bubble bursts next year. Oh, and another thing, the subprime in the US has spread to Alt A and prime as proven by Fanny May and Freddie Mac running into trouble.

King also predicted that a period of uncertainty lay ahead for the British economy given wider global problems stemming from the US subprime housing crisis.

http://afp.google.com/article/ALeqM5gw9oRr...eKWtDWARSzggEEQ

Let's see now. 25B to NR and another 10B; that's 35B. That is a third of the cost of running the whole of the NHS!

The large majority of NHS services are provided without a further charge to the patient. The costs of running the NHS (est. £104 billion in 2007-8 [1]) are met directly from general taxation.

http://en.wikipedia.org/wiki/National_Health_Service

The UK bubble bursting will be the cherry on the world wide banking catastrophe. The boys and girls in the city should not only be worried about their bonuses and jobs, but also for their security.

This is a good explanation of the state of affairs.

They hope to save the system but as the speaker concluded, hope is a crappy hedge.

http://www.sec.gov/news/speech/2007/spch112807ers.htm
Speech by SEC Staff:
Remarks Before the AICPA/FMD National Conference on the Securities Industry
by Erik R. Sirri
Director, Division of Trading and Markets
U.S. Securities and Exchange Commission
New York, N.Y.
November 28, 2007

...

An ABS CDO is effectively a re-securitization of an already securitized products. In a first securitization, a variety of loan assets — in recent years frequently subprime mortgages — are assembled into a pool. Then a variety of liabilities are created with differing risk-return profiles intended to appeal to different types of investors.

...

An interesting feature of ABS CDOs is that because they layer diversification on top of diversification, the sizes of most super senior tranches are quite large. In many instances, over 90 percent of the capital structure may be rated AAA. This means that for a $1 billion deal — a typical size — $900mm of the resulting securities could be AAA rated. In retrospect, the super senior ABS CDO was nearly a perfect structure to lull even sophisticated traders and risk managers into a state approaching complacency — and blind them at least temporarily to fundamental principles of risk management that would not have been new to them and which they could surely recite from memory.

The AAA ratings in particular made market participants comfortable holding concentrations that would have been unthinkable otherwise. The recent third quarter 10-Qs filed by a variety of institutions are eye-opening, in the sense that the size of the super senior ABS CDO books were often measured in the tens of billions. While these balance sheet numbers are eye-popping, the degree to which the positions represented concentrations of exposure to certain risk factors was probably even greater.

Returns on super senior tranches were fairly low, because the expected loss was low. Until all of the tranches beneath the super senior get wiped out completely, the super senior noteholder receives principal and interest payments. In short, the investment is "money good". In a mark-to-market world, however, lack of principal loss is not a defensible basis for valuing the instrument at par. As defaults mount, the probability of taking losses — i.e., of the investment not being money good — increases. Much more importantly, however, from a fair value perspective the price at which the investor can sell the position will decline. As more defaults occur, the rate of that price decline increases. Negative convexity begins to exert itself.

In addition, being at the top of the capital structure in a securitization means being short correlation. That is, as defaults become more correlated, the probability of default losses eating through the subordinate tranches increases. What happens when default losses increase not only in frequency and severity, but also in increasingly correlated fashion. The negative convexity compounds. Small increases in defaults lead to ever larger declines in valuation. To the degree that large balance sheet positions embed concentrated exposures to correlation, default probabilities, and a particularly difficult to capture interaction term between these two risk factors, the economic exposure rapidly becomes enormous.
...

If a firm were to have a concentrated position in a risk that suddenly became illiquid, that would clearly be bad. However, much worse would be a concentrated position with negative convexity that suddenly became illiquid. That trifecta is a risk manager's nightmare, as there is little to do once the markets start moving adversely and liquidity goes away, other than to hope. And as one head trader wisely said recently, "Hope is a crappy hedge." Combine this unhappy situation with risk that has begun to morph into less obvious forms and one starts to understand what occurred with super senior ABS CDO over the past nine months.

(huggy bear accent) say what ??

We've got a load of apples that we want to flog, but some of them are bruised.
We'll hide the bruised ones in the middle of the barrel, in case someone checks the apples.
Then we'll get loads of barrells in a shipment, and put only good apples in the barrells near the top. If anyone checks, they only see good apples.
Bruised apples go rotten quickly. It only takes one rotten apple to spoil a barrel. All the barrels in the middle are going bad, and investors can smell the rot.
And we've still got a load of shipments of these apples to get shut of, but now we can't cos weve been rumbled.
We're desperately trying to avoid turning the whole lot into cheap cider that only street alcoholics will buy.


House prices are pushed up by reckless loans (the bruised apples).
When those reckless loans default (the bruised apples go bad) it pulls the price of all houses down (the rotten apple spoils the barrell).

(said in best jaja binks accent) is a UK HPI gonna die?

riiiiiiight....


i'm gonna get stoned man

And where are we going to get the money to buy more apples with now? How are we going to continue in the apple business?

This is the mark of the derivative beast.

http://www.thebusiness.co.uk/news-and-********...-goes-mad.thtml
ECB rate cut pleas grow as Euribor goes mad
Thursday, 29th November 2007

A clutch of Europe's top economists have called on the European Central Bank to cut interest rates at its policy meeting next week, warning of severe downturn unless confidence is restored quickly to the banking system.

The concerns came as one-month Euribor spiked violently by 60 basis points to 4.87pc today, the sharpest move ever recorded. Italy's financial daily Il Sole splashed on its website that the Euribor had "gone mad".

The three-month Euribor rate used to price floating-rate mortgages in the Spain, Italy, Ireland, and other parts of the euro-zone rose to 4.77pc, near its August high and far above the ECB's 4pc lending rate.

Thomas Mayer, Europe economist for Deutsche Bank, said the authorities should take pre-emptive action to unfreeze the debt markets and reduce the danger that events could spiral out of control.

"If they don't do anything, this could go beyond just a normal recession. With this credit crisis it could turn into a very uncomfortable situation, with a real economy-wide crunch that we cannot stop," he said.

"We're still seeing considerable stress in the European banking system, especially for smaller banks that can't get credit. I am afraid we could have another Northern Rock case," he said.

http://www.thomsonfxhub.com/fxhub/news-det...10&pageId=0



http://www.ft.com/cms/s/8447b5b4-9dd0-11dc...om%2Fworld%2Fuk

Why do so many economists think that the solution to the credit crunch is to lower interest rates to encourage more borrowing.

Is it the solution?

Because it's worked for decades.

No. The energy/reward point has been breached and sentiment is turning.

This means this paper has been marked to market with a circa 70% discount.

Most of this stuff seems to relate to mortgage paper written by E*Trade to their own brokerage customers, many of whom had significant assets so these loans should have been 'good' credit risks.

No wonder firms like Citibank are desperate for their credit derivatives and ABS not to be brought into the light of day.

They must be sitting on enormous losses.

http://www.bloomberg.com/apps/news?pid=206...&refer=home


No bids means that no one is even willing to buy them for 1 cent per piece.

Same article:

A credit default swap is a credit derivative, in fact it's the fundamental building block for far more sophisticated credit derivatives.
Together these provide a way for investment banks and hedge funds to trade and manage credit risk.

ABX is an index of credit default swaps, ie it's a credit derivatives index. Very much like CDX, LCDX and the others, although these tend to track corporate risk.
If you do some research on the MarkIt site you will find more details of these indices.

I haven't mentioned the more sophisticated variants of CDS because people posting on this thread don't understand the basics, ie the difference between a CDS (which is a credit derivative) and a CDO (which isn't)

I've spent some time explaining why most of cgnao's posts on this thread are total nonsense.
I you continue to believe in that nonsense when I've explained why it's nonsense, that's entirely up to you. You make that choice.

MUHAHAHAHAHAHAHAHHAHAHAHAHAHAH

MUHAHAHAHHAHAHAHAHHAHAHAHHAHAHAHA

MUHAHAHAHAHAHHAHAHAHAHHAHAHAHHAHAHA

You can't sell them can you.

Would you be able to provide an idiots guide to MBS/CDO/CDS etc etc for errr idiots like me?

Thanks

Thank god there's someone on this thread with his feet touching the ground.

This charlatan will be exposed. Give it time

Meanwhile, teachers in Florida don't get paid anymore. Possibly.

You're not related to David Koresh are you?

People like you remind me David Koresh. I can just imagine you and your brainwashed disciples holed up somewhere with your hoard of tinned food.

The part I missed BandWagon was where you tell me how you objectively value a CDO, not a CDS?

If you can tell me that then I appologise and retract my statement of you being wrong.

Please review

http://www.m-cam.com/display_news?id=240

The next shoe to fall is consumer credit

....

CDO -- Collateral Debt Obligation -- Consumer Credit

Consumer credit pooled debt investment instruments (a form of CDO) are originated and rated based on underlying historical credit behavior and a complex series of predictive models for repayment dynamics. CDOs have "strips" which are a combination of similar profile tranches within a larger investment product. Based on the market's appetite for risk, investment performance guarantees (or credit enhancements) are packaged with the credits. These credit guarantees are issued by insurance companies, reinsurance companies, and other specialty finance companies -- many operating with extra-territorial jurisdiction rendering fiscal oversight more complicated.

These strips come in several categories:

* Investment grade
* Almost investment grade
* Junk and
* Why did we give them a credit card?

All of these grades are priced on historical default rates. The credit insurance companies (AIG, MBIA, Ambac, Financial Security Assurance, Channel Re, XL, Zurich Re and other reinsurers) have, from time to time, issued credit guarantees to the securities. Banks sell debt in the form of a Collateralized Debt Obligation (CDO).

Minor shifts in default actuarial activity (+/- 25 basis points) from normative behavior is absorbed within pricing of these financial guaranty contracts. However fundamental shifts (hundreds or thousands of basis points in one quarter) are not built into the model and result in credit enhancement insolvency on a major scale. When the insurer cannot pay based on its own liquidity impairment, the bank is left with catastrophic (an insurance term for excessive loss outside of expected) exposure.

If in a single quarter we have an increased foreclosure rate of 400% (or 4000 basis points) the insurance contracts simply cannot handle that kind of drastic shift as evidenced by the write offs in the third quarter. When we will follow the drastic third quarter with a loss of 500% in the fourth quarter, the trajectory becomes clear.

Neither the banking nor the insurance industry has a historical experience in dealing with this type of challenge and neither has the liquidity linked to these contracts to support system wide collapse.

...

Under a consumer credit melt-down, Capital One and/or Wachovia are likely going to put a massive foreclosure liability to an insurance company and the insurance company will not have liquidity to cover the exposure.

This is the problem we got into when we issued credit card debt on top of secondary mortgages -- (inflated the value of the home) and gave out credit based on faux equity that no one really had.

The reason why this problem is the second shoe to fall (subprime mortgage collapse was the first shoe) is because consumer credit has a different foreclosure frequency than traditional mortgage credit.

December is when the maturity of the giant buyout of the economy moves.

By December, you'll have a second round of charge offs based on consumer credit. The real big problem -- when you foreclose on consumer credit, people stop buying things. When people stop buying things, we don't have a tertiary way to pump liquidity into the market. People won't have extra cash from their paychecks and won't have capacity on their cards.

...

Therefore there will be depressed consumer spending this Christmas but what is spent, people will overcharge. This will take what used to be good investments in CDOs and will change the dynamic. If you used to be a person who paid their bills on time, you will now only pay half. If the credit companies are counting on the top two tranches to pay their card off in full and they don't, they won't have liquidity to cover the rest. The banks cannot afford the top tranch paying half.

The estimates are out. There will be at least $400B in the first round of charge offs in the CDO market.

We're not going to be done with the subprime mortgage when the CDOs fall. Therefore we will have an insolvency problem with the banks that are mentioned above.

This is the kiss of death of a privately held Federal Reserve. For the Federal Reserve to function, its stakeholder banks (like JP Morgan Chase) must remain viable and liquid. When one of them, or any major bank in the U.S. (like Bank of America, Citibank, Wells Fargo, Bank of New York, Washington Mutual, etc.) is impaired or ceases to exist, the architecture of the Fed's capacity to respond to systemic challenges is unsustainable.

If the banks have no money, they can't pump liquidity into the market. Taking half of a trillion dollars out of market in a single distressed write down becomes problematic. The US banking system does not have the liquidity to take the hit.

...

When February comes, the Chinese are going to do something as they will have to decide what the exposure is going to be with the treasury. As I see it they have to just dump the treasury. They only keep it because they can use it -- they have 43% direct/indirect of US treasuries so they'll dump them on the market.

...

March is when we realize that the dollar doesn't come back.

This is not as important as knowing the finer details of how financial instruments are constructed by investment banks etc.

The sad truth is that all you need to know is that their is a shed load of financial paper in a variety of configurations and flavours held within the western banking system which is not worth anything like the price printed on it. As a result a lot of people are going to lose their jobs and their homes. Still as long as the big financial institutions in the City of London and Wall Street survive everything will be cool.

Many won't survive. This is 100% correct, guaranteed.

Have you got enough time? Methinks not.

MUHAHAHAHAHAHAHHAHAHAHAHAHHAHAAH

If CG can repeat himself, so can I (in support of him):

"If one big brokerage goes there is a very significant risk that they all will."

http://www.tickerforum.org/cgi-ticker/akcs...669&page=15

Synthetic or cash?

Panic.

The worldwide hyperinflationary monetary holocaust gathers speed.

This is 100% correct, guaranteed.

http://www.mortgageintroducer.com/mortgage...gency_rate_cut_
MPC: Emergency rate cut 'essential'

30 November, 2007

One of the nine members of the Bank of England's Monetary Policy Committee (MPC) has called for an emergency rate cut to save the UK economy.

Responding to Mervyn King's Treasury Select Committee address on Thursday, fellow MPC member David Blanchflower issued a stark warning that rates need to come down in order to inject a degree of stability into an increasingly unsteady British economy.

Blanchflower said rates needed to "come down now so that we get ahead of the curve," as fresh statistics have shown house prices continuing to slump.

Calling the economic outlook "rather uncomfortable", King said that the BoE would be pumping a "substantial amount of money" into the credit markets to guard the banks against falling short during the Christmas period.

King said that growth will eventually return to its long-run average and inflation to its target of 2 per cent, but this will only happen once a degree of stability returns to the market, something that seems to become increasingly elusive as we look to the current volatility experienced within the markets.

This is the bit I like ''Blanchflower said rates needed to "come down now so that we get ahead of the curve," as fresh statistics have shown house prices continuing to slump.'' Which is what Ive suspected all along, some of these tossers in the MPC are looking after their own financial ringpieces, certainly not ours. Since when was ever inflating HPrices part of the MPC remit??

Anybody smells trouble?

I do.

http://investing.reuters.co.uk/news/articl...CK-TREASURY.XML
UK Treasury-willing to talk to any Northern Rock buyer
Fri Nov 30, 2007 12:21 PM GMT

LONDON, Nov 30 (Reuters) - Britain's Treasury said on Friday it was willing to talk to any potential buyer of Northern Rock as long as their offer complied with priorities it has identified.

"We stand ready to have discussions with any bidder that meets the principles that we have set out," said a Treasury spokesman in response to news that JC Flowers had revised its bid for the stricken mortgage lender.

A consortium led by the Virgin Group has already been identified as the preferred bidder.

EDIT: better comment.

This is the mark of the beast.

http://www.bloomberg.com/apps/news?pid=206...XU&refer=uk
Royal Bank May Write Down $4 Billion, Bernstein Says (Update1)

By Ben Livesey and Jon Menon

Nov. 30 (Bloomberg) -- Royal Bank of Scotland Group Plc, the U.K.'s second-biggest bank, may write down as much as 1.9 billion pounds ($4 billion) on credit-related securities and leveraged loans, Sanford C. Bernstein & Co. estimated.

About 1.8 billion pounds of the writedowns will come from securities linked to U.S. subprime mortgages and the remainder from the seizure in buyout loans, analysts led by Antony Broadbent in London wrote in a note to clients today.

....

``We see Royal Bank, particularly after the acquisition of ABN Amro, being particularly exposed'' to derivatives, said Sandy Chen, a London-based analyst at Panmure Gordon & Co. who has a ``sell'' rating on the stock. ``We are really in the first stages of the unwind of all the structured credit that has been built up over the last seven years'' in banks.

I've always been of the opinion that there are two options available in relation to NR, liquidation and a sell off on parts of the business Or Govt nationalisation. The longer it takes the worse it gets. I can't see how any business could take on the operation in it's current form, correct me if I'm wrong!

The Chinese? The saudi bunch?

All with barrels of spare cash. Buying NR will be like them buying into the UK property market at the worst possible time. They are not stupid I don't think they will want to stump up the cash.

Why would anyone want to buy a sinking ship? The goverment should have let it fail when they had the chance.

Both please. As you seem to be on the front line of this I'd appreciate understanding how you objectively value either cash or synthetic, without the obvious and logical objective valuation of selling them on an open market. Selling these on the open market will never happen because your models are faulty. Based on the assumption that house prices will never fall.


(I say your as I read your posts that stated you worked FO in fixed income).

The unthinkable and unimaginable? This is the mark of the derivative beast.

Prepare for more unthinkable, unimaginable events.

By March the public at large recognizes what's going on.

This is 100% correct, guaranteed, and all you need to know.

http://www.bloomberg.com/apps/news?pid=206...id=aPnDWh8v8p3g

Nov. 30 (Bloomberg) -- School districts, counties and cities across Florida sought to raise cash after being denied access to their deposits in a $15 billion state-run investment fund.

The Jefferson County school district was forced to take out a short-term loan to cover payroll for the 220 teachers and other employees in the system after $2.7 million it held in the pool was frozen yesterday. At least five other districts also obtained last-minute loans, said Wayne Blanton, executive director of the Florida School Boards Association.

``The unthinkable and the unimaginable have just happened here in Florida,'' said Hal Wilson, chief financial officer of the Jefferson County school district, located 30 miles (48 kilometers) east of the state capital Tallahassee. ``What we just experienced here is a classic run-on-the bank meltdown.''

Some lawyers are going to be mighty rich after all this stuff, people get really upset when pay checks are late or don't appear.

There's going to be no winner, only losers.

The winners will be those who lose less.

Yes my great fear is that you are right, I hope and pray that you are wrong, no disrespect . I do .

I pray and hope I am wrong too.

But prayers and hope are bad hedges.

So I hold bullion.

Saddam Hussain held lots and lots of Bullion, didn't help him much when everything went to sh!t.

I am sure it helped im for a while (until they found his little hideaway only, of course).

Don't mess with the Empire (especially not if your a mass murderer and this fact can easily be verified).