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I know it's 'above my pay grade' so to speak but have I missed a thread on this?

http://ftalphaville.ft.com/blog/2011/07/15/623881/the-aaa-bubble/

This, we think, could well be the most important chart in the world right now:

It comes from a new report, issued by the BIS and Basel Committee’s joint forum, on the subject of securitisation incentives. But what it shows has much wider, more current implications.

According to the report, between 1990 and 2006 — the year in which issuance of Asset-Backed Securities (ABS) peaked — assets with the highest credit rating rose from a little over 20 per cent of total rated fixed-income issues to almost 55 per cent. Think about it. More than half of the world’s debt securities were, for all intents and purposes, considered risk-free. In 2006, that was nearly $5,000bn of assets.

The financial crisis had a lot to do with triple-A ratings being slapped on to subprime securities which didn’t warrant them, we know that. The report says between 1990 and 2006 ABS accounted for 64 per cent of the total growth in the amount of AAA-rated fixed income, compared with 27 per cent attributable to the growth in public debt, 2 per cent to corporate and 8 per cent to other products.

But watch what starts happening from 2008 and 2009.

The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world’s triple-A supply. The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it’s true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral.  Where ABS dissipated, sovereign debt stood in to fill the gap. And more.

It’s one reason why the sovereign crisis is well and truly painful.

It’s a global repricing of risk, again, but one that has the potential for a much larger pop, so to speak.

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I know it's 'above my pay grade' so to speak but have I missed a thread on this?

http://ftalphaville....the-aaa-bubble/

This, we think, could well be the most important chart in the world right now:

It comes from a new report, issued by the BIS and Basel Committee's joint forum, on the subject of securitisation incentives. But what it shows has much wider, more current implications.

According to the report, between 1990 and 2006 — the year in which issuance of Asset-Backed Securities (ABS) peaked — assets with the highest credit rating rose from a little over 20 per cent of total rated fixed-income issues to almost 55 per cent. Think about it. More than half of the world's debt securities were, for all intents and purposes, considered risk-free. In 2006, that was nearly $5,000bn of assets.

The financial crisis had a lot to do with triple-A ratings being slapped on to subprime securities which didn't warrant them, we know that. The report says between 1990 and 2006 ABS accounted for 64 per cent of the total growth in the amount of AAA-rated fixed income, compared with 27 per cent attributable to the growth in public debt, 2 per cent to corporate and 8 per cent to other products.

But watch what starts happening from 2008 and 2009.

The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world's triple-A supply. The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it's true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral. Where ABS dissipated, sovereign debt stood in to fill the gap. And more.

It's one reason why the sovereign crisis is well and truly painful.

It's a global repricing of risk, again, but one that has the potential for a much larger pop, so to speak.

MBS became AAA because they were "backed " by AAA firms supplying CDS.

The fact that a lender is AAA doesnt mean they had the cash to pay up shuold a default have occured...what they did was "lay off" their own CDS bet with another bank...and so we have the CDS merry go round that ended in AIG busting...they treated CDS as insurance....they were wrong..it isnt.

CDS is the real reason they cant have sovereign defaults...there is no AIG in the market now...just fellow banks hoping THEIR CDS clients dont need to call in the payment.

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MBS became AAA because they were "backed " by AAA firms supplying CDS.

The fact that a lender is AAA doesnt mean they had the cash to pay up shuold a default have occured...what they did was "lay off" their own CDS bet with another bank...and so we have the CDS merry go round that ended in AIG busting...they treated CDS as insurance....they were wrong..it isnt.

CDS is the real reason they cant have sovereign defaults...there is no AIG in the market now...just fellow banks hoping THEIR CDS clients dont need to call in the payment.

MBS were triple A rated because the agencies were incompetent in measuring the risks of the underlying assets. The supply of CDS contracts made the whole thing even more confused and dangerous, but the ratings were not handed out on the basis of CDS contracts. However, as you state, AIG were the ones holding the crap at the end of the day.

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MBS were triple A rated because the agencies were incompetent in measuring the risks of the underlying assets. The supply of CDS contracts made the whole thing even more confused and dangerous, but the ratings were not handed out on the basis of CDS contracts. However, as you state, AIG were the ones holding the crap at the end of the day.

beg to differ.

If you wanted to get a AAA rated financial asset, all you needed was a CDS supplier that was AAA rated.....you made the loan to a B rated entity, they paid for the CDS, et voila, your loan is now AAA.

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MBS became AAA because they were "backed " by AAA firms supplying CDS.

The fact that a lender is AAA doesnt mean they had the cash to pay up shuold a default have occured...what they did was "lay off" their own CDS bet with another bank...and so we have the CDS merry go round that ended in AIG busting...they treated CDS as insurance....they were wrong..it isnt.

CDS is the real reason they cant have sovereign defaults...there is no AIG in the market now...just fellow banks hoping THEIR CDS clients dont need to call in the payment.

For some reason this calls to mind the image of someone dressed in a suicide vest screaming 'Give me the money or we all get blown away'.

The single most intelligent strategy for any financial institution today is to take on vast amounts of risk while offloading it into a CDS- instantly you become too big to fail and now cannot lose money no matter what you do- the sky's the limit.

:lol::lol::lol:

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beg to differ.

If you wanted to get a AAA rated financial asset, all you needed was a CDS supplier that was AAA rated.....you made the loan to a B rated entity, they paid for the CDS, et voila, your loan is now AAA.

No. That's not actually how it worked.

If you wanted an AAA financial asset, you could make a loan to a B-rated entity. You could then pay for a CDS from an AAA rated insurer, the net result was that you had a B-rated loan, plus a derivative - which together could be treated as an AAA asset. However, this is not the same as simply owning the MBS.

MBSs didn't contain CDSs. They were not derivative products. They were simply packages of loans. The problem was that the risk of these loans was mispriced by the ratings agencies. They were frequently rated A or above, when in reality they were not.

The problem was that AIG, etc. sold a lot of insurance on these 'AAA' MBS assets, thinking that they really were AAA. The insurance was totally mispriced, probably priced at under 20% of actual cost price, were the risk to have been correctly calculated. AIG went bust.

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No. That's not actually how it worked.

If you wanted an AAA financial asset, you could make a loan to a B-rated entity. You could then pay for a CDS from an AAA rated insurer, the net result was that you had a B-rated loan, plus a derivative - which together could be treated as an AAA asset. However, this is not the same as simply owning the MBS.

MBSs didn't contain CDSs. They were not derivative products. They were simply packages of loans. The problem was that the risk of these loans was mispriced by the ratings agencies. They were frequently rated A or above, when in reality they were not.

The problem was that AIG, etc. sold a lot of insurance on these 'AAA' MBS assets, thinking that they really were AAA. The insurance was totally mispriced, probably priced at under 20% of actual cost price, were the risk to have been correctly calculated. AIG went bust.

I think thats what I said...you wanted to make an MBS turd into Gold nuggets so you added CDS....At the start of the crisis, the Monoline Insurers were using their AAA ratings to supply CDS to Turds....turns out they didnt have enough to cover 1 default, let alone the thousands they took cover, and fees for.

Now AAA rated, the deal could be packages into CDOs and sold to pension funds.

I realise they were separate of course.. like a house insurance is not part of the house.

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I don't believe CDOs used CDSs either. That was for the purchaser to sort out, if they wanted to. The CDS market was actually a very small market compared to the size of the asset-backed securities market (which was sized in the multiple $ trillions). So, even though the CDS market was tiny in comparison, it was still a catastrophic collapse for a number of large companies.

The magic of CDOs was simply obscuring the risk behind a smoke screen. So you put dog-turd in but what came out looked like gold.

The problem here was that the monolines fell hook, line and sinker for the 'AAA' ratings given by the ratings agencies (and failed to do their own proper risk assessment), and as a result the prices they charged for CDSs on CDOs were negigible compared to the risk involved.

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Anything AAA is indistinguishable in all ways that actually matter from money. Your insured bank deposits are the 'original AAA' security, and why? Because the FSCS or the FDIC 'wrote you some AAA insurance'!

If there has been an explosion of 'new AAA' assets then that's because the world wants nominal risk free assets, and that will remain the case until we decide to rescind that deposit insurance, which is the foundation on which the whole AAA 'risk free' illusion is built on - hence the natural path is to replace failed AAA assets (MBS) with new AAA assets backed by a printing press.

There is no appreciable difference between nominal bonds like GILTS, and money.

Our economy has had too much private debt for a very long time and the extra public AAA issuance is simply redressing that balance.

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I don't believe CDOs used CDSs either. That was for the purchaser to sort out, if they wanted to. The CDS market was actually a very small market compared to the size of the asset-backed securities market (which was sized in the multiple $ trillions). So, even though the CDS market was tiny in comparison, it was still a catastrophic collapse for a number of large companies.

The magic of CDOs was simply obscuring the risk behind a smoke screen. So you put dog-turd in but what came out looked like gold.

The problem here was that the monolines fell hook, line and sinker for the 'AAA' ratings given by the ratings agencies (and failed to do their own proper risk assessment), and as a result the prices they charged for CDSs on CDOs were negigible compared to the risk involved.

IIRC correctly, the monolines were part of the stucture of returns in CDOs...AMBAC, MBIA, both with AAA ratings earned as they insured Government and Local Authority debt, were making money hand over fist, I mean, why wouldnt they, who needs to take money to insure This stuff, the safest debt you could buy.

The ratings agencies didnt misprice these firms rating.....it was bullet proof.

However, Goldmans, Lehmans, Bear and all the others could make things risk free simply buy adding default insurance....and they bought monolines to do their bidding.

CDS is now in the quadrillions of face value, so its not small beer at all.

I cant remember the numbers but Im sure the blow up of the monolines was a huge issue in 2007.....they had insured much of MBS and had little in the coffers to cover. I remember the noises the banks made..saying they were in a position to cover themselves if their offspring failed.....there was talk of putting the defaults into a new Super SIV with new insurance.....god, the criminals were trying to capitalise on their crime with a fresh scam....very exciting times....mostly forgotten today, and it was just 3 -4 years ago.

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CDSs were not a fundamental component of CDOs. The CDOs were constructed by taking multiple income-producing assets, and redirecting the income streams to give the overall effect of low risk. If you have 100 mortgages paying interest, and 10 default. In a conventional MBS, all holders would receive a 10% cut in income. In a CDO, the streams are redirected so your 'AAA' CDO holder will still get all his due income - but the purchaser of the 'C' CDO will get nothing. No CDS is required or was used.

There is a product called a synthetic CDO. This is because demands for CDOs outstripped the supply, because of their apparent low risk. So, a synthetic CDO was a derivative designed to replicate the behaviour of a CDO. The opposite to a synthetic CDO is a CDS - so investment banks would sell a SCDO and a CDS, and end up holding no risk. The buyers of the SCDO and CDS take on each others risks. However, this is clouding the matter.

CDS at their very peak were a market of about $60 trillion (that's everything, including government bonds, corporate bonds, asset-backed bonds, MBS, etc. and without hedging off of risks) They have been in major decline since then, and the total CDS market is probably well below $30 trillion notional value. However, that's not the whole story, CDS issuance in 'high-risk' bonds is way down, so what CDSs are in circulation tend to be things like government bonds, and corporate bonds, rather than dog-turd CDOs.

The 'quadrillion' figure refers to the derivatives market as a whole - the overwhelming majority is interest rate derivatives and currency derivatives - because IRs and currencies are generally quite stable, the notional values are enormous, but the likely liabilities are small (e.g. an IR swap that pays £250k for a 0.25% change in base-rate has a notional value of £100million - yet payouts of more than £1million would be expected to be exceedingly rare).

The monoline blowup came because the monolines had written about $3 trillion of CDS, with about $30 billion of capital - i.e. they had budgeted for < 1% loss rate. They had sold all these CDSs but had miscalculated the risks of many things - mainly MBS where their calculations were not even in the ballpark, but also government and municipal bonds. As a result, their premium income wasn't even remotely sufficient to permit them to payout the actual losses that they incurred.

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CDSs were not a fundamental component of CDOs. The CDOs were constructed by taking multiple income-producing assets, and redirecting the income streams to give the overall effect of low risk. If you have 100 mortgages paying interest, and 10 default. In a conventional MBS, all holders would receive a 10% cut in income. In a CDO, the streams are redirected so your 'AAA' CDO holder will still get all his due income - but the purchaser of the 'C' CDO will get nothing. No CDS is required or was used.

There is a product called a synthetic CDO. This is because demands for CDOs outstripped the supply, because of their apparent low risk. So, a synthetic CDO was a derivative designed to replicate the behaviour of a CDO. The opposite to a synthetic CDO is a CDS - so investment banks would sell a SCDO and a CDS, and end up holding no risk. The buyers of the SCDO and CDS take on each others risks. However, this is clouding the matter.

CDS at their very peak were a market of about $60 trillion (that's everything, including government bonds, corporate bonds, asset-backed bonds, MBS, etc. and without hedging off of risks) They have been in major decline since then, and the total CDS market is probably well below $30 trillion notional value. However, that's not the whole story, CDS issuance in 'high-risk' bonds is way down, so what CDSs are in circulation tend to be things like government bonds, and corporate bonds, rather than dog-turd CDOs.

The 'quadrillion' figure refers to the derivatives market as a whole - the overwhelming majority is interest rate derivatives and currency derivatives - because IRs and currencies are generally quite stable, the notional values are enormous, but the likely liabilities are small (e.g. an IR swap that pays £250k for a 0.25% change in base-rate has a notional value of £100million - yet payouts of more than £1million would be expected to be exceedingly rare).

The monoline blowup came because the monolines had written about $3 trillion of CDS, with about $30 billion of capital - i.e. they had budgeted for < 1% loss rate. They had sold all these CDSs but had miscalculated the risks of many things - mainly MBS where their calculations were not even in the ballpark, but also government and municipal bonds. As a result, their premium income wasn't even remotely sufficient to permit them to payout the actual losses that they incurred.

Here is an article that seems to deny your rosy view of the situation in 2008

Monoline ACA sells CDO business; averts disaster?

Posted by Sam Jones on Feb 12 08:34. Monoline ACA isn’t the largest in the world, but its failure would have been extremely painful for banks.

Since it only started out with an A rating, ACA had collateral posting requirements written into its numerous CDS positions. Thus in the event of a downgrade, not only did ACA risk losing new business, but insolvency too, since posting sufficient collateral was impossible.

A big downgrade and two waivers on posting that collateral later and the worst case scenario for ACA might just have been averted.

The monoline is being broken up – selling off its CDO and CLO management businesses. That in turn may raise enough cash for the monoline to meet capital requirements for its actual bond insurance business. And by that, saving Merrill Lynch, for one, $6.6bn.

But will it be enough? ACA, by some counts, has an awful lot of collateral to raise. Before Christmas, the bond insurer needed $1.7bn to post against CDS on CDOs. That was based against super-senior CDO tranches valued at 93 per cent of face. As AIG this week discovered, it’s important to value those super-senior positions correctly. By some estimates, they’re now worth 60 per cent of face. Which would push ACA’s required collateral pledges to $10bn.

Here, anyway, is the ACA statement:

ACA Financial Guaranty Corporation, a subsidiary of ACA Capital Holdings, Inc. (OTC BB: ACAH.PK), announced today that it has entered into a letter of intent with FSI Capital, LLC (“FSI Capital”) to sell its U.S. ABS and Corporate Credit CDO asset management business. FSI Capital, through its affiliates and subsidiaries, manages 17 CDOs totaling approximately $7.5 billion.

The Company also announced today that it has entered into a letter of intent with Resource Financial Fund Management, Inc. (“RFFM”), a wholly-owned subsidiary of Resource America, Inc., and the parent company of Apidos Capital Management, LLC, to sell its U.S. CLO asset management business. Apidos Capital Management has closed 8 CLOs with approximately $2.8 billion of assets under management.

Each of the transactions is subject to final due diligence, the negotiation and execution of a definitive agreement and other standard conditions.

http://ftalphaville.ft.com/blog/2008/02/12/10862/monoline-aca-sells-cdo-business-averts-disaster/

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We are doomed!!! :ph34r:

AAAratings.jpg

not really, just a bit short of the right paper for dollar bills and £5 notes.

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not really, just a bit short of the right paper for dollar bills and £5 notes.

OK, going for a quick jump to a very practical topic: In your opinion Bloo Loo, should I :

Buy now, and get a 10 years fixed?

Or buy in Jan/Feb 2012, with a 10 years fixed?

Edit: Stay renting, and trying to protect our deposit from inflation?

Edited by Tired of Waiting

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Here is an article that seems to deny your rosy view of the situation in 2008

Nothing in that article you quoted contradicts anything that I have said. In fact, it simply reiterates what I said about the monolines: that they had mispriced the risk on CDOs and had suffered cataclysmic losses because of that.

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No. That's not actually how it worked.

If you wanted an AAA financial asset, you could make a loan to a B-rated entity. You could then pay for a CDS from an AAA rated insurer, the net result was that you had a B-rated loan, plus a derivative - which together could be treated as an AAA asset. However, this is not the same as simply owning the MBS.

MBSs didn't contain CDSs. They were not derivative products. They were simply packages of loans. The problem was that the risk of these loans was mispriced by the ratings agencies. They were frequently rated A or above, when in reality they were not.

The problem was that AIG, etc. sold a lot of insurance on these 'AAA' MBS assets, thinking that they really were AAA. The insurance was totally mispriced, probably priced at under 20% of actual cost price, were the risk to have been correctly calculated. AIG went bust.

Greece's foreign debt is mostly to German and French banks. But I heard that most of these banks insurers are British. Does anybody know if this is true?

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Nothing in that article you quoted contradicts anything that I have said. In fact, it simply reiterates what I said about the monolines: that they had mispriced the risk on CDOs and had suffered cataclysmic losses because of that.

well, apart from the bit where you say CDS wasnt in part the fall of the monolines with CDOs. They clearly HAD been "insuring" CDOS, their own, other peoples, probably non existant ones too.

The whole problem with Off balance sheet vehicles, MBS, CDO, CDO squared etc etc, was that the risk was mis-sold..not mis placed.....remember, "no-one could see this coming", it was a total shock...bit like having your house burgled....yet you trusted the man with the alarm that had no wires, no detectors and beleived it was new infallable tech, now stop wasting his time for an explanation and buy the ruddy thing.

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OK, going for a quick jump to a very practical topic: In your opinion Bloo Loo, should I :

Buy now, and get a 10 years fixed?

Or buy in Jan/Feb 2012, with a 10 years fixed?

Edit: Stay renting, and trying to protect our deposit from inflation?

its your money, its your call.

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CDS at their very peak were a market of about $60 trillion (that's everything, including government bonds, corporate bonds, asset-backed bonds, MBS, etc. and without hedging off of risks) They have been in major decline since then, and the total CDS market is probably well below $30 trillion notional value. However, that's not the whole story, CDS issuance in 'high-risk' bonds is way down, so what CDSs are in circulation tend to be things like government bonds, and corporate bonds, rather than dog-turd CDOs.

The last graphs/figures I saw for CDS showed their number increasing at an apparently exponential rate. Do you have a reference to more up-to-date information on the CDS market?

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http://www.dtcc.com/...ata_table_i.php

28T of which 15T single name, 10T index and 2T structured product - all figures are gross

and here we see the riskless shadow banking in full.

2T in structured products, meaning loans most likely, which were supposed to have the risk removed by the mere structure, then theres gambling on indexes, then gambling on company defaults....no wonder they dont want a sovereign default....World record Domino tumbling anyone?

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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