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More On The Bear Stearns/cdo Market Collapse

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The great collapse is fast approaching, unlike LCTM no-one has come to the rescue of the latest credit massacre, hedge funds, banks et al are straight up lying to stop the real estate fallout collapsing the credit derivatives market therefor causing the great unwind we all no is inevitable. Add to that the fast approaching bottom of the 7 year fear cycle in 2008 - 7 years after 9/11.

http://www.bloomberg.com/apps/news?pid=206...id=agGitLyUP71Q

Planned sales of collateralized debt obligations backed mainly by subprime mortgages are drying up and may shut down amid concerns about the integrity of the market following the near collapse of hedge funds run by Bear Stearns Cos., JPMorgan Chase & Co. said.

The amount of U.S. high-grade, structured finance CDOs that are being offered to investors has plunged to $3 billion, from $20 billion a month ago, JPMorgan said in a report dated yesterday. CDOs are pools of asset-backed securities, bonds or corporate loans divided into securities with different credit ratings and maturities to cater to investors' preferences.

....

``We expect events surrounding warehousing liquidations last week to further slow, if not halt entirely, the new issue market,'' JPMorgan analysts led by Chris Flanagan in New York said in the report.

...

The damage to the $1 trillion CDO market could freeze what has been a large source of liquidity for the credit markets, Tim Backshall, chief strategist at Credit Derivatives Research LLC, said yesterday.

....

Merrill Lynch last week seized and sold $800 million in securities from the Bear Stearns High-Grade Structured Credit Fund to cover loans outstanding. Bear Stearns eventually stepped in with at least $1.6 billion to bail out that fund.

The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.

The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.

"Excess liquidity in the global system will be slashed," it said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."

Charles Dumas, the group's global strategist, said the failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of the CDO debt market. The sale had to be called off after buyers took just $200m of the $850m mix.

"The banks were not prepared to bid over 85pc of face value for CDOs rated "A" or better," he said.

"God knows how low the price would have dropped if they had kept on going. We hear buyers were lobbing bids at just 30pc.

"We don't know what the value of this debt is because the investment banks shut down the market in a cover-up so that nobody would know. There is $750bn of dubious paper out there in the form of CDOs held by banks that have a total capitalisation of $850bn."

US property writer Paul Muolo described the Bearn Stearns crisis as the “subprime Chernobyl”, saying the bank had created a “cone of silence”.

Abandoned by fellow banks, Bear Stearns has now put up $3.2bn of its own money to rescue one of the funds, a quarter of its capital.

This is the biggest bail-out since the Long-Term Capital Management crisis in 1998, which Bear Stearns refused to join at the time. Bear Stearns is now alone, a case of rough justice being served.

Lombard Street’s warning comes as fresh data from the US National Association of Realtors shows that the glut of unsold homes reached a record of 8.9 months supply in May. Sales of existing homes slid to an annual rate of 5.99m.

The median price fell for the 10th month in a row to $223,700, down almost 14pc from its peak in April 2006. This is the steepest drop since the 1930s.

....

“With defaults at their highest in the 37 years that records have been kept, it could be a long hot summer,” said Mr Dumas.

http://www.elliottwave.com/features/defaul...id=3164*time=pm

"Going back 30 years, there has been an extreme in social fear in the U.S. every seven years. All fixed-time cycles are temporary, so projection is speculative, but it has been a noteworthy progression to date. Here are the events that accompanied each peak:

*

1973: Arab oil embargo, with spillover into 1974 stock market low of wave IV.

*

1980: peak in the inflation rate; top in gold, silver and mining stocks, interest rate spike, stock-market “massacre” and low of wave 2.

*

1987: stock market crash and low of wave 4.

*

1994: “Republican Revolution;” suspicion of government due to Waco attack (1993), “black helicopters,” etc.; stock market breaks uptrend line at low; most bearish sentiment since 1984.

*

2001: successful terrorist attack on the World Trade Center.

This progression began seven (again) years after the end of Cycle wave III in 1966, which was the orthodox top of the Grand Supercycle for the DJIA measured in gold, as shown in Figure 7 in the February issue. If this 7-year cycle is a phenomenon of the great bear market, it may continue until the bear market ends, and it is a long way from over. Seven years after 2001 is 2008, so that is the next year to look for an extreme in social fear. If no extremity occurs that year (or very close to it), then consider the cycle ended."

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A bear already knows what to believe, that's what makes him/her a bear and the same goes for bulls. A person that doesn't know what to believe is neither a bull nor a bear, they're just confused, rather like the so-called 'neithers'.

Deciding to become a bear and then waiting to be convinced of the bearish case, does not make one a bear, as a bear would automatically believe the CDO fiasco to be a disaster for the housing market whereas a bull would cling on to every last drop of hope and see optimism in the Halifax report.

The 'neithers' won't know or care to know 'cos they simply lack the confidence to form any any kind of opinion for themselves and that's why they keep asking dumb questions such as who do I believe?

...markets can turn on a whisper......they go up they go down and it really is all about timing....depending on the days data you may need to change tactics on a sixpence....I do not tie myself down to a label.....

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A bear already knows what to believe, that's what makes him/her a bear and the same goes for bulls. A person that doesn't know what to believe is neither a bull nor a bear, they're just confused, rather like the so-called 'neithers'.

Deciding to become a bear and then waiting to be convinced of the bearish case, does not make one a bear, as a bear would automatically believe the CDO fiasco to be a disaster for the housing market whereas a bull would cling on to every last drop of hope and see optimism in the Halifax report.

The 'neithers' won't know or care to know 'cos they simply lack the confidence to form any any kind of opinion for themselves and that's why they keep asking dumb questions such as who do I believe?

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... Exactly...

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Ah! Fine titbits like this on the same day Halifax reports over 1% MoM house price growth.

What's a bear to believe?

:huh:

Well, if there is going to be global credit crunch the MoM house price figures will be the least of anyones worries. Anyway they like the LR figures will probably only show that the domestic housing market has tanked after it has become patently obvious to everyone. Certainly, that has been the experience in the US where the market obviously went into reverse in the last six months of 2006 but the downturn has only recently started to show up in the 'official data'.

HPI is just a symptom of the credit bubble which has impacted on a range of asset classes. It is not its cause. Indeed, there are reasons to think that sub prime mortgage failures are just part of the reason for the recent blow up in the CDO funds.

http://calculatedrisk.blogspot.com/2007/06...liquifying.html

Edited by up2nogood

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...markets can turn on a whisper......they go up they go down and it really is all about timing....depending on the days data you may need to change tactics on a sixpence....I do not tie myself down to a label.....

Trade what you see, not what you think you would like to see....

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Ah! Fine titbits like this on the same day Halifax reports over 1% MoM house price growth.

What's a bear to believe?

:huh:

Halifax report on the UK market. The US market is crashing and whats written in these articles is very real.

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This is what I and other people have been expecting for a while. It looks as though the deflationary collapse has already started, now we just need a panic-rush-to-the-exits and it will be very on. Despite the collapse it seems as though no-one is pumping liquidity, the fed kept interest rates flat yesterday despite the damage the rise in the 10-year is doing. The fed has chosen by its non-action it will be powerless in the coming panic.

http://www.telegraph.co.uk/money/main.jhtm.../ccredit129.xml

A credit crunch is menacing world markets. As funds exposed to the US sub-prime debacle start to topple, contagion is quickly spreading through broad swathes of low-grade debt.

Investors have refused to stump up $4bn (£2bn) for the KKR buy-out of US Foods Service; Carlyle has pulled the float of a fund that planned to borrow $17bn to splash on sub-prime debt; and MISC gas tankers has delayed a $750m bond issue, to name just three.

US treasury secretary Henry Paulson - Credit crisis threatens markets as funds topple

Wake up time: US treasury secretary Henry Paulson

US treasury secretary Henry Paulson warned on Wednesday the sub-prime mortgage mess was a symptom of the excess liquidity sloshing around financial markets and that recent interest rate rises provided a "wake-up call to focus on some of the excesses".

The window of cheap credit is slamming shut on those in the midst of leveraged buy-outs (LBOs) or trying to refinance. Some $300bn of junk issues scheduled for later this year face a frosty reception.

Lloyd Blankfein, the head of Goldman Sachs, warned this week that the takeover boom could "unravel very quickly" as the mood soured. "The risk we face would be a very big crisis in the credit markets," he said.

In the late 1990s the epicentre of excess was in dotcom stocks. This time trouble is concentrated in junk debt, where a forest of new-fangled CDOs, CLOs, and derivatives has burst into life.

As investors are now discovering, some buckle under stress. The near-collapse of two Bear Stearns hedge funds occurred because derivatives taken out to hedge the risk did not work as expected, playing havoc with the computer model.

The Financial Services Authority has been warning for over a year that easy access to debt has led to a massive mispricing of risk.

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Guest grumpy-old-man
Well, if there is going to be global credit crunch the MoM house price figures will be the least of anyones worries. Anyway they like the LR figures will probably only show that the domestic housing market has tanked after it has become patently obvious to everyone. Certainly, that has been the experience in the US where the market obviously went into reverse in the last six months of 2006 but the downturn has only recently started to show up in the 'official data'.

HPI is just a symptom of the credit bubble which has impacted on a range of asset classes. It is not its cause. Indeed, there are reasons to think that sub prime mortgage failures are just part of the reason for the recent blow up in the CDO funds.

http://calculatedrisk.blogspot.com/2007/06...liquifying.html

anomalies in the data. ;) I keep telling everyone, but not many are listening. I should put in my signature:

Q1 2007

Anomalies in the data

edited to add - I think we have far bigger problems ahead anyway, judging by the recent threads like this one. The housing crash is just one part of a much bigger economic crash. :o

Edited by grumpy-old-man

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anomalies in the data. ;) I keep telling everyone, but not many are listening. I should put in my signature:

Q1 2007

Anomalies in the data

edited to add - I think we have far bigger problems ahead anyway, judging by the recent threads like this one. The housing crash is just one part of a much bigger economic crash. :o

i listen to you, well even if you have one foot in the grave :)

i think we will see a meltdown of the worlds economy and when you see that the average household in american is burdened with over $500,000 of debt or put another way $59tr in total then you don't need to be too smart to see whats coming and throw on top of that the derivatives market that some say is worth in excess of $200tr with a large amount held by Ford and GM then i begin to think it's a done deal.

Gloabl warming and Peak oil will put the iceing on the cake but i'm not sure i beleive that much about them and it's so cold today i think i'll like some global warming please.

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Guest grumpy-old-man
i listen to you, well even if you have one foot in the grave :)

i think we will see a meltdown of the worlds economy and when you see that the average household in american is burdened with over $500,000 of debt or put another way $59tr in total then you don't need to be too smart to see whats coming and throw on top of that the derivatives market that some say is worth in excess of $200tr with a large amount held by Ford and GM then i begin to think it's a done deal.

Gloabl warming and Peak oil will put the iceing on the cake but i'm not sure i beleive that much about them and it's so cold today i think i'll like some global warming please.

hey, I'm only 40. ;)

yes, it all seems to be falling apart on a global scale doesn't it. The problem is the more I learn about what is really going on, the more scary it all becomes. :o

The general public doesn't want to know this though, (not that the majority would understand anyway) they just want to know how much their property is worth & how much can they borrow.

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i listen to you, well even if you have one foot in the grave :)

i think we will see a meltdown of the worlds economy and when you see that the average household in american is burdened with over $500,000 of debt or put another way $59tr in total then you don't need to be too smart to see whats coming and throw on top of that the derivatives market that some say is worth in excess of $200tr with a large amount held by Ford and GM then i begin to think it's a done deal.

Gloabl warming and Peak oil will put the iceing on the cake but i'm not sure i beleive that much about them and it's so cold today i think i'll like some global warming please.

The Credit Derivatives market is actually $450 trillion. Or rather NINE times global GDP.

Still feel happy holding that gold, bugs?

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i listen to you, well even if you have one foot in the grave :)

i think we will see a meltdown of the worlds economy and when you see that the average household in american is burdened with over $500,000 of debt or put another way $59tr in total then you don't need to be too smart to see whats coming and throw on top of that the derivatives market that some say is worth in excess of $200tr with a large amount held by Ford and GM then i begin to think it's a done deal.

Gloabl warming and Peak oil will put the iceing on the cake but i'm not sure i beleive that much about them and it's so cold today i think i'll like some global warming please.

The Credit Derivatives market is actually $450 trillion. Or rather NINE times global GDP.

Still feel happy holding that gold, bugs?

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i listen to you, well even if you have one foot in the grave :)

i think we will see a meltdown of the worlds economy and when you see that the average household in american is burdened with over $500,000 of debt or put another way $59tr in total then you don't need to be too smart to see whats coming and throw on top of that the derivatives market that some say is worth in excess of $200tr with a large amount held by Ford and GM then i begin to think it's a done deal.

Gloabl warming and Peak oil will put the iceing on the cake but i'm not sure i beleive that much about them and it's so cold today i think i'll like some global warming please.

The Credit Derivatives market is actually $450 trillion. Or rather NINE times global GDP.

Still feel happy holding that gold, bugs?

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While I agree it doesn't look good for the credit market, I will say one thing - the fact that everyone's pulling their CDO issues or debt raising doesn't necessarily mean that all such options are worthless or that credit is no longer available. It just means that the market's attitude right now means that the price isn't right so most people are choosing to wait if they can because they think that once things settle down they'll get a better deal. If they thought that what they were holding was worthless they'd be slashing their prices and scrabbling to get anything for it, the fact that they're waiting could just mean that they feel the fundamentals are sound and it's a temporary upset in market conditions.

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The Credit Derivatives market is actually $450 trillion. Or rather NINE times global GDP.

Still feel happy holding that gold, bugs?

Yep, but hoping for cheaper prices in the 'ka' of the ka-poom phase.

Don't think the 'ka' phase will be as long as many think - the cashed up Asian sovereign wealth funds will be shopping like Paris Hilton on Rodeo Drive.

Edited by LargelyIgnorant

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While I agree it doesn't look good for the credit market, I will say one thing - the fact that everyone's pulling their CDO issues or debt raising doesn't necessarily mean that all such options are worthless or that credit is no longer available. It just means that the market's attitude right now means that the price isn't right so most people are choosing to wait if they can because they think that once things settle down they'll get a better deal. If they thought that what they were holding was worthless they'd be slashing their prices and scrabbling to get anything for it, the fact that they're waiting could just mean that they feel the fundamentals are sound and it's a temporary upset in market conditions.

:lol::lol::lol::lol::lol::lol::lol::lol:

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

Everybody put your fingers in your ears and go nah nah nah nah nah and pretend it isn't happening.

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Good luck with choosing the right bank and the right currency.

Thanks :) And good luck to you.

But I'm not putting anything into banks aside from small savings and current account. Currency? Who knows? Sterling's high yield makes it as good as any for the moment.

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While I agree it doesn't look good for the credit market, I will say one thing - the fact that everyone's pulling their CDO issues or debt raising doesn't necessarily mean that all such options are worthless or that credit is no longer available. It just means that the market's attitude right now means that the price isn't right so most people are choosing to wait if they can because they think that once things settle down they'll get a better deal. If they thought that what they were holding was worthless they'd be slashing their prices and scrabbling to get anything for it, the fact that they're waiting could just mean that they feel the fundamentals are sound and it's a temporary upset in market conditions.

Or you could say that at the moment they have highly leverages positions which are reliant on the opinion of the value of the CDO assets they hold. If they scrabble to sell they wont just screw everyone else they'll confirm the market price of their remaining assets and instantly become untenable. By selling they are screwed immediately, by holding they get to be screwed later. Delaying the inevitable is part of the human condition. Something to do with eternal hope.

I like to think of it as being trapped in a dark room with a monster, and remaining completely montionless in the hope that you wont die.

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I like to think of it as being trapped in a dark room with a monster, and remaining completely montionless in the hope that you wont die.

Brilliant :rolleyes:

Trouble is that monsters can smell fear - and bull cr@p! :lol:

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via Barry Ritholtz. NO JOKE!

http://bigpicture.typepad.com/comments/200...etic-credi.html

44397162ok0.png

You can't make this stuff up!

I enjoyed this news story from the same site...

Rutters

June 28, 2007

New York, New York

In a last ditch effort to save two troubled hedge funds, Bearn Stearns announced today it would hold a save-the-hedge-funds charity car wash and bake sale.

Bear Stearns spokesman, Lev Raj Tudamax, said, "We are confident we will be able to raise the necessary capital in only one weekend - New Yorkers are used to paying higher prices. Maybe in some areas a $5000 car wash and $25,000 baker's dozen of cookies would seem high-priced, but here it's just another charitable contribution tax write off."

Unnamed sources state that the car wash and bake sale were last ditch efforts after a save-the-hedge-fund concert in Central Park collapsed when it was discovered that Billy Joel had purchased $50 million of CDOs from Bear Stearns.

:lol::lol::lol:

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:lol::lol::lol::lol::lol::lol::lol::lol:

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

Everybody put your fingers in your ears and go nah nah nah nah nah and pretend it isn't happening.

I didn't say that it wasn't happening, merely that one shouldn't always rush to jump to the worst conclusion.

From your own article:

A total of 11 percent of the loan collateral for all subprime mortgage bonds had payments at least 90 days late, were in foreclosure or had the underlying property seized, according to a June 1 report by Friedman, Billings, Ramsey Group Inc., a securities firm in Arlington, Virginia. In May 2005, that amount was 5.4 percent.

Let's take the May 2005 amount as a baseline level already priced into bonds where there was no problem. So there's approximately a 5% higher delinquency rate than planned. Say house prices have dropped 50% in the subprime market compared to expected levels, and say there was a 20% loss expected on existing delinquencies. So there's an additional 50% loss on the standard 5% delinquency level, and a 70% loss on the extra 5% of delinquencies, for a total 6% loss.

Even if delinquencies are e.g. 5x predicted levels and house prices drop 75% (which is a fairly doomsday scenario) that's only a 22.75% loss. A big loss, some of the higher exposed and less diverse hedge funds will go under, but not global financial meltdown. Considering the profits hedge funds have been making of late that's probably only a couple of years income wiped out at most.

Crude figures, but not way out of line with the article:

Rosner estimates that collateralized debt obligations, which have packaged thousands of bonds and derivatives into new securities, will lose $125 billion. Institutional Risk Analytics, a Hawthorne, California-based company that writes computer programs for the four biggest accounting firms, says 25 percent of the face value of CDOs is in jeopardy, or $250 billion.

Someone elsewhere in the thread has been talking of a credit derivatives market worth $450 trillion, $250bn is small change in that frame of reference.

Please note I do think this is going to be bloody, and that it's going to raise the cost of borrowing and shake up financial markets. I don't think that it's the global meltdown others are gleefully awaiting though. And I think that the banks are aware that market sentiment at present is leaning more towards the global meltdown so now is a bad time to trade. That may be irrationally optimistic, but if so please give me good arguments as to why. The data as it stands and as you're posting doesn't seem to be pointing towards a crisis of the magnitude you're all inferring.

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