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Goldfinger

S&p May Cut Ratings On Subprime Mortgage Bonds

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Even if the new ratings breach investment rules isn't it up to the trustees of the pension fund to decide what to do? I'd say some of them would make the case that they're better off holding on to them as selling in the current climate will probably yield far less than their real value.

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Even if the new ratings breach investment rules isn't it up to the trustees of the pension fund to decide what to do? I'd say some of them would make the case that they're better off holding on to them as selling in the current climate will probably yield far less than their real value.

Like people in negative equity holding on to their houses since they're in for the long run? Well, well.

I still somehow think this could trigger something bigger.

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Like people in negative equity holding on to their houses since they're in for the long run? Well, well.

I still somehow think this could trigger something bigger.

Ohio attorney general Marc Dann is building a case against Moody's:

"The ratings agencies cashed a check every time one of these subprime pools was created and an offering was made," Dann told Fortune, referring to the way the bond issuers paid to get their asset-backed securities (ABSs) and collateralized debt obligations (CDOs) rated by the agencies. These ratings run from AAA for debt with the lowest risk of default all the way down to noninvestment- grade bonds, which many pension funds are prohibited from purchasing in their charters. "[The agencies] continued to rate these things AAA . [so they are] among the people who aided and abetted this continuing fraud," adds Dann.

http://money.cnn.com/2007/07/05/news/econo...rtune/index.htm

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Even if the new ratings breach investment rules isn't it up to the trustees of the pension fund to decide what to do? I'd say some of them would make the case that they're better off holding on to them as selling in the current climate will probably yield far less than their real value.

I thought pension funds could only hold bonds above a certain level. They are not allowed to mess with junk

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I thought pension funds could only hold bonds above a certain level. They are not allowed to mess with junk

I thought pension funds had stated investment aims but the trustees could take views on whether and how to deviate from those aims, possibly varying with the nature of the fund.

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Like people in negative equity holding on to their houses since they're in for the long run? Well, well.

I still somehow think this could trigger something bigger.

Not an unreasonable analogy, but look at it this way - Pension funds have bought the sub prime debt because it provides a cashflow that matches their liabilities. The short term market price is irrelevant if they hold it, only the changing risk of default matters, and if the market is currently over-estimating the risk of default (and it's quite likely it is) then the expected return from holding it to maturity is far higher than the expected return by cashing it in and buying more secure debt. Especially if others are rushing to more secure debt and the price rises for that.

I know I'd much rather my pension fund held on to things and rode out the storm rather than panic selling.

As for the comparison with house prices, it's not entirely the same - the value of bonds like this are much more closely linked to the expected present value of the income streams those bonds produce. Okay there might be some expectations of capital growth or some price irregularities due to different demand for certain term bonds for matching etc but primarily there is some objective value to them. Housing is far more divorced from any real objective value, ultimately they should be the discounted value of the future rent that it can generate but rents have no objective value beyond what rents people can charge, and besides - people are nuts, especially when it comes to houses. So there's more of a "true" value to bonds such as this, and therefore more incentive to hold until the market is offering something close to true value, and at present the market is probably pricing in a greater default risk than is justified.

Edited by Benedict

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bond risks

http://www.bloomberg.com/news/markets/bonds.html

European Bonds Gain on Signs German, French Growth Is Slowing

By Lukanyo Mnyanda

July 10 (Bloomberg) -- European government bonds advanced for a second day as signs of slowing growth in the euro region's two biggest economies prompted investors to pare bets the European Central Bank will raise interest rates again this year

***

Bond Risk Soars After Home Depot, Sears Forecast Lower Profits

By Hamish Risk and Shannon D. Harrington

July 10 (Bloomberg) -- Corporate bond risk rose to the highest in more than a year after U.S. retailers Home Depot Inc. and Sears Holdings Corp. forecast falling earnings, prices for credit-default swaps show

***

Rolls Royce, Air Liquide, Danone: Credit-Default Swap Movers

By Hamish Risk

July 10 (Bloomberg) -- The risk of owning European corporate bonds rose by the most in four months, according to traders of credit-default swaps

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So there's more of a "true" value to bonds such as this, and therefore more incentive to hold until the market is offering something close to true value, and at present the market is probably pricing in a greater default risk than is justified.

The last part is where people might have different opinions - indeed, what IS the default risk? If we're entering Big Bang territory,

the valuations could be even too high at the moment. But I think the bigger problem for the insurers must be: what can they legally

declare as the value of their holdings in a monthly statement? And in whatever way that number is produced, if it goes down, the

policyholders won't like it.

Edited by Goldfinger

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Not an unreasonable analogy, but look at it this way - Pension funds have bought the sub prime debt because it provides a cashflow that matches their liabilities. The short term market price is irrelevant if they hold it, only the changing risk of default matters, and if the market is currently over-estimating the risk of default (and it's quite likely it is) then the expected return from holding it to maturity is far higher than the expected return by cashing it in and buying more secure debt. Especially if others are rushing to more secure debt and the price rises for that.

I know I'd much rather my pension fund held on to things and rode out the storm rather than panic selling.

As for the comparison with house prices, it's not entirely the same - the value of bonds like this are much more closely linked to the expected present value of the income streams those bonds produce. Okay there might be some expectations of capital growth or some price irregularities due to different demand for certain term bonds for matching etc but primarily there is some objective value to them. Housing is far more divorced from any real objective value, ultimately they should be the discounted value of the future rent that it can generate but rents have no objective value beyond what rents people can charge, and besides - people are nuts, especially when it comes to houses. So there's more of a "true" value to bonds such as this, and therefore more incentive to hold until the market is offering something close to true value, and at present the market is probably pricing in a greater default risk than is justified.

You're joking?

It's widely recognised as a historic peak. There are virtually no RMBS buyers in the US at the moment, or in the foreseeable future.

Credit is tightening globally for several reasons.

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

In response to the investor criticism, executives at S&P, Moody's and Fitch had said last month that they were waiting until foreclosure sales of homes proved that the collateral backing the bonds has declined enough to create losses.

Many bonds issued in late 2005 and most of 2006 now have ``sufficient seasoning'' to show delinquency, default and loss trends that indicated ``weak future credit performance,'' S&P said today.

...

``Data quality is fundamental to our rating analysis,'' S&P said. ``The loan performance associated with the data to date has been anomalous in a way that calls into question the accuracy of some of the initial data provided to us regarding the loan and borrower characteristics.''

What a joke! As George Soros says, markets can influence the events that they anticipate.

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The amount of $ 12 billion represents only a low single digit percentage of the total (chart).....

When they will continue with their "downgrading" pace we will hear news like this almost on a weekly basis for quarters to come... :-)

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post-7509-1184079692_thumb.jpg

Edited by jmf

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The amount of $ 12 billion represents only a low single digit percentage of the total (chart).....

When they will continue with their "downgrading" pace we will hear news like this almost on a weekly basis for quarters to come... :-)

I guess someone has to make a start...

Edited by Goldfinger

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I thought pension funds could only hold bonds above a certain level. They are not allowed to mess with junk

That's the whole point. The agencies overrated these things. Bascially ratings are horseshit. They work about as well as the Motley Fool school of investment. As long as everything is calm ratings agencies look responsible but in real life they compete with each other in the same way as estate agents.

So, if I'm an agency I'm not going to turn away the biggest market I've ever seen just because the underlying investments might turn out to be junk.

I understand that this stuff is not 'officially' junk but CDOs are packaged with a high percentage of 'good' debt, a high percentage of 'average' debt, and a 'low' percentage of debt that is so bad, nobody has a name for it. ('Toxic' looks like the word that is going to stick though.)

It's a bit like a cake that 'only' has 10% pureshite in it. The customer doesn't see it or ignores it. And nobody cares at all, until it starts to stick out the whole place.

Pension funds are hungry beasts. Mostly they rate themselves according to how much money they attract from unsuspecting fools rather than how much they actually make.

I once went for an interview at a fund and when I asked if they had a 'plan' or 'map' of the fund (I did expand; asking them for a place where I might see each and every price) they said they didn't have such a thing. I asked how did they know where they stood then, and they all looked at each other (probably wondering why I wasn't impressed by how much money they attract each month: they did know that).

So pension funds, in cahoots with our government, are allowed to buy anything that agencies rate as investment grade.

So why bother with the funds? Why don't we just get the agencies to hold our money?

I saw the same thing during the Asian crash and the ruble crash. Agencies were still saying debt was fine well after the bloody things had crashed.

I sincerely believe this is all collusion and that in the US agencies might get their hands slapped, but not here in the UK. A place where our new prime minister transfers his flat to his wife's name so that she can borrow against it and they can avoid tax.

They're all crooks. Only the poor souls at the bottom (people buying today, for example) will suffer for this great crime.

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http://www.reuters.com/article/ousiv/idUSN...0070710?sp=true

"...S&P said it underestimated loss rates of the subprime loans that back CDO debt structures. The situation will get worse before it improves, the rating company said.

"This could be important," said Lou Brien, a strategist with DRW Trading Group in Chicago. "Keep an eye out for the other rating agencies to follow suit."

.."

Oh, dear.

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The last part is where people might have different opinions - indeed, what IS the default risk? If we're entering Big Bang territory,

the valuations could be even too high at the moment. But I think the bigger problem for the insurers must be: what can they legally

declare as the value of their holdings in a monthly statement? And in whatever way that number is produced, if it goes down, the

policyholders won't like it.

Even if the markets are pricing in a reasonable default risk they'll also be pricing in a big hairy discount because they're expecting lots of people to be panic selling, right here and now whatever I thought the real value of the bonds were if I was in the market to purchase any I'd only buy at far less than that value because I'd know that there'll be people selling at those knock down rates. Supply and demand, for once an imbalance driving prices way down rather than keeping them high.

I agree that the declared value is the killer for some of them though, but I know what I'd rather see from my pension fund - a monthly statement with a theoretical write down and a monthly statement saying that they believe that the current market valuation is too low and is not a fair reflection of the fund's value than a monthly statement saying that they'd practically given them away in a time of mass market panic and even if the market recovers they've banked that massive loss.

Markets do tend to overshoot, they've understated the riskiness of these investments for a while and now they're swinging the other way and overstating it, and taking advantage of the market sentiment to rape and pillage. Someone out there is going to make a lot of money picking these bonds up at negligible prices, I'd be amazed if they didn't.

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