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Cdos Lose Marbles; Credit `kerplunks!':

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

July 13 (Bloomberg) -- Investors asking how many beans make four in the market for collateralized-debt obligations are realizing that the likely answer is three if you're lucky, fewer if you're not.

Moody's Investors Service cut its ratings on $5.2 billion of bonds backed by subprime home loans this week, and put a further $5 billion of CDOs on review. Standard & Poor's yesterday lowered its assessment of $6.39 billion of debt, after earlier putting the figure at $12 billion (which suggests S&P should spend some of its fees on new beads for the office abacus).

The two assessors should scrap every appraisal on the subprime portion of the $503 billion of CDOs sold globally in 2006, according to Mehernosh Engineer, a London-based credit strategist at BNP Paribas SA. Because people were able to borrow money without credit checks in last year's freewheeling mortgage market, the rating companies have no right to use inductive reasoning to predict the likely defaults on subprime CDOs.

``Their models are basically unable to predict any `normal' behavior due to this overriding fraud factor,'' Engineer wrote in a research report this week. ``The right thing for the rating agencies to do for the 2006 vintage would be to withdraw all ratings.''

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

July 13 (Bloomberg) -- Investors asking how many beans make four in the market for collateralized-debt obligations are realizing that the likely answer is three if you're lucky, fewer if you're not.

Moody's Investors Service cut its ratings on $5.2 billion of bonds backed by subprime home loans this week, and put a further $5 billion of CDOs on review. Standard & Poor's yesterday lowered its assessment of $6.39 billion of debt, after earlier putting the figure at $12 billion (which suggests S&P should spend some of its fees on new beads for the office abacus).

The two assessors should scrap every appraisal on the subprime portion of the $503 billion of CDOs sold globally in 2006, according to Mehernosh Engineer, a London-based credit strategist at BNP Paribas SA. Because people were able to borrow money without credit checks in last year's freewheeling mortgage market, the rating companies have no right to use inductive reasoning to predict the likely defaults on subprime CDOs.

``Their models are basically unable to predict any `normal' behavior due to this overriding fraud factor,'' Engineer wrote in a research report this week. ``The right thing for the rating agencies to do for the 2006 vintage would be to withdraw all ratings.''

Excellent find, in particular:

Contagion from the allegedly self-contained implosion in the U.S. subprime mortgage market is drifting through the securities industry like mustard gas. It helped push the dollar to a record low yesterday, triggered the biggest deterioration in European corporate-bond risk in at least three years, and drove an index that tracks leveraged-buyout loans to a nine-month low.

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

July 13 (Bloomberg) -- Investors asking how many beans make four in the market for collateralized-debt obligations are realizing that the likely answer is three if you're lucky, fewer if you're not.

Moody's Investors Service cut its ratings on $5.2 billion of bonds backed by subprime home loans this week, and put a further $5 billion of CDOs on review. Standard & Poor's yesterday lowered its assessment of $6.39 billion of debt, after earlier putting the figure at $12 billion (which suggests S&P should spend some of its fees on new beads for the office abacus).

The two assessors should scrap every appraisal on the subprime portion of the $503 billion of CDOs sold globally in 2006, according to Mehernosh Engineer, a London-based credit strategist at BNP Paribas SA. Because people were able to borrow money without credit checks in last year's freewheeling mortgage market, the rating companies have no right to use inductive reasoning to predict the likely defaults on subprime CDOs.

``Their models are basically unable to predict any `normal' behavior due to this overriding fraud factor,'' Engineer wrote in a research report this week. ``The right thing for the rating agencies to do for the 2006 vintage would be to withdraw all ratings.''

Although a morally plaudible suggestion in practice this would be disasterous, and obviously a none starter.

Can you imagine taking such a swipe at what is effectively over 1% of global GDP?

The risk to the system is the rapid erradication of the recently generated equity. The path for an orderly unwinding of the current climate is evaporating fast, and as the dollar denominated default rate continues to chug upwards whilst market capitalisation bizarrely and recklessly grows alongside it, the radius of effect of the eventual race to yen continues to eek out from New York casting a bleak and darkening shadow over the free markets of the credit systems.

Many of todays managers of capital are looking at each other and thinking...

The life boat is too small, and there are too many people between me and it. More wine please waiter, and a large scotch too.

It all makes for fantastic viewing (from the life boat of course).

.

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The risk to the system is the rapid erradication of the recently generated equity. The path for an orderly unwinding of the current climate is evaporating fast, and as the dollar denominated default rate continues to chug upwards whilst market capitalisation bizarrely and recklessly grows alongside it, the radius of effect of the eventual race to yen continues to eek out from New York casting a bleak and darkening shadow over the free markets of the credit systems

Would you expand on this a bit, please?

Does this mean that as the default rate rises, yet capitalisation also grows, the disconnect from fundamentals grows - meaning that the unwinds will be greater, and thus the yen will appreciate more (proportional to the size of the unwind) in a bigger rush to payback the borrowed money?

edit: I understood that the feb. lurch in the markets was due to an increase in Japanese IRs. Does the inverse also hold true - a decline in markets would lead to an increased yen, as borrows buy yen to pay off their debts?

Edited by LargelyIgnorant

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Guest DissipatedYouthIsValuable
Would you expand on this a bit, please?

Does this mean that as the default rate rises, yet capitalisation also grows, the disconnect from fundamentals grows - meaning that the unwinds will be greater, and thus the yen will appreciate more (proportional to the size of the unwind) in a bigger rush to payback the borrowed money?

edit: I understood that the feb. lurch in the markets was due to an increase in Japanese IRs. Does the inverse also hold true - a decline in markets would lead to an increased yen, as borrows buy yen to pay off their debts?

You took the words right out of my mouth.

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Would you expand on this a bit, please?

Does this mean that as the default rate rises, yet capitalisation also grows, the disconnect from fundamentals grows - meaning that the unwinds will be greater, and thus the yen will appreciate more (proportional to the size of the unwind) in a bigger rush to payback the borrowed money?

edit: I understood that the feb. lurch in the markets was due to an increase in Japanese IRs. Does the inverse also hold true - a decline in markets would lead to an increased yen, as borrows buy yen to pay off their debts?

Capitalisation is growing on the back of expanding credit. Credit is continuing to expand in the face of rising risk.

The unwind will be greater because more credit is at risk. Debit and credit is basically a way of selling future earnings. It is a bet one way or another on the time value of capital. If I borrow money I am betting it will be easier to earn money in the future. If I lend money I am betting it will be harder to earn money in the future.

When the fed went to 1% they allowed banks to bet it would be harder to earn money in the US in the future, with a huge margin of comfort. The banks bet heavily (indeed leveraged the whole system) and devised rakes of new vehicles to find people/entities to take their bet. The frenzy of activity of the banks to place these bets created an economic rejouvination and averted a slowdown.

The fed once happy the slowdown avertion was no longer necessary returned to a more orthodox approach the fiscal management. The banks now heavily leveraged (in a position that shorts the US economy) have blown massive liquidity into the system. This liquidity has found it's way into bad ventuers and the system is leaking equity (as bad debts). This leaking of market equity via bad debts exposes the banks to risk.

The banks have pushed a little too hard and the cashflows they have bought via securitisation of debt are looking very creaky. The future requires everyone to repay so much capital back into the system that much of the public are thinking f*** it.

Banks are holding contracts that require tens of millions of US voters to experience real hardship, these people are uniting against the bank and saying "I dont care if I lost the bet I'm not paying".

The banks are nervous. They actually have very little power in the face of spreading dissent.

.

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Capitalisation is growing on the back of expanding credit. Credit is continuing to expand in the face of rising risk.

The unwind will be greater because more credit is at risk. Debit and credit is basically a way of selling future earnings. It is a bet one way or another on the time value of capital. If I borrow money I am betting it will be easier to earn money in the future. If I lend money I am betting it will be harder to earn money in the future.

When the fed went to 1% they allowed banks to bet it would be harder to earn money in the US in the future, with a huge margin of comfort. The banks bet heavily (indeed leveraged the whole system) and devised rakes of new vehicles to find people/entities to take their bet. The frenzy of activity of the banks to place these bets created an economic rejouvination and averted a slowdown.

The fed once happy the slowdown avertion was no longer necessary returned to a more orthodox approach the fiscal management. The banks now heavily leveraged (in a position that shorts the US economy) have blown massive liquidity into the system. This liquidity has found it's way into bad ventuers and the system is leaking equity (as bad debts). This leaking of market equity via bad debts exposes the banks to risk.

The banks have pushed a little too hard and the cashflows they have bought via securitisation of debt are looking very creaky. The future requires everyone to repay so much capital back into the system that much of the public are thinking f*** it.

Banks are holding contracts that require tens of millions of US voters to experience real hardship, these people are uniting against the bank and saying "I dont care if I lost the bet I'm not paying".

The banks are nervous. They actually have very little power in the face of spreading dissent.

.

:) Great post. Good to have you back

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Excellent find, in particular:

The best part by Engineer was "Investors shouldn't bet on credit quality improving until the Crossover index ...reaches at least 325,000 euros, Engineer said."

Soooo, what he is basically saying is BNP are massively short Xover and would like to tkae profits at 325. how on earth a situation gets better by Xover widening is ridiculous.

Talking up their books per chance?

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Global Credit Crash

I can't help but contrast this with Gillian Lacey-Solymar on BBC2 Working Lunch last week, with reference to this topic she " asked around the office " - and everything will be OK - apparently.

The Australians are rather more in-depth. :lol:

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Ditto. Thanks, ?...!

Ditto again. Very clear explanation, in simple english, of difficult concepts.

You should write an 'economics / investment for begginers text book'.

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