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Extradry Martini

The Next Leg Of The Market Crisis

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This is just a quick one to give you a heads up on the next leg of this crisis….

You may have heard of a hedge fund called Peloton in a little trouble. These guys made a fortune last year by being short sub-prime mortgages while being long prime mortgages. Recently, triple-A tranches of prime mortgage pools have been trading at around 85% of face value. This is not because that is what they are worth, but because there are no buyers - investors are not touching mortgages of any kind right now, banks cannot buy them because they don’t have the room on their balance sheets and hedge funds don’t have the leverage to buy them because the banks aren’t lending money (Peloton have suffered from this and have not been able to meet margin calls). This really is the result of the whole system seizing up.

Now, bank holdings of sub-prime paper are dwarfed by holdings in prime paper. As the banks begin to make write-downs on the prime paper, they decrease their capital and therefore decrease even further their ability to lend. Not only that, but securitised mortgages are also held in size by the mortgage agencies – Fannie Mae and Freddie Mac. Theses agencies (set up by Congress, but without an explicit government guarantee on their debt) in turn finance themselves by issuing bonds, and the market for them is the largest bond market in the world, surpassing even that of the US Treasury Bond market.

I don’t know how long it will take for this next leg of the crisis to hit – it could happen tomorrow, or next week, but no longer than a month - nor how bad it’s going to be, but expect more nastiness in the near future.

By Katherine Burton and Tom Cahill

Feb. 28 (Bloomberg) -- Peloton Partners LLP, the London- based hedge-fund firm run by former Goldman Sachs Group Inc.

partners, is selling assets because of losses on mortgage-backed securities, said two people with knowledge of the matter.

Peloton, founded by Ron Beller and Geoff Grant in 2005, is liquidating part of its asset-backed fund after declines in higher-rated mortgage securities, said the people, who declined to be identified because Peloton hasn't disclosed the information.

The firm has bids for holdings of the Peloton ABS Fund from firms, including Citadel Investment Group LLC and GLG Partners Inc., and is working with lenders to meet commitments, the people said.

The Peloton ABS Fund was named the best new fixed-income fund of 2007 by EuroHedge magazine after rising 87 percent on what Beller called a ``world-coming-to-an end'' trade that debt linked to subprime loans would tumble and higher-rated securities would rise. The fund had about $1.8 billion of assets.

``The rubbish goes down first and then the good stuff is pulled down with it,'' said Nigel Blanshard, a partner at London- based Culross Global Management Ltd., an $800 million fund that invests in other hedge funds and isn't a Peloton client. ``The flight to quality this year has been to get out of mortgages altogether.''

Grant, 47, who works in Santa Barbara, California, declined to comment.

`No Clothes'

When he collected his EuroHedge award last month, Beller, 45, said the firm's investment strategy had been built on a conviction that ``the emperor had no clothes.'' The ABS fund is managed by Peter Howard and David Watson.

``Our shorts last year were largely in subprime and our longs in prime assets,'' Beller said in a Jan. 25 telephone interview. ``We just benefited from the sharp drop in subprime and feel well positioned going forward as we expected our longs to continue to perform and our shorts to continue to deteriorate.''

A short sale is designed to profit when the security falls in value, while a long position is a bet the security will rise.

At New York-based Goldman, Beller headed the fixed-income, currency and commodity sales groups in Europe, and Grant oversaw the global foreign exchange business and was co-head of the firm's macro proprietary trading group. After Beller left Goldman in 2001, he worked for a year reorganizing New York City's school system.

Stick With Success

Peloton, which is named after a bicycle-racing formation in which riders work together to increase their speed, held its profitable trades into this year because it was confident they would continue to advance, according to a December investor report to investors in its Multi-Strategy fund, a copy of which was obtained by Bloomberg News. The firm's $1.6 billion Multi- Strategy fund, run separately from the ABS fund, gained 27 percent in 2007.

``We believe there is substantial profit potential built into our portfolio and expect plenty of opportunities to augment this through opportunistic trading around our core positions,''

the report said.

``We have recently fielded questions from ABS investors about `the trade' in 2008 and are confident we already have it on,'' the report said. ``As each month passes, this will become increasingly evident as our senior securities amortize at par while our subordinate shorts start receiving writedown payments.''

--With reporting by Jody Shenn in New York. Editors: Larry Edelman, Tim Quinson.

To contact the reporters on this story:

Katherine Burton in New York at +1-212-617-2335 or kburton@bloomberg.net.

Tom Cahill in London at +44-20-7673-2052 or tcahill@bloomberg.net

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There's more to this Peloton than meets the eye...

In the sense that there are more Pelotons knocking around? or that Peloton itself will cause the next leg down? or is this "simply" an example of further constrictions of bank balance sheets as the poison now spreads to prime mortgages? or...?

Peter.

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I think the valuation of mortgage backed securities gets increasingly difficult if you are looking for a number above zero.

http://globaleconomicanalysis.blogspot.com...ay-in-wamu.html

Let' do the math.

The total pool size is $513,969,100.

$476,069,000 was rated AAA.

92.6% of this cesspool was rated AAA.

Yet 15% of the whole pool is in foreclosure or REO after a mere 8 months!

In addition, the data suggests that people are not even bothering to wait for delinquencies to hit 90 days. Instead they are handing over the keys right now.

What does Triple A mean these days Around About 'Alf?

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Guest happy?

That's the thing about a peloton - it only takes one small slip at the front and fifty riders all come crashing down...

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The problems for the Peloton ABS Fund have had a serious negative impact on the Multi-Strategy Fund and we are currently assessing our options.In order to protect the interests of stakeholders, the Directors have determined to suspend the calculation of Net Asset Value, subscriptions and redemptions with immediate effect and until further notice.

does that mean you can't have your money back? :(

Edited by gfromls

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Dear suscriber,

We're writing to you about your fund, it's a complicated situation, we'd rather not even measure how complicated it is and you certainly wouldn't understand the figures, so here's a pitcure.

1120321058_2065.jpg

Edited by OnlyMe

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From the OP

Peloton, which is named after a bicycle-racing formation in which riders work together to increase their speed

Thanks - I've given up reading enormous cut and pastes on here. Life is too short.

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/Sarcasm ON/

Couldn't happen to a nicer bloke.

/Sarcasm OFF/

He is almost certainly the most unpleasant individual I have ever met.

On another post I recall that mentioned that you and EDM swam in cold, deep waters. You have now admitted it!

p-o-p

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This is just the beginning.

A friend of mine works at a big vcity bank, they have been busy today winding down all the poleton crap. Theres a few banks out there that will have to take a hit.

This is just the beginning.

How can these asshats win best hedge fund award one year and crash the next.

Now we realise that all they were doing were pushing mickey mouse money around on their computer screens and taking a slice each time. When someone came to cash in their chips, they find out there's actually no money there in the first place.

If UK relies on London as a financial centre, then god help us all.

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In order to protect the interests of stakeholders, the Directors have determined to suspend the calculation of Net Asset Value, subscriptions and redemptions with immediate effect and until further notice.

I translate:

"In order to protect you, we don't give you your money back. Not today, and maybe never. If you don't understand, sorry, we don't either."

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Dear suscriber,

We're writing to you about your fund, it's a complicated situation, we'd rather not even measure how complicated it is and you certainly wouldn't understand the figures, so here's a pitcure.

1120321058_2065.jpg

Stop it......Stop it..!

I nearly hurt myself there.... :lol::lol::lol:

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The whole market is in such a mess its impossible to think of a way out, over the past few months banks investors have been adding money on top, its like a gambler keeps going on thinking it will turn around adding more money losing more. He stops when he can't add any more, and banks are just going to take greater loses.

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There's more to this Peloton than meets the eye...

In the sense that there are more Pelotons knocking around? or that Peloton itself will cause the next leg down? or is this "simply" an example of further constrictions of bank balance sheets as the poison now spreads to prime mortgages? or...?

Peter.

Peloton itself is unimportant in the bigger picture. Holdings of prime paper by banks far exceed their holdings of sub-prime paper. If they take large write-downs on this stuff, balance sheets get constricted even further, interbank rates rise again etc. What becomes scary is the possibility that the contagion spreads to agency paper (which is prime mortgage-backed in all but name.)

With due respect Dry - this is clearly not just a subprime issue...it's a credit and asset valuation bubble. Sub prime is merely where problems become evident first.

And it is not just about ABS bonds. Only 19% of US mortgages are bundled into bonds. Whilst the values of these bonds are going down now, write offs of on balance sheet mortgages will only take place when it actually happens....and will last for 2-3 more years.

Thanks for the lesson, but I wasn't talking about sub-prime mortgages. Also, while the percentage of RMBS may be as low as you say (I'll have to check that one), the size of the de facto (i.e. the agency/GSE bond market) RMBS market is huge - even bigger than the treasury market. (By the way, if a banks holds a mortgage-backed bond it's just as much "on-balance sheet" as a direct mortgage).

Edited by Extradry Martini

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A bank representative on bloomberg a couple of weeks ago said the banks had a "big problem" trying to come to grips with valuing this paper when there was no market for it.

Misses Loo told me to stop shouting at the screen.

I cant see a problem. If there is no buyer, there is no value.

Same with these MBSs

Le Peloton= Le crunch de banque= pas des mortgages= le masion prix casse

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"Recently, triple-A tranches of prime mortgage pools have been trading at around 85% of face value. This is not because that is what they are worth, but because there are no buyers "

The implication of what you said in the OP was that sub prime mortgages are bringing down prime mortgages by association....not because of the general issue of credit availability and asset values. Don't take it personally.

I agree with you about the holding of mortgage backed bonds...but it is the issuers of such bonds that are having the problems about bringing them back onto balance sheets and constricting their lending isn't it? And a bond's value alters dynamically with expected default whilst if the mortgage is on a balance sheet in an unadulterated form then it will only be written off once they have exhausted the recovery process. If the issuing bank has to bring the formerly issued bonds back onto their balance sheet I would expect them to alter the structure to avoid realising losses. But I'm sure I'm teaching my grandma to suck eggs.

No, these bonds are already on balance sheet.

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I am hearing they are/were leveraged 5x, meaning the Prime Brokers are likely to take a massive hit. I dont know who their PB's are but with the GS links, I would imagine GS will be one of them. Is this were GS will finally get caught up in this mess? They have stayed pretty clean so far...

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This is just the beginning.

A friend of mine works at a big vcity bank, they have been busy today winding down all the poleton crap. Theres a few banks out there that will have to take a hit.

This is just the beginning.

How can these asshats win best hedge fund award one year and crash the next.

Now we realise that all they were doing were pushing mickey mouse money around on their computer screens and taking a slice each time. When someone came to cash in their chips, they find out there's actually no money there in the first place.

If UK relies on London as a financial centre, then god help us all.

But I'm sure they'll say sorry and hand their 2/20 bonuses back.

If/when all of the fallout comes from this.. there needs to be a completely new way of regulating the whole financial services industry.

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Dear suscriber,

We're writing to you about your fund, it's a complicated situation, we'd rather not even measure how complicated it is and you certainly wouldn't understand the figures, so here's a pitcure.

1120321058_2065.jpg

:lol::lol::lol:

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The thing is ... things are not going quite as well as we'd hoped.

You know you thought you were going to make a load of money? Well, us too, no mistake about that, we definitely thought we were all going to make a load of money. Well the thing is there is the possibility, an outside chance, that we're not going to make quite as much as we'd hoped. In fact, not to put too fine a point on it, it's possible that we're not going to make much at all. If anything really. The problem is, well we don't know what the problem is to be honest. It's just that the market seems to have moved against us (what a b@stard eh?). Who'd have thought it. I've asked our main traders, Nigel and Jez (both under 20, fit as whippets and as sharp as they come) for an explanation but, to be honest, they've baffled us with science! Or it might have been bullsh!t. How can we tell? Anyway, the latest is, it's beginning to look as if it's all come unstuck. So, probably best if we don't communicate for a while. Less stressful for all of us - what?

Thanks for your support. It was fun while it lasted. I've just got to hand the keys in and we're done I think.

Cheers.

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  • 298 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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