Can Freddie And Fannie Survive Monday?

[A.steve]

I simply don't get the hysteria. Volatility yes, but nothing new there. We'll end the week higher imo.

I thought that October 2007 was the last chance to exit... I had self doubt when the FTSE hit >6300 ~Feb 2008... but I kept my nerve - and am now right again - by a comfortable margin. I expect prices to continue to fall into Autumn, but - of course - I can't rule-out irrational rallies... in fact, I expect them even though I can't predict them.

How sure are you that the FTSE100 will be up in a fortnight; month; quarter?

Edited July 12, 2008 by A.steve

[dogfox]

I thought that October 2007 was the last chance to exit... I had self doubt when the FTSE hit >6300 ~Feb 2008... but I kept my nerve - and am now right again - by a comfortable margin. I expect prices to continue to fall into Autumn, but - of course - I can't rule-out irrational rallies... in fact, I expect them even though I can't predict them.

How sure are you that the FTSE100 will be up in a fortnight; month; quarter?

Well I'm off for a drink, with my last remianing friend! Whilst I agree the markets will eventually provide a buying opportunity it is a fallacy to think that buying at anytime is OK in the long run. It is clear from the statistics that if you bought before market corrections it takes years to get back to your starting point. I dont know anyone with a 70 year time horizon so for my money it is time to wait or be short. I fully expect a relief rally at somepoint due to falling oil prices but in my opinion that is a selling opportunity, and as for hanging on well I guess its more exciting than watching paint dry but who needs excitement in this market. The level of debt in the USA and UK is tearing at the very fabric of both economies we are at the beginning and not the end. Volatility options ar efine to protect some of the downside but I woudn't recommend trading this market.

On CDS and CDO's the market is so opaque with so many SIV's created it will take years to work out which bank had what where and I would not be buying financials for a long while yet. This is all to say that while interesting no one really knows how bad the CDS CDO market can get and thats why banks wont lend to each other. Nite

[Dave Spart]

So Monday comes and wipes another 25%.

So what?

My guess is the government guarantees any shortfalls they have and slowly twists banking arms to take over their business. Or to close their doors to new business.

Cant see it starting a stampede.

The more that Stock Market Indices around the world fall, the sillier that astonomical house prices look.

Edited July 12, 2008 by Dave Spart

[Roman Abramovitch]

Crisis,what crisis???

LOS ANGELES - IndyMac Bank's assets were seized by federal regulators on Friday after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures.

The bank is the largest regulated thrift to fail and the second largest financial institution to close in U.S. history, regulators said.

The Office of Thrift Supervision said it transferred IndyMac's operations to the Federal Deposit Insurance Corporation because it did not think the lender could meet its depositors' demands.

IndyMac customers with funds in the bank were limited to taking out money via automated teller machines over the weekend, debit card transactions or checks, regulators said.

Other bank services, such as online banking and phone banking were scheduled to be made available on Monday.

"This institution failed today due to a liquidity crisis," OTS Director John Reich said.

The lender's failure came the same day that financial markets plunged when investors tried to gauge whether the government would have to save mortgage giants Fannie Mae and Freddie Mac.

[R K]

I thought that October 2007 was the last chance to exit... I had self doubt when the FTSE hit >6300 ~Feb 2008... but I kept my nerve - and am now right again - by a comfortable margin. I expect prices to continue to fall into Autumn, but - of course - I can't rule-out irrational rallies... in fact, I expect them even though I can't predict them.

How sure are you that the FTSE100 will be up in a fortnight; month; quarter?

I was mostely talking about the US stock markets. So I am expecting a volatile week but think they will end up responding positively to Indymac getting pulled. Less uncertainty. Ditto when the position is clearer with Freddie and Fannie. I've been waiting patiently for a "long" on the DOW/S&P and I think this will be it, but I'm talking about maybe 1,000 points up on the DOW, nothing longer term than 6-8 weeks or so maybe. If you look back to the pre Bear Sterns market it turned strongly when they got pulled. Dollar rallied, gold lost something like 18%. I wouldn't rule out something similar happening and the possibility of maybe Lehman disappearing at the same time.

They're taking players out of the game.

[Belfast Boy]

No one invites me to dinner parties anymore Im so bearish any similar experiences???

Yes I have similar experiences. Though I learned not to talk about it. My friends have also learned to to mention it infront of me. They used to laugh at me. Now they are scared.

[azogar]

I was mostely talking about the US stock markets. So I am expecting a volatile week but think they will end up responding positively to Indymac getting pulled. Less uncertainty. Ditto when the position is clearer with Freddie and Fannie. I've been waiting patiently for a "long" on the DOW/S&P and I think this will be it, but I'm talking about maybe 1,000 points up on the DOW, nothing longer term than 6-8 weeks or so maybe. If you look back to the pre Bear Sterns market it turned strongly when they got pulled. Dollar rallied, gold lost something like 18%. I wouldn't rule out something similar happening and the possibility of maybe Lehman disappearing at the same time.

They're taking players out of the game.

will you be shorting gold then?

[Joey Buttafueco Jr]

The options for both Fannie Mae and Freddie Mac look bleak. It is unlikely the US government will let them "fail" (technically they already have) but the risks for the world economy have now increased dramatically. If the US government takes on the debt of these two institutions its debt will double overnight. AAA US govt bonds will not be worthy of the AAA status and therein lies a huge problem. This is before the 46 trillion of CDS and CDO's start to be marked to market and unwind. (Fact: in 2002 the CDS market was 1.46tn in size with a default rate of 9.3% since then the market has grown to $46tn and default rates dropped to less than 1.5%. Now some 40% of CDS protection is written on below investment grade companies. If the default rate reverts just to norm then some $5tn will default. I think it will be worse.) THe only way out for the USA is to devalue the USD. (Note that the pound is in no better shape) hence the flight to the Euro on Friday. THese are seriously dangerous times and cash is king. This weekends press is poor at best. There are opportunities out there though in the form of short ETF's, and currencies. Would be a brave honcho to buy anything equity related or property related now. More pain to come (No one invites me to dinner parties anymore Im so bearish any similar experiences???)

"Fact: in 2002 the CDS market was 1.46tn in size with a default rate of 9.3%"

I assume most of the defaults were HY rather than IG? So you are saying the CDS (indices) markets are underpricing this risk?

"This is before the 46 trillion of CDS and CDO's start to be marked to market and unwind."

So you are saying that CDS's aren't currently marked to market. Which type? And what CDOs are you saying aren't marked to market?

"since then the market has grown to $46tn"

see

http://www.housepricecrash.co.uk/forum/ind...t&p=1207575

[Joey Buttafueco Jr]

Do you have a reference for those statistics?

You can find info here

http://www.dealbreaker.com/2008/05/credit_...ps_the_next.php

[Joey Buttafueco Jr]

:-S Thanks for the hint... I suppose I'd better say why I asked. I'm aware that CDS issuance has grown rapidly, but I thought the figure of the order of $4n trillion was a recent count of all derivatives - of which CDS was only a proportion (all be it a very important proportion).

Also of significant interest is the idea that there was a 9.3% default on $1.46tn and, later 1.5% on $46tn equates to an annual default of $136bn having risen to $690bn - or a five-fold increase in default. It has been discussed here at great length how the total notional value of CDS contracts holds little analytical information (because CDS contracts may be used to hedge CDS contracts - and, in doing so, reduce dramatically the risk per contract even if the systemic risk increases by some unquantifiable margin).

The idea your figures give me is this:

If we assume that the vast majority of CDS contracts are bought to hedge risk (from loans or from CDS contracts) - and that speculation in CDS contracts is not statistically significant (this is a pure assumption, and would have to be acknowledged in any tentative conclusion) and we can establish figures for the default rates on real loans... then we can accurately estimate the ratio of CDS contracts purchased to offset the risk of CDS contracts against CDS contracts purchased to protect against defaults on loans. If we can do that, then we can establish meaningful information about the perception of risk inherent in loans.... the graph of which, I'm sure, would be enlightening.

Of course, if any such calculations were to be undertaken, we'd need accurate figures (with no unknown caveats) on an annual basis (or, preferably, more frequently than that...)

N.B. The 'maths' above is only a sketch to suggest relevance... A lot depends upon how, exactly, I interpret the figures you posted.

and we can establish figures for the default rates on real loans... then we can accurately estimate the ratio of CDS contracts purchased to offset the risk of CDS contracts against CDS contracts purchased to protect against defaults on loans. If we can do that, then we can establish meaningful information about the perception of risk inherent in loans

Are you looking for loan CDS data?

http://www.markit.com/information/products...dices/lcdx.html

or am I misunderstanding?

[R K]

will you be shorting gold then?

I'm looking to go long DOW (I usually wait for the first pull back after a MACD crossover if it is above the prior low - somewhere around 10,800 would look good I think if it gets there) and I am short Euro/USD on the basis it has failed at this level every time so far, so if it breaks to the upside then we're in new territory and a smaller longer-term WTIC short so I don't want to over do it in the same direction in correlated markets. 960/65 gold is still resistance until it's not, so we'll see. It could blow straight through it on Monday or maybe we'll see another March style take-down. I really don't know. Whichever way you play it this seems like a pivot point in just about everything again. Clearly if the dollar breaks the March low then everything else will follow. I like to take positions around what look like clear support or resistance levels and they either run or close out. Bernanke still has some leeway with interest rates in a SHTF scenario. The banks may be trying to force his hand on his "no more cuts" line. Again, I am simply speculating. So it's either new lows markets/dollar or bounces of support resistance. Pays your money etc

[A.steve]

or am I misunderstanding?

Maybe, or maybe I'm just not clued-up enough to extract what I want from Markit.

The idea that is most interesting is default-rates. I guess these could be interpreted two ways: either as a rate of default on loans (which I assume would be proportion by nominal value) - or as the proportion of CDS contracts that pay out... perhaps passing through several hands (and several CDS contracts) before compensating the lender or someone else.

This all comes back to our discussions ages ago... the idea that there might be two extremes as to the organisation of today's CDS contracts... on one hand, a vary small number of loans might be re-insured by a stupendous chain of intermediates - and ultimately underwritten with more than adequate collateral. On the other extreme, a very large number of loans might be insured once by market participants with woefully inadequate collateral. Obviously the reality will be somewhere between the two... I'd find it very interesting to quantify this.

[jonpo]

hmm I really don't feel that saturday is the best day to be discussing CDS's at length...

given that most of these derivatives are traded OTC I wonder how many bank valuation models explicitly model the counterparty risk embeded in the CDS they buy... as the guest on the dealbreaker article says the only way to hedge the outstanding CP risk is to purcase a second layer of CDS's its like CDS^2 asthe CDS of a counterparty moves wider there is a decline in the value of every CDS it has written.. unless the second order CDS exposure is hedged the potential to misvalue CDS's is huge... other wise every CDS bought has another hidden embeded CDS written against the counterparty... this is why the monoline thing is so insideous...

[Joey Buttafueco Jr]

Maybe, or maybe I'm just not clued-up enough to extract what I want from Markit.

The idea that is most interesting is default-rates. I guess these could be interpreted two ways: either as a rate of default on loans (which I assume would be proportion by nominal value) - or as the proportion of CDS contracts that pay out... perhaps passing through several hands (and several CDS contracts) before compensating the lender or someone else.

This all comes back to our discussions ages ago... the idea that there might be two extremes as to the organisation of today's CDS contracts... on one hand, a vary small number of loans might be re-insured by a stupendous chain of intermediates - and ultimately underwritten with more than adequate collateral. On the other extreme, a very large number of loans might be insured once by market participants with woefully inadequate collateral. Obviously the reality will be somewhere between the two... I'd find it very interesting to quantify this.

"The idea that is most interesting is default-rates. I guess these could be interpreted two ways: either as a rate of default on loans (which I assume would be proportion by nominal value) - or as the proportion of CDS contracts that pay out... perhaps passing through several hands (and several CDS contracts) before compensating the lender or someone else."

Are you confusing corporate CDS (which insure bonds), and loan CDS?

Don't forget that you will be getting a certain amount of recovery, so you won't be paying out 100%, although IIRC recovery rates tend to be lower in a downturn

"woefully inadequate collateral"

Are you assuming the counterparty in question is AAA, otherwise they would have to post collateral?

[Joey Buttafueco Jr]

hmm I really don't feel that saturday is the best day to be discussing CDS's at length...

given that most of these derivatives are traded OTC I wonder how many bank valuation models explicitly model the counterparty risk embeded in the CDS they buy... as the guest on the dealbreaker article says the only way to hedge the outstanding CP risk is to purcase a second layer of CDS's its like CDS^2 asthe CDS of a counterparty moves wider there is a decline in the value of every CDS it has written.. unless the second order CDS exposure is hedged the potential to misvalue CDS's is huge... other wise every CDS bought has another hidden embeded CDS written against the counterparty... this is why the monoline thing is so insideous...

"given that most of these derivatives are traded OTC I wonder how many bank valuation models explicitly model the counterparty risk embeded in the CDS they buy"

It depends which valuation model. The desk don't explicitly take into account counterparty risk, although someone like product control would. As I said above, if the counterparty is not AAA, they will have to post collateral - note that both Bear and the Monolines were AAA.

[Guest DissipatedYouthIsValuable]

like they give a shit.

As long as the peasantry continues to hand over labour and assets in exchange for paper they couldn't give two curly turds.

All they want to do is keep people banking. If they do it from burned out slums with electrified metal collars on to keep them pacified, that's fine.

Bailout, collapse the dollar, shoot a few front men, have a bit of a scuffley war or unrest, new currency and back to hidden rule by bankers will be the plan.

Stop talking things up and tell us how bad you really think it's going to get.

[InternationalRockSuperstar]

note that both Bear and the Monolines were AAA.

note that Moodys, Fitch and S&P would have given a dead donkey an AAA rating

[VedantaTrader]

and we can establish figures for the default rates on real loans... then we can accurately estimate the ratio of CDS contracts purchased to offset the risk of CDS contracts against CDS contracts purchased to protect against defaults on loans. If we can do that, then we can establish meaningful information about the perception of risk inherent in loans

Are you looking for loan CDS data?

http://www.markit.com/information/products...dices/lcdx.html

or am I misunderstanding?

Noel, remember I said taking out "put" options on the financials would offer a good risk reward scenario? You said the market has priced it in already. With 50% falls in Freddie and Fannie and Lehman continuing to drop, I dont think the downside risks have been priced in. Was the imminent insolvency of these financials priced in last week? IMO< it would appear it wasnt priced in.

[VedantaTrader]

BTW Noel, I m not saying it wasnt, however, just curious to know how you can assess the downside risks and know it is priced in? What method or anything like that?

[Joey Buttafueco Jr]

Noel, remember I said taking out "put" options on the financials would offer a good risk reward scenario? You said the market has priced it in already. With 50% falls in Freddie and Fannie and Lehman continuing to drop, I dont think the downside risks have been priced in. Was the imminent insolvency of these financials priced in last week? IMO< it would appear it wasnt priced in.

I think I recall this - do you have a link to the thread? I also recall others saying it would be a great idea to short B&B/Taylor Wimpey etc. What was the price of the options you were looking at, as with volatility so high put options must have been quite expensive (I was investigating this last week for Taylor). My point about the market pricing in the falls was why are the financials priced so high if everyone knows they are going to going to go down in the short term? Are we saying the market has got it wrong? If so, why is the market getting it wrong?

[Guest Steve Cook]

like they give a shit.

As long as the peasantry continues to hand over labour and assets in exchange for paper they couldn't give two curly turds.

All they want to do is keep people banking. If they do it from burned out slums with electrified metal collars on to keep them pacified, that's fine.

Bailout, collapse the dollar, shoot a few front men, have a bit of a scuffley war or unrest, new currency and back to hidden rule by bankers will be the plan.

That prety much sums it up injin

[Joey Buttafueco Jr]

BTW Noel, I m not saying it wasnt, however, just curious to know how you can assess the downside risks and know it is priced in? What method or anything like that?

My thinking is this..... We have talked at length about efficient markets etc, and have agreed that in the past (tech boom etc), the market seemed to be behaving irrationally. Are we saying we are in a similar situation now? I could understand it if these companies were tiddlers, and had little analyst converage - there could be a misspricing there as not all the information is available to all players in the market.

"just curious to know how you can assess the downside risks and know it is priced in"

With Lehman, you have several hundred analysts doing this, so do you think they are getting it wrong, or are they being leaned on to paint a more rosy picture than is actually the case? I worry that you can't underestimate anyone, so in the case of the stockmarket I am loathe to say they are getting it wrong because they are stupid.

[VedantaTrader]

I think I recall this - do you have a link to the thread? I also recall others saying it would be a great idea to short B&B/Taylor Wimpey etc. What was the price of the options you were looking at, as with volatility so high put options must have been quite expensive (I was investigating this last week for Taylor). My point about the market pricing in the falls was why are the financials priced so high if everyone knows they are going to going to go down in the short term? Are we saying the market has got it wrong? If so, why is the market getting it wrong?

Not sure what was the name of the thread Noel. I wasnt looking at any options in particular, looked at some options on ETF's. To be honest, options are an area that I m only starting to learn about...However, I m starting to get ideas of when to use them and when not to and what options are best for certain times.

My suggestion that deep-out-of the-money puts on banks was more a postulation than anything. What defines deep out of the money? The reason, i think these would have been good choices are that they are cheaper because they are so far out of the money. However, if a stock drops to zero then that would present a good risk/reward scenario...possibly?

I know that these out of the money options usually expire worthless. However, in todays trading environment I think this might be one of those rare occasions when they offer an opportunity...

I mean buying put options on Lehman at 10 USD, 8 USD,5 USD when Leham was 20 I think is a good opportunity. As if the trade does come good and Lehmans do implode then they will pay out bigtime.

I think the markets per se can t be wrong as the price is the price. However, I think there is too much optimism in the markets, and the situation of the financials is underestimated until Friday when Freddie and Fannie came tumbling down.

I think it was obvious these companies would go bankrupt. They have 80 billion USD in CAP to back up 5 Trillion USD of mortgages. So a 4% drop in value of the mortgages would wipe them out. Jim Rogers was short investment banks 2 years ago, and he called Freddie and Fannie to go out of business then. He must now be sitting on a nice sum of money. He was short citi from 65 USD and all the banks ETFs. He reckons CITI will go to under 8 USD also.

I think what will surprise everyone is how many big institutions will actually fail. There are not too many times when these things come along, so in this case the deep out of the money options might be a good lottery ticket...

So what is defined as deep out of the money? 20%,30%,40% etc? Is there a definition?

Do you know any good sites where I can find the prices of lots of options?

Thanks in advance.

P.S

Iwas listening to someone who was short the financials ETF. A Lehmans product. So Lehans were counter party to the ETF> So he was asking what to do if Lehman failed, would he get paid. This was on radio, Peter Schiff, suggested he take deep out of the money puts on Lehman as insurance....

[_w_]

Let's see what our old chum Peter Schiff has to say on the issue

http://www.telegraph.co.uk/money/main.jhtm...12/cndow112.xml

Elsewhere A.Nalyst goes on to say

For the record i still hold equities and i pooped when i read this

Personally i think we'll see a mass sell off.

Peter Schiff is one step ahead as usual. The question of the OP should be:

'Can the dollar survive next week?'

[_w_]

no

or

maybe

i dont know give me a clue

I wish I could :-)