Monday, July 2, 2007

In the hole for upwards of $200 biilion….

S&P, Moody's Mask $200 Billion of Subprime Bond Risk

So what’s the spread on the impending CDO disaster?
$125bn to $250bn, according to Bloomberg, which stated rather boldly on Friday that a failure on the part of rating agencies S&P, Moody’s and Fitch to downgrade securities backed by suspect home loans was masking burgeoning losses. Almost 65 per cent of the bonds in indexes that track subprime mortgage debt don’t meet the ratings criteria in place when they were sold, according to Bloomberg’s data. “You’ll see massive losses from banks, insurance companies and pension managers,'’ Joshua Rosner, a managing director at New York investment research firm Graham Fisher, told the news service. “The longer they wait, the worse it’s going to be.”

Posted by lvmreader @ 01:27 AM (476 views)
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19 thoughts on “In the hole for upwards of $200 biilion….

  • Hold on to your hats, folks! The downswing is about to begin and it promises to be very rough ride!

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  • You are on the money (as usual) Royston.

    This is a very bad situation, akin to a lot of people simultaneously finding out that the £1,000,000 pieces of jewellery they bought are worth only £10,000.

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  • Ask a simple question – why were CDO’s invented?

    They have few worthy advantages over the components used in their formation, but they escape a lot of regulatory scrutiny, and can be used to dress mutton as lamb.

    The eternal optimists would maintain that every barrel of apples has the odd rotten one, and that everything is rosy..

    ..Come off it – they only exist to create an illusion, and all the big names in the financial world know it – they are collectively culpable of a huge conspiracy, albeit superficially legal.

    This is one of the cornerstones of the cheap money explosion we have witnessed – and it’s beginning to crumble.

    – So stand by for turbulence!

    But how will it pan out? How will it effect ordinary people?

    It should put upward pressure on interest rates, and do serious damage to some savings and pension funds – but it could also lead to a phenomenon that we haven’t seen for a generation now – a lack of money to lend…

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  • uncle tom, very insightful – thanks for the post.

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  • tyrellcorporation says:

    ‘…and do serious damage to some savings and pension funds’

    UT good post but how are savings going to be damaged by rotten CDOs?

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  • TC,

    For one thing, rotten CDOs could bring down banks.

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  • This is what I was saying back in February this year – we will see massive losses and forced (distressed) selling of any liquidly tradable assets to cover these losses.

    And to think, some derided me…..

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  • tyrellcorporation says:

    Do you reckon the current spate of bank mergers is partly to disguise all these bad debts and ‘super-size’ the banks ability to weather the storm that’s brewing just off our coast?

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  • Stoatgobbler says:

    What is terribly frustrating here is that someone would think that the main victims of any CDO debacle would be banks. They built them to get risk OFF their books. They are bought by investors, mainly pensions funds, so banks won’t give two tosses about CDOs going south as they have sold the risk to investors – ie Joe Public.

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  • On Feb 22, 2007, I said,

    http://www.housepricecrash.co.uk/newsblog/2007/02/blog-what-can-happen-to-other-asset-classes-when-you-bet-big-and-lose-big-on-a-commodity-2770.php

    9. lvmreader said…
    @Bing-diddely-bong

    If a bank gets killed on wrong way bets, you can be almost certain that they will begin to call in loans and mortgages.
    Remember the smallprint – “they can demand the money back at any time”. This will make people into distressed sellers.
    Easily the most illiquid asset they have is housing at auction, so the sooner they can unwind from these positions the better.

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  • Yeah, that would make sense wouldnt it. Demand the money back from your mortgage holders who dont have it. Then take their house off them and try and sell it in a market where there are no buyers because the banks are taking all the mortgages back.

    Do you guys even think before you write this stuff?

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  • “It was a cover-up,” says Charles Dumas, global strategist at Lombard Street Research. He believes the banks alone have $750bn in exposure. They may have to call in loans.

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  • Stoatglobbler – yeah – the original intention was to get rid of risk.

    I think, when then brokers got a look into this, they got a little over enthusiastic, with ‘securitizing their risk’. Some American sub-prime mortgage banks have already gone under as a result of law suits centered around ‘miselling’.

    The banks are still liable if they have incorrectly sold financial products, so they are very much at risk of collapse.

    Of course the broker’s themselves have already collected their fat bonuses, and have moved onto the next bank that offers them a golden hello.

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  • @Hedger,
    Yeah, that would make sense wouldnt it. Demand the money back from your mortgage holders who dont have it. Then take their house off them and try and sell it in a market where there are no buyers because the banks are taking all the mortgages back. Do you guys even think before you write this stuff?

    We think before we write (well some of us do – (Royston, confused76, Sold2 Rent1, Japanese Uncle, Paul)) – what you have just described is the all too real Hobson’s choice available to International Banks, Hedge Funds, Pension Funds and Mutual Funds, who went sheep like into the night lured by the promise of cheap credit derivatives.

    What do you think causes crashes? That’s right, eveyone trying to sell when there are no buyers (not enough buyers).

    I would suggest you read some basic economic theory and market theory.

    Sarcasm is great, but for it to work, you need to know what the hell you are talking about.

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  • Thanks, I will take that on board. Thanks for pointing out how my hedge fund works.

    You overstate your case yet again. My point simply was that creditors will not make solvent people insolvent by demanding the entire mortgage debt back. That is simply a nonsense suggestion which would serve no use to anyone. Common sense must also be applied with academics.

    Quite a lot of these CDO points/arguments are rubbish as they are instruments for banks to get rid of the risk but why let that get in the way of a good old scare story, eh?

    I agree with you on Japanese uncle, but not the rest. Most people have lost any sense of objectivity and follow their emotions so much they are willing to make things up to bolster their argument. Just because some tin-pot loony writes something on a blogsite doesnt make it right. It annoys me because I am a bear on the housing market but there are such ridiculous claims and prophecies that I find myself arguing against the others.

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  • Hedger,

    Banks that lend too much on the way up and pull back loans and credit too much on the way down – whoever heard of such a thing? Virtually everyone who has had more than a decade’s experience of running a business!

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  • @Hedger

    Pray tell, what is your Hedge Fund strategy? How much have you got under management? What is your fee structure? What risk metrics do you employ?

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  • @Hedger,

    So I guess the Bear Stearns meltdown is a figment of our (tinpot) imaginations? Nothing to do with radioactive subprime mortgage defaults.
    Bear didn’t have to stump up $1.6bn from other assets then?

    Oh, which point of “Japanese Uncle’s” post were you agreeing with?

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