Ok so Bear Stink Funds are worthless, where are the indictments?
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Wait for the spectacular spillover first! It doesn't end with these 2 funds. There are going to be quite a few of these funds now that will be marked to market instead of model. BYE BYE!
Enter Lawyers. This is gonna be fun!
Where it could get tricky is if this triggers Credit Default Swaps. These are where there are systemic risks, not the CDOs.
Stay tuned!
Enter Lawyers. This is gonna be fun!
Where it could get tricky is if this triggers Credit Default Swaps. These are where there are systemic risks, not the CDOs.
Stay tuned!
From Mauldin-
Credit Default Swaps? Who Is the Counter-Party?
Letâs assume for a moment that the highest estimates of subprime mortgage
defaults are correct. That would suggest losses of $250 billion. But these homes will not
go to zero. Even if they drop by 40% for a total market loss of $100 billion, that is going
to get absorbed by thousands of funds and investors. No one will be happy (except the
lawyers), and a few banking institutions will end up being taken over as their balance
sheets decline and make them vulnerable, but the mortgage losses will not directly put the
system at risk.
It will mean that home valuations are likely to drop more than most market
forecasters are projecting, and thus cash-out financing is going to drop, but in the grand
scheme of things that is not a severe blow to the overall economy.
The one true risk that is simply not knowable at this point is in the Credit Default
Swap (CDS) market. Basically, the CDS market allows an investor to pass on the risk as
well as the returns of a loan or a basket of loans. It is a form of insurance. If you are a
bank and need to clean up your balance sheet, you simply go to a CDS dealer and find
someone who will take your risk for a price. A fund, trading desk, or bank can make a
nice premium selling CDSs and show very steady returns, somewhat like selling naked
options. The CDS market is huge, in the hundreds of trillions of dollars and growing
dramatically.
There is said to be about $1 trillion in CDSs for an underlying $20 billion in GM
debt. There are institutions which both buy and sell CDSs, trading them for an arbitrage
profit. As long as there is adequate collateral, there is no problem. The game can go on.
And it is an important game. There is a reason this market has become so large so
quickly. A CDS can be a very useful risk management tool. It is one of the reasons that
the markets are so liquid.If there is a hiccup in this market, it could cause serious
problems in a very short time. And the hiccup could be caused by a few institutions or
funds not being able to honor their Credit Default Swaps. There is no agency overseeing
counter-party risk. This is the one true systemic risk that I see.
How probable a risk is it? Not very, but the problem if one developed would be so
huge that it is worth paying attention to.
Notice that the major investment banks are sporting P/E ratios of around 10, as
compared to many financial institutions with no exposure to the subprime or CDS
markets, who are often in the range of 20. That would lead some analysts to suggest the
risk is already priced in the market.
I disagree. If you cannot know the risk then you cannot price it, and you can
guarantee it is not priced into the market. Something may be priced, and maybe it is the
right amount, but no one can know for sure. And we do not know the exposure of the
major investment banks to the subprime and CDS markets. I note that Bear Stearns
announced today that they were going to increase their risk controls. Watch for all of the
banks to do the same. Reminds me of something my father used to say about locking the
barn door after the horses were already in the north 40.
They are all increasing the margin requirements for loans on subprime and all
types of mortgage-related debt. You are going to see lenders start balking at so-called
covenant light loans in the high-yield space, and making fewer PIK loans. (PIK loans are
Payment In Kind, which means that the debtor can pay the interest on the loan by sending
the lender more debt paper. Great if you can get it. You get what you deserve if you make
the loan.) Just for the record, these covenant light loans are going to be the next scandal.
Frankly, other than the potential problems with the CDS market, I see the return
of the adults to the loan desks as a good thing. I prefer normal, sustainable growth to the
bubble-like credit creation we have seen the past few years. Losses like the ones at Bear
Stearns and their lenders helps focus the mind, as it hits the annual year-end bonus pool.
Finally, and one more reason not to own the large financials, is that it is not clear
how much of the CDOs they sold they have on their own books, or how much they are
going to have to take back in legal settlements. They are all required to maintain a set
amount of net capital. The compliance officers at the various firms will start pounding the
table to write down the CDOs to market as opposed to model, because they know the
regulators will be coming in to look at their ânet capitalizationâ and asking very pointed
questions.
And it is not just CDOs. Bear Stearns and its affiliates are listed as buyers of at
least 53 homes so far this year in San Diego County, California, 48 in Maricopa County,
Arizona, and 40 in Cuyahoga County, Ohio, according to a search of property records.
JPMorgan, the third-largest US bank, and its subsidiary Chase Home Lending
acquired at least 194 homes this year through foreclosure in Wayne County, Michigan.
Merrill, the third-biggest securities firm by market value, and its mortgage unit, First
Franklin, took possession of at least 87 homes this year in San Diego County, California.
Citigroup and affiliates are the new owners of at least 47 homes in Clark County,
Nevada. (Bloomberg)
How much is the exposure if they have to mark their CDOs and subprime
holdings to market? Who knows? The answer is no one, yet. My guess is that there will
be accountants who are not going to get to go to the Hamptons this summer.
This is a developing scandal every bit as big as the Savings and Loan scandals of
what seems like another era. We will end up with new regulations that are going to make
it hard on the subprime borrower to actually get a loan, even when they should. Such is the way of rules. It is sad, in a sense, as it will now get harder for those starting out to get
that starter dream home.
2 and 25 was mighty good to the principals in 2005 and 2006. 2007, not so good. Well, what are you gonna do? Time to move on and start a new fund...
get this, from 'Real Money'
Sources say investors had been expecting a recovery of around 50 cents on the dollar for the less leveraged fund
BAWWWWWWWWWWWWWWWWWWWWWWWWWAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
Now, let's all hoped they fucked over some politically connected folk, so that worthless bunch a' bastards in Washington get off those cotts, and do something, so the kids coming up have some semblance of an economy.
You've seen my stuff. What has been happening, what has happened to me, what has happened to all of us, is the most despicable, disgusting examples of unmitigated greed in history. And right now, Bershad is singing to the FEDS. Good. Get it over. We've got gangrene. Lose the foot. If not good enough, take the leg; it's time to move on.
Sources say investors had been expecting a recovery of around 50 cents on the dollar for the less leveraged fund
BAWWWWWWWWWWWWWWWWWWWWWWWWWAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
Now, let's all hoped they fucked over some politically connected folk, so that worthless bunch a' bastards in Washington get off those cotts, and do something, so the kids coming up have some semblance of an economy.
You've seen my stuff. What has been happening, what has happened to me, what has happened to all of us, is the most despicable, disgusting examples of unmitigated greed in history. And right now, Bershad is singing to the FEDS. Good. Get it over. We've got gangrene. Lose the foot. If not good enough, take the leg; it's time to move on.