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Strategies & Market Trends : Free Float Trading/ Portfolio Development/ Index Stategies
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From: dvdw©10/1/2008 12:26:35 PM
of 3821
 
Some stuff from Ahhahas thread.

To: YourNameHere who wrote (11628) 10/1/2008 11:11:21 AM
From: ahhaha of 11636

Some securities only capture interest income,

Why would anyone buy a claim on a claim? Answer: confidence in eternal inflation.

They only have rights to the interest income stream from that group of mortgages.

There can't be judgements on the delivery of unicorns. You can't place a lien on someone who failed to deliver the unicorn you bought. You can't enter a contract to receive a fictitious quantity. The contract is invalid. You can't strike an agreement based on fictitious property. The agreement is non binding or fraudulent. Thus, how could securitization be allowed by the comptroller of the currency?

post 11628 from YNH

To: ahhaha who wrote (11600) 10/1/2008 10:13:06 AM
From: YourNameHere Read Replies (1) of 11637

Toxic securities presumably are ones which represent a collection of mortgages and presumably these mortgages aren't performing.

When something is toxic, it doesn't just kill itself off it kills off that which might be healthy.

Some securities only capture interest income, they have no rights to the underlying security, the house. They only have rights to the interest income stream from that group of mortgages. If the mortgages are paid off and reissued as new mortgages which is what needs to be done, in a lot of cases, they are worth nothing. So even in the case where the borrowers might be able to pay a lower interest income, that future stream can't be captured by the owner of that particular derivative of the original loan.

Other securities are only attached to principle repayments, including prepayments. Imagine trying to value those in an environment where foreclosures are frozen by government authority.

But the real systemic problem is the credit default swaps issued on all these securities. Remember toxic converts back in the day of the big tech bubble unwind? A company that was destined to go out of biz issued toxic converts so they had cash to dissolve orderly. The guy buying the converts would "insure" his position by simultaneously shorting the stock. This same sort of thing is happening with CDOs, the real game isn't holding them for the income stream it is in the buying of credit default swaps, as CDOs fell the default swap rose in price. As the price of the swap rises, the issuer has to raise more capital to put behind them forcing them to sell CDOs they still hold... at any price, putting the whole market for CDOs into a death spiral.

This is what killed Lehman. Now having a big issuer go BK had the effect of making the swaps fall in price for a while, but now that it is clear that the remaining issuers will be backstopped the game is back on.
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