Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Non-Tech : Bill Wexler's Trading Cabana -- Ignore unavailable to you. Want to Upgrade?

To: The Reaper who wrote (2576)	8/12/2007 6:58:35 AM
From: RockyBalboa	Read Replies (1) \| Respond to of 6370

Yes, regarding to the "who is suffering most" question which I also askey myself for practical (shorting) reasons. Whats worse, being a "market" man I still try to distinguish between liquitidy and market value. In the CDO world this is likely not the correct approach. As in RE, people often point out that CDO holders sell at their mark or they don't sell at all. Unless they are forced to do (and here comes liquidity in play). It is a good thing that after all, the "confined to the subprime corner" talk has ended (remember subprime is a FICO of under 620 whereas the low-doc alt-a of CFC and IMB have a fico of 700-720. Tell me where's the big difference and why would bad credit halt exactly at a certain FICO level?): This has 2 effects: -the number and size of potential casualties is now much bigger; -at the same time, any loss will be diluted into more and larger different entities to the point they become "non-toxic". -therefore losses can be taken more easily (this is what the industry hopes) As a result, the first companies in the mortgage food chain look pretty doomed. Practically all originators are down 2/3 if they didn't burn out completely. They fail for the lack of warehouse credit lines and drown in unsold whole loans and worse, claims to repurchase FPDs. Next in chain are the CDO purchasers often pseudo-REITS which purchased tranches never had liquidity and who found that their paper can neither be sold nor margined to desired amounts. They begin to fail too, as they used more leverage than the originators. LUM and RAS are good examples. They have as it seems "liquidity" problems not valuation problems, but this can not be distinguished. Margin calls are liquidity issues, but they result from perceived lower valuations. Once they sell a little bit and apply correct marks to the remainder of their book, it is more an issue of whether they have any equity. Between those two are some the arrangers of the debt, but as those are only brokers (like Lehman, Bear) they should not be impacted too much. They have lower revenues from the mortgage repackaging / issuing business. Farther behind are those funds who invested into the CDO reits in equity or junior debt. There are lots of different funds who liked the yields of paper which banks didn't buy. So they take the first loss of the vehicles which could be up to 30% depending on how much comes before the bank debt. Next come the guarantee providers. As those funds could not raise equity in larger amounts, but traditionally issued certificates with debt character - they put on (80% to 100%) guarantees combined with some protection schemes devised by financial engineers. You can find references under the keyword "CPPI" which is a tool for dynamic asset allocation. This is backed by a guarantor who promises to pay against any shortfall resulting from the scheme and collecting fees between a half and 2%. As long as the markets function properly, and allocation mechanisms are "continuous" the guaranty provider hardly pays. In illiquid times or on aprupt changes, he has to come up with the shortfall. Guarantors are SPVs backed by Bank of America, Bear Stearns, Societe, Lehman and also many continental banks who liked the fee for doing nothing. In this regard, german IKB which loaded some exposure on books and the "Landesbank Saxonia" who offloaded the paper into a SPV totalling E 13B are the first victims. And who bought the structures? We often were wondering who invested such large amounts. Banks arranging the certificates never put any principal into them... Besides corporations (like CCRT..), Endowment funds, various insurances which can not directly buy any hedge-fund equity but are willing to accept any paper where bond is written over it. Many of the guarantee certificates had assigned a double or triple A rating if the issuer could show some equity eating the first loss... Those pension funds are there to collect premiums and promise retirement benefits from ordinary people. Like you and me, everyone will bear a little slice of the mortgage malaise. Lets hope this little slice is non-toxic. -------------------------------- CPPI: many google hits google.at Defined: en.wikipedia.org CPPI, OPBI: chanahn.org