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.

Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: robert b furman who wrote (8539)	12/11/2007 10:42:44 AM
From: Hawkmoon	Read Replies (2) \| Respond to of 33421

Does any know how these products could be leveraged? I maybe incorrect, or simplistic, but I believe that the CDO/CMOs bonds were treated just like any other bond instrument for the purpose of creating leverage. They purchase bonds on credit, often from locations where they can borrow money for less than the yield of the bond (Japan.. etc). The banks accepted the bonds as being valid collateral against the loan. So, in the case of mortgage backed securities, the collateral effectively became illiquid, if not worthless. That puts many of those hedgies and SIVs on the hook for billions of dollars in loans against assets which have indeterminant value. I'm sure John and a few others can expand upon this.. But I also agree that, contrary to the S&L crisis, this one has global implications. But since that risk was so diversified, and not contained strictly to the US banking system, its created global bagholders.. Hawk

To: robert b furman who wrote (8539)	12/13/2007 5:00:35 AM
From: GUSTAVE JAEGER	Read Replies (1) \| Respond to of 33421

Re: Those who leveraged these CDO's are those in the worst problem. Does any know how these products could be leveraged? I just don't understand this capability? Dunno much about those CDO's either but I know what "leverage" is all about in the derivatives business... Basically, there's a leverage every time an investor doesn't have to fork up the FULL amount of the money needed to pay for a particular investment --be it futures, stock options,... Of course, the trick is to benefit --OR LOSE-- from the ups and downs of the FULL amount of money involved... So, for instance, suppose you want to speculate on the US real estate... you're bullish on a real-estate instrument worth $1,000,000 but all you have to put on your account is, say, $10,000 or a mere 1% of the actual "asset". If you're right and the market moves up by, say, 5%, then... Bingo! You've won $40,000 ($50,000 minus your upfront stake of $10,000). But if you're wrong and the market dips by 5%, then... ouch! You end up in the red by -$40,000. Get the picture?