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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: MulhollandDrive who wrote (188244)	3/4/2009 12:44:32 PM
From: James Hutton	Read Replies (2) \| Respond to of 306849

Nice summary. Sounds a wee bit like portfolio insurance. According to Peter Bernstein in "Against the Gods," "To the clients who signed up, portfolio insurance appeared to be the ideal form of risk management that all investors dream about - a chance to get rich without any risk of loss. Its operation differed in only one way from actual put option and in only one way from a true insurance policy. But those differences were enormous and ultimately turned out to be critical. A put option is a contract: the seller of the . . . put option is legally bound to buy if the owner of the option puts the stock. Put options . . . require the seller to post cash collateral to be certain that the buyer is protected. Insurance companies also sign contacts obliging them to make good in the event of a claim of loss, and they set aside reserves to cover this eventuality. Where does the necessary cash come from to reliquify insured portfolios when stock prices are falling? From the stock market itself - all the other investors to whom the insured investors will want to sell their stocks. But no reserves or collateral exist to guarantee that the liquidity will be there when called upon. The market had no legal obligation to bail out Leland and Rubinstein's clients and other insured portfolios against loss. Those other investors were not even aware of the role they were expected to play. Leland's brainstorm assumed that the buyers would be there, but he had no way to guarantee that they would actually show up when called upon to do their duty." Given Greenspan's role in supposedly saving the market in October 1987, one wonder why he vigorously opposed regulating derivatives.

To: MulhollandDrive who wrote (188244)	3/4/2009 12:48:37 PM
From: patron_anejo_por_favor	Read Replies (2) \| Respond to of 306849

If it goes much lower, I wouldn't be surprised if Buffett makes a run at them. The market cap for the whole thing is only 65 billion at current prices. That would blow that whole other mechanism out of the water and cause a ginormous collapse of a size heretofore unseen in the CDS market with a concurrent squeeze in the stock. A splendid time is guaranteed for all, as John Lennon said.....