smile
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Many seem to be watching for the potential forced selling of CDOs driven by margin calls or hedge fund investor redemptions.
I think the potential severity of the situation depends on the proportion of ABS CDOs held by the various categories of buyers:
1) buy and hold investors
2) Resec CDOs
3) MTM sensitive accounts, e.g. SIVs, banks and hedge funds
4) hedge funds using repo financing.
Does anyone have some numbers on the distribution of CDO tranches held by the four categories of buyers defined above? |
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Nonius
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| Founding MemberNonius Unbound |
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no, but my initial thought is that the risk, save for BSAM's funds and a few other funds, is pretty well spread out so that a lot of people are holding some pieces but that not too many people have bet the farm and are holding a ton of it. I've a client who's a 1.5 bill fund and who has a 15MM tranche. 15MM is big for a mere mortal retail account, and if 15 goes to zero, that's a lot. But, that's 15MM loss on 1.5Bill NAV. not earth shattering. similar stories hold for around 50 other clients I know. another bunch of clients, usually global macro, actually MADE money because they were short.
some people are saying this could spiral into Fall 98 contagion, but I sort of doubt it. |
No more Mr. Nice Guy.  |
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i believe i saw the numbers you want in last week's Lehman Bros Structured Products Weekly, or Mortgage Markets Weekly, or some related report by said house.
the conclusion was very similar to what Nonius said... |
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kr
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| Founding MemberNP Raider |
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I think the whole BSAM story highlights the valuation issue which runs through all of this. If you have unreliable valuations it's hard to know if you've lost money. Let's be clear, most of the capital is AAA and doesn't represent much of a threat - event ABX AAA indices haven't moved much. Remaining capital is let's say 10-15% of the originated number. For ALL of subprime I think that takes you to mid-double-digit-USDbillions, which isn't a cataclysmic number. Of that, actual distribution varies from desk to desk, but my hunch is that even in the best situation, real-money investor appetite for RMBS mezz has been almost entirely limited to CDO funds, which are not MTM. These people will have a problem eventually, but only when the assets get downgraded, and the net effect is not likely to be forced selling, just a lockdown on reinvesting and cashflow performance to tranches. So any effect is likely to be well delayed.
The bit that is really at risk is mainly the stuff that never left the bank - either it sits on prop books (DRCM) , in CDO warehouses (various IB shops), or as second-loss risk after HF MTM investors' haircut capital has vaporised (i.e. BSAM). Mainly these are 'true professional investors' in that they have access to liquidity outs (i.e. jamming their clients or repacking) or can manage to hide the losses for some time (so that all the street counterparties don't slice them to ribbons). Don't get me wrong - the risk IS there - and you can see it through the widely swinging ABX indices. But the amount of executed trades is limited by the market structure - I don't see it as a 'forced selling' situation just yet.
Once you do get to the forced selling, though, it is a mess (again, cf. BSAM). Every effort will be made to avoid printing trade prices. If it becomes impossible for the professional investors to look the other way, at some point management will send in the leg-breakers and portfolios will have to be liquidated. In that direction, I don't see it as a suprise that BSAM got toasted in the months following DRCM's closure - one may have indirectly led to the other. This is why the BSAM thing is interesting - whose skull will crack next if the BSAM funds do get liquidated? The freeze of United Cap is maybe important, but I'd be looking for somebody like Nomura to get squashed b/c they have been pretty active, their London principal desk has moved in the last 12 months, and management is known to be a bit nervous. |
my bank got pwnd |
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I know very little in this area, but I have heard people bagging out rating agencies with regard to these structured products. If the rating agencies have dropped the ball, as people suggest to me, wouldn't that indicate a more widespread situation than is now believed? Have they given reasonable ratings or not? |
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kr
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| Founding MemberNP Raider |
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| Arguably 2006 vintage is a new asset class so one can't say at this point. To date, it hasn't performed like other deals. Its singularity has brought in the possibility of political action which could also have an impact on performance, as the spirit of the talk is pro-equity/anti-debt. |
my bank got pwnd |
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doobs
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kr,
But the 2006 vintage adjusted for it's seasoning is still performing muchooooooo worse than the other deals. Of course you are the NP God, and I'm probably missing something here, but please correct me if I'm wrong.
Is there any way to value a unit of CDR, CumLoss in dollar terms on the index? As we know this shit does not trade like any other deriv.
I have never heard this from the ABS CDO crowd, but can one price CDR's on these deals as a basket of americans. Where each loan has a default/prepay option depending on HPI/LTV or something? I think I saw a paper on this but can't remember where.
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apine
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in cleaning up my desk, i came across a letter to the opinion page from the wsj written by Jim Chanos on "Short Lived Lessons -- From an Enron Short". He wrote up 10 points and 2 of them are particularly relevant to today:
1) Mark-to-market accounting was not the problem at Enron, mark-to-model was
and
2) the rating agency system breaks down when most needed. Rely on it at your own peril.
Felix Salmon compares the CDO market to Wile E Coyote running off the cliff. Sure, everyone is taking a hit but if we all simply close our eyes to it, we can pretend it is not really happening. Of course, knowing that your portfolio is mis-marked is a form of theft by misrepresentation. If you don't think so, consider under what terms you would be borrowing money if people found out you were down 10% instead of up 10%. reputation alone would put lenders off never mind worries of what other problems are in your portfolio.
i still don't think that this will end up being okay. wile e coyote can't escape the relentless pull of gravity and i dont think that the credit markets will be able to escape the relentless pull of homeowner defaults. no matter how hard traders try to mislead the rest of the financial world.
certainly many of the rest of you are more knowledgeable than i for this particular market. but based on the numbers i have looked at for the housing market, i just see it being very unlikely that this will end up with a happy face. |
People can't stand two things - randomness and responsibility. -- Art Cashin |
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dgn2
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I am with you on this apine. However, I can see that mark-to-market does not always make sense in the relative value world, but a speculative entity needs to be able to withstand drawdowns without liquidations. Realistically, if someone intends to buy things they think are undervalued or sell things they think are overvalued they need some breathing room. The established limits should enable that breathing room. The problem is that the people who set the limits may not really understand that they are too close.
Anyway, I think one should be upfront that the fund will work on a mark-to-model basis and will focus on cash flow over some long-term period. Realistically, trying to prevent trades from printing so that one doesn’t have to re-mark is nothing short of criminal in my view. A speculative entity should either be set up so that it is not as sensitive to mark-to-market swings or it should mark things as close to where they think they are.
As an aside, I think investors and managers are increasingly unrealistic about the smoothness of P&L in a more transparent world and this drives manipulation. This stuff is definitely not black and white but you have to draw the line somewhere. You have to draw it in advance and not redraw it whenever it is convenient.
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IAmEric
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| Phorgy PhynanceBanned |
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Ok. For this discussion, I'm back to my favorite icon.
All I can add is that I think July 16 will be an interesting day  |
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kr
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| Founding MemberNP Raider |
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just to be clear, I resist the appellation "NP God" - for one thing, God doesn't take the 7am out of Heathrow on a Monday morning (that is why they call it "an ungodly hour")
dare I say it: 2006 is a BLACK SWAN? because never before were there so many missed payments in the first year.
I am more tempted to say REFLEXIVITY - if it walks like BBB, talks like BBB, then surely it rates like BBB?
But really, guys, don't confuse MTM with expected performance of credit-risky assets. This is exactly where the whole risk-neutral thing goes wrong. No, those marks are not the indication of a healthy market, but a convulsing market is pretty hard to separate from an illiquid one. Maybe you look at it like a boundary case in Akerlof's Lemons Market. But unlike other pure-MTM trades, credit assets can be held for the long term. Those BBB indices trading at 50 will continue to pay L+1000 for at least the immediate term, if not longer. Maybe you wouldn't have the option to get out of the position if you had to, but some people don't need that option. This is really the best reason for somebody to manage a CDO. Ok, I appreciate that the ratings the CDO itself gets could be pretty shambolic, but that is a different question. |
my bank got pwnd |
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IAmEric
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| Phorgy PhynanceBanned |
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doobs
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I still need to read your Reflexivity stuff!
As you know majority of these buy and hold types are pension funds, insurance outfits and as soon as they start seeing downgrades in the rear view mirror they will start shitting these bonds out. When the agencies start with the downgrades then there might be more problems.
Also as far as the "black swan" theory do you not think that most of the FPDs, EPDs should by now have left those pools, and the performance should revert back to say 00, 01 vintage? This was the same with the 00, 01 vintage deals after all the MH shit left the pools. |
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apine
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i'm not confusing mtm with a good investment. hey, this might be great paper at the right price. and if a real money account has the nards to hold on to what they have, that is their decision. but obscuring the truth from investors and creditors by fudging the numbers and calling it a mark to model is not right. mark it to market. the whole point of a mark to market is so that everyone knows what a correct estimate for the liquidating value for a portfolio is.
for all i know, this guy is not representing the state of affairs correctly and that there is no issue. but i don't think so. and kr's prior post says the same thing (traders will avoid prints...). so i suspect everyone is holding their nuts and hoping for the best.
and, iae, what is july 16th? |
People can't stand two things - randomness and responsibility. -- Art Cashin |
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granchio
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IAmEric,
me dumber than usual... but what happens on the 16th july?
tx |
"Deserve got nothing to do with it" - Clint |
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IAmEric
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| Phorgy PhynanceBanned |
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Bear Stearns to add up fund losses by July 16: report
NEW YORK (Reuters) - Bear Stearns Cos. (BSC.N: Quote, Profile, Research) may take until July 16 to tally losses at two struggling hedge funds that invested in risky mortgage-related securities, The Wall Street Journal Online reported on Monday.
The process of calculating the funds' net asset value is taking longer than usual because the securities in which the funds invested are thinly traded and the market for them has been volatile, according to the Journal, which cited a letter to investors from Bear Stearns' asset-management arm.
Investors are keen to see how far the assets have fallen, since they believe other hedge funds are also holding mortgage-related securities, the report added.
A Bear Stearns spokeswoman was not immediately available for comment. |
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granchio
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| tx... i'll stay long those nice teeny july puts then |
"Deserve got nothing to do with it" - Clint |
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jungle
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| Chief Rhythm OfficerCSD LLC |
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| There was a fairly extensive analysis of this (will ABS CDO woes lead to 'contagion') by JPM last week. They "expect further modest contagion into other credit markets" and recommended positioning for "a steepening of the synthetic credit quality curve" and being long protection on ABX.06-2.BBB. |
"get set for a long summer of carry love" |
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Martingale
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| NP House Mouse |
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| jpm, haha, i heard a rumor that buffet made quite some money doing some trade on ABX against JPM...yeah the guy who said derivatives are evil... |
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"Anyway, I think one should be upfront that the fund will work on a mark-to-model basis and will focus on cash flow over some long-term period. Realistically, trying to prevent trades from printing so that one doesn’t have to re-mark is nothing short of criminal in my view. A speculative entity should either be set up so that it is not as sensitive to mark-to-market swings or it should mark things as close to where they think they are."
Someone should tell this to Citi......somehow my BB resi's (2005 vintage) are up an average of ten points over May - although we don't MTM, investors ask for these marks - am I in any of violation for reporting these clearly erroneous marks?(on second thought, not sure I want the answer to that) I'm guessing and hoping "no" and will continue to operate with my head in the sand.....also leads me to wonder what exactly they're trying to artifically elevate - to my knowledge they have no stake in keeping these marks artifically high - does anyone know of why they would do this? (other than the obvious hedge fund "appeasing" - but thinking about that, the usual HF play is long equity and shorting the BB - with these inflated marks HF are getting extra-screwed because their equity is in the shitter and their protection is following it right down)
Also, regarding kr's comment about the "possiblity of political action", the attached file was on BB this morning.
Attached File: subprime.doc
As I'm getting ready to hit the "post" button just got a message flashing across my BB that 612 classes of subprime bonds were put on negative watch by S&P............sweeeet...... |
"First God, then man, horse, dog. Then women. Then rat." |
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tbretagn
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Actually we are getting aggressive with the quotes (even on un semi-liquid stuff), and it seems that suddenly, the guys are marking the books in a rather clean way.
Seems like risk managers asked a couple questions to the guys on the floor after the Bear story. |
Et meme si ce n'est pas vrai, il faut croire en l'histoire ancienne |
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| TB, agree 100%, and that's my point......the marks from the street are quite conservative/reasonable these days, save for Citi.....was wondering if anyone had any insight into their aggressiveness...... |
"First God, then man, horse, dog. Then women. Then rat." |
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Bachelier
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| Transparent Doppelgänger |
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(S&P will host a conference call at 10 a.m. New York time.
To listen, dial +1-888-324-0379 in the U.S. or +1-210-234-6980
internationally. Conference ID#: 1197033, passcode: SANDP)
this call is hilarious....and scary |
No, that paper is really really good and makes everything clear. But just don't try that "sex with goats" that is advised in the middle part. *THAT* is completely wrong. |
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Yes, have been tuning in/out while waiting for my surveillance team to give me the bad news regarding the "Lucky 612".......the call is basically re-hashing what the attached article said on Bloomberg this morning - although everyone knows that 2006 is not the best, looking at some of the numbers and comparing them to 2000 kind of puts how shitty a vintage it is into perspective.......
Attached File: S&P.doc
Here's the replay/streaming/whatever in case anyone's interested......
Replay Numbers:
US/Canada: 1-866-397-8265
US/All Others: 1-203-369-0540
Replay will expire on Tuesday, July 17, 2007
Live Audio Streaming:
URL: http://www.mymeetings.com, Under Events, Select Join an event
Conference ID#: 1197033
Passcode: SANDP
Replay Web Streaming:
URL: http://www.mymeetings.com, Under Events, Select Join an event
Conference ID#: 1197033
Passcode: SANDP
Web replay streaming will expire on Tuesday, Aug. 7, 2007
[Edit: If you didn't listen to this call, you should. Laughably contentious - best Q&A in a while.]
[Double Edit: Moody's just got jealous of all the attention S&P's been getting today and released 399 downgrades (not even "watches", straight downgrades) of their own.] |
"First God, then man, horse, dog. Then women. Then rat." |
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Bachelier
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| Transparent Doppelgänger |
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50 bp in two days. The first order effect is of course the call for more margin for leveraged accounts, but second ordereffects would be a step change in the absolute amount of leverage available, based on both asset quality and fund rating.These you are not going to get from bbg screens, and it makessense to call your friendly prime broker to find out.
So NONIUS, are you asking for more collateral? reducing leverage lines? |
No, that paper is really really good and makes everything clear. But just don't try that "sex with goats" that is advised in the middle part. *THAT* is completely wrong. |
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