Post by jeffolie on Aug 12, 2007 11:50:38 GMT -6
My expectation for a systematic crisis in the summer of 2008 comes from the volume of resetting adjustable rate mortgages (ARM's) which peak next March. There are over $500 Trillion in derivatives world wide. Some of those Trillions directly play off the mortgage backed securities (MBS) that are now worthless since no one will give a bid to buy them when hedge funds and pensions must sell them.
The unfortunate homeowners lose their houses when their mortgage reset to higher monthly payments according to the terms of the adjustable mortgages (ARM's) ending their teaser, introductory, low rate periods. These mortgages have been bundled together when they were first made and sold to investors as bonds labelled MBS's. The MBS's also were accumilated in colateralized debt obligations (CDO's) which function like mutual funds that instead of being full of stocks are full of MBS's and derivatives. Banks, pension funds, insurance companies and other financial institutions bought these MBS's and CDO's because the rating agencies described much of the MBS's and layers of the CDO's as AAA, AA, and A, which are the labels for the very best investment grade bonds and financial instruments. Much of the CDO's and MBS's came from mortgages that defaulted or will default over the next 18 months. The term used for these mortgage related complex financial instruments which no one will buy and thus have little or no value is 'toxic waste'.
Everyday now the main street media is full of TV and print stories about houses being foreclosed. The financial media is full of hedge funds and banks losing vast sums of money from the toxic waste. The worst is still ahead. The first peak in resetting ARM's is in October. It takes at least six months for a house mortgage to go from the first nonpayment of the mortgage to the bank owning the house (REO). This is a downward spiral that lowers that comps that other houses get their prices. Add to this that house sales have declined and more houses are being built, the future for toxic waste can only be worse.
One index that tracks the declining value of toxic waste used for derivatives called the ABX shows in dramatic detail the collapse of derivatives: www.eurobondonline.com/abx-HE-AAA-06-2.Htm
There you can see how the rating agencies such as Moody's, S&P and Fitch have done horrible jobs of describing MBS's as AAA, AA, A, BBB and BBB- because the prices of these bond bundles and bonds have collapsed reflecting them as toxic waste. Rating agencies are starting to regrade the toxic waste to lower labels, but that is like shooting a dead horse then pronouncing it dead when it was already dead before shooting it.
Now comes the politics of the Democrats promoting a bailout and the politics of the President rejecting a bailout of the unfortunate, stupid people who signed up for the ARM's, the banks that made and sold the MBS's and the world wide investors of MBS's, CDO's or derivatives based on toxic waste. Ms Clinton's proposal will be a campaign issue. But, if my evaluation plays out, then the US and the worldwide investors will be in deep shit by next summer well before the fall 2008 elections.
I have tried to make this simple and readable. The financial instruments involved remain far more complex. It takes days and weeks for experts to place a true price on the financial instruments by pricing them to what real buyers will pay for them. This mark-to-market price remains difficult and the lack of clarity in what they are worth changes moment to moment so they are decribed as having a lack of transparency or opaque. When investors try to get their money from funds having toxic opaque waste, the funds can deny them access to thier money claiming that there is no bid or they don't know what their toxic waste is worth.
Added to this horrible development, the Federal Reserve (Fed) is coming to the rescue of the banks through its primary broker dealers on Thursday and Friday. The Fed makes temporary loans to its primary broker deals called repurchase agreements (repos). The Fed takes the toxic waste as collateral and gives the banks Treasuries notes to use. The repos must be repaid in 3 days by the banks. World wide Central Banks such as the Fed have added over $100 Billion dollars on Thursday and Friday.
Please remember that the worst is still ahead.
The unfortunate homeowners lose their houses when their mortgage reset to higher monthly payments according to the terms of the adjustable mortgages (ARM's) ending their teaser, introductory, low rate periods. These mortgages have been bundled together when they were first made and sold to investors as bonds labelled MBS's. The MBS's also were accumilated in colateralized debt obligations (CDO's) which function like mutual funds that instead of being full of stocks are full of MBS's and derivatives. Banks, pension funds, insurance companies and other financial institutions bought these MBS's and CDO's because the rating agencies described much of the MBS's and layers of the CDO's as AAA, AA, and A, which are the labels for the very best investment grade bonds and financial instruments. Much of the CDO's and MBS's came from mortgages that defaulted or will default over the next 18 months. The term used for these mortgage related complex financial instruments which no one will buy and thus have little or no value is 'toxic waste'.
Everyday now the main street media is full of TV and print stories about houses being foreclosed. The financial media is full of hedge funds and banks losing vast sums of money from the toxic waste. The worst is still ahead. The first peak in resetting ARM's is in October. It takes at least six months for a house mortgage to go from the first nonpayment of the mortgage to the bank owning the house (REO). This is a downward spiral that lowers that comps that other houses get their prices. Add to this that house sales have declined and more houses are being built, the future for toxic waste can only be worse.
One index that tracks the declining value of toxic waste used for derivatives called the ABX shows in dramatic detail the collapse of derivatives: www.eurobondonline.com/abx-HE-AAA-06-2.Htm
There you can see how the rating agencies such as Moody's, S&P and Fitch have done horrible jobs of describing MBS's as AAA, AA, A, BBB and BBB- because the prices of these bond bundles and bonds have collapsed reflecting them as toxic waste. Rating agencies are starting to regrade the toxic waste to lower labels, but that is like shooting a dead horse then pronouncing it dead when it was already dead before shooting it.
Now comes the politics of the Democrats promoting a bailout and the politics of the President rejecting a bailout of the unfortunate, stupid people who signed up for the ARM's, the banks that made and sold the MBS's and the world wide investors of MBS's, CDO's or derivatives based on toxic waste. Ms Clinton's proposal will be a campaign issue. But, if my evaluation plays out, then the US and the worldwide investors will be in deep shit by next summer well before the fall 2008 elections.
I have tried to make this simple and readable. The financial instruments involved remain far more complex. It takes days and weeks for experts to place a true price on the financial instruments by pricing them to what real buyers will pay for them. This mark-to-market price remains difficult and the lack of clarity in what they are worth changes moment to moment so they are decribed as having a lack of transparency or opaque. When investors try to get their money from funds having toxic opaque waste, the funds can deny them access to thier money claiming that there is no bid or they don't know what their toxic waste is worth.
Added to this horrible development, the Federal Reserve (Fed) is coming to the rescue of the banks through its primary broker dealers on Thursday and Friday. The Fed makes temporary loans to its primary broker deals called repurchase agreements (repos). The Fed takes the toxic waste as collateral and gives the banks Treasuries notes to use. The repos must be repaid in 3 days by the banks. World wide Central Banks such as the Fed have added over $100 Billion dollars on Thursday and Friday.
Please remember that the worst is still ahead.