Wait for the spectacular spillover first! It doesn't end with these 2 funds. There are going to be quite a few of these funds now that will be marked to market instead of model. BYE BYE! Enter Lawyers. This is gonna be fun! Where it could get tricky is if this triggers Credit Default Swaps. These are where there are systemic risks, not the CDOs. Stay tuned!
From Mauldin- Credit Default Swaps? Who Is the Counter-Party? Letâs assume for a moment that the highest estimates of subprime mortgage defaults are correct. That would suggest losses of $250 billion. But these homes will not go to zero. Even if they drop by 40% for a total market loss of $100 billion, that is going to get absorbed by thousands of funds and investors. No one will be happy (except the lawyers), and a few banking institutions will end up being taken over as their balance sheets decline and make them vulnerable, but the mortgage losses will not directly put the system at risk. It will mean that home valuations are likely to drop more than most market forecasters are projecting, and thus cash-out financing is going to drop, but in the grand scheme of things that is not a severe blow to the overall economy. The one true risk that is simply not knowable at this point is in the Credit Default Swap (CDS) market. Basically, the CDS market allows an investor to pass on the risk as well as the returns of a loan or a basket of loans. It is a form of insurance. If you are a bank and need to clean up your balance sheet, you simply go to a CDS dealer and find someone who will take your risk for a price. A fund, trading desk, or bank can make a nice premium selling CDSs and show very steady returns, somewhat like selling naked options. The CDS market is huge, in the hundreds of trillions of dollars and growing dramatically. There is said to be about $1 trillion in CDSs for an underlying $20 billion in GM debt. There are institutions which both buy and sell CDSs, trading them for an arbitrage profit. As long as there is adequate collateral, there is no problem. The game can go on. And it is an important game. There is a reason this market has become so large so quickly. A CDS can be a very useful risk management tool. It is one of the reasons that the markets are so liquid.If there is a hiccup in this market, it could cause serious problems in a very short time. And the hiccup could be caused by a few institutions or funds not being able to honor their Credit Default Swaps. There is no agency overseeing counter-party risk. This is the one true systemic risk that I see. How probable a risk is it? Not very, but the problem if one developed would be so huge that it is worth paying attention to. Notice that the major investment banks are sporting P/E ratios of around 10, as compared to many financial institutions with no exposure to the subprime or CDS markets, who are often in the range of 20. That would lead some analysts to suggest the risk is already priced in the market. I disagree. If you cannot know the risk then you cannot price it, and you can guarantee it is not priced into the market. Something may be priced, and maybe it is the right amount, but no one can know for sure. And we do not know the exposure of the major investment banks to the subprime and CDS markets. I note that Bear Stearns announced today that they were going to increase their risk controls. Watch for all of the banks to do the same. Reminds me of something my father used to say about locking the barn door after the horses were already in the north 40. They are all increasing the margin requirements for loans on subprime and all types of mortgage-related debt. You are going to see lenders start balking at so-called covenant light loans in the high-yield space, and making fewer PIK loans. (PIK loans are Payment In Kind, which means that the debtor can pay the interest on the loan by sending the lender more debt paper. Great if you can get it. You get what you deserve if you make the loan.) Just for the record, these covenant light loans are going to be the next scandal. Frankly, other than the potential problems with the CDS market, I see the return of the adults to the loan desks as a good thing. I prefer normal, sustainable growth to the bubble-like credit creation we have seen the past few years. Losses like the ones at Bear Stearns and their lenders helps focus the mind, as it hits the annual year-end bonus pool. Finally, and one more reason not to own the large financials, is that it is not clear how much of the CDOs they sold they have on their own books, or how much they are going to have to take back in legal settlements. They are all required to maintain a set amount of net capital. The compliance officers at the various firms will start pounding the table to write down the CDOs to market as opposed to model, because they know the regulators will be coming in to look at their ânet capitalizationâ and asking very pointed questions. And it is not just CDOs. Bear Stearns and its affiliates are listed as buyers of at least 53 homes so far this year in San Diego County, California, 48 in Maricopa County, Arizona, and 40 in Cuyahoga County, Ohio, according to a search of property records. JPMorgan, the third-largest US bank, and its subsidiary Chase Home Lending acquired at least 194 homes this year through foreclosure in Wayne County, Michigan. Merrill, the third-biggest securities firm by market value, and its mortgage unit, First Franklin, took possession of at least 87 homes this year in San Diego County, California. Citigroup and affiliates are the new owners of at least 47 homes in Clark County, Nevada. (Bloomberg) How much is the exposure if they have to mark their CDOs and subprime holdings to market? Who knows? The answer is no one, yet. My guess is that there will be accountants who are not going to get to go to the Hamptons this summer. This is a developing scandal every bit as big as the Savings and Loan scandals of what seems like another era. We will end up with new regulations that are going to make it hard on the subprime borrower to actually get a loan, even when they should. Such is the way of rules. It is sad, in a sense, as it will now get harder for those starting out to get that starter dream home.
But if there were no credit default swaps the banks holding the CDO's would eat the default correct? So effectively the risk is spread around the street to a greater extent than if it was solely held but the CDO holder banks?
Here come the lawsuits.... How much money did they make prior to the collapse of the funds... Dont worry this BULLISH for stocks as usual.
2 and 25 was mighty good to the principals in 2005 and 2006. 2007, not so good. Well, what are you gonna do? Time to move on and start a new fund...
get this, from 'Real Money' Sources say investors had been expecting a recovery of around 50 cents on the dollar for the less leveraged fund BAWWWWWWWWWWWWWWWWWWWWWWWWWAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA Now, let's all hoped they fucked over some politically connected folk, so that worthless bunch a' bastards in Washington get off those cotts, and do something, so the kids coming up have some semblance of an economy. You've seen my stuff. What has been happening, what has happened to me, what has happened to all of us, is the most despicable, disgusting examples of unmitigated greed in history. And right now, Bershad is singing to the FEDS. Good. Get it over. We've got gangrene. Lose the foot. If not good enough, take the leg; it's time to move on.