August 19, 2007

HousingPANIC Quote of the Day

"This will go down as one of the biggest financial illusions the world has EVER seen"

- Randall W. Forsyth, writing in Barron's - Aug 2007


For you wonks, here's a bit more from the Barron's piece, care of WC:

How did this all come about? A (bearish) hedge-fund operator, in a letter to his investors, describes how a senior Wall Street marketing director recounted the genesis of the current situation:

"'Real money' (U.S. insurance companies, pension funds, etc.) accounts had stopped purchasing mezzanine tranches of U.S. subprime debt in late 2003 and [Wall Street] needed a mechanism that could enable them to 'mark up' these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!!

"He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of subprime debt. Interestingly enough, these buyers (mainland Chinese banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, U.K. banks) possess the 'excess' pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the U.S. in U.S. dollars, 2) petrodollar recyclers. These two pools of excess capital are U.S. dollar-denominated and have had a virtually insatiable demand for U.S. dollar-denominated debt... until now."

These investors then had standing orders on Wall Street desks for any U.S. debt rated triple-A. Through the "alchemy of CDOs" and "the help of the ratings agencies," the CDO managers collected triple-B and triple-B-minus subprime and repackaged them so the top tier got paid out first. Then leverage the lower mezzanine tranches by 10-20 times and, "POOF... you magically have 80% of the structure rated 'AAA' by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets."

The letter concludes: "This will go down as one of the biggest financial illusions the world has EVER seen."

44 comments:

Anonymous said...

Well thats just shameful,dont think were gonna be anymore popular anytime soon.

Anonymous said...

WOW!!!

Anonymous said...

So basically we're using our dollars buying Toxic Chinese toys and then the Chinese take those same dollars and buy our Toxic American debt instruments? Sounds like a fair trade to me LOL!!!

Anonymous said...

Keith,

This is out of Barrons. Falls right in line with your concept of all assets getting hit from this bubble...


Aug. 17 (Bloomberg) -- Billionaire Eli Broad, who'll help shore up Goldman Sachs Group Inc.'s Global Equity Opportunities Fund, said art prices will decline as a result of losses by hedge funds and other large contemporary art collectors.

Anonymous said...

The CDOs may have been an illusion but the crash wont be

Anonymous said...

Keith;

You have been 2 years ahead of the curve in your prognosis. Now let us have your prognosis for the next 2 years. Is it Recession or Depression?

Anonymous said...

"financial illusion" is being kind to say the least. The word scam comes to mind more quickly.

D. said...

Don't the largest US banks have *interesting* equity positions in most of these Chinese banks?

What goes around comes around... the world is NOT flat after all!

SPECTRE of Deflation said...

The monetization of the debt has commenced. The little guy gets screwed again:


The Fed said in cutting the discount rate, it was approving requests from the boards of directors of the New York and San Francisco district banks. Among the New York Fed's directors are JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, Lehman CEO Richard Fuld and General Electric Co. CEO Jeffrey Immelt.

The discount window however is available to any bank or thrift, and the terms are easier than for fed funds loans. For example, banks may submit mortgage loans, including subprime loans that aren’t impaired, as collateral, and many probably will.

coffee is for closers still solvent said...

And you geniuses wonder why your kids are eating lead paint on toys, why you're brushing your teeth with antifreeze chemicals, why your pets are dying from poisons, and why there's no steel belt between the tread on the tires you're riding on. And you sit back thinking you're getting a great deal from it all.

FUKTARDS!

bubba said...

So Paulson and his pals pulled of a worldwide con on these greedy investors? Now Bernanke gets to do his part by inflating away all the bad paper, our national debt, and that $40-$80 trillion in unfunded obligations Uncle Sam has racked up.

Whoohooo! What a frickkin' delicious double scam, worthy of Lex Luthor! Definitely one for the history books. Gives new meaning to the phrase "ugly American".

Mark in San Diego said...

My 2 cents - depression or recession. . .First the good news - the central banks of the world will not allow the financial system to collapse like 1932. . .they will keep inter-bank loans going, and keep credit from freezing up. . . .now the bad news - A 1980 style "recession" with 10% unemployment, and stagflation - housing prices and rents will go down, but food and energy will go up (even if oil stays at $70, a decline in the dollar will make the price higher in USA).

News Flash - California July unemployment is up to 5.3% from 4.8% a year ago. . .mostly loss of jobs in construction and real estate. . . remember, unemployment figures are lagging, and we have yet to see the real fallout of cancelled construction projects.

Anonymous said...

I think we've known this basically on this blog for at least a year.

I guess what will come from all this is, "Never trust Wall Street".

I can't tell you how often, when I'm due some big money from my broker, there is some technical glitch getting in the way but when I owe them money, there is no problem.

I had a bunch of puts with one mortgage company and suddenly they pulled their trading off electronic. I had to call the broker on the phone to cash out those options. Harder to catch the exact bottom that way.

Another time I got a great purchase at a low price on the SRS index (bets against housing). OOPs there was some problem with the price and they reversed the transaction. If I had paid too much, I'm sure they'd have conveniently forgotten about it.

Anonymous said...

Impaired. Is that the same as encumbered, meaning, there are multiple lien holders? Many of these loads were 5/15/80 meaning the borrower actually had 3 loans to avoid down payment and mortgage insurance requirements.

That's right. A big scam to get around the safety measures. So what? The goo.. er, Chinese were going to buy the lead painted mortgages.

This is so ironic. We ship toxic financial products to them, and they ship us poison pet food and lead painted baby toys. Nice. I guess this Chinese/American relationship is a marriage made in heaven.

Anonymous said...

How sad that in this age of outsourcing, we're the best at finance. I guess we should have been outsourcing our banking and real estate industries too?

yoski said...

Foreign investors are basically retrards. First we took 'em for all they're worth with the .com bubble and now toxic mortgages. Good for us that they have don't much of a long term memory and are slow learners.
Hey, get ready for the next red hot investment...tulip bulbs...
Triple AAA rated and guaranteed not to chip, rust, fade or turn yellow. Better buy now before you're priced out of the market forever.
Good ridance SUCKERS!!!!

Bitter Renter said...

What did you cheerleaders for capitalism expect? Isn't this the idea in capitalism- get as much as you can, all that you can and don't give s second thought about the ethics of how you do it?

How naive of you. Now rush out and vote republican (or worse, libertarian) and see things get worse.

Anonymous said...

Well finally I got an answer as to why the Chinese were buying this Toxic Waste aka MBS & CDOs, etc...

Because Wall Street conned them!

Alas...the fix is always in. It really didn't make any sense. So many "smart and educated" people making such tragic and foolish business decisions.

Yep,

blame it on the clowns in the financial markets.

Veritas_Faust

Anonymous said...

P T Barnum was right.

there is a sucker born every minute, but for the life of me why on earth would anyone with half a full coconut believe anything coming from wallstreet is way beyond my comprehension.

Pon Raul said...

This is the book that recently woke my dad up, BIG time:

"The Creature From Jekyll Island" by G. Edward Griffin. It's a history of the Federal Reserve.

Shameless plug (from which I see no profit whatsoever, I assure you) - the book is available at my friend Harlan's bookstore in Austin TX - he's the owner, and I hope you buy it from him - he's a good guy and will appreciate the business.

866-516-6623 (he'll ship it to you) and tell 'em you heard about it at HP! I convinced my owner friend to start carrying "Manias, Panics and Crashes" and also "Extraordinary Popular Delusions" at his store as well. I'll also see if he's interested in buying a link at HP, seems only fair. Synergy is good.

I read the posting policy and I hope I'm not in violation - I don't think I am... but it's not my blog, after all.

area 51 said...

To all the DOPES, DOLTS and 1000 Word Douches:
I have been telling you for months that the Chinese are commie newbies when it comes to investing. And in reality, WE OWN their asses.

USA! USA!

If this story is true, then it is outstanding news. Who cares if the balance sheets of the commies blow up? Let's see, consequences would be:

Cheaper prices for Chinese crap. And all the trillions of $$ of crap we "bought" before winds up being free.

China's military gets less US $$ to build up their hardware for an attack on Taiwan.

We suckered them big-time.

WHO SAID we were in debt to the Chinese? NOT!
We OWNED their asses......

Who's gonna be the one to "bail out" the system? The Fed? NOOOOO you idiots....
It'll be the CHINESE! They're gonna pump liquidity into their lousy failed investments to keep them solvent....
Or just like some newbie investor, keep thowing good money after bad, hoping and praying it will come back.

Maybe US financial strategists are actually friggen geniuses, who used financial intruments instead of nukes to "nuke" the commie bastards.

And all the while, Piss Ant Paulson, was the quintessential undercover agent, lulling them softly to sleep and hypnotizing them into floating their currency.
He's a friggen genius! Talk about a double whammy!

Call it the THERMONUCLEAR financial bomb baby!

Threaten us with your Treasury "nuke" will you?

We preemptively STEALTH nuked your asses years sgo!

As far as the Europeans, I guess cell phones might become a little less expensive?
And maybe they'll re-think their condescending ways, treating Americans like a bunch of children.

Take that you commie surrender monkeys!

I love it.......

tim73 said...

For Americans this is just as healthy as a drug addict conning his drug dealer. You get cheap laughs for now but you won't laughing long.

Any American company seeking funds abroad is now as GOOD AS DEAD, persona non grata.

wawawa said...

We should not complain about Chines defective products. We have exported the most damaging product (garbage financila instruments) to the rest of the world.

Anonymous said...

Bitter Idiot thinks Cuban and North Korean style socialism is better.

Anonymous said...

Mark in San Diego said...
My 2 cents - depression or recession. . .First the good news - the central banks of the world will not allow the financial system to collapse like 1932. . .they will keep inter-bank loans going, and keep credit from freezing up. . . .now the bad news - A 1980 style "recession" with 10% unemployment, and stagflation - housing prices and rents will go down, but food and energy will go up (even if oil stays at $70, a decline in the dollar will make the price higher in USA).

=============================
I wouldnt bet that way. When the total monetary aggregate (pumped in by the Fed and other central banks) exceeds the value of the debt that they are trying to bailout then you could very well see a hyperinflationary blowout of the system as oppossed to a deflating of the financial aggregates and their ficticious current values.
The only true answer to this crisis is a total bankrtuptcy reorganization of the financial and monetary system. There is simply too much paper debt whicc cannot be paid under any scenario.

Anonymous said...

Nobody was forced to buy anything.

But I really get pissed at Moody's for slapping AAA on everything. That is why I am so suspicious of ETrade at the moment.

Magon said...

I don't think capitalism can ever be reformed.

Anonymous said...

Moody's S&P & Fitch rated these BBB tranches as AAA. Seems like they should be liable to some extent.

What about due diligence? Probably no time for that since too much money being made by the rich folk.

This could be world war 3 and 4!

I have an excellent idea! Sellers you need to lower your prices so the good buyers can come in and take over these empty homes. I don't care if you lose money! You already have! Please save our country and let go of 2005 prices. It's over! This is 2007!!!

BitterRenter said...

We had a form of capitalism pre-Reagan (may he burn in hell) that was more egalitarian. Wealth was distributed more evenly and people were much happier.

It's no coincidence that the rise of conservatism of the last 30 years tracks the rise in the incidence of depression and the use of depression-treating drugs. Conservatism has given us a soul-sucking culture of a few winners and lots of anxious losers or near-losers.

There's a reason why Stalin sent so many of conservatism's ideological ancestors to Siberia to freeze.

And Cubans ARE happier than Americans. By far. the only ones who aren't are the selfish pigs drawn to this hellhole country like a magnet. Cuba is better off without them.

kungfucious said...

The world should know that it's buyer beware when it comes to Wall Street. Don't trust any analyst, rating agency or anybody associated with Wall Street. Get your own people to hit the streets and do your own due diligence.

Bullwinkle and Rocky said...

And for something you'll really like!

Anonymous said...

vote for the green party

Anonymous said...

If this story is true, that is the funniest thing I've heard in decades.

The Chinese government is gonna feel the same way I did when I picked up some Chinese take-out recently, got home and realized one of the boxes was empty. That's the feeling they're gonna have times a Bazillion - LMAO

We've managed to pass off the cost of the housing bust to China and at the same time neuter them as an economic threat. If this is true, we're friggin geniuses. Say it all together now U-S-A, U-S-A, U-S-A - Yeaaaaaal Baby!

Please oh please, let us find out France and Russia got a piece of this economic heroin as well

Anonymous said...

To Mr Area51...partially correct sir. Yes, they might have been conned to holding the US's dirty laundry, but we cannot compete long-term.
What is it that the US produces? Hmmm? What is left of OUR manufacturing base?
Whatever IS left is around thanks to cheap Chinese gadgets and gimmicks that keep American companies afloat. Not to mention the American "consumer" afloat at their local Wal-Mart. What's more, I think you're a wally mart shopper...you love Chinese goodies.
Remember that the Chinese ALWAYS think long-term. Maybe they saw this coming and you know what? They probably SHRUGGED and laughed it off.
They can turn in on themselves AND STILL have the US market 4 times over...not to mention other markets around the globe.
Again...think locally as to what the US economic base has...nothing... Not a goddamn thing.

Anonymous said...

well that may all be true but trust me, the pension funds were the target and always were the target. they have to eliminate the middle class nest egg in order to control them better in the coming police state....

Anonymous said...

Hey I do think the Einsteins behind this and the 2/28's and other scam creators need to take the hit, afterall a responsible mortgage company or bank should be able to identify risk and basically asking for no doc, or low doc, no credit loans were the most irresponsible product, yes we know people can say NO and should have, but once they apply and they get that letter of approval that says...hey you, we want to lend you between 300,000 - 500, 000 dollars for only 500 dollars a month, how many average individuals will walk away from that deal and the majority spend to the limit of the approval?????? and comparing this deal to the most affordable rent in their area of say 1000.00 a month for a 1 or 2 bedroom...it's a no brainer even for a no brainer to get caught up in the scam....this whole well thought out scam has nothing to do with subprime borrowers because the targets of the products were sub prime borrowers, not 800 credit scores and 200k verifiable income applicants. Also YES the majority of people according to some stats I saw show either a negative or barely positive savings rate meaning most people do not have savings for a downpayment on a house, Now I am reading that places like South Florida had lots of 1st time homeowners with college educations and plenty of smarts to know better but they also got caught up in this...what I don't like is the stereotype of either the minority or immigrant borrower paint the not so true picture of the culprit behind this mess...the finger points both ways and the people that are victims come in all shapes, sizes, colors, incomes, backgrounds at the expense of buying into that whole American Dream theme.

Anonymous said...

*









'ILLUSIONS'?

Anonymous said...

"I wouldnt bet that way. When the total monetary aggregate (pumped in by the Fed and other central banks) exceeds the value of the debt that they are trying to bailout then you could very well see a hyperinflationary blowout of the system as oppossed to a deflating of the financial aggregates and their ficticious current values.
The only true answer to this crisis is a total bankrtuptcy reorganization of the financial and monetary system. There is simply too much paper debt whicc cannot be paid under any scenario."

When this happens, we will become a cashless society and have to have a mark on our hand and forehead in order to buy or sell.

Hey, I think I have read this story somewhere before.

I always suspected that Bush was the anti-Christ. Now I am certain.

Welcome to the New World Order.

Anonymous said...

The MSM finally gets is, subprime doesn't affect just subprime borrowers..(tomorrow the MSM should report that the sun rises in the east)

http://money.cnn.com/2007/08/19/rea
l_estate/mortgage_luxury.fortune/in
dex.htm?postversion=2007082006

Anonymous said...

Been there done that. I lived through the 81-82 recession, the 90-91 recession and 01-02 stock market crash / mini-recession.

I got smacked in 81-82. I was prepared and OK in 90-91 and I profited very nicely in 01-02. Same thing this time. We'll have the 08-09 recession and nothing more. Do you notice a pattern, like oh I dunno every 8 - 10 years we have a recession? It is NOT different this time. It is the same as it has always been.

The 1930s will never happen again. Not with FDIC, the SEC, welfare, social security, fannie/freddie etc. Are these programs perfect and immune from fraud? Of course not. But in my lifetime I will never see 25% unemployment like my grandfather saw. You guys need a good dose of reality.

Anonymous said...

Seattle inventory down 15% YOY

http://housing-watch.com/regionview.aspx?city=Seattle

Boston inventory down 22% YOY

http://housing-watch.com/regionview.aspx?city=Boston

San Diego inventory down 3% YOY
http://housing-watch.com/regionview.aspx?city=San-Diego

WOW WHAT A CRASH!!

Anonymous said...

Bitter Renter said...
What did you cheerleaders for capitalism expect? Isn't this the idea in capitalism- get as much as you can, all that you can and don't give s second thought about the ethics of how you do it?

How naive of you. Now rush out and vote republican (or worse, libertarian) and see things get worse.

F'ing commie. Vote Hillary and you will have to pay taxes just to wipe your own a$$.

BitterRenter said...

Hey Mr Arsewipe,

What did all your tax cuts get you? Most went to the rich and the rest got crumbling infrastructure, declining educational institutions (except private ones for the rich) and declining access to and quality of health care.

Stupid people are always penny wise and dollar foolish. "AH GOTS ME SUM TAX CUTS SO'S I KIN BUY MORE CRAP AT THE WALMARTS!" he says as he takes his $300 and buys another gun rack for the pickup.

www.avenue-s.org said...

now here is the funny part:
http://banking.senate.gov/97_11hrg/110597/witness/quon.htm
sometimes we just have to ask ourselves who really is taking one for a ride?