Guys, that "AA" rating is nasty, and so is the "A".

No contagion? BULL****!

Better watch the CMBX too....







That's commercial R/E construction. AGAIN - WHO IS IN TROUBLE HERE?

DO NOT BUY THAT WE'RE GOING TO GET A SUSTAINED BULL RUN HERE WITH THESE INDICES GOING STRAIGHT IN THE ****TER.

These spreads are NASTY and now - with the exception of AAA - are WORSE or equal than February!

The game is afoot.

"A hedge fund whose identity we know is having subprime-related problems similar to Bear Stearns, one veteran investment banking source told us. We are not releasing the name of the fund until we can confirm more information about the fund and its problems. Stay tuned. Meanwhile, several sources tell us that the CDO (collateralized debt obligations) market is in serious trouble. CDOs that invested in subprime assets are being hammered. "Most of these are held by insurance companies and foreign accounts," said one banker, requesting anonymity..."


[http://data.nationalmortgagenews.com/columns/hearing/]

WHOOOOAAA....There's the other one what a relief all's clear. :o )

It really is surprising how much and how fast the 'AA' bonds have fallen. Is this the possible scenario?........... " We started to do a serious check when this problem started and we now find that it surprisingly goes all the way up to 'AA'. Oh **** ! We didnt think it was that bad ! SELL SELL SELL !

Once the subodinate tranches get wiped out there is no more insurance.... further losses run up the ladder!

That AA deterioration is very serious..... as in `can't hold this crap any longer` serious.......

So is the CMBX.....

"This should hardly be news to anyone who read Warren Buffett’s broadside against derivatives four years ago. There is no market, he pointed out, for complex derivatives. So instead of being marked to market, they are marked to model – or in some cases, marked to myth."


http://www.ft.com/cms/s/1bc75e24-2812-11dc-80da-000b5df10621.html

Man. The trouble you could get into if you were issuing CDS for this stuff. Just a few contracts could totally wipe you out. It's a little like like having sold PUTs on a stock that was doing great and is now about to BK. At least here the bonds have some recoverable value but it sure doesn't look like it will be much when all is said and done. ABX BBB is going to zero.


For the swap to happen their has to be a "credit event" which is defined in the contract of the swap. That may why they are so afraid of having any of this stuff marked to market. And ratings agencies are dragging their feet to downgrade this stuff. Anyway the news folks talk about RMBS and CDOs that Bear Stearns' hedge funds held as being illiquid and difficult to account for. CDS is way worse than RMBS and CDO in that respect. Most CDS is not tracked by the ABX, CMBX, CDX, etc. Those indices represent only a sample. The total notional amounts of these contracts that in existence is in the hundreds of trillions. A hedge fund doesn't need leverage to get in trouble with these. These things are levered 10-20x to begin with.

When SEC commissioners start to discuss the BSC hedge fund problems, the over-leveraging of hedge funds, and the loans from banks to hedge funds, the writing is on the wall that additional oversight and/or regulation is on the way. Her comments are a bit long, but are an interesting read on one SEC's commissioner's views:

(URLhttp://www.exchange-handbook.co.uk/index.cfm?section=news&action=detail&id=67966)

Speech By SEC Commissioner Annette L. Nazareth: Remarks Before The SIFMA Risk Management Conference

"If we see creditors refraining from immediate exercise of their liquidation rights when hedge funds face liquidity difficulties, regulators will naturally question the adequacy of haircuts, particularly for less liquid positions of the sort in the High Grade Credit Strategies Enhanced portfolio. Setting haircuts to protect a firm for a 10-day period, for example, may not be adequate if dealers systematically hesitate to exercise their rights to make margin calls or liquidate collateral."

Give'em hell Annette!

There is a difference between martk-to-market and a credit event for CDS. Think of a CDS as an insurance policy. Monthly premiums are exchanged for the guarantee that there will be some payment if some credit event occurs. I-banks writing credit protection are definitely in trouble, but it is more due to mark-to-market than the credit events that CDS are suppposed to protect against right now (though, I'm sure that will change!). The triggers vary widely depending on the type of CDS. The majority are corporate debt based, but that's not what we are worrying about so much here. There is a very small market for name-specific ABS CDS. Most ABS CDS are written on the ABX index (or, at least they were at the last i-bank I worked for). That's why they were created in the first place. It has been a common complaint that they do not accurately reflect where the bonds are really trading, but it is the best info us non-insiders have at the moment. And, it does tell us which way the spreads are going.

The problem here is that the SEC takes a very dim view of alleged collateral for margin purposes (which they set the limits of, natch) that is not marked to market.

That is, so-called collateral which is in fact valued in a fictitious manner.

See, that makes a mockery of margin limits, and that is under SEC jurisdiction.

They are well-aware of what can happen, which is, I suspect, why the inquiries surrounding Bear's little charade.

This is likely to get a lot more serious in the future - the only issue now is exactly when.

I pulled the following quote from an article on CDS. What I was saying about "market-to-market" and "credit events" needs to be more clear. The way the first credit events will occur will be from ratings downgrade that come after forced sales trigger a mark-to-market. Some CDS include ratings downgrade as a "credit event." This is more often true with RMBS than corporate bonds. While most CDS don't have that feature, enough do to trigger the first wave of swaps. Ratings agencies are trying to clean up their act and are now downgrading all of these bonds.


" The most commonly used fixed income derivative is
the Credit Default Swap. Credit Default Swaps
(“CDS”) provide the holder (buyer) with protection
against certain risks within the credit market –
essentially making them a form of insurance. Such
risks are commonly referred to as “credit events” and can include default, failure to pay or company
restructuring. Interestingly, the downgrade of a company’s debt is not normally characterised as a “credit
event”. However, as with many derivatives, CDS can be specifically tailored to meet the needs of a
particular investor.
The most likely buyers of CDS are investors with direct exposure to corporate bonds. Such investors buy
CDS for protection against the risk of default, or some other credit event associated with the issuer of a
bond within their portfolio. More frequently, however, investors without exposure to physical bonds are
using CDS to manage their expectations for the credit market. The development of credit default indices
such as the iTraxx series has helped facilitate this growth "