Displaying items by tag: Asset Securitization Crisis

One of the most apparent side-effects of the turmoil resulting from what I have coined as the Coming (now arrived) Pan-European (soon to be global) Sovereign (soon to be private as well) Debt Crisis is the spread of the awareness the markets have drastically undercharged for risk over the last 7 years or so. This, of course, is just a long winded method of saying bubble. Many companies, and some entire industries (ex. residential and commercial real estate [Commercial Delinquencies], banking, etc.) as well as entire nations (namely Greece [Calculate Your Haircuts Here] and Spain whose underestimated debt woes I just posted on yesterday[Spreads are Blowing Out]) have grown so used to this under-charging of risk that to wean them off of this cheap capital would be devastating. This means, in essences, the bankruptcies and restructurings are coming, and its not a matter of if, but when. This will probably portend a return to the 2008 lows, close to it, or worse, because in this global economic ecosystem you cannot have one part of the developed world's  import/export component do that bad without infecting the other components. This was explained in explicit detail in "Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?" and modeled out to show which direction the chain reaction may push the dominoes, as well as which countries were at risk from whom in the BoomBustBlog Sovereign Contagion Model.

We can see the effects of contagion driving market rates higher already, even as central bankers set negative rate policies. Reference Spain T-Bill Yields Jump; Doubts Emerge over Rating and the (still 3 months too tardy) dropping of Greece's debt rating which exposes how politically exposed and potentially manipulable ratings agencies are even when they pussy foot around with should have been explicit downgrades months ago - reference EU Commissioner Attacks Moodys on Greek Downgrade.

It is only a matter of time (and I doubt it will be much time) before the popping rates of sovereign debt and the incessant demand from the market (or bailout vehicles to be funded in the market) start crowding out private debt consumers, and drive those rates higher. Those companies with weak balance sheet, minuscule margins and play-dough business models will crack like Easter eggs. The BoomBustBlog Bankruptcy Search Series will attempt to identify those companies before the market recognizes them and either warn our subscribers of the peril of holding said companies or allow them to potentially profit from their downfall. Let's start with the banks, which are a special case. You see, explicit bankruptcy (actually, regulatory receivership candidates) are often priced accordingly, but if you move one or two notches up the food chain, you can find a bevy of overpriced candidates that may not be ready to collapse immediately, but are priced as if they will continue forever. Add in a little sovereign malaise as a catalyst and boom, there goes the chemistry set!

Published in BoomBustBlog

The global equity markets are in meltup mode again. I want to take this opportunity to reiterate that I am still quite bearish on much of the situation in Europe. Let's glance at the credit markets, major banks and the state of sovereign indebtedness in Spain.


As you can see, Spain's 3 yr CDS spreads are the highest they have ever been. They are significantly higher than they were during the entire Lehman fiasco, and they are even higher (or at least comparable) than they were right before the EU/IMF trillion dollar bailout package was announced in conjunction with threatening those who dared to speculate against Spain's fiscal health!

spain bund spread

Published in BoomBustBlog

Enjoy! Feel free to leave comments on the videos.


Robert Shiller suspects Australia is in a housing Bubble


In Australia, Tax as a Contagion

Australia: The Land Down Under(water in mortgage debt

As an extension of the Chinese macroeconomic discussion at BoomBustBlog throughout 2010, there may be an “Asian Contagion” spreading as a result of a Chinese investment slowdown.  Those at risk are the countries and regions that have supplied China with the commodities necessary to build empty cities.  While the (comparatively, in terms of GDP) enormous Chinese stimulus package from the first part of the financial meltdown in 2008 has generated incredible growth in GDP and asset prices, the game appears to be over for flipping 1000 square foot apartments in Shanghai.  After the direct hit taken to China, the picture looks very grim for Australia, where a bursting Chinese housing bubble could drive industrial commodities lower, sparking higher unemployment in one of the nation’s largest sectors, and in turn pop their domestic housing and property bubble.  In the near to medium term, Australia is showing some major red flags.

Australian property bubble, wikipedia

Australia: The Land Down Under(water in mortgage debt), pt. Deux: Which Banks to Short?

We looked into the four largest Australian banks – Australia and New Zealand banking Group Limited, Commonwealth bank of Australia, National Australia Bank Limited, Westpac Banking Corporation. All the banks, except Commonwealth bank of Australia, have ADR.

The banks are trading at very high multiples when compared with their US counterparts. The current average price-to-tangible book value of the four Australian banks is 2.5x against the current multiples of less than 1.5x for US banks. The Australian banks are enjoying a premium largely owing to lower charge-off rates, delinquency levels and the NPL levels than their US counterparts. While the housing loans account for a substantial portion of the total portfolio of Australian banks, the housing bubble in Australia is yet to burst to result in defaults in this sector. Also, the Australian banks have additional shelter from two factors:

  • The housing loans in Australia are recourse loans (borrowers are personally liable to pay even after foreclosure)
  • The loans given in excess of LTV (Loan-to-value) of 80% have Lender Mortgage Insurance which covers the losses of the lending bank

Published in BoomBustBlog

Yesterday, I sat through a conference sponsored by Andrew Schneider's Hedgeco.net on starting and marketing hedge funds. As I sat through the various presentations focusing on transparency, performance results, etc., I though to myself, " You know Reg, you probably rank in the top echelon of these guys in terms of absolute performance, and in terms of transparency you actually publish what you do on the web for all to see." Shortly thereafter I glimpsed at the latest issue of HedgeWeekly2010_No21 and decided to compare my blog results with that of the top funds.

For 2008

fund 2008

As you can see, many funds were hurt in 2008, but there were some who did quite well, with the top of the pile pulling just over 72%. That's pretty damn good! Below is an excerpt from the BoomBustBlog post "Updated 2008 performance":

Below are the raw, absolute returns for my proprietary account. These returns are calculated by calculating the difference between my starting point and ending point, and is the number that I use for comparison (since it is the number that shows how much money I actually made).

Reggie’s gross avg. return S&P return
For all 2007 (6 months)
42.93% -8.23%
For Q1 2008 50.03% 0.68%
For Q2 2008 53.46% -8.66%
For Q3 2008 32.40% -8.30%
For all 2008 196.11% -8.69%
Since inception 481.04% -35.72%
2008 absolute return 335.42%

to S&P 500

The numbers below are average monthly numbers. They are posted for the sake of uniform comparison.

Published in BoomBustBlog

From Bloomberg.com:

The Hudson Mezzanine 2006-1 CDO contained credit default swaps that referenced $2 billion in subprime, BBB-rated residential mortgage-backed securities, according to the documents released by Levin’s committee. While Goldman Sachs selected the assets in the deal, the firm was also the only investor buying credit protection on the entire transaction, the documents show.

Goldman Sachs created and sold the Hudson CDO in late 2006, near the time documents released by Levin show senior executives wanted to reduce the firm’s exposure to subprime mortgages.

“The CDO imploded within two years. Your clients lost; Goldman profited,” Levin said in an April 27 hearing during which he questioned Goldman Sachs Chief Executive Officer Lloyd Blankfein about the Hudson deal and other CDOs. “To go out and sell these securities to people and then bet against those same securities, it seems to me, is a fundamental conflict of interest and is -- raises a real ethical issue.”

Blankfein responded that “we are one of the largest client franchises in market-making in these kinds of activities we’re talking about” and that “they know our activities, and they understand what market-making is.”

While Goldman Sachs was short on the Hudson Mezzanine CDO, meaning it stood to gain from a collapse because of the credit protection it had purchased, a marketing document for the deal released by Levin’s committee states that “Goldman Sachs has aligned incentives with the Hudson program.”

In April I told a reporter from Crain's NY that Goldman's overvaluation is totally overlooked by the market and the trend followers (see side bar for the full article), and guess what happened just a few days later... Yeah, reality caught up with them!

Earlier this month, Mr. Middleton took a break from blogging to tend to his yacht. Cruising the Hudson River, as the headquarters of Wall Street's big

Crain's New York

“His work is so detailed, so accurate, it's among the best in the world,” says Eric Sprott, CEO of Sprott Asset Management, a Toronto firm that manages about $5 billion and subscribes to Mr. Middleton's research

For more of my opinion as expressed through the mainstream media, click here.

banks sparkled brightly, he warned of dark times. He pointed at Goldman Sachs' huge new tower and proclaimed the bank “overvalued.” Bank of America Merrill Lynch is worse: “They bought Countrywide and some of the biggest trash out there.” He hasn't shorted banks' stocks lately, but plans “to go after them again” in the near future. Mr. Middleton likens himself to the character in the movie The Sixth Sense, who sees things no one else can. “I see dead countries, companies, municipalities,” he says. “They are dead and flying high in pricing.”

I can actually extend the Bloomberg article above for quite a while

When the Patina Fades… The Rise and Fall of Goldman Sachs??? Tuesday, 16 March 2010

I have warned my readers about following myths and legends versus reality and facts several times in the past, particularly as it applies to Goldman Sachs and what I have coined “Name Brand Investing”. Very recent developments from Senator Kaufman of Delaware will be putting the spit-shined patina of Wall Street’s most powerful bank to the test. Here is a link to the speech that the esteemed Senator from Delaware (yes, the most corporate friendly state in this country). A few excerpts to liven up your morning…

Published in BoomBustBlog
We've got a particularly heavy dose of BS in the mainstream news channel this morning. I believe it to be my duty to throw some facts amids this boiling cauldron of fiction, fantasy, propaganda, marketing and straight up lies. First up (yeah, you guessed it), those gosh darn Europeans...

June 9 (Bloomberg) -- France and Germany called on the European Union to speed up curbs on financial speculation, saying some bets against stocks and government bonds should be banned as markets suffer a resurgence of “strong volatility.”

Published in BoomBustBlog

Relevant commentary from BoomBustBlog and sources throughout the Web on the accounting change that added 80% to the S&P since March 2009!!!

Warning Shots from the IASB: FT

  • The IASB came under fire in the fall/winter of 2009 in regards to mark to market rules
  • Banks wanted continued relaxation of valuing models in order to “smooth out volatility swings in asset prices”
  • IASB and FASB plan to converge on mark to market ruling by 2011, both have stated a desire for more transparent financial statements, but have been politically compromised by bankers and commercial lenders

FASB Plan Would Force Banks to Report Loan Fair Value: BusinessWeek

  • FASB is seeking to approve a proposal that would force banks to mark loans at market value by 2013, potentially having billions of dollars at risk for writedowns
  • In April 2009, FASB gave significant leeway to banks in regards to pricing and modeling loan values, banking consultants are very opposed to a reversal of the measures
  • Pension obligations and leases will be exempt from new measures
Published in BoomBustBlog
Thursday, 03 June 2010 18:29

Must See Reality TV!

This is and interesting hour of reality TV for inflation hawks!
Published in BoomBustBlog

For those who have been following me in the Asset Securitization and Pan-European Sovereign Debt Crisis series this may be old news, but let's go through the exercise anyway. It looks as if we are back to those non-sense games being played by those that manipulate the market. Taking a look at Bloomberg.com's front page, you'll see "Stocks, U.S. Futures Rally on Economic Outlook; Yen Weakens, Bonds Decline" (hey, good times are here again) followed directly by "Banks Deposit Record $394 Billion With ECB, Avoiding Loans to One Another"(hey, isn't this the exact same environment wherein Bear Stearns, then Lehman Brothers collapsed leading the Treasury Secretary Hank Paulson to proclaim the end of the financial world was coming?). Then there's "Covered Bond Sales Surge; Transocean Tumbles: Credit Markets": Sales of covered bonds are accelerating as investors seek debt backed by collateral amid concern about the creditworthiness of governments and banks.

Okay, let's take this by the numbers....

Published in BoomBustBlog
Tuesday, 01 June 2010 10:44

Quick Newscan for Tuesday, June 1st 2010

In the news this morning:

  1. Stocks, U.S. Futures Tumble on China Growth Concern, BP Spill; Oil Plunges: We discussed the topic of China's unsustainable growth and the knock on effects its slowdown would have on other economies in detail just last week. How timely...
    1. The Narrowing Chinese Trade Surplus
    2. In Australia, Tax as a Contagion
    3. Australia: The Land Down Under(water in mortgage debt)
    4. BoomBustBlog China Focus: Inflation?
    5. BoomBustBlog China Focus: Interest Rates
    6. My China Ruminations Have Come to Pass As the Country Enters a Bear Market
    7. Chubble (The Unmistakeable, Yet Thoroughly Argued Chinese Bubble), Unemployed/Deleveraging Shopaholics Pushing Retail Stocks & Other News
  2. Euro Weakens Against Dollar on Speculation Crisis Hurting Region's Economy: Nothing new here. BoomBustBlog newcomers, see the Pan-European Debt Crisis here.
  3. BP Tumbles Most in 18 Years After Abandoning Attempt to Plug Leaking Well: The company's future doesn't look to bright!
  4. Paulson Drops 6.9% as Hedge Funds Post Biggest Monthly Losses Since Lehman (HNWs and institutional investors should take the time to read this article and my summaries): Many funds, including Paulson's, made hard bullish bets on the financial sector recovering, in direct contravention to my positions and research. Yes, the financial sector took off like a bat out of hell the last 3 quarters of 2009, but one shouldn't confuse sharp market price movements with fundamentals. Many, if not most are in bad shape, and it ain't lookin' much better in the near term either. See The Next Step in the Bank Implosion Cycle???. Most importantly, many (if not most) professional money managers and analysts totally underestimated the extent of the damage being done Europe. I have was weary of Europe since 2008, put short research and positions on in 2009 (with mixed results due to the bear market rally) and went full blown GRIZZLY BEAR in 2010 (reference the Pan-European Debt Crisis which publicly documents and details it all). Back to the news clip:
    1. (Bloomberg) -- John Paulson, Louis Bacon and Andreas Halvorsen navigated the global market turmoil of 2008 with little or no damage. They weren’t as successful last month as the Dow Jones Industrial average had its worst May since 1940. Hedge funds lost an average of 2.7 percent through May 27, according to the HFRX Global Hedge Fund Index, as the sovereign debt crisis in Europe triggered declines in stocks, the euro and commodities, and the gap in yields between U.S. short-term and long-term debt narrowed. It was the biggest decline since November 2008, when hedge funds lost 3 percent in the wake of Lehman Brothers Holdings Inc.’s bankruptcy two months earlier. Almost every strategy lost money in May, according to Hedge Fund Research Inc. in Chicago, as the Dow index of 30 big stocks sank 7.6 percent including dividends amid speculation that Greece’s debt problems would spread to nations such as Spain and Portugal. Some of the best-known funds saw their gains for this year erased. “Attempting to manage risk in an environment where everything that could go wrong does go wrong seems like a fruitless endeavor,” said Brad Balter, who runs Balter Capital Management LLC, a Boston firm that invests in hedge funds for clients. “The only defense that seems to work in months like these is being in cash.”

    "SAC Capital Advisors LLC, the hedge-fund firm run by Steven Cohen in Stamford, Connecticut, with about $12 billion under management, lost 2.9 percent last month through May 21 with its SAC Capital International fund, trimming this year’s gain to about 4 percent, according to people familiar with the firm.

    Citadel Investment Group LLC, the $12 billion hedge-fund firm run by Ken Griffin, lost about 2 percent with its biggest funds last month through May 21, said people familiar with the Chicago firm. The funds soared as much as 62 percent last year as markets rebounded after losing as much as 55 percent in 2008.

    Brevan Howard Asset Management LLP in London, Europe’s largest hedge-fund firm, lost 0.1 percent for the month through May 21 with its Brevan Howard Fund Ltd., leaving it with a decline of 0.3 percent this year, according to an investor.

    1. I will gladly compare the performance of BoomBustBlog research to any bank, fund or asset manager that charges big commissions or 2 and 20! Reference Updated 2008 performance and the 2009 Year End Note to BoomBustBlog Readers and Subscribers for rough performance numbers covering 2007, 2008 and 2009.
  5. Analysts Boosting Forecasts See 25% Stock Gain Defying El-Erian New Normal: Yeah, but aren't analysts mostly wrong unless we're in  a bull  market? Stocks always go up, Right????!!!! Reference Blog vs Broker, Who Do You Trust?
  6. Cameron Bull Market in Gilts Beating Merkel Bonds as U.K. Keeps AAA Rating: For now, at least. Subscribers, see 
    File Icon UK Public Finances March 2010

Published in BoomBustBlog
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