Lehman

[PLATO]

Originally posted by Kidicious


I don't know if you know what uncertainty is and how it works in financial markets. It means that people don't believe there is a good enough chance that it will be valuable in the future.

No Kid. You are completely wrong in this case. It means that they do not know within reason what kind of return they can expect. A AAA rated bond will perform in a certain range if the rating is correct. When that rating is called into question then uncertainty surrounds the actual return. Once that kind of uncertainty is present then the vast majority of institutional investors want no part of it. It is not performance levels that are making them nearly unsellable, it is the uncertainty of the actual returns. That has nothing to do with if they are expected to be valuable or not.

Now, I know you like to show off how much you know, but MBS is a field that I am an expert in and have years of experience with. Not to be harsh here, but I am certain that you have no idea what uncertainty is and how it works in our financial markets.

[DanS]

Let the legislative fun and games begin... Everybody's going to try to make this a Christmas tree.

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/21/AR2008092102060.html

A 5% dive in the stock market would prove very beneficial in everybody dropping stupid demands.

[MarkG]

can we declare Apolyton a bank and get some FED money?

Foreign banks may get help

In a change from the original proposal sent to Capitol Hill, foreign-based banks with big U.S. operations could qualify for the Treasury Department’s mortgage bailout, according to the fine print of an administration statement Saturday night.

The theory, according to a participant in the negotiations, is that if the goal is to solve a liquidity crisis, it makes no sense to exclude banks that do a lot of lending in the United States.

Treasury Secretary Henry Paulson confirmed the change on ABC's "This Week," telling George Stephanopoulos that coverage of foreign-based banks is "a distinction without a difference to the American people."

"If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Paulson said.

full text at

http://news.yahoo.com/s/politico/20080921/pl_politico/13690

[Colonâ„¢]

The age of independent investment banks had come to an end: http://www.bloomberg.com/apps/news?p...Geg&refer=home

Will they attempt to create a deposits base from scratch now? In any case, this kind of solves the issue of tighter regulation for investment banks ever since they got access to the Fed's emergency loans.

[DanS]

Never thought I would see an old-fashioned scrum for bank deposits, as we're currently seeing.

[DanS]

Here's an interesting FT analysis piece on the "shadow banking system" and the impact of the leveraged hedge funds starting to take huge hits.

http://www.ft.com/cms/s/0/622acc9e-87f1-11dd-b114-0000779fd18c.html

[Ecthy]

So, all of you know I've always been a big fan of free markets and free entrepreneurship and all, a huge admirer of the American banking system and a personal worshipper of DanS. Nothing could ever have indicated any other way. Now that this is established, I need the help of you people

So a bank of mine has actually raised interest. Normally they only do that if the base interest rate goes up, which IIRC hasn't been the case as of late. So I suppose they're doing this to attract more savings to increase their liquidity in the current / upcoming crisis.

Furthermore, they'll put an even higher interest rate on any new savings I'll pay onto that account during the 4th quarter. Now things really begin to smell fishy for me.

As indicated above, I assume this to be a means to increase liquidity on short notice. Is it a sign of desperation though? Does it mean this bank will go bankrupt soon?

How big is the risk of losing savings here? Should I exploit these high rates and save more, or withdraw my money as soon as possible? If I did the latter, what else could I do but put it into another bank? Having huge amounts of cash is so 1970s.

[Colonâ„¢]

Haven't you got deposit insurance?

[Ecthy]

No idea. Have I?

[Dinner]

Originally posted by DanS
Never thought I would see an old-fashioned scrum for bank deposits, as we're currently seeing.

Oh, that's part of it as the new deposits would help create new liquidity but the larger part is that banks will likely get more feed out of the $700 billion trough so all the investment companies will convert to banks in order to get free taxpayer money and then later convert back after they've milked the taxpayers dry.

[Kidlicious]

Originally posted by PLATO
It means that they do not know within reason what kind of return they can expect. A AAA rated bond will perform in a certain range if the rating is correct. When that rating is called into question then uncertainty surrounds the actual return. Once that kind of uncertainty is present then the vast majority of institutional investors want no part of it. It is not performance levels that are making them nearly unsellable, it is the uncertainty of the actual returns. That has nothing to do with if they are expected to be valuable or not.

That's so ridiculous that I don't know where to begin. It's no wonder that you all ****ed up your system and need us to bail you out.

[PLATO]

Originally posted by Kidicious


That's so ridiculous that I don't know where to begin. It's no wonder that you all ****ed up your system and need us to bail you out.

I can't say that I disagree with you here.

That part isn't even the worst of it really.

I think that a lot of the problem is the way we have set up the accounting systems and, in many ways, the structural design of the system itself. The US financial system is 100 times more complicated today than it was just 20 years ago. I am entirely convinced that no one has a handle on the depth of the integration of things like credit default swaps. Lehman's failure has already triggered many unthought of consequences. In part I think this is why the gov't decided to step in and support AIG and why they have made the decision to buy up all the "toxic" debt. For the last 18 months banks have been scrambling to lay off their risk...and have consequently dug the rabbit hole deeper as the only people they have to lay the risk off on is themselves. If $700 billion in debt were to go "bad" overnight, it could trigger trillions in credit default swaps. The accounting on this crap is a nightmare. Further, there is no clearinghouse for this kind of transaction...no central place where records of the transactions are kept. Many of these trades are simply written down and filed in a filing cabinet. No one...and I mean no one...has any idea how much of these instruments are floating around out there. Just the transactions at Lehman are expected to take a couple of years just to identify them.

This is a major reason why some foriegn entities are being considered for part of the bailout funds. The default swaps are heavily tied into the US banks.

When you talk about our financial system being ridiculous, I have to say that you have no clue how correct you really are!

[Kidlicious]

Originally posted by PLATO


No Kid. You are completely wrong in this case. It means that they do not know within reason what kind of return they can expect. A AAA rated bond will perform in a certain range if the rating is correct. When that rating is called into question then uncertainty surrounds the actual return. Once that kind of uncertainty is present then the vast majority of institutional investors want no part of it. It is not performance levels that are making them nearly unsellable, it is the uncertainty of the actual returns. That has nothing to do with if they are expected to be valuable or not.

Now, I know you like to show off how much you know, but MBS is a field that I am an expert in and have years of experience with. Not to be harsh here, but I am certain that you have no idea what uncertainty is and how it works in our financial markets.

When a bond rating is called into question what does that mean to you? To me that means that there is less of a chance that it will pay. You can't believe that there is less of a chance that it will pay and at the same time believe that the bond will be more valuable in the future. So what are you on about? Are you trying to say that there is something wrong with how the bonds are rated, or something wrong with how people judge the ratings?

[PLATO]

Originally posted by Kidicious


When a bond rating is called into question what does that mean to you? To me that means that there is less of a chance that it will pay.

Not necessarily. AAA bonds are not composed of entirely AAA debt in most cases anyway. They are broken into tranches that you can invest in. The way that they are set up is that all the money that comes into a bond will pay the AAA tranch first, then the AA, etc... Most of these instruments were set up with close to 80% AAA ratings. Now, just because some of that may be AA or BBB instead of AAA doesn't mean that the tranch is not going to be paid. It means that the risk has been undervalued and that money could have been placed in more secure investments for the predicted rate of return. With widespread defaults, the lower tranches are not providing the income stream that was predicted to the higher tranches. This is causing uncertainty on what the actual returns for those tranches will be and is causing institutional investors to seek out more predictable investments where they can properly analyze the risk return ratios.

You can't believe that there is less of a chance that it will pay and at the same time believe that the bond will be more valuable in the future. So what are you on about?

Don't know where you got that I think a bond can be more valuable when there is less chance it will pay. I do think that the higher rated tranches will end up performing just fine if that is what you are asking???

Are you trying to say that there is something wrong with how the bonds are rated, or something wrong with how people judge the ratings?

There is definately something wrong with how bonds were being rates. So many of these never had due diligence done on them by the rating companies. The issuers would send it to the raters with a notation like "80%AAA 10%AA 8%BBB 2% residuals". The rating firms would say "Okay" and never even look at it...trusting the issuer to be reliable in what they were sending.

Either the issuers were blinded by their own greed, stupid beyond belief, or just plain criminally greedy is a question that still remains unanswered. The ratings are one of the fundamental unerlying causes of what we are experiencing.

[snoopy369]

Originally posted by Kidicious


When a bond rating is called into question what does that mean to you? To me that means that there is less of a chance that it will pay. You can't believe that there is less of a chance that it will pay and at the same time believe that the bond will be more valuable in the future. So what are you on about? Are you trying to say that there is something wrong with how the bonds are rated, or something wrong with how people judge the ratings?

Kid, you're starting to make me think of Heraclitus and his conversation with Krazyhorse...

Plato, correct me if I'm wrong, but IIRC the problem is that a lot of institutional investors have rules about their risk - ie, 'risk must be <5%' or something like that. When the bond's risk goes up, they have to dump it in order to stay within the bounds they are required to. This is not the fault of the mortgage industry per se, but of the secondary market.

I don't think anyone's accusing the primary mortgage industry of causing this, except that they offered credit where they shouldn't have; but even then, they offered it because there was a market to sell the mortgages to. If the institutions (and the raters) had been more careful to evaluate the risk on these mixed instruments, there would have been fewer high risk mortgages sold, and no massive collapse.