Economy question

[KrazyHorse]

I'm asking what legitimate justification there is for taking out insurance on your neighbour's house.

I already explained what reasons they could have. And the only reason we don't allow you to take out insurance on your neighbour's house is that it's really goddamn easy to burn a house down. Good luck doing that to GE et al.

[KrazyHorse]

I would think they could buy shares in or bonds from Mortgage Company X.

Or, they could get into the secondary market.

The secondary market is precisely what MBS are....a secondary market where you get to diversify far beyond what your means would allow you to.

[notyoueither]

I already explained what reasons they could have. And the only reason we don't allow you to take out insurance on your neighbour's house is that it's really goddamn easy to burn a house down. Good luck doing that to GE et al.

There's been no short selling of banks?

Hedge funds are all completely fine and upstanding corporate citizens?

[notyoueither]

The secondary market is precisely what MBS are....a secondary market where you get to diversify far beyond what your means would allow you to.

The secondary market I am refering to is the second mortgage market, where private funds are bet against equity.

I don't see what MBS contributed to the economy or society, other than incentivising fraud on a wide scale and pumping the bubble up to a larger pop.

[KrazyHorse]

There's been no short selling of banks?

Hedge funds are all completely fine and upstanding corporate citizens?

You really don't understand how this stuff works, do you...

[notyoueither]

You really don't understand what is going on, do you?

[KrazyHorse]

I'd really like you to provide numbers on how much fraud in the MBS market there was, NYE.

The secondary market I am refering to is the second mortgage market, where private funds are bet against equity.

I'd really like to know how you think MBS differ from this...

And I've already explained that MBS provided a means of diversification to a level normally only available to a select few.

[KrazyHorse]

You really don't understand what is going on, do you?

It's certainly not banks failing left and right due to short selling by actors trying to capitalize on their CDS positions.

[The Mad Monk]

Uh, you plan to invalidate with a stroke of a pen hundreds of billions of dollars of contracts negotiated in good faith between private parties?



Yeah, that ought to do wonders for public confidence. Welcome to the United States of Zimbabwe.

What do you think of invalidating much smaller contracts, like the AIG fiasco?

[notyoueither]

It's certainly not banks failing left and right due to short selling by actors trying to capitalize on their CDS positions.

It only took the first.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aB1jlqmFOTCA&refer=home

[KrazyHorse]

a) Nice article. All it provides is evidence that declines in share prices correlate (in time) with failed naked shorts. Way to go, you've just proved that when a company looks like it's failing there is a lot of interest in shorting it.

b) There's a lot of nonsense about a ninefold increase in the rate of failed naked shorts over a period of twelve years. So what? The ****ing volume of all trades is up hugely in that time, and the more exotic the trade the more it went up.

c) The article spreads a bunch of insinuations of fraud being made, in part, by the FORMER CEO OF LEHMAN.

d) Nowhere in it are CDS mentioned. Because the article isn't about that.

Nice try, dude. Lehman failed because they sucked and uncle sam didn't ride in in time to save them. Also, you should note that I'm all in favor of pursuing those engaged in fraudulent practices like failing to deliver...

[KrazyHorse]

What do you think of invalidating much smaller contracts, like the AIG fiasco?

a) Technically, Congress didn't invalidate them. But no, I'm not n favour of that either.

b) The harm is less due to a smaller scale

[KrazyHorse]

By the way, shorting a company is a valuable means of sharing what you think of a company's future. Killing the shorts is retarded. It just forces an overly optimistic view of things to be reflected in the market price.

[notyoueither]

Are you a rube?

Twice last year, hundreds of thousands of failed trades coincided with widespread rumors about Lehman Brothers. Speculation that the company was being acquired at a discount and later that it was losing two trading partners both proved untrue.

WTF do you think was happening?

http://www.rgemonitor.com/financemarkets-monitor/254052/lehman_cds_payout_on_october_21_360bn_or_6bn

In a CDS settlement auction, protection sellers generally bid for the defaulted bonds while protection buyers supply the defaulted bonds in exchange for face value. The dismal recovery value of 8.7% might be an indication of a large supply overhang, or many more credit protection buyers with a residual claim [update: on Lehman] after they seized their collateral (remember: CDS collateral is seized immediately in a credit event and is not stayed as is the collateral of general creditors.) Clearly, the expected and realized losses don’t add up in risk management terms which puts a question mark on claims that the ultimate exposure to Lehman’s default is small because soundly hedged. Somebody will have to come up with a lot of cash by October 21 if the $54 trillion CDS market is to retain some credibility.



Do we know who the net credit protection sellers are? The first immediate victim of Lehman’s CDS exposure was AIG and it resulted in a $85bn bail-out by the government, later increased by another $37.8bn. So we’re already talking about a multiple of the $6bn mentioned by DTCC in the beginning. And this is only one counterparty, the fallout can only increase. Other net protection sellers in general include insurers, monolines, SPV specialized in structured products. Neither of these are known for their strong capital bases. Neither are hedge funds who are facing margin calls on a large scale in the aftermath of Lehman’s default and who are strongly suspected to be driving the global stock market selloff. Large global banks themselves have gone from being hedged players to taking on net credit risk exposure in the wake of securitization and structured finance but they at least have access to unlimited Fed liquidity. Pension funds are among the main net protection buyers.






Update: Let’s not forget the new private sector sponsored liquidity pool of $70bn funded by the 10 largest global banks in the aftermath of Lehman’s bankruptcy filing. The FT reports that the 10 banks – Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase, Merrill Lynch, Morgan Stanley and UBS – all pledged $7bn towards the liquidity fund, which is in effect a self-insurance scheme to accommodate CDS assignments to the remaining large counterparties:



“In a joint statement, the banks said the fund was intended to support liquidity and reduce volatility in an “extraordinary market environment.” They said they would also work towards an “orderly resolution” of Lehman derivatives exposure.”



So far, among dealer banks and AIG the CDS fallout from Lehman’s default amounts to around $200bn already.

[KrazyHorse]

Are you a rube?

No, but you obviously are.