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mojo's Account Talk
- Thread starter mojo
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This is an article I posted before on synthetic CDOs
http://www.businessspectator.com.au...-of-hope-or-terror-LHRJP?OpenDocument&src=sph
Here is some follow up info on synthetic CDOs
by deuterium_is_heavy on Sun Dec 14, 2008 3:20 am
Understanding Synthetic CDOs and Trigger Events, Part I
Alan Kohler's Article, A tsunami of hope or terror?, is critical to understanding the events we are witnessing today. I do not believe Mr. Kohler is entirely correct in everything written in the piece. But he did write a sensational, if controversial piece.
A Synthetic CDO - an sCDO for short - can be considered a new kind of CD, or Certificate of Deposit. But instead of being invested in real or relatively safe assets, sCDOs contained groupings, or tranches, of Credit Default Swaps. Credit Default Swaps are derivatives, or side bets on the markets. In particular, they were speculative bets on the potential risk that a given company would default on its bonds.
Put another way, sCDOs are yet another Vehicle of Monetary Exchange.
sCDOs have been around for the better part of this decade. The boom in the sCDO market was from 2005-2007. The entire CDS market has a notional value in the vicinity of US$ 62 trillion.
sCDOs were composed of Credit Default Swaps that were sliced up and packaged into tranches of different ratings - sub-prime, Baa, AAA, etc. Creating tranches is a practice perfected by Michael Milken at Drexel Burnham and Lambert in the late 80s with junk bonds. Milken's scheme caused that venerable investment brokerage, one of the top 5 back then, to go under, contributing to the market debasement of that decade. For his role in the scheme, Milken went to jail for 2 years. Then he was released, diagnosed with prostate cancer, and founded his Prostate Cancer Foundation. But that's a story for another time.
These tranch hierarchies (called mezzanines) were pieced together into complex structures considered difficult to understand by the entities who purchased the sCDO instruments. In the contracts, it WAS made clear that investors stood to lose all their money, but it seems that the purchasers of these instruments did not understand this. They should have. Yet another case of pretending to fail?
Continued in Part II
"So foul a sky clears not without a storm." William Shakespeare
by deuterium_is_heavy on Sun Dec 14, 2008 3:23 am Understanding Synthetic CDOs and Trigger Events, Part II
The essential point of the Kohler article is likely true. Somebody underwrote these instruments and issued them. And those entities are going to make a lot of money when the instruments debase.
But there will be not necessarily be a singular mass-transfer of wealth trigger event where losers have to pay money to the winners on these sCDO bets. The money has already been transferred. It's just that the defaulters don't know that they're the bag holders...yet. As Scrushy would have said, "There are 8,000 companies out there with **** on their balance sheets." (And as R~~ would say, he's not complaining - he's bragging). Some day soon, it will come out, and companies that thought they had millions, or billions, of sCDOs on their balance sheets will see those paper assets vaporized. So in some sense, that could be considered a wealth transfer event, though the money has really already changed hands.
Results of the sCDO bets will be settled at cash settlement auctions. The auctions take place after major trigger events. The first such auction took place in Europe after the default of the 3 Icelandic banks.
The unfolding of these defaults is moving like a contagion through the markets. It is quite possible, as Kohler asserts, that we will witness a critical meltdown point, where the contagion gets completely out of control and companies begin falling in rapid succession, like dominoes. This could bring down the entire web of sCDO agreements, which will likely be vaporized, reduced to pennies on the dollar of their original underwritten value.
And where it gets really out of control is the fact that these sCDOs were sliced up, repackaged, and sold again, and again, and again, leveraged to the hilt, creating debt obligations multiples in excess of their original value. And though current sCDO debasements have only resulted in losses of maybe 3-9% to the instruments, such losses on disclosure are essentially causing margin calls during the settlement auctions. These margin calls can force the holding entities into bankruptcy.
It will happen like a game of musical chairs, where the music stops and the losers will be left standing. Indeed, the music has already stopped; we simply have yet to determine where all the junk paper wound up.
Continued in Part III
"So foul a sky clears not without a storm." William Shakespeare
by deuterium_is_heavy on Sun Dec 14, 2008 3:54 am Understanding Synthetic CDOs and Trigger Events, Part III
Another error Kohler makes is in naming the companies involved in trigger events. The actual trigger companies are as follows:
1) Fannie Mae & Freddie Mac
2) Lehman Brothers
3) Washington Mutual
4) The 3 Icelandic banks - Landsbanki, Glitnir, & Kaupthing
The list of failures so far is therefore seven, not six.
Kohler lists the Countrywide and Bear Stearns failures in his article, but technically they were not trigger events.
Fannie and Freddie were placed into conservatorship under the US Government's aegis. But in Credit Default Swaps terms, this was considered equivalent to bankruptcy. It is not nessecarily important that the companies go totally bankrupt. It depends on how the CDS contracts were written.
Where Kohler got the idea that it would be just 9 companies that cause a final, massive, catastrophic trigger is not understood. It is possible he has read some of the agreements himself. But the sCDOs typically reference 100 to 150 individual companies. The CDS agreements would not likely have been structured to hinge on the fate of just 9 companies.
At the moment, nobody is disclosing who holds these instruments, or how exactly they will play out if and when the reference entities default. The list of holders is wide and varied, though it is likely that many of the entities are small and public.
It is now known that CitiBank held a good number of the bad sCDO instruments, which factored in their downfall. Ironically, they were listed on many of the very same sCDO contracts as one of the reference entities. The same was true for Lehman Brothers. It would be similar to making a bet with somebody that your company will be going bankrupt, knowing full-well that your company will be going bankrupt. But outsiders do not know, since the books have been cooked and total exposure hidden. In fact, Citibank reshuffled and sold some of the tranches to themselves.
"So foul a sky clears not without a storm." William Shakespeare
deuterium_is_heavy Member Posts: 133 Joined: Sat Dec 06, 2008 10:04 pm
http://www.businessspectator.com.au...-of-hope-or-terror-LHRJP?OpenDocument&src=sph
Here is some follow up info on synthetic CDOs
by deuterium_is_heavy on Sun Dec 14, 2008 3:20 am
Understanding Synthetic CDOs and Trigger Events, Part I
Alan Kohler's Article, A tsunami of hope or terror?, is critical to understanding the events we are witnessing today. I do not believe Mr. Kohler is entirely correct in everything written in the piece. But he did write a sensational, if controversial piece.
A Synthetic CDO - an sCDO for short - can be considered a new kind of CD, or Certificate of Deposit. But instead of being invested in real or relatively safe assets, sCDOs contained groupings, or tranches, of Credit Default Swaps. Credit Default Swaps are derivatives, or side bets on the markets. In particular, they were speculative bets on the potential risk that a given company would default on its bonds.
Put another way, sCDOs are yet another Vehicle of Monetary Exchange.
sCDOs have been around for the better part of this decade. The boom in the sCDO market was from 2005-2007. The entire CDS market has a notional value in the vicinity of US$ 62 trillion.
sCDOs were composed of Credit Default Swaps that were sliced up and packaged into tranches of different ratings - sub-prime, Baa, AAA, etc. Creating tranches is a practice perfected by Michael Milken at Drexel Burnham and Lambert in the late 80s with junk bonds. Milken's scheme caused that venerable investment brokerage, one of the top 5 back then, to go under, contributing to the market debasement of that decade. For his role in the scheme, Milken went to jail for 2 years. Then he was released, diagnosed with prostate cancer, and founded his Prostate Cancer Foundation. But that's a story for another time.
These tranch hierarchies (called mezzanines) were pieced together into complex structures considered difficult to understand by the entities who purchased the sCDO instruments. In the contracts, it WAS made clear that investors stood to lose all their money, but it seems that the purchasers of these instruments did not understand this. They should have. Yet another case of pretending to fail?
Continued in Part II
"So foul a sky clears not without a storm." William Shakespeare
by deuterium_is_heavy on Sun Dec 14, 2008 3:23 am Understanding Synthetic CDOs and Trigger Events, Part II
The essential point of the Kohler article is likely true. Somebody underwrote these instruments and issued them. And those entities are going to make a lot of money when the instruments debase.
But there will be not necessarily be a singular mass-transfer of wealth trigger event where losers have to pay money to the winners on these sCDO bets. The money has already been transferred. It's just that the defaulters don't know that they're the bag holders...yet. As Scrushy would have said, "There are 8,000 companies out there with **** on their balance sheets." (And as R~~ would say, he's not complaining - he's bragging). Some day soon, it will come out, and companies that thought they had millions, or billions, of sCDOs on their balance sheets will see those paper assets vaporized. So in some sense, that could be considered a wealth transfer event, though the money has really already changed hands.
Results of the sCDO bets will be settled at cash settlement auctions. The auctions take place after major trigger events. The first such auction took place in Europe after the default of the 3 Icelandic banks.
The unfolding of these defaults is moving like a contagion through the markets. It is quite possible, as Kohler asserts, that we will witness a critical meltdown point, where the contagion gets completely out of control and companies begin falling in rapid succession, like dominoes. This could bring down the entire web of sCDO agreements, which will likely be vaporized, reduced to pennies on the dollar of their original underwritten value.
And where it gets really out of control is the fact that these sCDOs were sliced up, repackaged, and sold again, and again, and again, leveraged to the hilt, creating debt obligations multiples in excess of their original value. And though current sCDO debasements have only resulted in losses of maybe 3-9% to the instruments, such losses on disclosure are essentially causing margin calls during the settlement auctions. These margin calls can force the holding entities into bankruptcy.
It will happen like a game of musical chairs, where the music stops and the losers will be left standing. Indeed, the music has already stopped; we simply have yet to determine where all the junk paper wound up.
Continued in Part III
"So foul a sky clears not without a storm." William Shakespeare
by deuterium_is_heavy on Sun Dec 14, 2008 3:54 am Understanding Synthetic CDOs and Trigger Events, Part III
Another error Kohler makes is in naming the companies involved in trigger events. The actual trigger companies are as follows:
1) Fannie Mae & Freddie Mac
2) Lehman Brothers
3) Washington Mutual
4) The 3 Icelandic banks - Landsbanki, Glitnir, & Kaupthing
The list of failures so far is therefore seven, not six.
Kohler lists the Countrywide and Bear Stearns failures in his article, but technically they were not trigger events.
Fannie and Freddie were placed into conservatorship under the US Government's aegis. But in Credit Default Swaps terms, this was considered equivalent to bankruptcy. It is not nessecarily important that the companies go totally bankrupt. It depends on how the CDS contracts were written.
Where Kohler got the idea that it would be just 9 companies that cause a final, massive, catastrophic trigger is not understood. It is possible he has read some of the agreements himself. But the sCDOs typically reference 100 to 150 individual companies. The CDS agreements would not likely have been structured to hinge on the fate of just 9 companies.
At the moment, nobody is disclosing who holds these instruments, or how exactly they will play out if and when the reference entities default. The list of holders is wide and varied, though it is likely that many of the entities are small and public.
It is now known that CitiBank held a good number of the bad sCDO instruments, which factored in their downfall. Ironically, they were listed on many of the very same sCDO contracts as one of the reference entities. The same was true for Lehman Brothers. It would be similar to making a bet with somebody that your company will be going bankrupt, knowing full-well that your company will be going bankrupt. But outsiders do not know, since the books have been cooked and total exposure hidden. In fact, Citibank reshuffled and sold some of the tranches to themselves.
"So foul a sky clears not without a storm." William Shakespeare
deuterium_is_heavy Member Posts: 133 Joined: Sat Dec 06, 2008 10:04 pm
[FONT=arial,helvetica]Choose Historical Charts & Data1. GOLD2. SILVER3. PLATINUM4. PALLADIUM5. RHODIUM 6. DAILY LEASE RATES [/FONT][FONT=arial,helvetica]Choose Live Charts1. GOLD2. SILVER3. PLATINUM4. PALLADIUM [/FONT]
[FONT=Arial, Helvetica, sans-serif]Advertise on Kitco[/FONT]
[FONT=arial,helvetica]Choose Historical Charts & Data1. GOLD2. SILVER3. PLATINUM4. PALLADIUM5. RHODIUM 6. DAILY LEASE RATES [/FONT][FONT=arial,helvetica]Choose Live Charts1. GOLD2. SILVER3. PLATINUM4. PALLADIUM [/FONT]
[FONT=arial,helvetica] Choose Live Charts1. GOLD2. SILVER3. PLATINUM4. PALLADIUM [/FONT]
[FONT=arial,helvetica] Choose Live Charts1. GOLD2. SILVER3. PLATINUM4. PALLADIUM [/FONT]
[FONT=Arial, Helvetica, sans-serif]Advertise on Kitco[/FONT]
[FONT=arial,helvetica]Choose Historical Charts & Data1. GOLD2. SILVER3. PLATINUM4. PALLADIUM5. RHODIUM 6. DAILY LEASE RATES [/FONT][FONT=arial,helvetica]Choose Live Charts1. GOLD2. SILVER3. PLATINUM4. PALLADIUM [/FONT]
This was an interesting anomoly someone posted regarding the silver NYC spot close for the 4 days the market was open leading up to 9/11. I don't know how to research if this has ever even happened before but I found it interesting. Reinhardt claims these organizations use Numerology to communicate. Gold closed at the exact same price for 2 days prior to 9/11.
From now on I'm going to post my findings on Reinhardt in the lounge. I will start a thread there later if anyone is interested in following it.
Take care
From now on I'm going to post my findings on Reinhardt in the lounge. I will start a thread there later if anyone is interested in following it.
Take care
"WASHINGTON, Feb 11 (Reuters) - The U.S. futures industry regulator would be empowered under a bill filed by the House Agriculture Committee chairman on Wednesday to suspend trading in credit default swaps if needed to protect investors and the financial market."
http://www.reuters.com/article/etfNews/idUSN1138178920090211
Hmmm... Now why might they feel the need for this.
http://www.reuters.com/article/etfNews/idUSN1138178920090211
Hmmm... Now why might they feel the need for this.
