Déjà vu
Remember the decade of 1990’s in
Cut to the present: Massive levels of debt underlying the world economic system are about to unwind in a profound and persistent way. It’s an optimistic era of too much liquidity; too much leverage and too much financial engineering slowly giving way to fundamental reasoning.
Who takes the responsibility?
Who do you think is to be blamed??? Is it
(a) that American slob who took mortgage that he couldn’t afford
(b) the
(c) the I-Banks – who repackage sub primes and transfer credit risk into the hands of unsophisticated funds
Now you can’t blame that poor sod who took that loan from that next door broker who pushed the loan down his throat! The smart quants at bulge bracket I-banks took that loans and built tower of securitized debt with models that are fundamentally flawed while the US regulators were caught sucking their thumbs!
Stripped by Leveraged liquidity!
Say the bank has – $100 and issues loan worth $100. Now it collateralizes (CDO / CMO call it what you may!) the loan and immediately receives say $98 which it loans out to another borrower. This continues and the bank finances itself multiple times using nothing but that initial amount of $100. According to Satyajit Das a dollar of ‘real capital’ supports $20 - $30 worth of loans.
Fundamentally Flawed – painful unwinding!!!
Now when we look at the recent doubling of default rates (in contravention to that predicted by the geniuses at I-Banks) the pass-troughs (MBS etc…) began to collapse. Now valuing these papers would put rocket science to shame. Through last couple of months billions of dollars of these securities have been ‘orphaned’. That is it cant be sold off or used as collaterals (well, apart from the fact that, the day before Fed started accepting ABCP’s as eligible collateral).
This has had a big effect on the big bad world of PE. Yeah! I'm talking about private-equity takeovers, leveraged buyouts and corporate stock buybacks -- the works. So the structured finance market is coming undone; not only will those pillars of strength for equities be knocked away, but many recent deals that were predicated on the easy availability of money will likely also go bust.
The current market volatility is much more profound than a simple "correction" in prices. It is a gigantic liquidity bubble unwinding -- a process that can take a long, long time.
While you might think that the
Some off the cuff thinking leads to believing that post crises environment will be:
(I) Declining supply of underlying assets (i.e. Mortgages, Loans etc…)
(II) Move from structured to more plain vanilla products
(III) Less leverage more desirable
(IV) Lower returns on credit structured products due to lower demand
(V) Regulatory overhaul
(VI) Well… and… hmmm… some other new crises… !!!!
1 comment:
Good going man, !!
yup, its ppl like u, who are the culprits, hee hee.. !! u price the structured products, and help.. i-banks... to play around.
second, its the rating agencies and credit bureaus like S&P, experian, etc... who give out loans w/o considering the risk profile....
and yup, the biggest fools are ECB and FED, who want to bail out financial houses, with supplying liquidity in the market, which i believe they shud not be doing... rather let the maket face the temporary turmoil.... !! thou, there are many if's and but's here... wud c u personally on tis !! wud b fun discussin the same over a glass of vodka, wat say :)
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