The Money Pyramid - How the Money Supply has Grown

chucky

mbga9pgf wrote: »

The thing about CDSs... the mrket has changed considerably since Lehmans; I agree the write dons will never be as large as the above article, but their economic models relied on Gaussian distribution, what we are seeing on the economic markets currently was considered as likely as a meteorite hitting the earth at the time the CDS's were issued, as the models didnt factor such a huge global recession and people without jobs unable to pay for their mortgages.

I personally think losses from CDSs have grown substantially, purely becuase some that took out CDSs will not be able to settle as their losses are so staggeringly huge. Thats bad news for banks that are still expected to pay out to those that are obviously significantly in the Black.

Unfortunately, the money the banks made in the sidelines will not cover the defaults. Neither will the insurance the banks took out, as again they face huge losses.

its one great big sh*t sandwitch and we are all going to have to take a bite...

with buyers and sellers - someone is going to make a profit.
can't be that bad then.

bubblesmoney

chucky wrote: »

look at the Lehmans auction - there was something like $500 billion dollars worth of trades out there. it ended up being something like a fraction of this amount that was netted when they were settled when they went bust.

don't forget in this settled number there will be buyers and sellers - the same firm will not always be the buyer or even the seller, so everything basically nets itself out. there will be losers and winners but not "doom" and "crash" numbers.

the problem that the journalist has missed is that the underlying of these trades may be the problem especially with the CDO's - he's missed the point completely.

serious question and not having a go; but do you make a habit of starting threads on stuff that you don't understand or was it the headline that got you?

Everything doesnt necessarily even out especially in mortgage backed securities.

In a mortgage - The lender gives money to the borrower, who then spends this money on a home. Assume that a lender and borrower entered into a mortgage and that before maturity the value of the home falls, prompting the borrower to default on its mortgage. Further assume that the lender forecloses on the property, selling it at a loss. Since the buyer receives none of the foreclosure proceeds, the buyer can be viewed as either neutral or incurring a loss, since at least some of the borrower’s mortgage payments went towards equity ownership and not just occupancy. It follows that there is a loss to the lender and either no change in or a loss to the borrower and therefore a net loss. This demonstrates what we have all recently learned from the recent financial problems facing the world: poorly underwritten (non recourse debt)mortgages can create net losses. And anyone up the securities chain all carry more risks with the leverage attached to these securities. Securities when leveraged (which they usually are) in the boom time to maximise profits, work the other way as well when the market turns against you. The losses can be magnified just like the gains were magnified during the boom years due to leveraging. With the Credit derivatives sector being many times in value of the worlds GDP, this could only occur with leveraging in a booming market, now the losses will be magnified as well precisely because of that leveraging in a falling market.

chucky

bubblesmoney wrote: »

Everything doesnt necessarily even out especially in mortgage backed securities.

In a mortgage - The lender gives money to the borrower, who then spends this money on a home. Assume that a lender and borrower entered into a mortgage and that before maturity the value of the home falls, prompting the borrower to default on its mortgage. Further assume that the lender forecloses on the property, selling it at a loss. Since the buyer receives none of the foreclosure proceeds, the buyer can be viewed as either neutral or incurring a loss, since at least some of the borrower’s mortgage payments went towards equity ownership and not just occupancy. It follows that there is a loss to the lender and either no change in or a loss to the borrower and therefore a net loss. This demonstrates what we have all recently learned from the recent financial problems facing the world: poorly underwritten (non recourse debt)mortgages can create net losses. And anyone up the securities chain all carry more risks with the leverage attached to these securities. Securities when leveraged (which they usually are) in the boom time to maximise profits, work the other way as well when the market turns against you. The losses can be magnified just like the gains were magnified during the boom years due to leveraging. With the Credit derivatives sector being many times in value of the worlds GDP, this could only occur with leveraging in a booming market, now the losses will be magnified as well precisely because of that leveraging.

bubbles - we can go on all day about ABX/ABS/CMBX and all other types of trade structures that go on. let's keep it simple without going all out trying. we're not trying to prove that mortgage backed securities are good or bad or even their profit and loss - we're looking at the accuracy of the article in question.

sorry to burst that bubble - excuse the pun but can you see what i've done there

bubblesmoney

chucky wrote: »

bubbles - we can go on all day about ABX/ABS/CMBX and all other types of trade structures that go on. let's keep it simple without going all out trying. we're not trying to prove that mortgage backed securities are good or bad or even their profit and loss - we're looking at the accuracy of the article in question.

sorry to burst that bubble - excuse the pun but can you see what i've done there

ok no problems :beer:

bubblesmoney

i found this quite telling of the derivatives market.

“Derivatives are like sex,” Buffett said. “It’s not who we’re sleeping with, it’s who they’re sleeping with that’s the problem.”

chrisweb

Radiantsoul wrote: »

Company A issues a mortgage for £100k.

That loan is sold to company B for 99k, so company A receives £99k. If the loan goes wrong then the loss is £100k at most and not £199k. And in practice these loans were sold and resold many times.

Gotcha - thanks for the explanation.
I am right in thinking that the only company/person that gets hurt is the one that owns the CDS's at the end, and not the people that bought and resold, or got the loan in the first place? Or is it more complicated than that?

chucky

chrisweb wrote: »

Gotcha - thanks for the explanation.
I am right in thinking that the only company/person that gets hurt is the one that owns the CDS's at the end, and not the people that bought and resold, or got the loan in the first place? Or is it more complicated than that?

yes a bit more complicated - some people by CDS's and hedge them against (bonds) governement debt or company debt as investment or even in case they go bust. so instead of receiving 5% they'll receive 4.9% coupons - the 0.1% spread being taken by the seller of the trade as payment for the protection in theory. this then get's resold and hence you get the trillion $ numbers in your article.

there are many different scenarios that credit derivs are used for - that's just one of them.

chrisweb

Hedging is still something I am having trouble getting my head around.
If they hedge how does it end up hurting more than the last person who owned the CDS?

Radiantsoul

chrisweb wrote: »

Hedging is still something I am having trouble getting my head around.
If they hedge how does it end up hurting more than the last person who owned the CDS?

Because the CDS will have a lot of different owners, they have been broken into tranches with different owners. However in theory the total loss should not exceed the losses on the underlying loan.

If counterparties are allowed to go bust things get worse as losses will then appear in the system(because the liquidator will claim the gains, but will not pay out all the losses incurred). This seems to me to be the problem with letting Lehmans collapse.

chrisweb

I sort of get it but its still not clicking - I think maybe cause some of the practices with CDS's were a bit illogical to begin with.
Recommend any background reading?