Tuesday, March 13, 2007

How Subprime Problems Can Spread

I was thinking more about how subprime problems can spread.

For background, the Street has been packaging many types of debt into securities. They deposit the debt (loans, bonds, mortgages, etc.) into trusts. The trust issues securities (e. g. a "collateralized loan obligation" = "CLO", etc.) in many layers of priorities & payment ranking. Most of the trust securities are highly rated based on statistical default analysis. But there are always a few layers of low rated securities and residual or equity in the trust. Who bought those? Beefers greedy for high returns, mostly. They are probably getting margin calls from their Street "buddies" who care only about their annual bonus.

So what can happen? Suppose the beefers can't / won't buy these anymore. The CBO-CDO-CLO etc. might (or has) frozen. This happened to the entire corporate bond market in 2002 after Worldcom and Enron. If the exit strategy for bonds & loans via CLO/CBO/CDO market is gone, then the debt itself might not be created. Hence a source of loss of "liquidity" for the world markets.

I think watching high yield bond spreads might give us a clue if this gets serious.


mern said...

doesnt seem like corporates r giving it up. issuance was like 40 or 50 billion last week, which is stunning, imo.

u have any links that show the spread between high yield corporates against the t curve?

man im totally exhausted, last nite at the watering hole i was debating over 10 people. the topic of discussion was evolution. i swear its just unbelievable, everyone here in crackerville, believe in Adam and eve. this one guy, college educated, white collar, tried to convince me the earth is about 9000 yrs old.

thank whoever the north won the civil war, becuase the crackers in south r so dumb, ive really got to move.

the concept that we evolved from apes, is so insulting to these retards, it boogles my mind.

come to think of it the last time i was in colorado i was looking at the moutains and thinking "ya, these r probably only about 8000 years old" ROFL

short florida whities

Bunkerman said...

lol mern. Re the Civil War, thank nine of my ancestors & distant relatives for their bit in Sherman's Army. I'm a proud member of Sons of Union Veterans of the Civil War. :-)

Re evolution, I always like to say, the creationists "have a lot of explaining to do" (paraphrasing Ricky Ricardo in the "I Love Lucy" TV show). The only way they can do it is simply to postulate everything was created at once to give man an interesting world to explore. Unfortunately for that line of thinking, it presumes God put us in a Potemkin Village.

I have no links to a high yield spread curve - those cost money on many sites. If there was a high yield ETF, we could track its relative strength vs. the treatury ETFs.

mern said...

punting the VIX at 18, shes too old and expires friday anyway. bud wud be proud. in her at 13.80 out before she hit 18.

geesh those stunck, sold below intrinsic value, well below, but a nice trade though.

i cant believe IB's platform froze on the short side at noon. and they wont do anything to compensate me.

enuff with them they r a nitemare. is terra nova similar. i love the IB platform, they just have the worst back office ive ever seen

Bud said...

Yes...I am very grateful to Bunkerman's ancestors for their role in crushing the south. Can you imagine what type of backward and bigoted country this would have been had dixie won? Rofl 'creation'. Just a bunch of narrow-minded bible-thumping cousin-loving jesus freaks. too funny!!