The debt hedge funds are sitting with, or got crushed on, huge losses in investments in crappy loans. The Street was putting junky loans with terms that no serious "real" lender would accept into CLO/CDO/CBL trusts with many other types of loans, getting ratings based on diversification, and the hedgies bought the subordinated classes. Now that the subprime residential defaults rates went up a lot, the poor quality and structure of those loans got attention. All those 2-28 loans were just time-bombs - Caa/CCC quality needing something good to happen to avoid certain default. Stable or lower home prices guarantee defaults. The horrible terms of the corporate LBO loans in those trusts were such that no lender planning to hold to maturity would ever accept them, hence they are now unmarketable. So they are all stuck. The residential subprime loans are poisoning the trusts and the value of the garbage corporate loans are falling. So the subordinated class owners are being killed. If they funded those speculations with margin, they've been getting margin calls and have been - or will be - liquidated. That's the past.
New loans have to be written with terms and covenants that a "real" lender will accept, not a just a "dumb money" trust. A return to normalcy. And residential loans have to provide that the borrower can pay the debt service assuming nothing changes - real income coverage of debt service needed.
Are there lenders to make those loans? I think yes. Demographics is pushing huge sums into income oriented investments. Fannie Mae and Freddie Mac still provide liquidity to huge amounts of conventional home mortgage loans. Pension funds and insureance companies need long term income to fund liabilities. With good terms and covenants, the LBO loans can be excellent investments for a diversified income portfolio. That's means an LBO loan that requires some debt repayments BEFORE the private equity guys get a dividend. So as long as the economy grows, the future looks fine. Corporate earnings are good and the consumer is mostly fine. Stocks are cheap. Corporate defaults are very low. Commercial mortgage loan defaults are very low. This is the future.
This panic might take a awhile more to run. It seems like an old fashioned "money" panic - one that hits the street harder than the economy. As long as government doesn't do something to make it worse.
PS: the losses of FNMA and Freddie Mac on subprime loans really brings their investing policies into question again. They had no business buying those loans - loans that expressly do not meet their lending guidelines.
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19 comments:
oils being puked up like mad here...
Bud probably 6 under par by now....
PPP at work re oils.
seems bit silly the way the oils are getting killed here...ill stick my toe in...small to start...always funny to watch the action there...when crude goes down 50 cents they seem to get sold with alacrity...is that a $10 word?
I've seen the oils act like this several times over the last year. When the momo beefers are getting out, they just dump them with abandon. They bid them up and then run for the hills as soon as they start going down. Then they base at a higher level and go higher after a few weeks or months.
Hmm, alacrity - it's not a $10 for me, but for some, definitely ;-)
yes a Harvard graduate certainly wouldnt regard alacrity as a $10 word....maybe $5...although I wonder if Elaine Chao even knows what it means....
well, I had Latin in high school so know that word from it.
Yes, I'm so old I had three years of Latin.
Wow B'man. I finally gettin through to you. Excellent post. None of that herd of elephants nonsense. I actually learned something. good stuff.
6 under par..........lmaooooooooo
Oils are gettin killed on fear of a global slowdown. Maybe in the US we see a slowdown......but I don't see it worldwide. But....did the oils runup 'too much'. I don't know what the 'normal' PE's are that they should trade at.
When I become President.....Elaine Chao will be in charge of white house laundry. Except on "chinese' night.....than she will be the head chef. I heard she makes a mean kung pao chicken.
Still early.....but looks like a win for the bulls today. I don't think they needed to rally today.....but they definitely needed to stop the bleeding.
lol you haven't heard the last of the elephants, Bud. That's a very apt metaphor.
Bud knock it off with that fear of a global slowdown nonsense....stop poaching ideas from cnbc....lmaoooooooo
Holy smokes!! Calpers had a return of 19% for fiscal year ended june30. They made $36B and their assets now at $248B. Are Calpers part of your 'beefer' crowd B'man? If so, that is one smart elephant.
Rofl....poaching. True. I'll try to come up with an original thought some day. May take awhile.
I think the oils are still way undervalued. What I meant was that the beefers pushed them up too fast - having too much momo money in them left the real buyers behind and waiting for a lower entry price. Look at teh CVX chart. That run up from 84 to 95 was just momo money.
Calpers is a real buyer. THey should have made that during that year. A diversified index strategy could do that. I made about that for 2006 in my Krypto Fund and most was in the last half.
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