Tick, Tock, Debt Market Time Bomb
Jim Jubak at MSN is officially on board with the Debt Market Bomb that could hurt us all, a must read.
Like The Nattering One, Jubak is worried about a debt market unwind in subprime, derivatives, MBS, CDO's and CDS that could go postal and global.
Jim does a wonderful job of explaining in lay mans terms, how these synthetic derivatives are packaged, sold and the risks involved.
Choice cuts: The greatest economic threat today isn't deflation in the housing market. A bigger worry is that a meltdown in the debt markets could force the global economy into a credit squeeze and recession.
You should be watching the debt markets and not the stock market. In the debt market insurance goes by names such as "credit default swaps" and "collateralized debt obligation.
About 10% of subprime mortgages are now delinquent by 90 days, according to investment bank Friedman, Billings, Ramsey (FBR, news, msgs). That's above the peak in the 2000-01 economic downturn.
Yield-hungry but risk-averse investors have flocked to the market encouraged by "synthetic" financial engineering.
CDO's accounted for $503 billion globally in 2006, up $64 billion in 2005, according to JPMorgan Chase.
Add in private CDO deals and CDOs based on one index or another, and the figure climbs to $2.8 trillion in 2006, estimates the Financial Times, three times the issuance in 2005.
Much of the decline in risk premium is a result of confidence that this new generation of synthetic debt instruments has reduced risk in the debt markets, especially for the riskiest credits. There is good reason to believe that confidence is misplaced.
When the economy went into a slump in 2000-01, the CDO market hit the wall, generating huge losses.
Defaults wiped out equity and mezzanine tranches, and then, because the senior bonds were now exposed to losses, they received credit-rating downgrades that sent the price of these bonds tumbling.
But its different this time... yes it is, the downside risk is far worse... going into the 1990 recession, most-likely-to-fail CCC-rated companies made up just 2% of the junk-bond market, In February 2007, the figure is 17%.
Like The Nattering One, Jubak is worried about a debt market unwind in subprime, derivatives, MBS, CDO's and CDS that could go postal and global.
Jim does a wonderful job of explaining in lay mans terms, how these synthetic derivatives are packaged, sold and the risks involved.
Choice cuts: The greatest economic threat today isn't deflation in the housing market. A bigger worry is that a meltdown in the debt markets could force the global economy into a credit squeeze and recession.
You should be watching the debt markets and not the stock market. In the debt market insurance goes by names such as "credit default swaps" and "collateralized debt obligation.
About 10% of subprime mortgages are now delinquent by 90 days, according to investment bank Friedman, Billings, Ramsey (FBR, news, msgs). That's above the peak in the 2000-01 economic downturn.
Yield-hungry but risk-averse investors have flocked to the market encouraged by "synthetic" financial engineering.
CDO's accounted for $503 billion globally in 2006, up $64 billion in 2005, according to JPMorgan Chase.
Add in private CDO deals and CDOs based on one index or another, and the figure climbs to $2.8 trillion in 2006, estimates the Financial Times, three times the issuance in 2005.
Much of the decline in risk premium is a result of confidence that this new generation of synthetic debt instruments has reduced risk in the debt markets, especially for the riskiest credits. There is good reason to believe that confidence is misplaced.
When the economy went into a slump in 2000-01, the CDO market hit the wall, generating huge losses.
Defaults wiped out equity and mezzanine tranches, and then, because the senior bonds were now exposed to losses, they received credit-rating downgrades that sent the price of these bonds tumbling.
But its different this time... yes it is, the downside risk is far worse... going into the 1990 recession, most-likely-to-fail CCC-rated companies made up just 2% of the junk-bond market, In February 2007, the figure is 17%.
Comments