Smearing Lipstick on a Pig
We've Nattered about how its different this time...
Howard Marks is the Chairman of Oaktree Capital Management:
"investors’ recurring acceptance that it’s different this time – or that cycles are no more – is exemplary of a willing suspension of disbelief that springs from glee over how well things are going."
The good news... due to the global nature of things, the risk has been sliced, diced and dished out six ways to Sunday.
The bad news... since its spread out globally, trouble can come at any time and from any direction.
Hat Tip to Mish's GET for this letter from Hayman Capital Partners.
Said letter explains in detail how foreign investors (Asian and Petro dollar recyclers) have been duped in the greatest bait and switch of all time...
Duped into buying a sub prime MBS pig with a glossy red AAA rating lipsticked on it.
Read on and pray that none of our commericial banks, insurance co. or pension funds kept buying this crap after 2003.
A small excerpt: "the “real money” (US insurance companies, pension funds, etc) accounts had stopped purchasing mezzanine tranches of US Subprime debt in late 2003.
Mezzanine CDOs were the only way to get rid of the riskiest tranches of Subprime debt.
Buyers (mainland Chinese Banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, UK banks) possess the “excess” pools of liquidity (from massive trade surplus or petrodollar recycling).
With the help of the ratings agencies the Mezzanine CDO managers collect a series of BBB and BBB- tranches and repackage them with a cascading cash waterfall so that the top tiers are paid out first on all the tranches – thus allowing them to be rated AAA.
Well, when you lever ONLY mezzanine tranches of Subprime RMBS 10-20X, POOF…you magically have 80% of the structure rated “AAA” by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets.
These institutions have these investments marked at PAR or 100 cents on the dollar for the most part.
When they are downgraded, these foreign buyers will most likely have to sell them due to the fact that they are only permitted to own “super-senior” risk in the US.
I predict that these tranches of mezzanine CDOs will fetch bids of around 10 cents on the dollar.
The ensuing HORROR SHOW will be worth the price of admission and some popcorn.
Consequently, when I hear people like Kudlow on CNBC tell their viewers that the Subprime problem is “contained”, I can hardly bear to watch.
In California today, home prices are down between 25%-40% in the central valley. From San Bernadino to Stockton, home prices are in free-fall.
If you plug in 15% depreciation in housing prices and 50% loss severities into our Subprime model, the capital structure is wiped out all the way to the “AA” tranches." OUCH!!!
Howard Marks is the Chairman of Oaktree Capital Management:
"investors’ recurring acceptance that it’s different this time – or that cycles are no more – is exemplary of a willing suspension of disbelief that springs from glee over how well things are going."
The good news... due to the global nature of things, the risk has been sliced, diced and dished out six ways to Sunday.
The bad news... since its spread out globally, trouble can come at any time and from any direction.
Hat Tip to Mish's GET for this letter from Hayman Capital Partners.
Said letter explains in detail how foreign investors (Asian and Petro dollar recyclers) have been duped in the greatest bait and switch of all time...
Duped into buying a sub prime MBS pig with a glossy red AAA rating lipsticked on it.
Read on and pray that none of our commericial banks, insurance co. or pension funds kept buying this crap after 2003.
A small excerpt: "the “real money” (US insurance companies, pension funds, etc) accounts had stopped purchasing mezzanine tranches of US Subprime debt in late 2003.
Mezzanine CDOs were the only way to get rid of the riskiest tranches of Subprime debt.
Buyers (mainland Chinese Banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, UK banks) possess the “excess” pools of liquidity (from massive trade surplus or petrodollar recycling).
With the help of the ratings agencies the Mezzanine CDO managers collect a series of BBB and BBB- tranches and repackage them with a cascading cash waterfall so that the top tiers are paid out first on all the tranches – thus allowing them to be rated AAA.
Well, when you lever ONLY mezzanine tranches of Subprime RMBS 10-20X, POOF…you magically have 80% of the structure rated “AAA” by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets.
These institutions have these investments marked at PAR or 100 cents on the dollar for the most part.
When they are downgraded, these foreign buyers will most likely have to sell them due to the fact that they are only permitted to own “super-senior” risk in the US.
I predict that these tranches of mezzanine CDOs will fetch bids of around 10 cents on the dollar.
The ensuing HORROR SHOW will be worth the price of admission and some popcorn.
Consequently, when I hear people like Kudlow on CNBC tell their viewers that the Subprime problem is “contained”, I can hardly bear to watch.
In California today, home prices are down between 25%-40% in the central valley. From San Bernadino to Stockton, home prices are in free-fall.
If you plug in 15% depreciation in housing prices and 50% loss severities into our Subprime model, the capital structure is wiped out all the way to the “AA” tranches." OUCH!!!
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