Its one thing when we see that the BBB- bonds — the junkiest sub-prime crap in the Residential Mortgage Backed Securities (RMBS) universe — getting shellacked due to foreclosures.
But today, we see that the AA and even the AAA are getting whacked. It looks like either a fund is getting liquidated across all asset qualities — or someone is panicking.
UPDATE: July 16, 2007 7:28pm
On the train home, I bump into a friend from UBS, who reminds me that triple AAAs contains up to 8% toxic sludge, while the double AAs contain up to 12%.
As we mentioned this morning in the Beyond the ‘Wall of Worry,’ perhaps the focus has been in the wrong place — not the low quality junk, but the supposed AAA stuff . . .
>
Very ominous charts (all via Markit):
Triple A (AAA)
2007
2006
Double A (AA)
2007
2006
Maybe there is a problem at Bear Stearns.
Regardless, looks like another hardly efficient market . . .
I mean its only 5% — but its AAA fer cryin out loud!
Well, I haven’t heard much about this today. It will be interesting to see whether it gets press and if there is followthrough to the downside…
Could the other option be that some investors now realize that the lack of compliance and rampant fraud over the past 2-3 years could mean that AAA are not really AAA quality and they are getting out? What does this mean to pension funds????
Looks like someone jumped out the window. On the 99th floor.
I can see someone in a boardroom somewhere explaining to the CEO what is going on. Pointing to the chart and circling the cliff , “It is right about here where we think something went wrong.”
i understand the single and double A finally dropping -it seemed like something was artificially holding them up. and expected losses should rise as you go down in seniority
but AAA now implying 4.5% losses? THAT will be an interesting world to live in.
If this keeps up, I am buying a handgun instead of another slug of these *sigh* worthless QQQQ puts.
WTF indeed.
James Sivco
Houston, TX
everyone should run, not walk, to read what some of the minyanville professors have to say about these indices. those prices you are seeing don’t do the actual prices justice. they are much lower than the print you are seeing. it’s explained in great detail at minyanville.com. scary stuff.
is this to do with it?
Subprime Downgrades Sideline ABS Issuance
Asset Securitization Report–SourceMedia (July 16, 2007)
Donna Mitchell
The asset securitization market usually does not stop issuing new deals for any reason, except perhaps the usual holiday breaks. After enduring several days of downgrades on subprime MBS by Moody’s Investors Service, and warnings of more from Standard & Poor’s, however, the ABS market largely decided to hold back from issuing new debt last week.
http://www.securitization.net/article.asp?id=1&aid=7470
Perhaps this is one of the reasons why treasuries were steady today on some unwinding of spreads.. I really could’n put my finger on that, although I must admit that I haven’t been too diligent today… Taking a few days off…
Could we be seeing the beggining of the “now you dont phase of the global “now you see” it liquidity.. There was a slight divergence Dow/S&P.. Any thoughts on this….
Econolicious
Alt-A’s are starting to stink up the joint.
I’m thinking they’re going to need a bigger container!
“Hefty Hefty Hefty!”
not….
“Wimpy Wimpy Wimpy”
Frankly, I’m disappointed the market did not climb on this news.
hey MichaelA – do you have a link to the minyanville stuff? Their website front page is proving hard to scan for that subject…
(maybe it’s just me).
Thanks,
-IM
Do some research, there is absolutely no correspondence between the AAA, etc ratings used in the mortgage CDO market and the formerly sane bond market with respect to default rates. In the lowest investment grades the CDO default rate is 10 times greater than the same rated corporate bond. Perhaps the use of the same rating letters was an inadvertant mistake by the rating….
dont worry the Bernake/Paulson put will keep this market intact, the PPT is on call.
From the economist: “AAAsking for trouble”
http://www.economist.com/finance/displaystory.cfm?story_id=9482945
About this CDO trap, plus quote: “According to Standard & Poor’s (S&P), a rating agency, only six American non-bank companies carry a triple-A rating today, including Berkshire Hathaway and General Electric.”
Also MER reports tomorrow, so this drop could be a preventive move or somebody knows something.
What follows are excerpts from Absence of Fear, an excellent article written by Robert L. Rodriguez at First Pacific Advisors.
We were on the March 22 call with Fitch regarding the sub-prime securitization market’s difficulties. In their talk, they were highly confident regarding their models and their ratings. My associate asked several questions.
FPA: “What are the key drivers of your rating model?”
Fitch: They responded, FICO scores and home price appreciation (HPA) of low single digit (LSD) or mid single digit (MSD), as HPA has been for the past 50 years.
FPA: “What if HPA was flat for an extended period of time?”
Fitch: They responded that their model would start to break down.
FPA: “What if HPA were to decline 1% to 2% for an extended period of time?”
Fitch: They responded that their models would break down completely.
FPA: “With 2% depreciation, how far up the rating’s scale would it harm?”
Fitch: They responded that it might go as high as the AA or AAA tranches.
this is a great article that might explain some further problems at bear:
http://www.bloomberg.com/apps/news?pid=20601087&sid=akelO4PqGUco&refer=home
CMBX indexes performed just as bad today. Contained, yeah right…
Institutions selling all subprime after rough Q?
OH yea….don’t forget we’re in the “black out period”.
Ciao
MS
Isn’t it odd that uranium also sold off today? I suspect that was uranium owned as a commodity speculation and not for true use.
Is there someone out there with a powerful need to deleverage and raise cash by selling everything NOW?
CMBX indexes performed just as bad today. Contained, yeah right…
Speaking of uranium, if you take the CMBX shooting up and collide it into the ABX shooting down… maybe they negate each other and we have no problems?
Kinda like putting matter and anti-matter together, they also negate each other and nothing remains… er, except for a ‘little’ energy.
I may have gotten a ‘C’ in quantum chemistry but I got an ‘A’ in economics!
Beyond the ‘Wall of Worry’
There is an interesting article in the Money Investing section of the WSJ this morning: What Could Topple Bulls’ ‘Wall of Worry’?. The wall of worry idea is that stocks can still flourish when people are nervous. Skeptics hold money on the sidelines. A…
Yes Fred…it would seem that there was a liquidation, or bid list that was forced. Buyers are licking their chops.
These ABX markets are a joke…but the sellers are not laughing.
I have not seen other credit spreads (corporate) widening however.
How many here are praying for a correction??
Watch as the carry trade unwinds….the JPY finally showing some signs of life….
I’d like to the Fed say inflation ex-imports is well contained.
Go Yen go.
It was never an ‘efficient market’ in this crap. Folks chasing yield and advisors chasing cc is what this is all about. Investing in ‘bonds’ not marked to market is nuts. I’m surprised at BSC and others for getting involved in this stuff from the get-go. Pure stupidity and I don’t feel sorry for the investors at all.
Bear Stearns doom andgloom
Over on Nuclear Phynance I predicted that today would be an interesting day
Posted July 8, 2007:
All I can add is that I think July 16 will be an interesting day
The reason being that Bear Stearns was suppose to report their losses today…
This makes it appear as if the default rate is much larger than we have been led to believe.
Of course, when you give someone a 2-year introductory rental price without even asking for a deposit, it should come as no surprise that they simply walk away when the time period expires and the rent is jacked up.
If you want to call a no down payment, no document ARM loan a home sale, then you must be smoking some Greenspan.
Don’t bogart that Al, my friend, pass it over to me.
I’ll sell you this real fine home, with a no doc, liar loan.
What happened today was predicted on July 12 at
http://www.economist.com/finance/displaystory.cfm?story_id=9482868
“Those required to ascribe a market value to these securities are faced with what ING, an investment bank, describes as a version of the prisoner’s dilemma. Everybody would be better off if nobody traded, so that there would be no need to recognise lower prices. But if everybody is planning to sell, those who trade first will have an advantage.”
What I can’t understand is on what grounds Mike M could have expected the market to CLIMB on this news. This is how the linked article ends:
“The current fear is not so much that the housing market could drive America into recession, although that could still happen. The worry is more that credit conditions may get tighter. The spread paid by higher-risk European firms has increased by almost a percentage point since mid-June. Investors are shying away from some loans being offered to finance leveraged buy-outs. A slowdown in such private equity-driven bids would hit the stockmarket.
Richard Bernstein, a Merrill Lynch strategist, says excessive lending has been fuelling the growth in financial markets in recent years. But he fears that now liquidity is drying up. That means no cushion when the punch lands.”
Am I missing something? Isn’t this just flight to quality?
I don’t understand the relationship between the 2006 and the 2007 charts. What happened in 2006 that I’m missing?
Please disregard my brain-fart. I noticed those are prices, not yields.
Wow. Those cliff dives are the most interesting concrete thing I’ve seen in months. Lots of interesting talk, but no activity. Anyone know how to estimate how much “value” would have been wiped out today assuming those prices hold?
Eddie, the relationship is that both suck. Peak loose lending standards and bottom of the barrel home purchasers.
Also, can anyone shed some light on the scale. Is the beginning of that slope just Friday? Or earlier last week?
Maybe some of those CDOs contained uranium. Then they would be nuclear waste.
Hmmm…I wonder how those drops today is helping HUD Secretary Alphonso Jackson peddle his CDO goods? The chinese would have to be out of their minds to throw good money after bad. Do you think Alphonso or the Chinese have seen these charts today…just wondering. Talk about impecable timing. …NOT!
Fred,
Was uranium sell-off due to the earthquake in Japan and the reported radiation leak?
Well, ABX is an old story, this CDS index died two weeks ago.
Look better at CMBX index, that’s where the next story develops:
http://theroxylandr.wordpress.com/2007/07/16/
commercial-real-estate-death-on-two-legs/
Bad link, fixing:
http://theroxylandr.wordpress.com/2007/07/16/commercial-real-estate-death-on-two-legs/
It is critical to note that these charts are for Residential Mortgage Backed Securities – these are not the CDOs.
With these prices, subprime lending is over, as the banks and mortgage companies will not be able to sell these loans.
“According to Inside Mortgage Finance, subprime loan originations totaled 20% of all originations in 2006 at a total dollar amount of $605 billion.”
That is a direct hit to liquidity – subtract $605 billion times the amount of times the loans were leveraged and that is the future lquidity outlook.
All I can say is thank God it is contained or we might be talking about some real money.
Munn
don’t forget Alt-A , it was another 20% in 2006.
so all this shittalk here whats the short play?
I would not trust the ABX indices without consulting the cash securitized bond markets. I have heard average prices are higher there. The ABX is a home for punters, not investors, and trading dynamics can overwhelm the actual economics, which are bad, but how bad?
I have had AAA securities go bust, so I know the pain potential here. Given that the ABX is a pool of twenty different origination platforms, though, for BBB- ABX to trade under 50 implies that half will burn through roughly 4% of principal in 4 years. That implies that the majority mis-underwrote subprime. Probably true, but astounding all the same.
US FX Morning Note – Street Views
ABN – Global FX Daily
Discussing sub-prime and the sudden fall in the ABX index, ABN expects the USD to suffer the brunt of the FX fall out while high yielding currencies remain resilient:
The market has got used to talking about sub-prime and is no l…
OK, I am a beleiver. How does someone make money betting that subprime and Alt A market will continue to collaspe? I shorted Countrywide Financial Corp. stock but that seems to be a very inefiicient way to play this downturn. Does anyone have another non-technical way?
even if you think you understand the aspects of the cdo market, you probably don’t. read this:
http://www.minyanville.com/articles/CDO-Credit-Debt-Investors/index/a/12869
ACA Capital Holdings (ACA) shares fell 22% on the heaviest volume in the company’s brief history yesterday. The shares have lost a third of their value since Thursday, and are trading at less than half of their value a month ago.
See NYT, Floyd Norris:
A Company’s Stock Suffers, but Mostly in Silence http://www.nytimes.com/2007/07/17/business/17place.html
Some of the comments here seem to be viewing the ABX index as an index of MBS prices. My understanding, however, is that the ABX is an index of prices of *credit default swaps* on the underlying MBS. (See, for example, the last bullet on page 19 of http://www.markit.com/information/affiliations/abx/documentation/content2Paragraphs/0/document/ABX%20Marketing%20Presentation%20-%20FINAL.pdf) So, a 5% price drop on the AAA ABX, for example, doesn’t necessarily imply that the underlying MBS are off 5%.
You are correct…in fact the (massive/crowded)shorting of these indicies may be creating a self fulfilling prophesy on bad data. IOW, there will be (smart) buyers taking the other side, who actually understand this, and could make a killing.
re: ACA
Short squeeze today…….or something else??
Ciao
MS
Barry — Thanks for posting this… would’ve commented sooner but I was stuck in the dentists chair undergoing root canal.
So that puts me right in-tune with the Bear Hedge fund guys (I also used to work there and almost went to work at these subprime funds).
1 – We’re all still waiting for the June EOM number from those subprime exposed hedge funds, right?
2 – If the A tranche of the ABX was paying 60 bps in spread. You could lever that 10x and make LIBOR+600 in your hedge fund. Sounds like about where the larger unlevered Bear fund was at.
3 – At June 29th, the A tranche was trading around 90 (and really moved down from June 15th on). Thus equity in the fund would basically be a “0” (subject to some pricing fudge and vintage exposure).
4 – As of now, the A tranche is trading in the low 70s, implying as much as -200% equity if they chose not to cover at end of June.
5 – Since this became so public — creditor auctions, Blackstone advisory, etc.. I trust that information is being leaked. They are probably not yet covered, and smart aggressive players (hmm.. Citadel?) are trading massively against them.
6 – The AAA thing, at first glance appears crazy. These bonds represent the top 70% of the collateral pool and should only default if lower tranches are all zeros. So with 30% collateral in front of you… and with 50% recovery on foreclosure… we’d have to see 60% defaults in subprime.
All just my draft opinions. Would be great to hear comments.
-M
solution for this is obvious.
we need to buy up all the bridge making companies in the world, then invade the world and blow up all the bridges. as share prices in the bridge company increase 10million fold sell our shares and use it to cover our financial crisis. then retire somewhere nice that needs no bridges.
“6 – The AAA thing, at first glance appears crazy. These bonds represent the top 70% of the collateral pool and should only default if lower tranches are all zeros. So with 30% collateral in front of you… and with 50% recovery on foreclosure… we’d have to see 60% defaults in subprime.”
Michael Storm: This is rather amazing. When I saw the ABX numbers, I said to myself without calculations that there must be more like 50-60% defaults on these subprime loans.
Spooky thing is I see this as a very real possibiltiy – it could be even higher – more like 60-70% on the 2005/2006 vintages.
The quality of the loans is overstated, IMO. Calling them toxic waste is an insult to real toxic waste. Most of these loans are not much better than a made-up name on an application.
The lenders – who are nothing more than salesman – convinced those who could not afford the loan that it was a “no-lose” proposition, that the worst that could happen is 2 years down the road they could sell the house and pocket 40K because house prices always go up.
So what you ended up with was a ton of lower income owners who thought they could get a piece of the American Dream not by house ownership, but by speculation in housing. Floppers instead of flippers – when the loan flops, they still make money.
Trouble is, when something sounds too good to be true, it is.
I wouldn’t get too worried. The guys in Washington will fix everything. Of course, we won’t recognize it with they’re finished with it, but….
Damn those are some scary charts
“On the train home, I bump into a friend from UBS, who reminds me that triple AAAs contains up to 8% toxic sludge, while the double AAs contain up to 12%.”
huh? BR your ignorance of home eq securitization is very apparent, every bond AAA down to BBB- in a home eq deal is exposed to the same collateral; how the tranches differ is in the amount of subordination and their order in the cash waterfall. by the way, the ABX is hardly liquid, the bid/ask spread for BBB- is about 4 POINTS not ticks, POINTS! imagine an equity trader making a markt in GOOG with bid/ask of 500/550
Im not in the mortgage securities business, but, damn it makes me hopping mad, there are AAA rated bonds with %8 manure, and AA rated bonds out there with %12. Who the hell SOLD this stuff anyway, they should be in JAIL getting caught up with Bubba on the incarceration social events.
If you put your name on an uderwriting scheme, you should bloody well be responsible for what you’re hiding in the box after its sold.
Ho tep there Bubba. I think all this AAA nonsense is a flash in the pan, like what you’ve got in your shorts.
Mitch Haase
The Big Picture | WTF is going on in the ABX Markets?
Link: The Big Picture | WTF is going on in the ABX Markets?. WTF is going on in the ABX Markets?This is from about a month ago, but it is a bit on the ABX