Subprime Credit Rot

Rather than respond to the various cheerleaders and pollyannas (Ben Stein, Brian Wesbury, David Malpass, et. al.) who have been telling us how great things are even as recently as this week, I prefer to respond via some humor, culled from around the web.

First up: Long or Short Capital:

The Jitters
by Johnny Debacle

Guy #1: Subprime?
Guy #2:
Guy #1: Subprime.
Guy #2:
Guy #1: Exposure?
Subprime Jitters.
Guy #1:
Guy #2: No, CONTAGION.
But the expected loss on all residential subprime loans is de
to the greater economy.
Guy #2: Liquidity. And
Guy #1: Oh. Fuck.
Guy #2:
Commercial paper.
Guy #1: The end.

And I love  their tag line: "Let us think for you, since we’re better at it."


And, the always amusing Ben Sargent:


via Yahoo!

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What's been said:

Discussions found on the web:
  1. SPECTRE of Deflation commented on Aug 16

    Long Term Capital Mismanagement. For anyone who hasn’t read this, it’s a must. Have no food or liquids in your mouth as you read this. You have been warned:

    Hedge-Fund Guy Atones for His Subprime Bond Sins: Mark Gilbert

    By Mark Gilbert

    Aug. 16 (Bloomberg) — Dear investor, we’d like to take this opportunity to update you on the recent performance of our hedge fund, Short-Term Capital Mismanagement LLP.

    As you know, market selection for the entire fund is guided by a proprietary investing tool we like to call “a dartboard.” Once the asset classes are decided, individual security selections are generated by digitizing our unique hexagonal cuboid models.

    Unfortunately, it transpires that our hexagonal cuboids are not as unique as we thought. Hundreds of other hedge funds possess identical dice. The technical term for this is a “crowded trade.” You may also see it referred to as “climbing on a bandwagon already headed for the wall.”

    As our alpha generation collapses, our beta has turned negative, our delta hedging has gone toxic and, trust me, you do not want to hear about our gamma. We can’t even find our epsilons in the dark with both hands.

    You will appreciate that accurate pricing is essential for evaluating our investment strategies. This has proven to be extremely challenging in recent days. Previously, we have relied on Bob, the sales guy at Hokey-Cokey Bank. Bob assured us the securities were still worth 100 percent of face value, so everything was cool. Bob sold the collateralized debt obligations to us in the first place, so he knows what he’s talking about.

    Bob, however, appears to have had a nervous breakdown, judging by the maniacal laughter that greeted our requests for price verification this week. Our efforts to implement an in- house CDO valuation framework, using a technique the ancients knew as “making things up,” proved unsatisfactory.

    Where’s the Bid?

    Currently, all of the portfolios we manage are undergoing a rigorous screening known as “crossing our fingers and praying that we don’t have to try and find a bid in the market.” This is supplemented by a cross-market statistical analysis originally developed by the U.S. military called “don’t ask, don’t tell.” This “unmarking-to-unmarket” procedure has been the benchmark for the hedge-fund industry for the past, ooh, 72 hours.

    We have, of course, been in touch with the rating companies to update our default-probability scenarios, particularly on the AAA rated investments we own. They recommended a forecasting method using stochastics to regress the drift-to-downgrade timescales for the past 100 years and throw them forward for the next five minutes. The technical term for this is “induction,” though those of you of a less quantitative bent may know it as “guessing.”

    AAA or Toast?

    We are pleased to report that, contrary to what current market prices might suggest, all of our top-rated securities remain absolutely AAA. Provided, that is, the future performance of the underlying collateral is identical to its history. Otherwise, the rating companies say our investments are likely to be reclassified as “toast.”

    We have also been checking our back-up credit lines with our friends in the investment-banking world. As soon as they return our calls, we’ll be able to update you on our emergency liquidity position. We are sure they are fine.

    Some of you have written to us asking for your money back, citing clauses in the fund documentation called redemption rights. Frankly, we never expected you to actually read that prospectus, which came prepackaged when we bought the Microsoft Hedge-Fund Guy software. We certainly have no idea what all those long words mean.

    We have filed your letters in a special drawer in the filing cabinet marked “trash” for now. Do you have any idea how much trouble you all would be in if we actually sold this stuff in the market today? At these crazy prices? Fuhgeddaboudit. You’ll thank us later.

    Not a Rescue

    Speaking of crazy prices, we know you’ll be thrilled to learn that we’ve invited a bunch of our rich pals into the fund to participate in this once-in-a-lifetime opportunity. But this is not a rescue. Do not even think the word rescue. This is an opportunity. Not a rescue. An opportunity.

    In fact, we think this is such a fantastic opportunity, we’ve agreed to forgo our usual management fee, and we’ll only take half our usual slice of the profits. Provided there are any profits to slice. You, of course, are absolutely invited to participate in this offer by sending us yet more of your money on exactly the same revised terms as our rich pals.

    Finally, a word for all of you who have been kind enough to inquire about my personal financial situation. I am relieved to report that my directors and officers insurance is fully paid up. Furthermore, my Bentley Continental was paid out of the 2 percent fee we levied when you wrote your first check to us, so I will still be able to trundle into the parking lot each morning in an open-necked shirt to ignore your telephone calls and e-mails. Yours, Hedge-Fund Guy.

    To contact the writer of this column: Mark Gilbert in London at

    Last Updated: August 15, 2007 19:34 EDT

  2. michael schumacher commented on Aug 16

    Nice rally……too bad it’s brought to you by the $17 billion in hand……

    OT: Cracks begin to appear

    Bear Stearns Confirms Cutting 240 Jobs At Mtge Lending Unit >BSC


  3. johntron commented on Aug 16

    wow….what a day. only regret….missing out on some ETFC @ 10. time to do some blow and wash it down with guinness. hahah.

    don’t fight the fed….whether going up or down.

  4. johntron commented on Aug 16

    PS…a thank you to Tomasek?, Norway?, PRC?, PPT, the ghost of JPM…whoever took out all the sellers at 3:08.

    hahaha. now let’s see this dead cat bounce.

  5. techy2468 commented on Aug 16

    i am really amazed by the stock market rallies…

    gam-bling at its very best.

    can you imagine who will have the guts to buy stocks at 3%+ when every news is a bad news…..

    on second thought i can buy them….if someone gave me their money with a promise that i can keep that gain….and if i lose i may not have to pay it back for next 50 years…

  6. Fred commented on Aug 16

    I imagine that we will follow a modified version of the Canadian plan to stabilize the asset backed CP market, announced last night. I imagine that Barry won’t talk about that solution potential.

    Plenty of dry powder, btw:

    U.S. money market mutual fund assets rose to a record $2.68 trillion in the latest week, the Money Fund Report said on Wednesday.

    Taxable assets jumped $41 billion to a record $2.23 trillion, while tax-free assets rose $29 billion to a record $447 billion.

    An important low was made today (pukefest) on record volume.

  7. Short Man commented on Aug 16

    Today’s late action was all about rumors of an emergency meeting by the Fed and the expectation of a resultant pre-meeting cut in rate. Whether that transpires or not, we shall see.

    If there’s no news of that then buckle up and look for one heck of a volatile day tomorrow. With options expiry and people not wanting to hold sensitive positions into the weekend, it should be exciting. The market opportunities are phenomenal right now. Today was easily the best trading day of the year so far.

  8. Fred commented on Aug 16

    Actually alot of today’s action was on the back of the financials…where there has been RECORD insider buying. Punk Ziegel’s analyst also came out with a note suggesting that BSC might have found new funding…he feels, if true it would can all those rumors. Very pleasant.

  9. karen commented on Aug 16

    Fred, last week…

    “Total money market mutual fund assets increased by $49.28
    billion to $2.657 trillion for the week ended Wednesday, August
    8, the Investment Company Institute reported today.

    led to this week:

    “NEW YORK, Aug 16 (Reuters) – Equity mutual funds posted an outflow of $19.86 billion during the week ended Wednesday, a research firm said on Thursday, larger than the level reached following the Sept. 11, 2001 attacks.

    Equity mutual funds posted outflows of about $16 billion after the 2001 attacks, said Vincent Deluard, an analyst at TrimTabs Investment Research of Santa Rosa, California.

    Equity funds that invest primarily in U.S. stocks posted an outflow of $12.87 billion, versus an inflow of $2.09 billion during the previous week.”

    MEW is over. We are entering RAW times… Retirement Account Withdrawal.

  10. Fred commented on Aug 16

    Yes Karen,

    Investors puked out mutual funds and stocks and have placed the money in money markets.

    That’s $2.657 trillion of liquid caishe…and growing…dry powder for buying.

  11. bullb commented on Aug 16

    Investors puked out mutual funds and stocks and have placed the money in money markets.

    That’s $2.657 trillion of liquid caishe…and growing…dry powder for buying

    How exactly do you think those MF investors who exited got paid?

    Cash just changed hands.

  12. Byno commented on Aug 16

    Out of curiosity, I started channel surfing around 4 PM today to see what other networks were saying about today’s rally.

    Over on CNN, the consensus seemed to be that the bottom was in and that stocks were ripe for picking.

    Fox News echoed the same sentiment.

    Even MSNBC was of a mind that the pros were stepping in to stop the bleeding (never mind that they’ve been the ones causing the bleeding, but I digress).

    And on CNBC, Maria made the “O-face” around 3:55 when the Dow broke positive for the day.

    We *probably* rally for a day or three, but no bottom I’ve ever seen involved some jackass who used to be an MTV News Jock calling the bottom and telling folks to buy stocks while CNBC anchors experienced on-air orgasms.

  13. David commented on Aug 16

    A strong case can be made for the value of cash as an investment. What really matters in the cash market is your real return. Fed can not lower the federal funds rate with the unemployment rate only around 4.6 percent.

  14. Sven commented on Aug 16

    Fred, that is actually cash they’ll have to use to pay their bloated mortgages. They won’t have anything left by the time the bottom is really in.

  15. Pool Shark commented on Aug 16

    Everyone mark your calendars.

    Thursday, August 16th, 2007, will be remembered by all as the famous “Fred Bottom.”

  16. Jester commented on Aug 16

    Wait, cash out of funds to pay bloated mortgages? If those subprime mortgage folks, with those horrible adjustable rates, had cash assets then they wouldn’t be “subprime” now would they?

  17. mhm commented on Aug 16

    A bit off-topic but the white house help to Peru, to recover from a big earthquake, is a whopping $100.000. Yep, one hundred thousand bucks.

    No much left in the gov bank, is there?

  18. ac commented on Aug 16

    That wasn’t even a rally today, yet you people call it that? Er ok.

    Until the panic part comes, The “bottom” is far down yet.

  19. MarkM commented on Aug 16


    “V” bottoms, “W” bottoms, and now the “O” Bottom? :) Too funny.

    Come join us at BDGs as we contemplate the end of the world.

  20. Marcus Aurelius commented on Aug 16

    I love it. We (the economy) just get through one day of careening around, out of control (to be stopped at the ostensible edge of the cliff by infusions of cash from a bankrupt government), and the bulls act as if the worst of times are behind us and we are now on solid ground. Last hour of trading was stop-gap, at best. A true rally would have put us back over 14,000. Go ahead and have your cigar and brandy, but this time, you should really savor it.

    BTW: I’m out (cash and PMs in hand) and only posting here on morbid interest. Real dirt bag, ain’t I?

  21. Joe Klein’s conscience commented on Aug 16

    Anyone see Kudlow today? What is it with Kudlow and the WSJ types? I thought they were all free marketeers. Now they want “Helicopter” Ben to come to their rescue? Some guy from either Forbes or Fortune was on Kudlow tonight, he told Larry to stop being a p–sy, that corrections happen.

  22. Jerry commented on Aug 16

    Along the comedy lines, when I got home I watched Kudlow on CNBC (purely for comedic value)and again his guests never fail to deliver the punch lines. The same, I repeat SAME analyst said in one segment that the financial sysytem is at the verge of collapse and the banking system needs immediate rescue by the Fed,(no details on how to do just that). Larry then asks the guy what the chances are for a recession going forward and the SAME guy (glasses, white beard, blond hair, I think a national review writer) says the chances are less than 10% because of the overwhelming power of the US economy! Which is it, everything is great or the world ends tomorrow? I wonder if that kind of jekyll and Hide mentality explains the whippy behavior of the markets lately. I think personly today was massive short covering at the end of the day, too much profit made to let sit over the weekend. I know I closed out my CFC, TOL, and BZH shorts at 11am.
    Have a laugh and a beer and enjoy the show!

  23. BuffaloT commented on Aug 16

    I fielded more calls from clients today and yesterday than anytime in the last 3 weeks combined. People were very scared, some puked em up. Might be a tradable low back to 13250 or so, I think we’ll see 12,000 before this thing is over though. Seasonality is not favorable now.

  24. Guambat Stew commented on Aug 16

    I’m confused. Are things so bad that the Fed simply must SLASH rates? Or, so good that we needn’t worry and press the “Regulate” button? I have no idea. No idea.

  25. michael schumacher commented on Aug 16

    A little anecdotal information regarding countrywide: my wife, loan broker, relays the following information about coutrywide’s “deals” on mortgages.

    The same deal shopped to Wells and Countrywide produced the following rates:

    7.5% from Wells 30 y F
    9.5% from C’Wide 30 y F

    Pretty wide range of rates. Here’s the best part, the AE from C’Wide also tried to tell her that the loan (bridge loan) that they took was standard operating procedure (since when is taking an $11.5 billion LOC that is unsecured SOP??) But here’s the best part, he then tries to launch into an obviously prepared statement on why it’s a great time to buy C’wide stock because “we have no liquidity issues…..”

    this is from someone that my wife has trusted in the past so she knows that the sales pitch is forced and part of the game but how’s that for total and complete contradiction…..

    I told her to tell him that Angelo could have her shares should he call again.

    That’s chutzpah!!


  26. Dk commented on Aug 17

    today WAS a great day to buy some CFC, i was in & out with a 20% return, keep puking em up morons

    eurodollar futures pricing in 81% chance of sub 5.25% BY Sep fed mtg, 32% chance of a 75bps cut at Sep mtg

  27. Fred commented on Aug 17

    Thanks Pool Shark…I’ll take it.

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