Who Owns Troublesome CDO/CMOs?

There is an interesting article in July Bloomberg Mag ("Toxic Debt")about who owns the CDOs and CMOs now causing so much trobule at Bear Stearns, and possibly elsewhere.

Its only in the dead tree version, so there is only so much I can link to. If you pay for a Bloomberg terminal, you are entitled to the mag as part of your sub (just ask for it). There were four stories in the magazine:

The Subprime Sinkhole

Subprime Money Trail

The Ratings Charade

The Poison in Your Pension

Here is a short excerpt:

"Worldwide sales of CDOs—which are packages of securities backed by bonds, mortgages and other loans—have soared since 2003, reaching $503 billion last year, a fivefold increase in four years. Bankers call the bottom sections of a CDO, the ones most vulnerable to losses from bad debt, the equity tranches. They also refer to them as toxic waste because as more borrowers default on loans, these investments would be the first to take losses. The investments could be wiped out. . .

Because CDO contents are secretive, fund managers can’t easily track the value of the components that go into these bundles. “You need to monitor the collateral in your investment and make sure you’re comfortable there will be no defaults,” says Satyajit Das, a former Citigroup banker who has written 10 books on debt analysis. Most investors can’t do that because it’s extremely difficult to track the contents of any CDO or its current value, he says. About half of all CDOs sold in the U.S. in 2006 were loaded with subprime mortgage debt, according to Moody’s and Morgan Stanley. Since CDO managers can change the contents of a CDO after it’s sold, investors may not know how much subprime risk they face, Das says."

Two things struck me about the magazine coverage: First, the CMO issue is far more widespread than many people realize. Apparently, cheap money made a highly leveraged reach for yield ever more appealing. Lots of surprising players seem to have got sucked in.

Second, the incongrously "fun" graphics Bloomberg used throughout — they reminded me of a comic book, which is so contra-indicated by the seriousness of the subject matter (maybe they wanted to add some levity to a serious subject).

Its really noticeable in the magazine, but it here are the two graphics I pulled from the online PDF:

>

Cdo_buyers

Rating_cdos

Graphics courtesy of Bloomberg Magazine

>
I’m taking Betty and Veronica down to Pop’s Sweet shop after the bell if anyone wants to join me . . . 

>

Source:
The Poison in Your Pension
David Evans
Bloomberg Magazine, July 2007
http://www.bloomberg.com/news/marketsmag/pensions.pdf

Category: Data Analysis, Derivatives, Financial Press, Hedge Funds, Real Estate

Housing Deterioration Continues

"The housing market
has continued to deteriorate throughout the second quarter" and "the
supply of new and existing homes has continued to increase, resulting
in declining home prices across our markets.

As Lennar looks into the third quarter and the
rest of the year, it continues to see weak, and perhaps deteriorating,
market conditions’ and expects a third-quarter loss."

-Lennar President/CEO Stuart Miller

 

>

Case Shiller Home Price Index, Year-over-year price changes
Case_shiller_june
Source: S&P

>

As the chart above shows, the S&P/Case-Shiller House Price Index fell the most it has in 6 years. Dropping 2.1% y/o/y, this is the index’ 4th consecutive down month. Home prices are still up 26.5% from 3 years ago, and 8.8% from 2 yrs ago.

CNN/Money reports that "While sales picked up from the early part of the year, they tumbled
15.8 percent from May 2006 – marking the 18th straight month of
year-over-year declines."

This index differs from the pricing data from the Office of Fed’l Housing Enterprise Oversight (OFHEO) in that it includes the homes in all price ranges — OFHEO pricing data only covers "conforming mortgages" which doesn’t include most of the upper end of the housing market.

Meanwhile, Home Inventory continues to rise: The WSJ reported the number of homes on the market "increased 5% in May, adding to a glut
in many parts of the country and threatening to push prices lower as
the housing market keeps tumbling."

This amounts to a 15 year high of home inventory. And, all this inventory is not going away anytime soon. At current sales levels, the annualized housing sales rate has slipped below 6 million — 5.99 — a four-year low.

>

Read More

Category: Data Analysis, Economy, Real Estate

Connectivity problems this morning!

Category: Weblogs

A Fix for the Alternative Minimum Tax?

Category: Politics, Taxes and Policy

Apple iTunes outsells Amazon and Target

Category: Digital Media, Music, Retail

Microsoft Search Request: Is Google a Monopoly?

Category: Corporate Management, Web/Tech

Solstice Linkfest: Week in Preview

Category: Weblogs

Trade Like a Scientist

Category: Apprenticed Investor, Psychology, Technical Analysis, Trading

Summer Solstice Linkfest: Week in Review

Category: Weblogs

How Bear Got Burned

Category: Corporate Management, Derivatives, Hedge Funds, Trading