patrick.net

As others have already said, there is a very legitimate reason for the existence of MBS/CDO upper tranches. One is the difficulty in matching duration of T-Bills and Notes, as well as the yield curve on any given day.

Also, there is a very good reason why investors (which are *not* retail in any circumstance) would want 2nd or 3rd tranches. The top tranche, AAA as some called it earlier, is actually *more* risky than AA-ish. That is because of the top tranche carries a very large pre-payment risk. Every US-style conforming mortgage contains an embedded option which allows the borrower to pre-pay. As a buyer of the MBS I may not want to own a callable mortgage bond which the issuer can and very likely will call it exactly when I don't want them to -- that is when my real returns are highest. I'd rather step a tranche or 2 down so I get a much lower pre-payment risk, and can balance the rising default risk with some nifty financial alchemy.

I really shed no tears for the whole MBS/CDO saga. G'ma and G'pa aren't in the chain. They don't own anything that invests in toxic-waste tranches. The paper they own through funds is probably better than US-Treasuries in many situations. The buyers of all the toxic shit have been hedge funds, foreign investors and foreign central banks. Even that's not the problem--they can buy as much junk as they want. The problem is quite simply the risk premium has been systematically mis priced, and all these guys overpaid for their junk bonds.

But then, money is cheap globally, so the argument chases its own tail. When money only costs you a couple %, a junk bond doesn't seem so risky so long as a few pay off.

I read quite a few California History books and I just got to a chapter that explained how Claus Spreckles (the brother of the guy who built the Spreckles Mansion in Pacific Heights where Danielle Steele currently lives) knew that former San Francisco Mayor Eugene E. Schmitz was on the take just after the 1906 Earthquake. “Once elected Mayor Schmitz began building an ornate mansion at the corner of Vallejo and Pierce that cost five (5) times his salary as mayor”…

Mayor Schmitz should have just legally taken low interest loans from business partners or legally set his spouse up with lucrative government contracts. When he was a SF Supervisor Mayor Newsom lived in a $1mm home that was twenty seven (27) times his $37K as a Supervisor’s salary and he moved up to a $3mm home that cost about thirty (30) times his salary after he was elected mayor. Senator Feinstein paid $16mm for her new home in the City that is (after the rehab cost) just over one hundred (100) times what she makes as a Senator…

I-bonds don't have principal risk. Interest is compounded, kinda like a zero coupon kind of bond, I think.

They don't really have interest rate risk, either, once you've held them for a year. You can redeem them early for full face value, plus much of the interest, if a newer issue comes out with a higher base rate.

They are direct treasuries, no insurance involved. So unless Al-Queda destroys our federal system, the treasury guarantee seems safe. I think that even if that happens, the states would reconstitute a new federal system and make good on old federal obligations. There are precedents.

No, they are not glamorous, they are not sexy, right now new issues only pay 4.5 %, but overall they're a good way for Americans who are stuck in the dollar economy, to save dollars.

I asked a robot to build my house, and this is what it did :(

can you get a brick-laying machine? I would think a brick-laying machine would be useful. Bricklayers are paid a lot, and it is extremely time-consuming...

Actually, a cement rendering machine for multi-storey projects would be good also -- that feeds into one of my many get-rich-quick ideas for home makeovers. If you could erect a minimal vertical scaffolding rig that the machine could traverse in 2 dimensions and render surfaces, that would be brilliant. It would just have to work out how to go around windows and doors... That's so inspiring I might just work on it...

The buyers of all the toxic shit have been hedge funds, foreign investors and foreign central banks. Even that’s not the problem–they can buy as much junk as they want. The problem is quite simply the risk premium has been systematically mis priced, and all these guys overpaid for their junk bonds.

Gosh, Randy, when you put it like that, screwing over MBS owners sounds like... poetic justice.

PuffDippy,

Well, you beat me to the punch. Bring down the thunder sir!

With some HF's having minimums as little as 5K (and their largely unwarranted popularity) it will hit a segement of the population that can least afford the hit.

Right now we're getting an e-mail a day reassuring us as per Mike's post above. The truth is, it won't matter. Wall St. runs on rumors, always has. This "guilt by association" will likely be dealt w/using the "shotgun method" (meaning w/ a shotgun, you're bound to hit "something"?) Right now it "appears" that the dollar flow at the retail level is moving out of MBS (int. rate sensitive, pre-payment/no payment issues) and towards income that is "buy-write" driven as witnessed by the HUGE ETF IPO's being done on a monthly basis. It's so prevalent you have to weed through all the "me too" offerings. With the yield talk flirting w/double digits why buy MBS? Period?

DinOR

In the US don't all hedge fund investors, regardless of how small the minimum fund investment requirement, have to pass as "qualified purchasers" under SEC rules? That used to mean $1m net worth, $200K salary and $5m total assets.

Not a lot of people are going to shed tears for people in that category losing their hedge fund investments. Anyway, I really doubt that many have anywhere near all their eggs in the HF basket. Most people I know with HF investments view them like people used to view emerging economy funds about 10-15 years ago: good to have a little there for the returns, but good chance you could lose it all.

Randy H,

As usual, you're right. Problem is virtually NO ONE is verifying the validty of these "sophisticated investors" credentials. In many cases it's actually administered on line.

*This site contains nudity and s_xual content:
No one under the age of 18 allowed!

I mean it's just that laughable! Let's be honest here, it's a hell of a lot easier to find 1,000 guys w/25k than ONE w/25 mil. The sheer proliferation of these things should be telling us there are some "minors" on the web-site.

Bank of America Higher Standards?

Looks like it's time to fire up the presses at HARM/X Industries!

HARM, you and X stamp out the plastic and I'll sell them as LBS (lettuce backed securities)! Do you have any idea how HUGE this is going to be?

(Never mind it's illegal) when has THAT ever stopped bangsters before!

Good Lord.

Why robots? What about factory-built homes? People often confuse them with manufactured or mobile homes, but it is possible to have modular houses built completely off-site with much better quality than conventional homes and then get them installed in weeks.

Sriram Gopalan,

AND they're NOT assembled in all kinds of weather AND vadalized etc. etc. I took the time to tour one of the mfg. home builders in the valley and it was time well spent. These people work w/the same guys day in day out and have a TQM approach. Besides they have to be built to withstand transition to their home-site. I wonder how many overpriced stucco sh@tboxes could stand up to that!

True, not as classy as Michelle Kaufman's "Glide House" but unlike traditional approaches where the electrical guy blames the painter, the painter blames the drywall guys, the drywall guys blame the framers.......

DinOR :

Are you talking about BofA'a credit card for illegal immigrants ? Hey, the market loves it, stock is up nicely.

Yesterday oil was down, so it means good for stocks - but the market was broadly -ve. Go figure.

Today, the trade gap hit a new record. Should have been bad for stocks, but everything is up. Go figure.

Watching the daily gyrations of the stock market is as pointless and entertaining at the same time, as watching some B-grade horror movie.

StuckinBA,

Agreed. I was short the Yankee Dollar and the S+P 500 during last summer but w/$70 a barrel oil and Israeli troops in Lebanon the market just laughed it off. (I made out "o.k" but it should have been HUGE!)

Throughout the 4th qtr. as "BLown-it" was imploding it wasn't a concern. Now I guess it kind of is. :(

Randy and others,

Where do "jumbo" loans figure into this MBS mess ? Since the GSEs supposedly don't buy it, where do they get funded from ? Or do the GSEs buy the conforming part and the amount above comes from non-GSE sources ?

Almost every loan in BA is a jumbo loan. It may be comparable to AAA rated, and the investor appetite for them may remain unchanged. Any insight on how this may play out ?

StuckinBA,

Well know that IS a good question! There was a time when "jumbo" loans were only given to the best of customers. Another thing I'd like to know is if most MB's that wrote themselves jumbo loans charged themselves points (huge pay-out) or took the discount?

OT:

Michelle Malkin had an uproarious take on the Illegal Alien BofA Gold Card!

Typically, a hedge fund needs to have at least $25 million in assets to generate sufficient fees to sustain itself. For regulatory and practical reasons, you'll never reach $25 million by relying on a thousand people investing $25,000. You need investors who can write checks of at least $250,000 -- and, in reality, much higher amounts. This effectively screens out the average Joe regardless of how sophisticated he claims to be. Also, keep in mind that the $250,000 number is a practical minimum for a small hedge fund, and the small funds are not your typical players in the MBS/CDO market. The larger hedge funds typically will not consider you as an investor unless you can write at least a $1 million check. You can lie about your credentials, but if you don't have the cash to back it up, you'll never be able to invest.

Shanghai real estate goes bust.

http://www.lestwarog.com/newsArticle-2010.html

sorry - just noticed that it is an old article - march 2006

Sandibe,

Any decent boiler room worth it's salt w/50 or so brokers can raise that in under a month ( I should know). Done it on several occasions. You ARE right though, w/lower min. the expenses WILL be through the roof (but do you want a HF manager or don't you!) We can always tout a non-AIMR compliant return and leverage our "track record" down the road w/bigger fish.

One HF states clearly in their "red herring" that their min. NW for clients is 150K OR! a NW of 45K IF you have an income of 45K! (So basically everybody). Minimum investment of 5K (and subsequent inv. a min. of 1K).

I'm not saying they're aren't guys that belong in HF's (or the HF biz) but it's gotten out of hand. WAY out of hand.

DinOR, HARM/X Industries is please to announce a 5 billion dollar issue of LBS payable to said principles. For brokering (floating the paper downstream?) we are please to offer you as much as 90% of the face value provided the co-founders of HARM/X Industries LLC, GmbH, OTSY* are denominated to the tune of 5% of face value. Note, each LBS is denominated with black marker pin by LBS professionals working in King City.

*Out to screw you.

crap

-pin
+pen

DinOR,

Any hedge fund that uses the boiler room tactic you describe is running afoul of a number of federal securities laws. If the investors in those funds lose their shirts, it's not because of their exposure to MBS/CDOs. Its because they are handling their money over to a scam. I would hesitate to call the funds you describe hedge funds at all.

My point is that it is very difficult for the average Joe to invest in a legitimate hedge fund because of the barriers to entry. Most hedge funds rely on one of two exemptions to avoid regulation as a mutual fund. Under the first exemption, all investors need to be "qualified purchasers" which, in the case of an individual, is someone with at least $5 million in investments (that's investments and not just net worth). Funds relying on this exemption have more important fish to fry than the average Joe (or even the above average Joe). The second exemption is available only if the fund has 100 or fewer investors. If you have to target small fry, you have no choice but to rely on this exemption. But it is hard to see how you can legally raise a meaningful amount of money if you only have 100 investors putting in a few thousand each.

Sandibe,

Well I was actually covering a few issues at the same time w/ a broad swath but there is absolutely nothing illegal about soliciting securities transactions over the phone and legit firms do it everyday, I assure you.

Right now Christian Baha is taking investors down to 5K. I know, I know that's not a "real" HF. SFWoman's husband is innundated w/guys basically off the street wanting to start HF's under whichever exemption they can shoe horn themselves into but he isn't taking on any new clients. I imagine for a reason.

I'm not an expert in securities litigation (and I don't want to be) but it was that aura of "no guarantees here" that opened the door to a largely unregulated, unaudited and unmitigated disaster. For each HF that opens, one just went bust. In the meantime the "managers" carved out a nice living for themselves. Why are you defending these guys?

newsfreak Says:
I would like to be there when a home buyer asks the robot to move 2 walls, install 3 extra wires and replace the poorly installed shingles that are curling.

Yeah, I think that engineer is dreaming. Some guys in England want to make a machine that makes machines of any sort in your own living room too. Just give it 100,000 years of dedicated research and it will be there...

On the other hand, maybe robots can land on other planets and make it habitable, inject oxygen into the air and build whole cities in time for the humans to arrive -- there's an idea for a screenplay or sci-fi story...

I'm still interested in developing the unattended rendering robot tho...

Person,

Unless I am misunderstanding you, the process you describe has existed for some time...it's called rapid prototyping and it is used extensively in industries such as consumer product design.

There are many variations out there, one of the more well known being the SLA (Stereolithography) process.

http://en.wikipedia.org/wiki/Rapid_prototyping

The cost of products made using these techniques scale with volume. If you wanted a solid plastic replica of your cell phone it would cost maybe $100. Of your Laptop...well over $1000. And the rapid-prototyping machines only go so big. So the robotic house-builder is basically taking an existing concept and trying to scale it to a different application (and using a much different material.)

Oh, and a rapid protoyping machine can cost anywhere from tens to hundreds of thousands of dollars...

For example...

http://www.zcorp.com/products/printersdetail.asp?ID=1

If you guys are bored, there's been a mildly interesting thread about just how good/bad san jose is:

http://www.burbed.com/2007/02/11/grow-up-in-the-bay-area-do-you-agree/#comment-6818

Or if you're even more bored, you can join in on the discussion here:

http://www.yelp.com/topic/rDp0r5MtesBaUfS6ee1TpQ

Sample quote:

"dangerous loans"... let me know guess, you've been reading popular media warning against exotic loans and their readjustments. guess what... it's not happening. (btw, i work in the industry). will it happen? probably, but not nearly to the degree that you or the media wish it to. The US economy continues to remain strong, people have jobs, and guess what... they're paying there bills. Will these exotic readjustments put some families on the street? sure. a lot? maybe. enough so that we taxpayers will have to bail them out? good one. that is "unprecedented" my friend.

my fundamental problem with you persective is A) it's based on non-expert opinion and B) you are the cosumate dooms day advocate and C) you speak so surely about the future.

HARM,

I would like to commend you on your ability to consider new information and revise your position / thread. Your actions speak volumes about your integrity and intelligence!

Sincerely,
Paul

They might be borrowing in Yen or Euros at a lower rate.

... and then hedging the currency risk.

It has begun...

(02-13) 17:57 PST PHILADELPHIA (AP) --
An investor who killed three people and himself at a marketing company was upset about losing money in a failed real-estate venture and told his victims to "say your prayers" before he opened fire, police said Tuesday.

http://www.sfgate.com/cgi-bin/article.cgi?file=/n/a/2007/02/13/national/a133744S42.DTL&type=printable

stuckinthecity,

But but bu.... I thought Roman "the Candle" retired and is living the quiet life in Las Vegas? Please remind me from time to time to stop by Second City Bubble! Is that embarrassing or what?

eburbed,

Is this the right "Vu"?

infomercial.tvheaven.com/tomvu.htm

Uh, I don't know if anyone else noticed but somehow Patrick.net has "slipped" in Google rankings from #1! to (#6?). How is this possible?

Dean Baker and Mike Whitney haven't done updates (on the bubble anyway) in MONTHS!

Helicopter Ben on the hot seat this morning. Again total jibber jabber he's so in the pockets of the Investment Bankers. He briefly mentioned risk on the sub-prime implosion. He also said there is no way to assess whether it will spread to other sectors and prime. I think he knows what's coming and knows he's too late to stop it. But I am enjoying watching the Senate grill his ass.

OT - Pro's and Con's of renting - the rats in the garage that the landlord won't do anything about have now started living in out car engines! So now we have to get them inspected for damage at $125 each! Maybe we can get the landlord to pay?

Uh, I don’t know if anyone else noticed but somehow Patrick.net has “slipped” in Google rankings from #1! to (#6?). How is this possible?

Don't we have our friend as an insider there ? Maybe he can fix it.

Or maybe it's time for a "Huh ? 2.0" and "Duh ! 2.0" thread.