patrick.net

Don't worry, be happy.

HARM - I think you have this right, the latest thing is counterparty risk. The WSJ has an article today about one of the bond insurers that was just downgraged - apparently they are a counterparty to hedges Morgan Stanley has for subprime exposure.

I don't get it - if you are a bond insurer, why would you get more exposure to subprime by entering into derivatives with banks to be even more exposed to default risk - shouldn't they have been hedging the risk and not getting longer?

Insurance has always only been as good as the solvency of the insurer. The, gasp, moreal hazard is that when State Farm goes under Uncle Sam always steps up and honors their claims. I am so sick of privatizing gains and socializing losses.
The shenanigans with the hedge companies is that they are not required to carry capital reserves at the same rate as banks. So, as these firms go under (which hasppens really fast) what will be at risk is the entire financial concept of a hedge.

Coupled with the other doozies today (good series of posted articles 12/20/07)on bond holders suing banks for knowingly lending on fraudulent loan applications and we have the potential of wiping out banking.

At a guess I would say the Federal governement will not allow lawsuits. Foregn appetitide for American debt will demand a huge premium. Fannie and Freddie face insolvency unless they can only buy loans for what they can package and sell them for, which will mean WAY more then 0.25% premium - I am thinking more like 2%.

I really hope our governement can make this all unwind in an orderly fashion as we face the biggest financial crises we are likely to ever see in our lives.

I recall some gloom-n-doomers on some obscure Bay Area real estate blog about 2 years ago whining about ridiculous stuff like "counterparty default risk" and "Cascading Cross Defaults". I wonder whatever happened to those cockeyed conspiracy wingnuts?

HARM, very good of you to invoke Confused Opinions and his/her colleagues.

But I suspect they're having to take a fresh look at their affairs just now. All those Mia Farrows just realized they weren't dreaming. (Rosemary's Baby)

Harm,

What do you expect from people who were drinking the kool-aid? Yep, they were all wrong, just like we knew they would turn out to be.

It is frightening that so many bloggers have been so far ahead of the curve than these bankers, investors and economists. It indicates much deeper problems in the financial institutions.

HARM,

Let's see. I loaned money to someone to buy a house. Since I am so smart, I also buy insurance that this guy pays back the loan. Now the house is 50% of the loan value, and that guy has disappeared. And in the meanwhile, the insurance agency meanwhile has no money either. Hmmm. May be, I have a problem. I admit to that possibility. You are definitely onto something here.

I think what wigs me out most about watching the bubble burst is reading about it several months earlier on the blogs. To see “counterparty default risk” in the MSM is disquieting, to say the least. Oh, and it looks like there may be some "seepage" into CA munis: Municipal bonds hit by mortgage fallout.
Also, it appears that "jingle mail" has hit main street with a vengence. Low/no equity FBs getting the green light (look, my neighbor did it) is the final shoe dropping as far as I am concerned.

Last I heard derivatives were touted as great tools to spread risk.

The risk is spreading alright.

There's some entertaining stuff in the story pointed to by the "Bass Shorted" link.

"When someone explained to me that it was a synthetic CDO that takes the other side of my trade, it took me a month to understand what the hell was going on.''

This guy vs. the charlatan Sadek? God I love it when guys Sadek have to eat dirt.

"and that guy has disappeared" LOL!

Great topic HARM! Perhaps ACA's 29% ownership by BSC explains why Santa didn't visit them this year!? ( Naughty little Bear Sterns!)

O.K, here we go. I got some brand new steps and some weight to lose!

Just as most of us had never heard of, or gave any further thought to now defunct, laughable subprime lenders like Sebring, Own-it and my favorite "QuickLoanFunding.com" we'll have a whole new cast of J.O's to lampoon. Warren B. gave out some stern warnings about the explosion of derivatives as early as '02 (but what the hell would HE know ).

Perhaps the problem was that he spoke in too vague a terms and should instead pointed to s-p-e-c-i-f-i-c J.O's?

"The risk is spreading alright" LOL!

Good one Bear. Kind of like "the containment is spreading" but w/ a fresh new twist. I like it!

“The risk is spreading alright” LOL!

Yet another reason for a bailout!

Oh just to clarify (and please feel free to correct me) when WB was quoted in interviews about his concern for the growth in the use of derivatives I think most of us just kind of assumed he was talking about.... options, futures, options on futures and so on.

Does anyone here recall thinking to themselves back in '02 this pertained to credit default swaps etc? I know I sure didn't.

What was it that Warren called "derivatives"? Oh yeah, I believe it was-"weapons of financial mass destruction".

DQ numbers for the Bay Area November are out.

http://dqnews.com/RRBay1207.shtm

Richmond,

Yeah, I believe he DID say that. :) I'll see what I can't dig up. Even though WB sold his long held SoCal beach home around the peak, he insisted it was more about fundamentals and portfolio management than out of fear of a housing bubble. I don't ever recall a direct comment connecting the HB w/ WOFMD's?

DQ: Bay Area home sales stuck at two-decade low; price picture mixed

Deep Freeze coming
http://www.dqnews.com/RRBay1207.shtm

oops, skibum beat me to it

Question: I am looking at foreclosure.com, there's a new tab called sheriff sale, what does it mean? Thanks.

Isn't that where the Sheriff executes the forelosure sale in the front yard?
I don't think they do that in CA. Real estate pros say it takes their business.
I could be wrong, but that rings a bell.

Man, I want to get myself one of them sheriff deals.

Question: I am looking at foreclosure.com, there’s a new tab called sheriff sale, what does it mean? Thanks.

Perhaps it means that the persons or occupants had already been hauled out by the sheriff.

Perhaps it means that the persons or occupants had already been hauled out by the sheriff.

I sure hope not, because half the fun of buying a foreclosure is being there in person to see the look on the previous fliptard occupants' faces' as they get hauled off. :twisted:

“The risk is spreading alright”

Like my middle-aged a$$ after another round of holiday binging.

In this example the Gov is the Lion, the RE-bailout is the Zebra, and we be the grass.

At least we are "renewable." ;)

Yes, Peter, but we also are the "poopees".

DQ: Bay Area home sales stuck at two-decade low; price picture mixed
Median price is up 1.5% year over year. Come on folks, remember, a rising median rasises all boats -- or something like that.
Paging Prince Prospero, you're wanted in the green room.

I don't know exactly what Warren Buffett had in mind as derivatives but if anything fits it's the whole CDO, CDS CLO markets. It's hard to tell what's in them, there's no standard method for valuing them, and there's no standard of accounting for that value. And yet, the numbers are counted as if they were cash on hand. Until the contract is ultimately settled both parties can book a profit. Money from thin air!

Warren Buffett on Derivatives:
http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivatives.pdf

Buffett's observations in the final paragraph are quite prescient in light of the current situation.

What's wrong with DQ ? Deep freeze and stuff. But fortunately, the indicators are moving in different directions.

Different than where they want to be. But all in their different ways pointing to the same direction.

Latest nominee for bleeding-heart media "victim" sob story of the year!:

http://www.reuters.com/news/video?videoId=73045

Just loved the whole "2nd generation illegal immigrant", "homeless renter" tent city thing --very Hooverville-ish. Got the MSM "American Dream/victim" boilerplate down pat. They even managed to fit in a quick stat on foreclosures without even once mentioning the possible reasons WHY these people were being foreclosed on!

Bravo, Reuters!

What is a 2nd generation illegal? Did their parents go outside of the country for childbirth just so that the kids can remain illegal?

DinOR :

I definitely was not aware of what CDO and related alphabet soup when I read about WB's comment about derivatives. Even now I am trying to wrap my mind around the figures being thrown. For example Mish's post about 681 Trillion being the size of derivatives. This is magnitudes bigger than the size of the global economy. Someday I might understand how the hell this can happen.

Another thing I noticed today on CR was also talked in the blogsphere long time ago. Now banks are afraid that the stigma of losing the home will no longer be there. Financially, it will be a smart move for many people to simply walk away. And it will become kind of fashionable as well.

It was long time ago that I remember someone (TxChick) saying "Broke is the new black".

Bush just signed into law a bailout bill aimed at removing taxes from debt forgiveness relating to foreclosure or refinancing. Let the flood gates open, now there is no incentive for hanging on to a house or any penalty for walking away from it.

What is a 2nd generation illegal? Did their parents go outside of the country for childbirth just so that the kids can remain illegal?

:lol: I was mainly referring to her parent's (likely) status, but yeah, point taken.

Q for all you Aussies, Kiwis, Canadians, Brits & other nationalities out there: Do children of illegal immigrants get automatic residency/citizenship in your country too?

Q for all you Aussies, Kiwis, Canadians, Brits & other nationalities out there: Do children of illegal immigrants get automatic residency/citizenship in your country too?

Brits: No. Mother must be settled at the time of birth.

Ha ha, and the latest boomer folly, it turns out that those fine art TV auctions were selling fake paintings. Hope none of you guys paid $3,000 for one of those fake $90,000 Salvador Dalis. God what is it with these people?

Ok, I know the boomers used to ditch economics class because it was teaching evil concepts or you just wanted to smoke pot. In either case, if something is worth $90,000 in a normal market you are not going to just pick it up for $3,000 on a nationally telivised auction. It is just a reocurring theme with these people, it is charged on a credit card, so it is like the money doesn't demand the same care.

Aparantly this fraud was 6 billion dollars a year. Who cares though? It is just debt.