Category Archives: Credit markets

Ilargi: Subprime is Back With a Vengeance

Yves here. While it remains an open question as to whether frenzied efforts to push investors even further out on the risk limb will come to fruition, the fact that so many measures are underway looks like an officially-endorsed rerun of early 2007. If the Fed indeed raises rates in the not-insanely-distant future, getting into subprime and other speculative credits is a quick path to losses. But even if the Fed and other central banks remain super-dovish, risky borrowers can and will go tits up independent of interest rates. Credit risk is not the same as interest rate risk, but the inability to get any return for the latter is producing an extreme underpricing of the former.

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Steve Keen: The ECB’s Eurozone Medicine is Nonsense

Yves here. While the impetus for Steve Keen’s post is the ECB’s latest pretense that it can and is doing something to combat deflation, he provides an excellent and short debunking of two widespread misconceptions about money and banking. The first myth is the money multiplier and the second is that reserves are the basis for bank lending.

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Discrimination: Minority Mortgage Market Experiences Leading Up to and During the Financial Crisis

It took this many studies to get to “Discrimination exists”? Ah well. Important to have the data underpinning the reality. This is another reason, incidentally, why industry rebuttals to the foreclosure crisis and its associated frauds always fell back on the “deadbeat” trope. Quite simply, it’s playing to a crude stereotype, one created by racially discriminatory lending.

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Hidden Bomb in Single-Family Rental Securitizations: Trigger Risk

Yield-hungry investors have been snapping up single family rental securitizations, with recent deals heavily oversubscribed. Buyers have been comforted by raging agency reviews that give the top tranches AAA grades, based on loss cushions that these scorekeepers treat as generous (a dissenting view comes from Standard & Poors, which stated that the “operational infancy” of these rental securitizations made them ineligible for a triple A rating).

However, investors appear to be overlooking a risk component that can deliver large-scale losses. We’ll call it trigger risk.

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Regulators Punting on “Too Big to Fail” Problem of Repo, Looking to Install Yet Another Bailout Vehicle

The post-crisis era is rife with band-aid-over-gunshot-wound approaches to deep-seated weakness in the financial system. Perversely, because the authorities were able to keep the system from falling apart, albeit via a raft of overt and covert subsidies to the perps, they’ve reacted as if all that needs to be done is a series of fixes rather than more fundamental interventions. One glaring example is a critically important funding mechanism, repo, for firms that hold large inventories of securities and/or enter into derivative positions, such as major capital markets firms like Goldman, Deutsche Bank, and Barclays, as well as hedge funds. Here, the authorities have been giving way to industry demands that will assure that repo, which was bailed out in the crisis, will be bailed out again.

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Summer 2007 Deja Vu: Banks and Short Sellers Dump Risk on Chumps Via Complex Products

NC contributor Michael Crimmins flagged a Bloomberg article yesterday that described the proliferation of complex synthetic structures, depicting it as return to some of the bad risk-shifting of the blowout phase of the last credit bubble.

The amusing bit is the headline was toned down after the post was launched (you can tell by looking at the URL, which almost certainly tracks the original). The current version is the anodyne “JPMorgan Joins Goldman in Designing Derivatives for a New Generation.” But the very first paragraph flags the troubling resemblance to the last hurrah of the pre-crisis credit mania:

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Argentina: Debt Default is a Solution, Not a Problem

Unless you just returned from holiday in some ultra-remote region lacking newspapers, television or internet access (is there such a place?), you are aware that the government of Argentina defaulted on its external debt on Wednesday. A New York federal court provided the immediate cause of the default with a ruling that rendered illegal an agreement reached between the Argentine government and creditors holding over 90% of the country’s external debt.

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Only Now Does Influential Bank Group Complain That Low Volatility is Producing Too Much Risk-Taking

The spectacle of banks wring their hands about how low volatility is leading them as well as investors to take on too much risk bears an awfully strong resemblance to a child who has killed his parents asking for sympathy for being an orphan.

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How Much of a Short Position Did Paul Singer Take in Argentina? And Who Were the Bagholders?

With the Argentine default, we are seeing a replay of a strategy that established Naked Capitalism readers will remember from the crisis: use a complex structure to disguise risk so that short sellers can place their wagers at far lower prices than they would be able to otherwise. And that raises the interesting question of how large a net short position Paul Singer, the instigator of the litigation that has undone Argentina’s restructuring deal and put the country in default, took against Argentina, as well as the relationship among the parties that put on the positions on behalf of short sellers.

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Argentina Deadline Day: Punishment for Rejecting the Neoliberal Consensus Nearly Complete

Today is technically the drop-dead date for Argentina to work out an agreement to pay off vulture funds that long ago purchased their distressed debt, or else the country will go into default for the second time in thirteen years. 11th-hour negotiations with a mediator have yielded no results thus far. WSJ divines momentum from the length of the mediation session, which is pretty weak tea.

The default would actually be to the exchange bondholders who already hold agreements with Argentina for restructured debt payments going back to the 2001 default. Judge Thomas Griesa prevented the country from making a scheduled interest payment to the exchange bondholders without the vulture funds getting their $1.5 billion first (the vultures paid roughly $48 million for the distressed debt, so it’s a huge payday).

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Financial Predators Move On From Foreclosure Rescue, Enter Student Debt, Military Lending Spaces

At one level, a crackdown on foreclosure rescue scams and not the overarching mortgage and foreclosure fraud is like letting the arsonist who set fire to the house go while busting the guy who took five bucks off the dresser before the house started to burn. Nevertheless, these scams do represent some of the worst elements of our society, featuring the kind of people who see suffering and vulnerability and think about dollar signs. One of my first entrees into this world of foreclosure nightmares was through a friend who had fallen behind on his payments, and then paid somebody up-front money to help him secure a loan modification. That person did nothing to help and then skipped town with the cash.

So it’s good to see CFPB finally take a crack at this, in conjunction with the Federal Trade Commission and 15 states.

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