One of Wall Street’s ongoing pin-the-liability-on-the-chump exercises is finding purchasers for the riskiest (often called “equity”) tranches of asset backed securities and CDOs, which in the trade are called “nuclear waste.” They come about because the attractive upper tranches get priority in the distribution of cash flow and may also be overcollateralized or credit enhanced. […]
Read more...The Journal’s front page story, “Homeowners Abroad Take Currency Gamble in Loans,” had numerous anecdotes about how Eastern Europeans are active in the carry trade, borrowing in cheaper currencies, gambling that the interest rate savings won’t be offset by currency appreciation. Some have compared the carry trade to picking up nickels in front of a […]
Read more...I have spent the entire long weekend avoiding dealing with this article by David Ranson and Penny Russell, “Does the Fed Matter?” in Friday’s Wall Street Journal. The reason is that if I got going, there is so much in it that is off beam, misleading, or just plain wrong that it would be hard […]
Read more...Nouriel Roubini looked at the various stats released last week – the 16% increase in new home sales versus the 1.4% fall in home prices averaged across 32 metropolitan areas (Federal Housing Finance Board survey) and the 2.6% fall in existing home sales from March to April (National Association of Realtors) and focused on the […]
Read more...This article ran on MarketWatch, and I find it a sign of the times. Despite the supposedly sound state of the economy (if you call a tanking housing market and 1.3% GDP growth, which is negative in real terms, “sound”), MarketWatch nevertheless thought this story would appeal to its target audience, the investing class. The […]
Read more...Calculated Risk pointed us to a story in the Chicago Tribune, “Price slide nationally hides big gains in some metro areas,” which cites the Federal Housing Finance Board survey of 32 metropolitan areas. The report, which the article notes tends to produce more flattering results than some other analyses, found that, averaging new and resale […]
Read more...CFO.com, in “S&P Junks Investment-grade Ratings,” tells us that that ratings agency is of the view that investment grade borrowers aren’t getting enough of a cost advantage for it to be worth it to them to keep a good bond rating: “Borrowers have taken advantage of the cheap money by increasing leverage to finance dividend […]
Read more...Thanks to Felix Salmon for pointing this tidbit out to us. Due to leveraged buyouts (notice how the press has started to use that 1980s term once again?), there has been a surge in junk issuance. But since below-investment-grade issuers pay only about 180 basis points more than investment grade issuers, there is virtually no […]
Read more...From “Mortgage Brokers: Friends or Foes?” in the Wall Street Journal: The National Association of Mortgage Brokers, the main nationwide trade group for brokers, argues that brokers work neither for consumers nor for lenders. Aha. If the mortgage broker worked for the borrower, they’d have to make sure he got the best deal. If they […]
Read more...We have Mark Thoma to thank for pointing out this story on research by Nancy Wallace at the Haas School (UC Berkeley). She found serious deficiencies in the risk models used by banks to evaluate residential mortgages and predicted widespread problems a year before the subprime meltdown. She and her colleagues have just completed a […]
Read more...As I have mentioned before, this blog relies a bit more than I’d like on the Financial Times because its writers have a greater understanding of the inner workings of the financial markets and take a jaundiced view of recent developments. One has to wonder if the two traits are linked: if you have a […]
Read more...Unlike its US counterparts, the Financial Times has consistently been on top of the various unsavory elements of the credit market bubble: the near disappearance of risk premia, the growth of leverage on leverage, the lack of investor sophistication. A piece by John Plender does a very good job of connecting some of the dots […]
Read more...Until recently, the stock and bond markets have both signaled a great deal of optimism about the economy. But bond yields have started to creep up, which says that fixed income investors are becoming wary. We’ve noted in several posts that inflation is running at a higher rate than the oft-cited CPI stats would lead […]
Read more...Although it’s the Dow’s new highs that get the headlines, the really speculative action is taking place in the debt markets. As we have discussed in past posts, lenders and bondholders have abandoned their customary caution and are accepting yields that many feel are inadequate for the risks involved, and are also waiving customary covenants, […]
Read more...Michael Panzner of Financial Armageddon provides a nice synopsis of the oft-unappreciated adverse consequences of securitization. One element that is not inherent but seems inevitable is that the profits in the transaction are front-loaded, taken more as fees and less as spreads over the cost of funding over the life of the transaction. As he […]
Read more...