SERVING THE QUANTITATIVE FINANCE COMMUNITY

NoelWatson
Posts: 90
Joined: September 14th, 2005, 10:56 am

### Credit Derivatives & Subprime Crisis

QuoteOriginally posted by: penguinalooks like the UK economy is just falling apart. Incredible.But not unexpected

Gmike2000
Posts: 801
Joined: September 25th, 2003, 9:49 pm

### Credit Derivatives & Subprime Crisis

QuoteOriginally posted by: penguinahttp://news.bbc.co.uk/1/hi/business/7589291.stmoh and UK Treasury Secretary admits the UK is facing the "worst economic crisis in 60 years."Not sure what was so bad in 1948 - perhaps he meant worst in 80 years but couldn't quite bring himself to say it.If you go through old newspaper articles of past crises, you will realize that every crisis so far has always been "the worst in X many years". The current crisis has been rather mild and anything but a depression. People always do a mental linear extrapolation of the most recent trend and then poop in their pants. This will repeat over and over and over and over again...Mark my words: This crisis will come to an end, just like all the previous ones. And those who have sold out will once again get in when the next bull market is already well under way, get out when it is too late. This is how it has always been and how it will always be.

Gmike2000
Posts: 801
Joined: September 25th, 2003, 9:49 pm

### Credit Derivatives & Subprime Crisis

QuoteBill Gross panickingWelcome to deflation.Q]He is not panicking, simply pointing out that there are valuations in the current environment that simply make no sense at all. Look at GNMA spreads for example, their are explicitly guaranteed by Uncle Sam. If you believe the world as we know it is going to come to an end, then maybe you can justify those spreads, otherwise they are a clear buy. There are many more such examples. In the absence of private investors with deep enough pockets and big enough cojones to take advantage of current valuations, there is the need for a Leviathan to come in and support the market. This is just what the HK government did during the Asian crisis when they bought billions of stocks. And when the skies cleared up again and people came back to their senses, those stocks were sold back to the public at a handsome profit. So much for efficient and rational markets....if anything, the current crisis marks the end of "rational" quantitative model driven finance (and economics). It is behavioural finance's finest hour.

penguina
Posts: 174
Joined: August 17th, 2008, 11:36 pm

### Credit Derivatives & Subprime Crisis

QuoteOriginally posted by: Gmike2000QuoteOriginally posted by: penguinahttp://news.bbc.co.uk/1/hi/business/7589291.stmoh and UK Treasury Secretary admits the UK is facing the "worst economic crisis in 60 years."Not sure what was so bad in 1948 - perhaps he meant worst in 80 years but couldn't quite bring himself to say it.If you go through old newspaper articles of past crises, you will realize that every crisis so far has always been "the worst in X many years". The current crisis has been rather mild and anything but a depression. People always do a mental linear extrapolation of the most recent trend and then poop in their pants. This will repeat over and over and over and over again...Mark my words: This crisis will come to an end, just like all the previous ones. And those who have sold out will once again get in when the next bull market is already well under way, get out when it is too late. This is how it has always been and how it will always be.I disagree with you. The UK, for example, has the highest level of consumer debt (as a percentage of GDP) of any G7 country in history.You can't have major countries consuming more than they produce and accumulating more and more debt forever.

penguina
Posts: 174
Joined: August 17th, 2008, 11:36 pm

### Credit Derivatives & Subprime Crisis

QuoteOriginally posted by: Gmike2000QuoteBill Gross panickingWelcome to deflation.Q]He is not panicking, simply pointing out that there are valuations in the current environment that simply make no sense at all. Look at GNMA spreads for example, their are explicitly guaranteed by Uncle Sam. If you believe the world as we know it is going to come to an end, then maybe you can justify those spreads, otherwise they are a clear buy. There are many more such examples. In the absence of private investors with deep enough pockets and big enough cojones to take advantage of current valuations, there is the need for a Leviathan to come in and support the market. This is just what the HK government did during the Asian crisis when they bought billions of stocks. And when the skies cleared up again and people came back to their senses, those stocks were sold back to the public at a handsome profit. So much for efficient and rational markets....if anything, the current crisis marks the end of "rational" quantitative model driven finance (and economics). It is behavioural finance's finest hour.The process he's describing is deflation and is what happened during the Great Depression. This is the result of banks making too many loans to too many people who are unable to pay the loans back. There is an unprecedented debt bubble. This process is undoubtedly deflationary.The US Government can not bail out the entire financial system - there are limits to its power. The nationalization of Freddie and Fannie may well result in the yields on treasuries going up.

Posts: 23951
Joined: September 20th, 2002, 8:30 pm

### Credit Derivatives & Subprime Crisis

Feds seize Fannie & Freddie. FRE/FNM fell 20% Friday in the aftermarket. Monday will be interesting.Also, we had our 11th weekly bank closure
Last edited by Traden4Alpha on September 5th, 2008, 10:00 pm, edited 1 time in total.

penguina
Posts: 174
Joined: August 17th, 2008, 11:36 pm

### Credit Derivatives & Subprime Crisis

And BTW, Gross has been buying GSE debt not because he thinks the underlying stuff was good but because he was betting the US Treasury would have to guarantee it. Looks like he's going to make a lot of money on it. Its pretty sickening really.

Posts: 23951
Joined: September 20th, 2002, 8:30 pm

### Credit Derivatives & Subprime Crisis

QuoteOriginally posted by: penguinaAnd BTW, Gross has been buying GSE debt not because he thinks the underlying stuff was good but because he was betting the US Treasury would have to guarantee it. Looks like he's going to make a lot of money on it. Its pretty sickening really.I would not say it is "sickening." Far too much was riding on those agency bonds to allow FRE or FNM to default and everyone knew it. Too many big important economic partners hold GSE debt. Moreover, the only way for the U.S. to pull out of this downturn is for housing prices to stabilize. And that means having a functioning mortgage process with low enough mortgage rates that housing affordable. I don't know how that can happen without adequately capitalized mortgage lenders like FRE & FNM.I'm not that bothered by the bailout unless it turns into a cashcow for shareholders. To me, the entire GSE episode was one big unintended "government stimulus" program because most of the money went to taxpayers in the form of cash-outs, bigger homes, and a ton of consumer spending. Now the taxpayers will have to repay the losses on GSE debt even if they can't repay their mortgages.
Last edited by Traden4Alpha on September 6th, 2008, 10:00 pm, edited 1 time in total.

trackstar
Posts: 26747
Joined: August 28th, 2008, 1:53 pm

### Credit Derivatives & Subprime Crisis

Quote from GMike 2000 "Look at GNMA spreads for example, their are explicitly guaranteed by Uncle Sam. If you believe the world as we know it is going to come to an end, then maybe you can justify those spreads, otherwise they are a clear buy. There are many more such examples." \\There are interesting opportunities now; shall we start a new thread on winnowing them out?
Last edited by trackstar on September 6th, 2008, 10:00 pm, edited 1 time in total.

Cuchulainn
Posts: 59715
Joined: July 16th, 2004, 7:38 am
Location: Amsterdam
Contact:

### Credit Derivatives & Subprime Crisis

If you believe the world as we know it is going to come to an end, then maybe you can justify those spreads, otherwise they are a clear buy. There are many more such examples. Things always get better, sooner or later. It's just knowing when. If everyone thinks it's the end of the world and you think otherwise, you just might be right, if not why worry anyway?I vaguely remember 1987 crash, but a few months later it was back to business as usual.
Last edited by Cuchulainn on September 6th, 2008, 10:00 pm, edited 1 time in total.

Posts: 11048
Joined: February 1st, 2005, 11:21 pm

### Credit Derivatives & Subprime Crisis

Boom and bust, boom and bust.... this is the very essence of capitalism.

Posts: 11048
Joined: February 1st, 2005, 11:21 pm

QuoteStocks tumble ...... NEW YORK - A stunning makeover of the Wall Street landscape sent stocks falling precipitously Monday, with the Dow Jones industrials sliding 500 points in their worst point drop since the September 2001 terrorist attacks. Investors reacted badly to a shakeup of the financial industry that took out two storied names: Lehman Brothers Holdings Inc. and Merrill Lynch & Co. Stocks also posted big losses in markets across much of the globe as investors absorbed Lehman's bankruptcy filing and what was essentially a forced sale of Merrill Lynch to Bank of America for $50 billion in stock. While those companies' situations had reached some resolution, the market remained anxious about American International Group Inc., which is seeking emergency funding to shore up its balance sheet. A faltering of the world's largest insurance company likely would have financial implications far beyond that of Lehman, the largest U.S. bankruptcy.The swift developments that took place Sunday are the biggest yet in the 14-month-old credit crises that stems from now toxic subprime mortgage debt. For the first part of Monday's trading, the market was falling, but in a largely orderly fashion as investors seemed to draw some relief from the resolution of Lehman's problems.But as the session wore on, and there was no word about AIG, the market's suffered another bout of fear that the ongoing credit crisis will continue to devastate the financial sector, and selling accelerated in the final hour.AP. TraderJoe Posts: 11048 Joined: February 1st, 2005, 11:21 pm ### Credit Derivatives & Subprime Crisis QuoteDow Down 500: It Could Have Been Worse, But 'Crash' Risk Remains, Roubini saysAs shares of Wall Street titans Lehman Brothers, Bank of America and AIG plummeted, the Dow tumbled over 500 points Monday while the S&P suffered its worst decline since 9/11.The decline was certainly dramatic and painful for those long, but it was not as bad as the "Black Monday" many market participants expected heading into the session. Still, a 1987-like crash cannot be ruled out and investors should take steps such as buying puts to protect themselves against such a "fat-tail event," says Nouriel Roubini, economic professor at NYU's Stern School and chairman of RGE Monitor.Roubini says Monday's decline could have been worse if not for a series of "new dams" created this weekend and Monday, including:The Fed's expansion of its lending facilities for financial firms.Raised expectations for a Fed rate cut at Tuesday's previously scheduled policy meeting.The Bank of America deal to acquire Merrill Lynch, discussed in detail here. The$70 billion "liquidity fund" created by a consortium of banks.Discussion of a separate fund to aid AIG, whose shares fell 61% Monday. But noting has changed Roubini's baseline forecast for another 20% drop in the stock market. The economist, who has been eerily prescient in predicting the ongoing crisis, recommends investors avoid risky assets, including commodities as fears of a global slowdown take hold. On Monday, gold benefited from a "flight to safety" trade in the wake of Lehman's bankruptcy, but oil fell to its lowest level since mid-February.Meanwhile, NY Post reporter Mark DeCambre notes major Asian markets were closed Monday for holidays. "We could be looking at two days of carnage," he says, when Wall Street reacts tomorrow to the delayed reaction in (most notably) Japan, China and South Korea to Monday's slide and this weekend's drama.The drama included a special trading session for counterparties to Lehman. As bad as Monday was for the stock market it was much worse in the market for credit default swaps, a somewhat arcane market that is at the epicenter of a great debt unwinding that may just be getting started. (Click here for a discussion of what the coming credit contraction means for consumers and the economy at large.)

Posts: 11048
Joined: February 1st, 2005, 11:21 pm

Government bailout imminent but will it be enough?QuoteInvestors shying from the risks of stocks turned to government-backed debt. On Wednesday, the 3-month Treasury bill -- considered one of the safest short-duration assets -- saw demand surge so high that its yield briefly dipped into negative territory for the first time since 1940. Investors are so focused on parking their money in safe assets that they're willing to take very little return on such investments.The prices for short-duration Treasurys fell from Wednesday's levels. But the yield on the 3-month T-bill was still extremely low at 0.23 percent -- up from 0.2 percent late Wednesday, but well below its yield of 1.60 percent just a week ago.Longer-term bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, jumped to 3.55 percent from 3.42 percent late Wednesday.Investors also continued a move into other safe havens, though demand eased somewhat as stocks soared. Gold rose again Thursday, up $50.20 to$900.70 an ounce on the New York Mercantile Exchange after posting its largest ever one-day price jump Wednesday.Oil shot up early in the day, moving back above $100 as investors sought it as another haven. But crude fell back with the market's realization that the financial turmoil will likely exacerbate the drop in demand that has taken oil down sharply from its July record of$147.27 a barrel.Light, sweet crude on the Nymex rose 72 cents to settle at $97.88 a barrel."We are in uncharted territory," said Linda Duessel, the equity market strategist at Federated Investors. "The seriousness and the size of this fallout has been underestimated from the beginning. It's most disconcerting what's going on in the credit market." TraderJoe Posts: 11048 Joined: February 1st, 2005, 11:21 pm ### Credit Derivatives & Subprime Crisis FTSE rose by a record 8.8% today.Bailout could cost the US taxpayer$1trillion - while the fatcats who created this carnage walk away with their huge bonuses ! Looks like capitalism bailed out by socialism yet again.
Last edited by TraderJoe on September 18th, 2008, 10:00 pm, edited 1 time in total.