It's eerie how reliably a thread in this forum that bears the name of a fund with which I am not familiar turns out to concern another blow-up.

Quote It's eerie how reliably a thread in this forum that bears the name of a fund with which I am not familiar turns out to concern another blow-upperhaps if you told us which you were familiar with, then we can arrange for them to blow up. That way you are not too disappointed !

I appreciate that you'd do that for me, Dave.

my pleasure old boy.

QuoteOriginally posted by: rle2281I don’t think the rating agencies will ever have the same credibility as before.I started this saying this the year I arrived on Wall Street, and every three or four years since it seems to get proven again. But it never happens. So I've stopped saying it.

the ratings agencies will always have a job to do 'cos we all need someone to point to when our stupid investment decisions come a cropper.

More impending implosions as Hedge Funds Squeezed As Lenders Get Tougher It seems banks are rethinking all the loans they've made to the hedgies. The repo loans look especially nasty because they are short-term and may leave banks holding repossessed illiquid assets if the fund can sell fast enough.The great unwinding continues....

QuoteHedge Funds Frozen ShutTo buy time and stave off losses, more funds are blocking withdrawals. Are they just postponing the inevitable? by Matthew Goldstein www.businessweek.com, 7 March 2008There's a chill spreading across the hedge fund industry. With more portfolios falling victim to the credit crunch, managers by the dozen are freezing investor redemptions, preventing a mad rush to the exits that would force funds to sell beaten-down assets to raise cash. But is this unprece­dented move just postponing the day of reckoning for funds and the market? Since November at least 24 hedge funds have barred or limited investors from taking their money out, tying up tens of billions of dollars for an indefinite period. Among them: GPS Partners, a $1 billion fund that bets mainly on natural gas pipelines; Pursuit Capital Partners, a $650 million portfolio with troubled debt; and Alcentra European Credit, a $500 million fund that owns slumping loans used to finance private equity buyouts. The new rules affect not only the pension funds, endowments, and well-to-do families that buy the funds directly but also smaller individual investors exposed through diversified portfolios of hedge funds, known as funds of funds. Some hedge funds have broad powers under their contracts with investors to make such changes at their discretion. "It's the largest period of redemption suspensions in the industry's history," says Jonathan Kanterman, a managing director with Stillwater Capital Partners, a money manager. It's understandable why hedge funds would want to keep investors from pulling out their money en masse. In this market, any sales would almost certainly be at cut-rate prices, guaranteeing big losses in portfolios. And once managers start dumping assets, there's also the danger that big banks, which provided the funds with credit lines to amp up returns through what's known as leverage, will demand their money back as collateral shrinks. Those margin calls would prompt further sales, setting off a vicious cycle that could ensure a fund's demise. "If you are an investor, you are upset," says one well-heeled investor in a fund that has stopped redemptions. "But if every fund has to sell at once, it's terrible." Mad ScrambleIn such fire-sale situations, the results can be ugly. The $2 billion Peloton Partners ran into trouble in February when Wall Street banks began tightening their lending requirements. The fund's managers scrambled to pay back the banks by quickly selling off assets. Peloton is now in the process of liquidating all its investments and closing the fund. Sailfish Capital Partners, a onetime $2 billion fund, got hit by investor withdrawals following a bad bet on mortgages. Instead of navigating the murky market, Sailfish shuttered last month to return as much money as possible to investors. To prevent such scenarios, managers are trying to buy time until there's a recovery. It's a big gamble since many of the funds blocking withdrawals specialize in asset-backed securities, such as bonds made up of risky mortgages or debt for private equity buyouts. That quadrant has been the hardest hit in the $1.6 trillion hedge fund universe. In some cases, there are simply no buyers for the securities sitting in these funds' portfolios. If the turmoil continues for too long, other types of hedge funds, such as big multi-strategy portfolios that hold billions in stocks and corporate loans, may follow the trend and lock in investors. The waiting game is dangerous for other reasons, too. By not clearing out problematic securities, uncertainty will continue to hang over the markets, given the suspicions that the real pain simply has been delayed. One fund manager, who didn't want to be identified, says the losses are inevitable since it could be years before many of the illiquid assets bounce back, if they do. For Your ProtectionIt's not just troubled funds that are bolting the exit. Pursuit Capital, which invests mainly in debt backed by mortgages, corporate loans, and aircraft leases, earned 12% in 2007 and is up 1% since January. But early this year, nervous investors started asking for their money back. Rather than selling assets into a falling market, the managers decided to block redemptions to prevent a run on the bank. "They are doing it to protect investors," says Michael Burg, a lawyer for Pursuit. Fund managers are also protecting their paychecks. In a freeze, funds still collect a management fee, which ranges from 1.5% to 2% of assets. That can be frustrating for investors, especially for those at funds generating huge losses. GPS Partners, a Santa Monica (Calif.) fund run by Brett Messing, the brother of actor Debra Messing, dropped nearly 15% in January, according to two investors. After more than 15% of investors ran for the door, the fund imposed a "gate" in February that limits withdrawals. Citigroup's (C) $500 million Corporate Special Opportunities fund lost 11% last year, prompting nearly a third of the funds' investors to request withdrawals. In February, Citi banned redemptions on the fund. A Citigroup spokesman says CSO's new management team "is taking steps to position the fund as best as possible for future growth." Of course, funds that ban investor redemptions don't exactly have a good history. They sometimes end up like the two infamous Bear Stearns (BSC) hedge funds that helped touch off the credit crisis. The funds, which owned mainly subprime debt, blocked withdrawals in June. By August they had both filed for bankruptcy. More pain to come.

I think the rating agencies clearly dropped the ball in that any time a large class of AAA rated stuff goes to 50 cents on the dollar, it was not bad luck, but rather a bad rating. When a 1 in 1000 event happens, more than likely your probability was incorrect. But the rating agencies feed off their consumers, and so their ratings weren't unilaterally forced down an ignorant public, but rather a joint estimate that these things were bullet proof. The fundamental assumption they all took for granted was that housing prices would go up, or at least, not down. This was not a belief crammed down investors throats, but rather the consensus. What makes this especially troublesome for investors, is that pure plays are difficult, in that a MBS contains lots of essential detail about the collateral obligors, the collateral values, the nature of the waterfall of cashflows prior to yours. I would imagine, someone knowledgable of MBS, is buying things now that will make him a fortune, because indiscriminate selling creates opportunities.

QuoteOriginally posted by: efalkenI think the rating agencies clearly dropped the ball in that any time a large class of AAA rated stuff goes to 50 cents on the dollar, it was not bad luck, but rather a bad rating. When a 1 in 1000 event happens, more than likely your probability was incorrect. But the rating agencies feed off their consumers, and so their ratings weren't unilaterally forced down an ignorant public, but rather a joint estimate that these things were bullet proof. The fundamental assumption they all took for granted was that housing prices would go up, or at least, not down. This was not a belief crammed down investors throats, but rather the consensus. What makes this especially troublesome for investors, is that pure plays are difficult, in that a MBS contains lots of essential detail about the collateral obligors, the collateral values, the nature of the waterfall of cashflows prior to yours. I would imagine, someone knowledgable of MBS, is buying things now that will make him a fortune, because indiscriminate selling creates opportunities.I agree with all your points, although I would like to think (while wearing rose-coloured glasses) that the ratings agencies would be more cautious of potential asset price bubbles.As for knowledgeable MBS buyers, that depends on some factors that aren't yet clear. First, one new phenomenon is the rise voluntary foreclosures -- solvent homeowners are choosing not to exercise the OTM call that is their underwater mortgage (and more that 8 million mortgages are currently underwater in the U.S.). That raises the specter of higher foreclosures in all mortgage segments (including primes) and a decoupling of foreclosure risk from credit scores.Second, and I don't know the answer to this one, how will MBS be affected if the constituent mortgages are renegotiated (reduction of interest rate or principle)? How will the proposed "negative equity certificate" be valued by the MBS holders? Will MBS holders sue over the terms of renegotiations and block needed corrections to mortgage terms?Third, what happens when the entity that created/managed the MBS goes bankrupt? Even if the MBS is still producing cash, do the MBS holders lose to other more secured creditors of the entity? And will crushing financial pressures in the mortgage industry increase fraud so that some MBS holders discover that they were blatantly lied to by a now defunct entity?I'll be the first to admit that I'm not a "knowledgeable MBS buyer". Yet something tells me that the answers to at least some of these questions are undecidable in a logical sense and not just uncertain in a stochastic sense (see the Falkenstein v. Taleb discussion). Catching a falling knife is risky, especially if you really can't tell how fast the knife moving, which edge is sharp, and how heavy the knife really is. That said, I'm sure some will make a bundle (and others will blow-up)

QuoteI agree with all your points, although I would like to think (while wearing rose-coloured glasses) that the ratings agencies would be more cautious of potential asset price bubbles.It is too much too ask, I think. Ratings agencies cannot be viewed as some omniscient observer of the market. They are part of the market and their actions are very "reflexive", to borrow a analytical tool from George Soros. Soros says and I quote"credit depends on expectations: expectations involve bias; hence credit is one of the main avenues that permit bias to play a causal role in the course of events". "Credit is intricate to the boom bust cycle - the pattern is asymmetrical: the boom is drawn out and accelerates gradually: the bust is sudden and often catastrophic"Soros makes the point that there is a reflexive connection between loan and collateral and that although valuation is supposed to passively reflect the underlying asset, but the act of making a loan affects the value of the collateral.As to the point about voluntary foreclosures, it seems to me that homeowners are acting in a very rational way. The OTM call and the ATM call almost worth the same. The likelihood is that house prices fall further or stay around these levels for a while - and in 12-18 months the lenders will be willing to lend them again.

QuoteCapitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone - John Maynard Keynes

QuoteOriginally posted by: daveangelQuoteI agree with all your points, although I would like to think (while wearing rose-coloured glasses) that the ratings agencies would be more cautious of potential asset price bubbles.It is too much too ask, I think. Ratings agencies cannot be viewed as some omniscient observer of the market. They are part of the market and their actions are very "reflexive", to borrow a analytical tool from George Soros. Soros says and I quote"credit depends on expectations: expectations involve bias; hence credit is one of the main avenues that permit bias to play a causal role in the course of events". "Credit is intricate to the boom bust cycle - the pattern is asymmetrical: the boom is drawn out and accelerates gradually: the bust is sudden and often catastrophic"Soros makes the point that there is a reflexive connection between loan and collateral and that although valuation is supposed to passively reflect the underlying asset, but the act of making a loan affects the value of the collateral.You are right, of course, that raters are embedded in the same social/financial milieu as the borrowers and lenders. Moreover, like the borrowers, mortgage brokers, home appraisers, and securitizers, the raters had strong incentives to over-rate the financial picture. Yet, in a Pollyanna world, one could hope for more objective and far-sighted raters who had read Soros and been able to take a step back to see how the financial froth of the moment covered a rather murkier (il)liquid reality beneath.QuoteOriginally posted by: daveangelAs to the point about voluntary foreclosures, it seems to me that homeowners are acting in a very rational way. The OTM call and the ATM call almost worth the same. The likelihood is that house prices fall further or stay around these levels for a while - and in 12-18 months the lenders will be willing to lend them again.Exactly! And that's what's scaring the Fed so much! In the past, a mortgage was like a bond (in two senses of the word) in that it was a financial bond instrument and an honor-bound personal-bond to pay the lender each month. People paid kept paying the mortgages for emotional reasons. The stigma of "losing one's home" meant that only people who really could no longer afford the house would stop paying the mortgage as a last resort.But now some are realizing that a mortgage is not a bond, either personal or financial. Rather, it is an instrument of a very different breed. Lenders thought that the pay-off structure of mortgages was bond-like (i.e., fixed cashflow over a relatively predictable horizon with some slight chance of default tied to the creditworthiness of the borrower). Instead, lenders are discovering that they've written ATM (now OTM) covered-calls on housing prices and are stuck with something whose pay-off structure looks much more like an equity (i.e., stochastic returns on an indefinite horizon tied to asset prices). Lenders bought what they thought was a low-volatility instrument (with leverage) and now find they own a high volatility instrument on a down trend.Perhaps one key failure in ratings has been this shift in the model. The raters were scoring mortgages as bonds but the industry and society have turned mortgages into covered calls or equities.

I was interviewing here until the day before this was announed when they "lost their headcount". I was annoyed at first but it seems like a lucky escape now

funny