The Check is in the Mail...Has Finally Arrived

Put a Tiger in Your Tank!

 If Team Obama's non-plan to rescue the banking system fails we are all in for an epic struggle.  The two year recovery becomes the lost decade where we are in for an epic financial struggle-- perhaps the mother of all struggles.    Want to know just what an epic struggle really is?  Check out this gritty. grainy "Python  versus Tiger" video that have been must be the original inspiration for the now ubiquitous "Battle at Kruger" that now  has over 42 million views on youtube .  If you can't make it through  "Python versus Tiger" video then I hope you are truly religious and know how to pray while the the bottom fishers and grave dancers take advantage of a different kind of prey.

Big Warning--This is an unbelievably intense video.  If you can't take intense drama take a valium before watching:

Here's the less cinematic knock-off Battle at Kruger:

In a world  full of doom and gloom it takes a lot to change market sentiment.  But a pleasant crack in the fissures and adhesions of the econolypse that are gripping the world's capital markets took place today.  Trying to fix the global economy that has run on a super-uber-abundant supply of loose and  silly if not downright idiotic credit is like trying to keep all the cars in the world on the road and freely running if you shut down all of the world's gas stations all at the same time.  Let's face it boys.  We are running on vapors. 

But just today a devoted contributors reports  a very pleasant surprise that arrived in the mail.  His  five year adjustable rate mortgage  whose rate was  set back in early 2004 at 4.875% just rolled over at ....3.25%.  Okay, so it's only for one year.  The index was set at 2.75% over one year treasuries that clocked in at a blistering .54% (that's right... basically 1/2% )! A little rounding to the bank's favor and there you have it.  A drop of almost 17% in the  monthly debt service. This contributor's  home equity line was now now priced at the prime rate of 3%.  You do the math.  While the new adminstration remains politically popular their policies are not... at least not yet. 

It takes a while for the rat to pass through the snake (or in this case the tiger through the python).  Mortgage applications, appraisals (an archaic term) take time to work their way through the financial system.

 When all those borrowers with  6% and 7% coupon mortgages start to roll and refinance (if the banks ever start lending in earnest) real dough will start appearing in the wallets of terrorized Americans who  sufferring from "inconfidence" a combination of total loss of control of the bowel and bladder functions  coupled with acute fear of just about everything.  Not a particularly robust set of dynamics for a bull market.

 But there is a cautionary tale of the perils the Great Refinancing.  All those fancy sausage-sliced securities with mind boggling acronyms:  CDSs. CDOs, CMOs, MBS, CMBS, Ginnies, Fannies, Freddie's, Sallie's. When the refinancing hits, an investor in these securities  who had a relative high rate of return is now stuck with a much lower rate of return for the same risk/reward profile.  One borrower's gain is another lender's loss.  Sort of sounds like a zero sum game.  So when all those endowments, pension funds find they can't meet their actuarial commitments we begin to replace one crisis with another.

Remembering Howie Rubin (May 1987)

Beware the IO's  of May... the PO's become PU's

A Blast from the Past:  So there  was a specific incident--  The Howie Rubin Double Down Memorial Trade-- back in 1987-- over 20 years ago that resulted from a rapid change in interest rates.  Back then if a trader lost (or stole)  $250 million it was big news.  Now-- unless you are talking in the tens of billions-- a good trade gone bad barely hits the radar screen.  So here's a blast from the past involving then-mortgage exotica  known as IOs (interest only)  and POs (principal only) securities.  A very clever form of slicing and dicing, ripping and stripping ginnie mae bonds into "interest only" securities and "principal only" securities. 

As young and highly regarded Merrill Lynch mortgage trader Howie Rubin found himself a little behind the 8-ball when rates unexpected "sky rocketed" so the interest only securities that he had sold rose quickly in value and the highly rate-volatile principal only that he held on to dropped precipitiously in value. So he did what any respectable gunslinger playing with other people's money would do: he doubled down and lost.  When the dust settled Merrill Lynch was out of 250 million smokes, Howie was out of job and the markets were rattled to the core.  Not to worry, Howie landed on his feet at guess where?  Bear Stearns.  He learned his lesson and went on to make gobs of money.  Today IOs and POs are quaint relics and we now deal with something more insidious: the CDS market whose notional principal stands at somewhere between $30 trillionand $62 trillion depending on who you ask. Just don't ask AIG who wouldn't have clue. 

AIG: This bottomless pit that has finally "frustrated" Ben Bernanke and made him mad. We are headed rapidly toward the $200 billion bailout with no end in sight, no analysis in mind and no backbone in place to say-- enough is enough:  All naked (unhedged) credit default swaps other than for verifiable hedging purposes are hereby declared null and void as against public policy.  Our friends at J.P. Morgan wouldn't be too happy since they just reported a $5 billion profit from trading credit default swaps-- seems they're  the only credit worthy counter party left on the planet. At least fo the time being.

So the lesson is if we live long enough and all those mortgage bills are reduced by 15-20% and the investors on the other side of the trade don't go belly up, we just might work our way out of this mess.  But if we don't have any banks who will lend and borrowers who will borrow this is  going to be really long and "ucking fugly".   So, even if you re-open all the gas stations in the world, fill up the gas tanks of all the cars, its going to be very hard to get from A to B is everyone in the world is afraid to get back on the road again and drive.  We need to put the  tiger back in everybody's tank before they get strangled by the python!

Caveat Emperor

Sticky

Monday, May. 11, 1987

Bond Bombshell

It started as a mistake, by all signs an honest one, but it grew into a Wall Street disaster. A 36-year-old senior bond trader at Merrill Lynch apparently lost his cool last month when rising interest rates started rapidly eroding the value of his $900 million portfolio. Instead of liquidating the securities and taking the loss, as most of his colleagues on Wall Street were doing, the Merrill Lynch trader seemingly gambled on a go-for-broke strategy. Without his employer's permission, he plunged in deeper, buying up $800 million more of the securities in the hope that an interest-rate turnaround would bring enough profits to bail out all his losses. His wager failed spectacularly. When Merrill Lynch announced the episode last week, the firm estimated its losses at $250 million, possibly the largest single trading deficit in Wall Street history.

The financial community was stunned at not only the immensity of the loss but also the identity of the trader: Howard Rubin, the head of Merrill Lynch's trading desk for mortgage-backed securities. Rubin, who has been fired but not charged with any criminal wrongdoing, was a respected trader and is a Harvard Business School graduate. Said Stephen Joseph, a senior trader at Drexel Burnham Lambert: "It's really strange. He has a great reputation."

But Rubin was apparently dealing in one of the tricky, relatively untested new types of securities. The bonds that tripped up Merrill Lynch are interest-only/principal-only securities, known as IOPOs. Investment houses create them by buying mortgage-backed bonds -- typically those issued by the Government National Mortgage Association, or Ginnie Mae -- and then splitting the securities into two parts, one that pays interest and another whose price rises or falls with the resale value of the bond. Rubin was selling the interest-paying bonds and hanging on to the principal securities, which lost value rapidly as interest rates rose.

The incident prompted questions about Merrill Lynch's internal supervision. The firm claimed it had put a closer watch on Rubin at least a year earlier, after assessing him as talented but riskprone. Last week the company began an in-house probe and fired a second trader, who had allegedly failed to disclose investments and lost $10 million. Meanwhile, colleagues began looking for hints in Rubin's background about why he took such a plunge. According to one account, the trader had been a devoted blackjack player before his business-school days.

Comments

[Anavar]

Great video with tiger and snake. Tiger just didn't stop nagging to snake :) Interesting that he got safe when the snake was already all around tiger.