Posted on 09/27/2008 1:16:46 PM PDT by politicket
OK, that clarifies. I was misinformed. Thanks!
I'm a FReeper with an opinion... ;-)
I also run my own company as a business analyst for the financial community. I do not have a 'degree' or 'certification' in investment consulting, so take all I say as 'food for thought' and nothing else.
I spent the last seven years working in the Investment Consulting industry, specifically in the area of administering CIMA (Certified Investment Management Analyst) designations. Most of the investment professionals that obtain this designation are CEO's, VP's, and other highly experienced consultants from across the nation, and spanning many countries.
I learned a lot during those seven years and have formed my opinions based on that knowledge. Nothing more. Nothing less.
So....don't go sell your 401k because you think I told you to. :-)
For example?
For the case of CDS's on MBS's, you just wait for the next recession.
Sounds easy. Makes you wonder why anyone would sell a CDS, seeing as you think it's a guaranteed winner.
I agree. My point was that greed drove it.
I saw this relevant description on the following site:
http://biglizards.net/blog/archives/2008/09/democrats_try_t_1.html
Let’s jump back 18 months. I spent several letters going over how subprime mortgages were sold and then securitized. Let’s quickly review. Huge Investment Bank (HIB) would encourage mortgage banks all over the country to make home loans, often providing the capital, and then HIB would purchase these loans and package them into large securities called Residential Mortgage Backed Securities or RMBS. They would take loans from different mortgage banks and different regions. They generally grouped the loans together as to their initial quality as in prime mortgages, ALT-A and the now infamous subprime mortgages. They also grouped together second lien loans, which were the loans generally made to get 100% financing or cash-out financing as home owners borrowed against the equity in their homes.
Typically, a RMBS would be sliced into anywhere from 5 to 15 different pieces called tranches. They would go to the ratings agencies, who would give them a series of ratings on the various tranches, and who actually had a hand in saying what the size of each tranche could be. The top or senior level tranche had the rights to get paid back first in the event there was a problem with some of the underlying loans. That tranche was typically rated AAA. Then the next tranche would be rated AA and so on down to junk level. The lowest level was called the equity level, and this lowest level would take the first losses. For that risk, they also got any residual funds if everyone paid. The lower levels paid very high yields for the risk they took.
Then, since it was hard to sell some of the lower levels of these securities, HIB would take a lot of the lower level tranches and put them into another security called a Collateralized Debt Obligation or CDO. And yes, they sliced them up into tranches and went to the rating agencies and got them rated. The highest tranche was typically again AAA. Through the alchemy of finance, HIB took subprime mortgages and turned 96% (give or take a few points depending on the CDO) of them into AAA bonds. At the time, I compared it with taking nuclear waste and turning it into gold. Clever trick when you can do it, and everyone, from mortgage broker to investment bankers was paid handsomely to dance at the party.
I'll give a prime example - National City Bank. It is my opinion that they are about to go belly-up, really soon. Yet, if you look at their books they are well capitalized. They're going belly-up because they played in the sandbox and got burned.
And the numbers are hidden from the investor whose is about to lose their shirt.
A “naked short” position in an asset simply means you owe something which you do not own. Many people, including people who carp about naked stock shorts, have “naked short” positions in U.S. dollars, in so far as such people owe more dollars than the dollar value of the assets they own. The risk of a “naked short” position is that the price of the asset goes up before the debt is settled. Then, repayment is made with something more valuable (adjusted for time) than that which was borrowed.
For example, take your common student. He takes out a big loan when the dollar is weak to pay for worthless (assumed) educational services (the next bubble). Over the years, say the dollar strengthens. The hidden cost to the student, beyond the interest, is difference in value, adjusted for time, of the relatively dear dollars that he must use to repay the loan. Educational services are used in this example to represent a usage of funds for something that does not hedge the short position in dollars.
That's all it is. Nothing sinister.
“Why doesn’t everyone wait until I post the last two lessons based on the article, and then make a determination of the whole?”
Do you really thing that these lessons will present anything new? Perhaps, but very likely not.
It's a winner as long as you can defer the day of reckoning to the point where the problem is so big that a government bailout is required to avoid a total collapse.
Something like the S&L crisis. People were making lots of money right up to the point of systemic failure.
You may not think so, but if you look through the thread you will find at least a few people who are very interested in them.
Not to be rude, but you're free to visit other threads at any time...
There were several offers because Bob’s stock price got down in low single digits. The reason the stock price dropped is that investors have learned from previous Fed interventions that they are out of luck, so if there’s any chance of it, they withdraw their equity.
So you’re not going to tell me how to cause IBM to fail, to make my CDS profitable?
profit: http://www.financialsense.com/fsu/editorials/amerman/2008/0917.html
That and the political appointee of the now disgraced former governor of New York said it was ok to do it.
These guys got junk bonds onto institutions books as AAA assets
And Mike Milken got into a lot of trouble for far less.
Keep posting that silly link. LOL!
One big problem about naked shorts is it allows more shares to e sold than actually physically exist.
Every chance that you give me.
I was talking MBS’s, you’re the one who did the bait and switch to talking about IBM debt.
Toddster likes to argue perfect world examples like wideawake’s post 19. The concept of taking the profit and running doesn’t exist in his world.
Also see palmer’s link from post #93, which shows how it can be done.
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