The scary truth about the subprime bond market
There's a lot of ink being spilled today about the meltdown in the markets yesterday. Stocks, high-risk bonds, the dollar -- they all got shellacked on fears of spillover from the subprime mortgage mess. I couldn't possibly link to all of the stories out there, but I wanted to share this one from Bloomberg. You simply can't sum up how ridiculous things are in the subprime mortgage bond market right now better than the two reporters on this story did ...
"On Wall Street, where the $800 billion market for mortgage securities backed by subprime loans is coming unhinged, traders are belatedly acknowledging what they see isn't what they get.
"As delinquencies on home loans to people with poor or meager credit surged to a 10-year high this year, no one buying, selling or rating the bonds collateralized by these bad debts bothered to quantify the losses. Now the bubble is bursting and there is no agreement on how much money has vanished: $52 billion, according to an estimate from Zurich-based Credit Suisse Group earlier this week that followed a $90 billion assessment from Frankfurt-based Deutsche Bank AG.
"Even the world's second-largest company by market value must 'triangulate' the price of an asset-backed bond when it gets bids from traders, said James Palmieri, who helps oversee $197 billion in investments at General Electric Co.'s Stamford, Connecticut-based GE Asset Management Inc.
Then there's this quote a bit farther down:
"One subprime mortgage bond, Structured Asset Investment Loan trust 2006-3 M7, is valued at about 91 cents on the dollar to yield 9.5 percent, according to the securities unit of Charlotte, North Carolina-based Wachovia Corp. Merrill Lynch in New York puts the price of the same security at 67 cents to yield 18 percent."
It's followed up by an even more ... er ... encouraging couple of paragraphs:
"At least a third of hedge funds that invest in asset-backed bonds pick and choose values for their investment that help mask wide swings in performance, according to a survey of 1,000 funds worldwide by Paris-based Riskdata, a risk management firm for money managers.
"'If you have five different brokers you will get five different quotes, so if you don't have an objective valuation process you can choose the quote which for you is the most interesting,' said Olivier Le Marois, chief executive officer of Riskdata. 'There's no consensus on where the market price is.'"
Are you freaking kidding me? If that doesn't speak to how messed up things are in mortgage finance land right now, I don't what does. Nobody seems to know what their holdings are worth, where the market is headed, and just how bad things will get. But I can tell you this -- everyone ... everyone ... should have seen this coming, given the deterioration in the housing market over the past 18 months.
"On Wall Street, where the $800 billion market for mortgage securities backed by subprime loans is coming unhinged, traders are belatedly acknowledging what they see isn't what they get.
"As delinquencies on home loans to people with poor or meager credit surged to a 10-year high this year, no one buying, selling or rating the bonds collateralized by these bad debts bothered to quantify the losses. Now the bubble is bursting and there is no agreement on how much money has vanished: $52 billion, according to an estimate from Zurich-based Credit Suisse Group earlier this week that followed a $90 billion assessment from Frankfurt-based Deutsche Bank AG.
"Even the world's second-largest company by market value must 'triangulate' the price of an asset-backed bond when it gets bids from traders, said James Palmieri, who helps oversee $197 billion in investments at General Electric Co.'s Stamford, Connecticut-based GE Asset Management Inc.
Then there's this quote a bit farther down:
"One subprime mortgage bond, Structured Asset Investment Loan trust 2006-3 M7, is valued at about 91 cents on the dollar to yield 9.5 percent, according to the securities unit of Charlotte, North Carolina-based Wachovia Corp. Merrill Lynch in New York puts the price of the same security at 67 cents to yield 18 percent."
It's followed up by an even more ... er ... encouraging couple of paragraphs:
"At least a third of hedge funds that invest in asset-backed bonds pick and choose values for their investment that help mask wide swings in performance, according to a survey of 1,000 funds worldwide by Paris-based Riskdata, a risk management firm for money managers.
"'If you have five different brokers you will get five different quotes, so if you don't have an objective valuation process you can choose the quote which for you is the most interesting,' said Olivier Le Marois, chief executive officer of Riskdata. 'There's no consensus on where the market price is.'"
Are you freaking kidding me? If that doesn't speak to how messed up things are in mortgage finance land right now, I don't what does. Nobody seems to know what their holdings are worth, where the market is headed, and just how bad things will get. But I can tell you this -- everyone ... everyone ... should have seen this coming, given the deterioration in the housing market over the past 18 months.
posted by Mike Larson at
9:41 AM
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