Friday, August 10, 2007

Quotes You Don’t Want to See at a Time Like This



Those of you looking for solace in today’s Wall Street Journal—some sign that the current melt-down in the sub-prime mortgage-backed fiction of a debt market is near an end—may want to skip the C-Section of the Journal, go straight to the "Weekend Journal" and look at all those nice houses in Vail seeking a buyer.

More specifically, readers should avoid the following quote on the front page of the C-Section from one Ann Rutledge, who is identified by the paper as the principal of a structured finance consulting firm.

Here’s what she said:

“No one really knows how to price asset-backed securities and CDOs and that’s a real problem in the market now.”

You think?


Me, I made the mistake of reading Ms. Rutledge’s quote. So now I’m looking at all those nice houses in Vail in the "Weekend Journal."

Is it my imagination, or are a lot more of ‘em for sale than last week?


Jeff Matthews
I Am Not Making This Up


© 2007 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

6 comments:

Zach said...

What did you think of the WSJ Editorial today, pushing the Fed away from 'bailing out' investors? Seems as though institutions were incentived by the Greenspan Put to undervalue risk, as they thought they'd be saved if anything went wrong. Now that it did, and smaller consumers may be getting hurt, what is the right move?

whydibuy said...

No, its not your imagination. There will be pages of them at the bottom of the slump. Its the classic reversal from virtuous cycle to vicious cycle. The easy money begot higher home prices which gave confidence to lenders to loan more which lowered or eliminated any and all lending quality criteria which enabled any and all deadbeats to bid for houses which caused prices to rise more, etc, etc. Now its turned vicious. Tighter standards and teaser rate resets means less qualified buyers which cause prices to fall which causes defaults and foreclosures and tighter standards with some margin of safety for the lenders which lowers home prices again which triggers more walk away defaults and foreclosures, etc, etc. Yeah, the virtuous side is alot easier to price since ,well, you really don't even have to think about it. The front half of a ponzi scheme takes care of itself. Now trying to price the vicious side is alot trickier. Determining the present price of the future value requires determining where the vicious cycle ends. Thats a tough one.

Chris Fischer said...

Hmm.. but a lot of buyers would have to finance one of those nice homes with a 30 year jumbo, whose rates have gone up almost a 100 bps since early June while the 10 year has dropped 50 bps. Wait, that can't be right....

BelowTheCrowd said...

Reading that one between the lines is fun.

As a "structured finance consultant," her job is to do such things as provide valuations for the various structured finance products she dreams up. Now, she is forced to admit that really, when it comes right down to it, there is no realistic way to value something for which there is no liquid market.

Expect to see lots of this going forard. And it won't be good for employment on Wall Street or in any of the various consulting professions that have grown up around structured finance and the hedge fund business. Who needs a "structured finance consultant" whose apparent function is to assist in the creation of products that can't be valued in the real world? Who needs the investment bankers whose function is to create such junk? And who needs the hedge funds whose strategy is to generate narrow spreads using these exotic and impossible to value products, then lever them to the moon?

I would not want to be looking for a job on or around Wall Street these days. The repercussions have yet to be felt.

-btc

David said...

The quants theoretically know how to price the securities (what a word), but when there are few trades in a security, and the bid-ask spreads get very wide (if there are any bids), the inputs to their models become far less certain.

There are many who complain about mark-to-model, but when there is no active market in many of these securities even in good times, I'm afraid that's all you can ever do; it is just far less certain now.

At RealMoney, I said that this day would eventually come, but I never predicted a time, because that is usually foolish to do. So it goes.

Aaron said...

“No one really knows how to price asset-backed securities and CDOs and that’s a real problem in the market now.”

Jeff:

Isn't the job of credit rating "oligopolies" (i.e., Moodys, Fitch, S&P) to understand what factors affect the pricing of asset backed securities such as CDO's when they're issued?

I would think that if credit-rating agencies don't know how to price asset-backed securities based on their flawed methodologies, then should institutional investors rely upon their information to make investment decisions regarding either the purchase or the sale of asset-backed securities?

Just wondering....