So I keep reading about how the 700bl could actually make the government a ton of cash- with estimates that the mkt value of the assets could climb to 2 trillion+ after the market settles down. Much of the logic behind these statements, on its face, seem to make sense to me. Delinquency rates still ~6% and even prime MBS is getting killed. Heck, being young and having a couple disposable bux I would possibly be in the market. So question is- if its such a great investment opportunity why aren’t there hedge funds and private equity firms, etc lined up to get a piece of the action? Just wondering…
cuz you can’t leverage it and you can’t sell it when you have redemptions and you can’t mark it to market so your clients hate you and nobody really knows what the deliquency rates will be when the economy goes tits up and…
Ask Bid
Hedge funds don’t want to get in the business of enforcing/negotiating mortgage payments. There is a chance that a new gov’t entity could change some terms and prevent some defaults, but no private money wants to get involved because that is beyond the scope of the private sector. No one wants to make the deals, because there is no precedent. The damage is done, people are in houses they can’t afford, and the mess needs to be cleaned up before P/E and hedge fund $ moves in. At lease I hope that is the case. There is obviously plenty of cash and energy that could be used to fix this, but no one wants to make the first move, and the public doesn’t want to see “unfair” wealth distribution.
dlpicket, you made me laugh. 
I think the issue is that no one has deep enough pockets and long enough time horizons to buy enough of the frozen-up stuff to restore “normal” market functioning. The US government is the only one who might have it. Hedge funds who play with this stuff probably have a lot of it, which is why they are frozen up too. It might not be a bad idea to allocate a *small* portion of one’s portfolio to some of these assets - on the order of 5% - provided you can ride out the crisis. If so, you’ll probably collect a nice liquidity premium, at least for the most senior stuff. I’m not sure where you’d buy the stuff, though - virginCFAhooker was trying and couldn’t get ahold of anything.
Dwight makes a good point about the HF problem. If it weren’t so difficult to know exactly what is in these packaged securities, they might. Part of the problem is determining the credit quality of each security at a micro-level could range from really time-consuming to nearly impossible. HFs would love to buy a block of Double-Income-No-Kid primary residence mortgages. Its just not that easy to figure out what is in some of these mystery-meat securities.
dlpicket Wrote: > > Part of the problem is determining the credit > quality of each security at a micro-level could > range from really time-consuming to nearly > impossible. Isn’t this exactly what someone along the line was supposed to have done? Key word being “supposed.” Help me out here. I know about the dodgy lending practices at the ground level by some of those suddenly vanished mortgage originators. What entities are between that mortgage originator and the bundling of that mortgage with thousands of others in a toxic MBS or CDO on the Lehman balance sheet? And don’t forget the rubber stamp of the rating agency along the way.
dlpicket Wrote: ------------------------------------------------------- > HFs would love to buy a block of > Double-Income-No-Kid primary residence mortgages. > Its just not that easy to figure out what is in > some of these mystery-meat securities. Yeah really sign me up for those only. Even for these great deals though, no one really knows what will happen when that Double-Income-No-Kid family sees comparable houses in their neighborhoods lose 30% of their value and then hears from a friend to go to www.youwalkaway.com or something similar and sign up for their program. “Unshackle yourself today from a losing investment and use our proven method to Walk Away. Your lender WILL NOT be able to call you in attempt to collect! Your lender MAY NOT be able to collect any deficiency or loss they may receive by you walking away! (Select states only) You CAN stay in your home for up to 8 months or more without having to pay anything to your lender! You may even be able to have the foreclosure REMOVED from your credit!” When it is morally acceptable for Americans to dump their homes on the creditor, who is going to want to lend to them?
akanska: I was thinking about this in relation to the LTCM bailout. The banks that bailed out LTCM (CS, GS, ML, etc) ended up turning a profit from it in the end. LTCM had a similar problem to what is going on today: illiquid assets and no buyers. LTCM was facing investor withdrawals and liquidity problems and couldn’t wait out the market. A similar thing is happening here and these banks need bailed out, which may even be profitable for the gov’t since it can wait out market trends longer than private institutions.
haha nice dlpicket
juventurd Wrote: ------------------------------------------------------- > akanska: I was thinking about this in relation to > the LTCM bailout. The banks that bailed out LTCM > (CS, GS, ML, etc) ended up turning a profit from > it in the end. LTCM had a similar problem to what > is going on today: illiquid assets and no buyers. > LTCM was facing investor withdrawals and liquidity > problems and couldn’t wait out the market. A > similar thing is happening here and these banks > need bailed out, which may even be profitable for > the gov’t since it can wait out market trends > longer than private institutions. Good analogy. Warren Buffet was out of the country whining and dining with Bill Gates and could not get cell phone reception or something to get in on a piece of this deal (a large bet on some spreads vs treasuries if I remember). He later complained about the millions of dollars of profit that Bill Gates cost him.
Dwight Wrote: ------------------------------------------------------- > juventurd Wrote: > -------------------------------------------------- > ----- > > akanska: I was thinking about this in relation > to > > the LTCM bailout. The banks that bailed out > LTCM > > (CS, GS, ML, etc) ended up turning a profit > from > > it in the end. LTCM had a similar problem to > what > > is going on today: illiquid assets and no > buyers. > > LTCM was facing investor withdrawals and > liquidity > > problems and couldn’t wait out the market. A > > similar thing is happening here and these banks > > need bailed out, which may even be profitable > for > > the gov’t since it can wait out market trends > > longer than private institutions. > > > Good analogy. Warren Buffet was out of the > country whining and dining with Bill Gates and > could not get cell phone reception or something to > get in on a piece of this deal (a large bet on > some spreads vs treasuries if I remember). He > later complained about the millions of dollars of > profit that Bill Gates cost him. Word. http://www.marginalrevolution.com/marginalrevolution/2007/04/buffett_on_ltcm.html
The government can’t make money from the Paulson plan. Paulson’s plan is to purchase these assets at their “held to maturity” value, which would require a 0 default rate just to break even on the deal. Clearly we know that will not be the case.
juventurd Wrote: ------------------------------------------------------- > akanska: I was thinking about this in relation to > the LTCM bailout. The banks that bailed out LTCM > (CS, GS, ML, etc) ended up turning a profit from > it in the end. LTCM had a similar problem to what > is going on today: illiquid assets and no buyers. > LTCM was facing investor withdrawals and liquidity > problems and couldn’t wait out the market. A > similar thing is happening here and these banks > need bailed out, which may even be profitable for > the gov’t since it can wait out market trends > longer than private institutions. Yeah, I get that. My question is if its such a great deal how come no one wants it?? I’ve gotten some [reasoning] already and it seems like time horizon is the main constraint. I would think it would be good if there was some vehicle out there that would allow those of us who would be willing and able to ride this out for 5-10 years to invest in the possibility. I also see the opportunity cost side, considering the kinds of “deals” available in the mkt now.
CFA500 Wrote: ------------------------------------------------------- > The government can’t make money from the Paulson > plan. Paulson’s plan is to purchase these assets > at their “held to maturity” value, which would > require a 0 default rate just to break even on the > deal. Clearly we know that will not be the case. I thought it was reverse auction not HTM…?
akanska Wrote: ------------------------------------------------------- > juventurd Wrote: > -------------------------------------------------- > ----- > > akanska: I was thinking about this in relation > to > > the LTCM bailout. The banks that bailed out > LTCM > > (CS, GS, ML, etc) ended up turning a profit > from > > it in the end. LTCM had a similar problem to > what > > is going on today: illiquid assets and no > buyers. > > LTCM was facing investor withdrawals and > liquidity > > problems and couldn’t wait out the market. A > > similar thing is happening here and these banks > > need bailed out, which may even be profitable > for > > the gov’t since it can wait out market trends > > longer than private institutions. > > > Yeah, I get that. My question is if its such a > great deal how come no one wants it?? I’ve > gotten some already and it seems like time > horizon is the main constraint. I would think it > would be good if there was some vehicle out there > that would allow those of us who would be willing > and able to ride this out for 5-10 years to invest > in the possibility. I also see the opportunity > cost side, considering the kinds of “deals” > available in the mkt now. Not many institutions can operate on a 5-10 year time horizon with no real idea of how much its assets are worth in the interim and there is no way for retail investors to buy this stuff. Maybe an endowment fund or something will jump in here?
… this reminds me of the reading on how although many institutional accounts are legally not allowed to invest in sub-investment grade issues that there is empirical evidence showing that there is no real risk adjusted difference bt junk and investment grade bonds. I worked in compliance at a large MM that had multiple huge retirement accounts (CALPERS, etc). Anytime there was a downgrade it was a mandate to sell out. Now it seems like a huge burden; meaning, having to sell off at these ‘firesale’ rates seems more costly than maintaining a small (~5%) position to ride out the tough times. It just doesn’t seem to make sense to me. In the same vain, it appears that those who are in the ‘safest’ investments 401k wise will reap most of the downside w/out as much of a possibility of an upside. None of my "safe’ equity funds can short per the prospectus and they must be 95% invested so unless there are a lot of educated mom’s and pop’s out there seems like their portfolios have no way to hedge against this downside risk. Yeah- re-balancing is an option but how many out there actively manage their allocations. Not any nonindusry ppl I know. Seems like its the same hedge funds and hugely capitalized private groups who supposedly led to this mess are the same ones who will now profit from it.
akanska Wrote: ------------------------------------------------------- > So I keep reading about how the 700bl could > actually make the government a ton of cash- with > estimates that the mkt value of the assets could > climb to 2 trillion+ after the market settles > down. Much of the logic behind these statements, > on its face, seem to make sense to me. > Delinquency rates still ~6% and even prime MBS is > getting killed. Heck, being young and having a > couple disposable bux I would possibly be in the > market. So question is- if its such a great > investment opportunity why aren’t there hedge > funds and private equity firms, etc lined up to > get a piece of the action? > > Just wondering… It’s how I pay my bills… (commercial real estate only though…)
Akanska, there are people out there buying up MBS and they have been for almost a year. I know of one group of MBS pros from my old firm that immediately set up special opportunity funds and starting buying up MBS, CMBS, CDO and CDO^2 Tranches they deemed as “good” as soon as the first downgrades starting hitting last summer. Word around town in LA is some ex Countrywide guys are doing the same thing. They are getting this stuff dirt cheap and believe they have the analytical skills and experiences to separate the turds from the gems with a high enough winning percentage to make a profit. Talking to some CAM 1 rated rated CDO managers about this fiasco is eyeopening. I personally witnessed how a large portion of the shunning of MBS, and CDO’s tranches is completely unrelated to the economic fundamentals of the issues. In the weeks before I quit (realizing the axe was coming anyways) I would sit in on calls where the people who structured the deals were trying to explain to hedge fund managers holding super senior tranches that the probability of them not receiving their scheduled payments was trace. They weren’t having it. They didn’t fully understand them when they bought them and could care less about trying to then. They just wanted to dump them. The group I was with was eventually dissolved, primarily because the brass didn’t want the deal pipeline dried up. Regardless the guys made a killing in previous. The head of group brought in 35 million alone in “07”. Now there putting there own capital on the line because they think they can pluck the winners from the losers. I believe their going to pull it off. If I had the minimum million dollars to invest with them, I’d be all over it. For you naysayers, of course I recognize the possibility that Paulson and people buying up this stuff could get toasted. Your entitled to your view. I tend to favor it can be done. It will be tougher on the scale that Paulson is trying to do it.
so again the average investor willing to risk 10k and long window has no entrance opportunity- accredited investors only huh??