Now, that the picture of MBS has become crystal-clear, we will move to the next level: the Collateralized Debt Obligations (CDO). These structured products are nothing more than a redistribution of credit risk, similar to the way MBS are constructed. If the assets purchased for cooking-up MBS were residential mortgage loans, when structuring CDO deals the pool of assets consists of MBS. Depending on the average credit rating of the MBS, we could structure a High Grade Asset Backed Securities CDO (HG ABS CDO) or a Mezzanine ABS CDO. In a typical HG ABS CDO, we could purchase a $1 billion collateral portfolio of MBS bonds with a weighted average coupon of LIBOR plus 80 basis points. Continue reading ‘Weapons of Mass Destruction (II)’
Monthly Archive for October, 2009
Today, before the markets opened in New York, there were plenty of encouraging signs coming from both fronts: corporate earnings and economic indicators. However, Dow Jones index lost 1 percent by the end of the trading day. One could say that the old “buy the rumor sell the news” has prevailed. Early morning, we found out that the sales of existing US homes surged a record 9.4 percent in September. Even though the number is extremely bullish, one should notice that half of the transactions were basically foreclosed properties. According to S&P, there are $408 billion in mortgages more than 90 days overdue and $332 billion in home loans that have been foreclosed or written off by lenders. Continue reading ‘The State of Global Recovery’
First Friday of every month at 8:30 a.m., the whole financial world is watching the release of the most important indicator: the US employment report. The official unemployment number is the U-3 rate, which is defined as “total unemployed, as a percent of the civilian labor force“. This number was 9.8% in September of 2009. There are three different types of people who are not included in the U-3 rate:
a) People that hold a part-time job, look for full-time work, but simply cannot find any (a.k.a. the underemployed)
b) People that have not had a job for a long period of time, look for full-time work, but simply cannot find any (a.k.a. the unemployed)
c) People that have not had a job for a long period of time, gave up looking for full time work, but would work if they could find a full-time job (a.k.a. labor force reserve) Continue reading ‘The Real Unemployment Picture’
The New York Stock Exchange (NYSE) has withstood a number of financial shocks during the last century. We have read about the Great Depression when the world economy went through a long and painful recession. We have learned about the 1973 oil crisis and the resulting dramatic spike in inflation. I have personally witnessed the September 11 events, when NYSE has been closed for four business days. However, the greatest one-day crash in the history of the Dow Jones happened 22 years ago on “Black Monday”. On October 19th, 1987, the Dow index plummeted 508 points to close at 1,738 points. That fall represented a total drop of 22.6%, which is still to this day the biggest one-day percentage drop in the history of the Dow Jones. Continue reading ‘Black Monday – Deja Vu’
In a 2002 speech referring to credit derivatives, Alan Greenspan – the former FED chairman and one of the most illustrious minds I have ever come across, said that financial instruments such as credit default swaps (CDS) and collateralized debt obligations (CDO) have helped make the economy shock-resistant: “Such instruments appear to have effectively spread losses from defaults by Enron, Global Crossing or WorldCom”. If Greenspan, with a heavy background in math, could not understand the complexities of CDO, all the less so the unsophisticated investors could not assess the risk embedded in these esoteric securities. My ultimate goal is educating my readers and removing the black-box label from these securities once for all. To get to our Omega destination, we have to start at the Alpha point. Continue reading ‘Weapons of Mass Destruction (I)’
Since October 2008, more than 360 US banks have received at least $360 billion of Troubled Asset Relief program (TARP) funds from the Treasury. Of this, more than half went to the top fifteen banks in the country. This includes $145 billion of capital injections awarded to Citigroup, Bank of America, JP Morgan and Wells Fargo, the top four US commercial banks and another $10 billion each for Goldman Sachs and Morgan Stanley. There was also $40 billion in capital injections and $113 billion in credit in AIG, the insurance company that pioneered a whole new “too crook to fail” rule. In addition, by now US banks have also received at least $1.8 trillion of federal loan guarantees and $870 billion in federal loans. Believe it or not, the same day PNC Financial Group received $7.6 billion in TARP money, they acquired the rival bank National City for $5.6 billion. Continue reading ‘Greed – The Name Of The Game’
On December 29, 1989, the Nikkei-225 hit an intra-day all-time high of 38,957 yen. The Nikkei-225 (N225) is a stock market index that contains 225 of Japan’s largest publicly traded companies, including the likes of Toyota, Honda, Mitsubishi, Sony, Panasonic and Toshiba. From 1985 to 1989, the N225 grew exponentially, trading from around 10,000 to an unbelievable 38,916 in just a few years. The 1990s – referred to as the “Lost Decade”, were characterized by massive losses across both the real estate and stock markets, while the economic growth was nowhere to be found. Japan took on an enormous amount of debt in an attempt to stimulate the economy – however, these efforts were largely in vain, as the economy endured a long, L-shaped depression. According to World Bank’s statistics, Japan had a GDP of $3.57 trillion in 1990 and $4.49 trillion in 2008. On March 10, 2009, the Nikkei-225 was trading at 7,055 yen. While the GDP has increased by 26%, N225 lost around 82% of its 1989 peak value. Could that be a possible scenario down the road for US and EU? Continue reading ‘Nothing New Under The Sun’
Since 2005, the National Bank of Romania (NBR) has switched to an inflation targeting regime. That target level has been established in terms of Consumer price Index (CPI) with an upper/lower band of +/- 1 percentage point. In a nutshell, the new monetary policy strategy encompasses few key elements: i) the public announcement of the target inflation; ii) full commitment to price stability, while other goals become second-order priorities and iii) an increased transparency of the central bank’s actions. One of the main drawbacks of this monetary regime is emerging once the inflation rate has been contained at low levels. At that point, the probability of undershooting or overshooting the inflation targets is high and the results could be very costly at both ends of the spectrum. Continue reading ‘In NBR We Trust’
The Election Conundrum
The presidential election campaign started last Friday in Romania. According to the polls, there are four major contenders: incumbent President Traian Basescu – a Liberal-Democrat (PDL), Mircea Geoana – a Social Democrat (PSD), Crin Antonescu – a Liberal (PNL) and Sorin Oprescu – an Independent. Without any political affiliation, I will impartially scrutinize the presidential candidates’ economic platforms. Among the many topics included in the abovementioned presidential aspirants’ programs, I will put the spotlight on two critical economic issues: near-term economic stimulus and fiscal policy. Continue reading ‘The Election Conundrum’