A Few Interesting News of the Day

Thursday, August 30, 2007

Markets were rangebound on Thursday ahead of Fed chairman Ben Bernanke's speech on housing and monetary policy he will deliver on Friday in Jackson hole.
Today's release of strong GDP figures for Q2 will not ease the task of the Fed chairman who is expected to hint at lower interest rates in order to shore up markets dependent on daily cash infusions by central banks. The BEA released a preliminary growth figure of 4.0% for Q2 2007 that stems from stronger exports and nonresidential construction and higher government spending, predominantly in the form of defense expenditures and the running costs of the Iraq war.
The turmoil in mortgage backed securities currently benefits Treasuries tremendously.

10-Year Treasury Yield

GRAPH: 10-year Treasuries have eroded almost all losses, benefitting from the flight from mortgage backed securities. Chart courtesy of Yahoo.
A wave of downgradings of mortgage or asset backed securities will make many a pension fund manager sweat these days. According to a Bloomberg story some bonds were slashed from AAA to CCC overnight. Some snippets:
Last week, Standard & Poor's butchered the ratings on $3.2 billion of debt from structured investment vehicles spawned by Solent Capital Partners LLP in London and Avendis Group in Geneva. About $254 million was slashed from the top AAA grade to CCC+ and CCC -- slides of 16 and 17 levels, triggered by their investments in mortgage-backed bonds.
Think about that for a second. You left the office Tuesday owning a AAA rated security. By the time you got back to your desk on Wednesday morning, it was eight steps below investment grade in a category S&P defines as "currently vulnerable to nonpayment.'' Try explaining that to your pension-fund trustees.
DBS Group Holdings Ltd., Singapore's biggest bank, said on Aug. 7 it had S$1.4 billion ($921 million) at stake in collateralized-debt obligations. This week, it boosted that total to S$2.4 billion. It seems the bank had overlooked its commitment to a unit called Red Orchid Secured Assets. As the man said, a billion here and a billion there and pretty soon you're talking about real money.
A rare moment of comedy arises from what Moody's Investors Service had to say about the oversight. "I don't think DBS will be the only one who has missed something the first time," said Deborah Schuler, a senior Moody's analyst in Singapore.
Could this be the same Moody's that called structured investment vehicles "an oasis of calm in the subprime maelstrom" in a July 23 report? "The vehicles are not structured to forcibly liquidate assets in times of crisis," Moody's said. Their ability to access several sources of finance "obviates the need to liquidate large buckets of assets at potentially the worst period in the life of the vehicle."
Moody's recently added some new phrases to its lexicon of code words. When the rating company refers to "updating its methodology" or "refining its risk assessments," what it really means is that its historical models say absolutely nothing about how the future might turn out.
Last week, for example, Moody's summarized "the most recent refinements" to how it treats bonds backed by so-called Alternative-A mortgages. "In aggregate, the change in our loss estimates is projected to range from an increase of approximately 10 percent for strong Alt-A pools to an increase of more than 100 percent for weak Alt-A pools," Moody's said.
So a mortgage-backed security with a rating based on, say, a 1.5 percent loss rate might now suffer 3 percent losses in its collateral, Moody's said. How's that for missing something the first time?
Again rating agencies were sitting on their hands it appears, as in all debt crises in the past 15 years. I am wondering if anybody has an idea of the size of all outstanding risk. I am willing to bet "no."
Looking for a cover for the financial hurricane descending on Wall Street I immediately look whether my gold shield will protect me.
It looks good. India, the biggest buyer of physical gold, just reported a 72% increase in demand in the first half of 2007. According to a story found at the BullionVault India imported a record 372 tons in that period. This equals half of global gold production.
Thanks to the efforts of Western central banks Indian savers enjoy artificially depressed prices. A funny way of development help.


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