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Conduits or structured investment vehicles (SIVs),
Credit-default swaps, Monolines and Disintermediation

Contingent Convertibles - CoCos

The problem with cocos more broadly is that nobody knows if they work.
Lloyds Bank of the UK issued the first coco as part of a big capital restructuring in 2009.
Over $153bn of the securities have been issued since
FT 21 March 2017

But their utility in reducing stress on a troubled bank in a crisis has yet to be tested properly.

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If there was one big realisation to come out of the financial crisis
— alongside the fact that banks were riskier than believed —
it was this: policymakers did not know how to wind up a bank without causing chaos.
FT 6 March 2017

Last year, investors who braved the riskiest class of bank debt were rewarded.
So-called coco bonds, which convert to equity or are written down when banks run into trouble, returned almost 7 per cent over 2015.
Already this year, the music has stopped.
FT 11 Febr 2016

Deutsche Bank Co-Co bond yields hit 12%
Rolf Englund blog 8 Febr 2016

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Why coco bonds are worrying investors
FT February 9, 2016

At a simple level a company has owners, and it borrows money from lenders, who expect to get their money back. If the business runs into trouble, the owners lose their stake and the debt becomes equity — lenders turn into owners — in what can be a drawn-out process of restructuring.

As a bank in trouble would not have time for such negotiation, coco bonds are designed to anticipate that process and transform auto, matically from debt to equity when certain conditions are met.

Their full name is Tier 1 contingent convertible bonds, and they have their roots in the financial crisis, when governments were forced to bail out banks.

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Welcome Back, Leveraged Super Senior Synthetic CDOs
You can tell that leveraged super senior synthetic collateralized debt obligation tranches are fun
because they are called leveraged super senior synthetic collateralized debt obligation tranches,
and anything with that many words in its name is up to something.
Matt Levine Nov 27, 2013

And in fact LSS CDOs were popular prior to the financial crisis, got various people in various kinds of trouble, and more or less vanished.

But now Euromoney is reporting that Citigroup is trying to market them again, with a slight modification that might get people into less or at least different kinds of trouble, though it is far from clear that anyone will be interested.

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Former Fed Chief Greenspan Sees No Bubble in Dow 16,000
Bloomberg, Nov 28, 2013

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"I wrote the software that turned mortgages into bonds"
Michael Osinski’s reflection on his Wall Street days when he created the software program
that turned mortgages into mortgage backed securities, enabling them to be traded around the world.
via Tim Iacono, May 18, 2011

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“Volcker Rule”
As Paul Tucker, deputy governor of the Bank of England, noted in an important recent speech,
“shadow banking” also had to be rescued.
Any institution that promises to redeem its liabilities on demand, while investing in longer-term or riskier assets, has bank-like characteristics and is vulnerable to a run.
Martin Wolf January 26 2010

Derivative Thinking
Gillian Tett, FT May 31 2008

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VIEs, or variable interest entities, have been around for some time.
They were a favorite device of Enron's.
SIVs are a subset of VIEs.

The bailout was nothing more than an agreement by the ratings agencies to pretend that the monolines were still worthy of AAA ratings.
How could MBIA - which recently had to pay 14% to borrow money ever possibly be considered AAA?
Fleck CNBC 3/3 2008

The bulls have enjoyed a nice rally. It was precipitated by the anticipation that the monoline insurers would be bailed out. Then anticipation turned into reality: The bailout was nothing more than an agreement by the ratings agencies to pretend that the monolines were still worthy of AAA ratings.

How could MBIA - which recently had to pay 14% to borrow money, and whose debt still yields over 13.5% - ever possibly be considered AAA?

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In May 2006, Alan Greenspan, the former Chairman of the Fed, noted:
"The CDS is probably the most important instrument in finance. . What CDS (credit default swaps) did is lay-off all the risk of highly leveraged institutions - and that's what banks are, highly leveraged - on stable American and international institutions."
Satyajit Das, March 04, 2008

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives

The CDS is economically similar to credit insurance. The buyer of protection (typically a bank) transfers the risk of default of a borrower (the reference entity) to a protection seller who for a fee indemnifies the protection buyer against credit losses.

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The monoline insurers, as the news goes, will be split up into bad company/good company entities, and this "magic wand" will save the day.
It will not
Fleckenstein, February 25 2008

What people overlook is that there also has to be an AAA rated Bad Co.

Bad Co. is the gigantic pink elephant in the room that everyone either ignores or fails to recognize.

It will take a printing press to capitalize Bad Co. to afford it a AAA rating.

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Ambac and MBIA tumbled After stripped of their triple-A ratings by another rating agency.

Moody’s cut MBIA’s insurer financial strength rating to A2 from Aaa, and cut Ambac to A3 from Aaa
CNN/Fortune June 20, 2008

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S&P downgrades Ambac, MBIA
S&P cut its insurer financial strength ratings on the companies’ main insurance units to double-A from triple-A.
The news came a day after Moody’s said a downgrade of Ambac and MBIA was “likely.”
Shares fell more than 6% after dropping more than 15% Wednesday.
CNN/Fortune June 5, 2008

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Citi, Merrill Lynch and UBS could face $10 billion in further writedowns tied to last week’s downgrade of bond insurers Ambac and MBIA,
the Financial Times reports.
Fortune June 11 2008

Ambac and MBIA swooned after Moody’s said it might downgrade the struggling bond insurers
Fortune June 4, 2008

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A group of banks is preparing to inject $2bn to $3bn into the troubled bond insurer Ambac,
which is racing against time to come up with fresh capital to avoid a sharp cut in its triple-A credit
rating that could trigger wider financial market turmoil.
Financial Times February 22 2008

Municipal borrowers are being hit by the crisis of confidence in the insurers, whose guarantees back $2,400bn of bonds. With interest rates for some municipals rising sharply, regulators have called for a solution that will ensure the municipal business retains its triple-A rating.

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Like a 1930s bank run
There are now plans to split up the companies
that insure bonds and derivatives based on mortgages and buyout loans.

breakup plans also would lead to tens of billions more in write-downs
Jim Jubak 22/2 2008

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Credit markets were thrown into fresh turmoil on Wednesday
as the cost of protecting the debt of US and European companies against
default surged to all-time highs.

Financial Times February 21 2008

The sharp jump, which rivalled the sell-off at the height of last summer’s credit market turmoil, came as traders rushed to unwind highly leveraged positions in complex structured products.

The way CDS (credit default swaps)spreads influence real borrowing costs has been illustrated this week by the situation at Credit Suisse.

While most analysts and traders believe unwinding is taking place, few are sure of how much or by whom.

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Monoline insurers are so named because they originally covered just one line of business – municipal bonds.
Today, however, because they do not insure lives, or automobiles or medical expenses, the name has stuck despite their additional reach into insuring financial assets of all varieties. In a real sense, the monolines have taken on their shoulders a supersized portion of the guaranteed solvency of modern asset structures. In combination with overly generous triple-A ratings on not only these assets but the monoline companies themselves, they have fostered a bubble of immeasurable but clearly significant proportions.
William (Bill) Gross, FT February 7 2008

Buffett's deal may be good for him,
but it demands that the ailing bond insurers
essentially give up the best part of their business.

CNN 13/2 2008

Warren Buffett to the rescue?
Stocks jump after the Oracle of Omaha
offered help to troubled bond insurers by reinsuring $800 billion worth of municipal bonds
CNBC 12/2 2008

The genius investor behind Berkshire Hathaway told CNBC this morning that his company last week offered to help three troubled bond insurers -- Ambac Financial, MBIA and Financial Guaranty Insurance -- by reinsuring $800 billion worth of municipal bonds the companies cover in exchange for a payment of 1.5 times the premium they receive.

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Eliot Spitzer, New York governor, gave bond insurers three to five business days to find fresh capital, or face a potential break-up by state regulators
Moody’s highlighted concerns about the bond insurers by withdrawing its triple-A credit rating for Financial Guaranty Insurance Company.
Financial Times, February 14 2008

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Eliot Spitzer

Ben Bernanke:
"Given the adverse effects that problems of financial guarantors can have on financial markets and the economy, we are closely monitoring developments," Federal Reserve Chairman Ben Bernanke said in a letter.
The 4 February letter was to Paul Kanjorksi, the chairman of the House of Representatives subcommittee that overseas capital markets.
He will hold a hearing on the need for reform to the sector on 14 February.
BBC 7/2 2008

What is good for Ambac, the bond insurer, is good for the country.
Well, perhaps in the short run if it prevents a run on the shadow banking system – our over-leveraged system of financial conduits that have provided the spending power to keep the US economy going in recent years. But not in the long run.
William (Bill) Gross, FT February 7 2008

The writer is founder and managing director of Pimco

How could Ambac, through the magic of its triple-A rating, with equity capital of less than $5bn, insure the debt of the state of California, the world’s sixth-largest economy?

How could an investor in California’s municipal bonds be comforted by a company that during a potential liquidity crisis might find the capital markets closed to it, versus the nation’s largest state with its obvious ongoing taxing authority?

Apply the same logic to the gargantuan size of the asset-backed market it has insured in recent years – subprimes and CDOs in the trillions of dollars – and you must come to the same logical conclusion: this is absurd.

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More by Bill Gross

Kan detta vara lösningen på Subprime-krisen?
Moody’s is considering a possible move to numbers-based ratings for CDOs and other structured finance products instead of the traditional letters.
CNN/Fortune 7/2 2008

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1. Moodys (and S&P and Fitch's) labelled a bunch of horrific junk -- RMBS, CDOs, CDS, and other stuff -- high quality AAA.
2. The banks and brokers all shoveled this crap to their clients around the world, many of whom whom then promptly blew up.
3. Once the music stopped, these banks and brokers got caught holding loads of this AAA rated shit paper, leading to $130 billion (and counting) in write downs.
4. The banks then saw their credit ratings get downgraded by the same companies that rated the original crappy paper AAA.
The Big Picture February 5th 2008

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There is a serious effort to figure out how to capitalize the monoline insurance companies.
I think it is not unlikely that public money will eventually be brought into play, much like the Savings and Loan Crisis on the late 80's.
In short, and no matter what your view is, the Fed and the Treasury are going to do what they have to do.
John Mauldin, February 2, 2008

Meredith Whitney, whose research note on Citigroup in late October triggered a $369bn sell-off in global equities
warns Citigroup will be one of the banks to be hardest hit by a collapse in the monoline sector, along with Merrill Lynch and UBS.
Daily Telegraph, 30/1 2008

Ms Whitney, who now works for Oppenheimer following the boutique investment house's recent purchase of CIBC World Markets, warns: "Among the myriad of negatives that surround financial stocks today, we see no issue more critical than the fate of the monoline insurers."

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p>Meredith Whitney says unemployment will rise again
Pointing out that banks are still cutting credit lines (to the tune of $2.7 trillion by 2011
CNN Money April 8, 2010

Wall Street bond rating agencies could downgrade two big bond insurers, Ambac Financial Group and MBIA, as early as today
CNBC 30/1 2008

Losing a Triple A rating could be devastating for the bond insurers, preventing them from drumming up new clients -- and possibly forcing them out of business.

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Collateralised-debt obligations (CDOs), structured investment vehicles (SIVs) and
the “monoline” bond insurers. Their plummeting fortunes helped to spark the stockmarket sell-off.
The loss of the AAA badge would cost investors and borrowers up to $200 billion.
The Economist print 24/1 2008

Though themselves no giants, monolines have guaranteed a whopping $2.4 trillion of outstanding debt. The two largest, MBIA and Ambac, cut their teeth “wrapping” municipal bonds, in effect, renting their AAA rating to the securities for a fee.

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Monoline meltdown?
Monolines, companies that insure against the risk of a bond or other security defaulting
Interactive feature: how they work - and the risks they pose
Financial Times, January 25, 2008’s interactive graphic explains how monolines work and what the threat to their triple-A ratings from the credit agencies could mean for investors, banks, municipal bond issuers and the monolines themselves.


I believe the monoline insurance companies like Ambac and MBIA are in worse shape than most realize,
the counter-party risk in the $45 trillion Credit Default Swap market is much worse than we realize, and
the exposure by various banks to their problems is much larger than currently understood.
The Fed understands this
John Mauldin, Janauray 25, 2008

The Barclays report said that Financial Guaranty Insurance Company is likely to be downgraded.
They have insured just $315 billion in bonds.

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Banks 'may need an extra $143bn'
if bond insurers lose their top credit ratings.
BBC January 25, 2008

The world's largest banks have already admitted losing more than $100bn from mortgage bonds gone bad.

Analysts at Barclays Capital said banks own $820bn of securities guaranteed by bond insurers.

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At the AEA conference, it fell to Alan Taylor of the University of California to make the case that things might not turn out quite as badly
If all of America's subprime borrowers defaulted and
only half of the $1.3 trillion lent to them was recovered,
the losses of $650 billion would amount to around 5% of GDP
The Economist


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So Far, Hype Exceeds Progress on Bond Insurer Rescue Front
Naked Capitalism 25/1 2008

No one would care about the monolines' fate if the value of most of instruments they insured did not depend on the ratings. And the credit default swaps market and the secondary market price of MBIA's bond issue say that the debts are at high risk of bankruptcy, therefore the guarantees are also at high risk of being worthless. So this most assuredly is about propping up the underlying value of these securities in order to keep prices from collapsing. To pretend otherwise is wrongheaded.

Full text with links to Gillian Tett

The trigger for the Fed action was the move on Friday by Fitch to strip the US monoline insurer AMBAC of its `AAA’ rating,
with the mounting risk that the rating agencies would soon downgrade its bigger peer, MBIA.
Why does it matter?
Because they have guaranteed a large part of that $2.4 trillion bond market.
Ambrose Evans-Pritchard, Daily Telegraph January 23 2008

If they lose their AAA ratings, all the bonds that they have insured will lose their ratings pari passu. This would force a large number of pension funds and institutions under strict investment rules to sell their bonds, setting off a cascade of sales with no obvious buyers in sight.

Those who accuse the Fed of acting out of panic in slashing rates 75 basis points on Wednesday do not grasp the seriousness of the situation.

The move was imperative to prevent a grave financial crisis spiralling into disaster.

The best we can hope to do is right the ship slowly, and turn a blind eye to moral hazard for now.

It is not pretty. It means a lot of pin-stripe villains and leverage louts in the City will escape their condign punishment.

But as Fed governor Frederic Mishkin put it recently, we cannot chastise whole societies to keep the moralists content.

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Moral Hazard

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Leading US banks are under pressure from New York state’s insurance regulator to provide as much as $15bn to support struggling bond insurers.
FT, January 23 2008

Eric Dinallo, New York insurance superintendent, held a two-hour meeting with bank executives on Wednesday and urged them to provide as much as $5bn in initial capital to support the insurers – the largest of which are MBIA and Ambac – and ultimately to commit up to $15bn.

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The cost of protecting corporate debt against default surged in Europe on Monday as fears intensified over
the fate of global bond insurers and the $2,400bn of debt they guarantee. Ambac, one of the biggest bond insurers, or so-called monolines, was downgraded
FT January 21 2008

The credit market was in its blackest mood since the height of the summer’s subprime panic after Ambac, one of the biggest bond insurers, or so-called monolines, was downgraded by Fitch Ratings on Friday.

“The biggest near-term risk to all credit – and with it all asset classes around the world – seems to be from the potential unravelling of the monoline sector,” said Jim Reid at Deutsche Bank. “The downside risk could be extreme.”

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See also my Doom-page

The real problem is the "monoline insurers" like ACA, Ambac, and MBIA.
Here's a quick primer on how they work.
John Mauldin January 18 2008

Today, Fitch downgraded Ambac Financial Group two notches from AAA to AA. That doesn't seem like a lot, until you realize that 74% of their revenue comes from that AAA rating that covers $556 billion in municipal and structured finance debt.

Oh, and that means that 137,990 municipalities that were insured by Ambac will see their credit ratings drop and their costs rise.

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Bearing Asset Management's Kevin Duffy and Bill Laggner, who warned about "value traps" back when they were classic shorts. Note that MBIA, which closed at $20 today, was $60 when this was published.
"This Time It’s Value Traps", published 6/13/2007
dollarcollapsedotcom 12/21/2007

It closed at 8.55 January 18, 2008 (CNN):

MBIA, the municipal bond insurer, looks cheap at 11x earnings and 1.4 x book value, but when you look at the balance sheet, which very few people look at today, you see that it’s levered 94 to 1. The statutory capital that they keep on hand is 3.5 basis points of their bond guarantees. Compare that to Citigroup, which has almost 9.5 basis points of reserves. Ten years ago just 14% of MBIA’s business came from structured finance guarantees on asset backed securities. Today that number is 32%. Of course the structured finance world is all based on numerous assumptions, including stable interest rates and low default rates. We would say that those are very generous assumptions.

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Three-month Libor, overnight index swaps and interbank liquidity: they are all so 2007.
Yet all is not well - structured investment vehicles and bond insurers
FT Editorial Januoary 19 2008

As 2008 begins, banks are again lending to each other at almost normal rates, and pressure on the money markets is much reduced. Yet all is not well. The ground may have stopped shaking – for now – but the aftershocks of the earthquake have revealed that thousands of financial structures were fragile and poorly-built. Important among them are so-called structured investment vehicles and bond insurers such as Ambac and MBIA.

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Ambac, the world’s second-biggest bond insurer, on Friday lost its crucial triple-A credit rating,
undermining its ability to add new business and dealing a blow to the billions of dollars of securities it has guaranteed.
Rating agency Fitch cut the bond insurer’s credit rating to double-A, citing a $1bn capital shortfall caused by losses on mortgage-related bonds Ambac has guaranteed. Fitch did not rule out further downgrades, citing “significant uncertainty with respect to the company’s franchise, business model and strategic direction”.
FT January 18 2008

Rating agencies

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The next banking crisis on the way
Write-downs for high-risk, high-yield corporate debt, known as 'junk,' could dwarf losses in the mortgage mess.
Jim Jubak January 18 2008

As the economy slows, the default rate is rising for corporate debt, especially for the high-risk, high-yield corporate debt called "junk" by many of us. That's opening a Pandora's box of potential write-downs that could dwarf the losses in the mortgage market.

Everyone wanted something as safe as U.S. Treasurys that paid more than Treasurys. Everyone wants to believe in magic.

Wall Street obliged by packaging and then slicing debt backed by mortgages, so that even the riskiest mortgages could earn a safe AA or AAA rating from Standard & Poor's, Moody's (MCO, news, msgs) or Fitch. It performed the same magic with credit card debt, with auto loans and finally with corporate debt -- even the riskiest kind, called high-yield because it pays out a higher dividend to compensate for its higher risk. It's known as junk because in hard economic times it can become worthless.

(See my Aug. 10 column, "How Wall Street got into this mess."):
How did some of the smartest minds on Wall Street and at banks, insurance companies, pension funds and hedge funds around the world get into the current financial-market mess?
Read it here

The real concern: Credit-default swaps

Actually, I'm worried not so much about the junk-bond market itself as the huge market for a derivative called a credit-default swap, or CDS, built on top of that junk-bond market. Credit-default swaps are a kind of insurance against default, arranged between two parties. One party, the seller, agrees to pay the face value of the policy in case of a default by a specific company. The buyer pays a premium, a fee, to the seller for that protection.

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Se also: Doom
Although nearly 70% of the Americans do fear a recession, the possibility of a major crisis is not considered.
Sharon-Brigitte Kayser, January 16, 2008
RE: Highly recommended

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If you thought this credit is going to be over soon, as banks are gradually writing off their subprime debt, you could not be more wrong.

There are many asset classes in the credit market that have still to hit trouble - securities credit market and, of course, the market for credit default swaps, possibly the biggest Ponzi game in all history.
Wolfgang Münchau 10.01.2008

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A credit default swap (CDS)
is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity.
Under a credit default swap agreement, a protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a credit event (such as a default or failure to pay) happening in the reference entity.
When a credit event is triggered, the protection seller either takes delivery of the defaulted bond for the par value (physical settlement) or pays the protection buyer the difference between the par value and recovery value of the bond (cash settlement).

Pyramids Crumbling
Bill Gross thinks the cost to the world economic system
could be in the $250 billion dollar range.

Add that to the $250 billion in losses due to the subprime markets,
and you are starting to talk real money.
The Shadow Banking System is at the center of the problem.
Bill Gross January 2008

Bill Gross was just named Fixed Income Manager of the Year by Morningstar. He sits on the largest pile of bonds in the world at PIMCO and is their Managing Director.

In addition to the pyramid shape of its securitized assets and the endless chain of its letters, finance and especially modern finance is centered around banking and now, unfortunately, around shadow banking.
Both, The Economist magazine points out in its September 22nd issue, are built on a fundamental (and ever present) mismatch: they borrow short and lend longer and riskier.

But today's banking system as pointed out in recent Investment Outlooks, has morphed into something entirely different and inherently more risky.

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Ponzi - "Charles Ponzi, one of the most notorious swindlers in US history, who lived in the early 20th century."

Subprime was part of the general craziness. If it had not provided the trigger, there were plenty of other candidates.
First on the list come complex credit derivatives, of which the collaterised debt obligation, or CDO
Another innovation that seems justly doomed is the structured investment vehicle, or SIV.
Tony Jackson, Financial Times 23/12 2007

All this in turn forms part of a much larger issue, that of securitisation. With hindsight, much of the purpose of those innovations was to let the banks accelerate their lending in the upswing of the cycle, without any tiresome regulatory capital constraints.

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Until the summer, structured investment vehicles (SIVs) and collateralised debt obligations (CDOs) attracted little attention outside specialist financial circles.
Though often affiliated to major banks, they were not always fully recognised on balance sheets.
These institutions, moreover, have never been part of the “official” banking system:
they are unable, for example, to participate in Monday’s Fed auction.
FT 16/12 2007

The Economist:
In theory the damage is safely contained off banks' balance sheets. But then, in theory American house prices never fall.
The banks have belatedly discovered that they cannot just abandon their failing progeny of SIVs, conduits and the rest—at least if they want a reputation worth having. Worse, the banks now facing up to these contingent liabilities have not had to set aside capital in case of trouble—that gap in the regulations was precisely what made it so attractive to get their investments off the balance sheets in the first place.
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The Fed has lost control of the money supply, because the banks it regulates no longer are the primary movers of debt creation.
From 1990 until the spring of this year, we saw the development of what Paul McCulley calls the shadow banking system.
Non-depository institutions and funds created massive amounts of new money based on leverage.

The obsession with M-2 or M-3 makes for good newsletter copy, but what do such broad aggregates mean in a world where new forms of money (SWAPs, derivatives, mortgages bonds, etc) appear every day?
The implication is that the old linear relationships between money supply (as measured by some arbitrary and outdated statistic like M-2) and inflation may no longer be valid.

John Mauldin 2007-12-14

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This isn't just a mortgage or housing crisis.
At the center of this still-unfolding disaster is the collateralized debt obligation, or CDO.
Steven Pearlstein, Washington Post, December 10, 2007

Citigroup has slashed the size of its struggling off-balance-sheet investment funds by more than $15bn in two months
SIVs sell cheap, short-term debt to invest in higher-yielding, longer term assets
FT 10/12 2007

The moves appear likely to reduce the demand for the so-called “super-SIV”, conceived by Citigroup, Bank of America and JPMorgan with the backing of the US Treasury as a buyer of last resort for the industry that would prevent fire sales.

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Mean times - Why credit spreads revert to the middle
SIVs and Disintermediation Dec 9th 2007

Perhaps the biggest change in the debt markets over the last 20 years is described by the ugly world “disintermediation”:
banks have been replaced as the providers of finance. Instead, borrowers are seeking money directly from the capital markets
(albeit with banks usually acting as arrangers).

It was widely assumed that this process had improved the stability of the financial system, because risk had been dispersed.

In fact, as the last six months have shown, the banking sector has continued to absorb risk, because banks often provided the finance for debt buyers, whether hedge funds or more arcane outfits such as conduits or structured investment vehicles (SIVs).


Smithers argues that fund managers have probably assumed the returns from such a strategy are linear; in other words, if the spread between the yield on an asset and the cost of funding is 0.5% a year, then the annual return will be 10% if the manager borrows 20 times his initial capital.
However, it does not work like that.

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President George W Bush has outlined plans to freeze rates on sub-prime mortgages
for five years to help people hit by the US housing market crisis.

Mr Bush said his plans did not signal a "bail-out" for mortgage lenders, property speculators or those "who made reckless decisions to buy a home they knew they couldn't afford".
BBC 6/12 2007

Bush plan om Subprimes
Rolf Englund blog 7/12 2007

The US government’s attempt to stem the growing housing crisis involves arbitrary judgments, rewards for reckless behaviour and variations of contracts.
But it is justified by the extreme circumstances.
FT Editorial, December 7 2007

Saving Face (SIV Rescue Edition) Events have overtaken the SIV rescue plan
brokered by the Treasury Department and sponsored by Citigroup, Bank of America, and JP Morgan.
We said early on that this plan looked to be for the benefit of Citi, and that is turning out to be the case.
Nakedcapitalism 6/12 2007

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Support for SIV $75bn superfund grows
FT November 18 2007 with good links

The plan for a $75bn superfund to buy assets from cash-strapped structured investment vehicles appears to be gaining support among sceptical institutions, amid concern that SIVs might start dumping bank debt.

Almost half the assets in SIVs are financial institutions’ debt and if the SIVs were forced to make big sales to raise cash, it would tend to drive down prices. This would lift funding costs for banks, which could respond by tightening the supply of credit.

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The shadow banking system of hedge funds and CDOs, CLOs, PIPES, etc.
I'm sure that Bernanke, Paulson, and their cohorts understand this, but...
Bill Gross 1/10 2007

How do the big banks differ from Northern Rock?
Richard Lim, Singapore, Letters FT 2007-10-23

Sir, I would like to thank the FT for your reports on the issues relating to the credit crunch and its potential impact on the global economy. In particular I was shocked to read about special investment vehicles (SIVs) and “SIV-lites”, off-balance-sheet vehicles used by big banks essentially to circumvent banking regulations on maintaining reserves against lendings, and sound liquidity management, such as not covering long-term commitments with short-term fundings, which everyone with a little bit of knowledge would know is risky to the survival of a bank. What is the difference between the big banks and Northern Rock?

Now a more shocking development is the talk about creating a seeming master SIV by the big banks endorsed by the US Treasury. How could the banks be allowed to perpetuate such self-destructive activities, which the SIVs and SIV-lites have proven to be?

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Big banks and the feds are working to throw an $80 billion lifeline to companies holding bad loans.
But no one seems interested in rescuing families who need just a little help.
Jubak 2007-10-23

Adjustable mortgage resets are projected to hit $55 billion in October, up from $22 billion in January, and then continue to climb until the market hits a peak of $110 billion in adjustable mortgage resets in March 2008.

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A super-duper bad-loan bailout scam
Call it Super SIV Mae. Wall Street's pals in the Treasury Department want to ride to the rescue
with a new entity of entitlement, the 'structured investment vehicle.'
Bill Fleckenstein 2007-10-22

This week I have another entity of entitlement to add to the list: "SIV Mae" (SIV = structured investment vehicle).
That seems a fitting description of the super-duper bailout put together by the Goldman Sachs subsidiary known as the U.S. Treasury Department.
(Goldman itself doesn't appear to be participating in the bailout, which is interesting.)

When I first heard about this, I was outraged, disgusted and slightly depressed. I thought, here we go, another bailout.
Barney Frank and friends are trying to bail out the homeowners. Wall Street, the Treasury Department and the Bank of England appear determined to do whatever it takes so that we have absolutely no price discovery on any mortgage-related assets that may have gone bad -- thereby giving a pass to the folks who've made obscene amounts of money conceiving and marketing them.
Whether you call this crony capitalism or socialism, the worst of it is what we have become.

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Even 'safe' funds play with fire
Consumers view money market funds as conservative, but...

Fortune 2007-10-19

It's but the latest blow to SIVs - large, lightly-regulated debt funds that have run into a liquidity squeeze as investors have balked at buying the securities that SIVs issue to fund themselves.
Experts estimate that some $400 billion is tied up in SIVs.
Banks like Citigroup have set up SIVs themselves and have been allowed to keep them off their balance sheets
- an omission which causes problems for investors and regulators because they can't easily gauge the banks' true exposure to SIVs.

Banks and other financial firms are also exposed to the SIVs because they have bought securities issued by the SIVs. Along with banks like Bank of America and JP Morgan Chase, the U.S. Treasury is trying to organize support for the SIVs, because they fear that, without such help, the SIVs may have to sell off their assets to raise funds, which could drive markets lower. Friday's steep dive in stock prices reflects, in part, fears that credit markets will deteriorate still further.

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The Wall Street Journal says it is London.
The Yves Smith of Naked Capitalism cries foul: the real SIV-City is Citi.
Brad Setser Oct 18, 2007

Yves Smith has a point. The Journal’s reporting makes it clear that
Citi – an American bank – was the center of the SIV-world,
even if most of Citi’s SIVs were managed out of London and registered in the Caymans.

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