Market myths
The Sage of Omaha, Warren Buffett, was correct in describing CDO (collateralised debt obligation) pricing as "mythical". In recent years there has been an massive increase in debt financing, taking advantage of low interest rates and a myriad of new structures has emerged, embraced by both private equity houses and investment banks and lapped up by hedge funds desperate for higher yields to boost performance. CDOs are the black sheep of the moment. These gather together different types of debt eg leveraged loans and bonds and sell them off in packages. However, these packages are very difficult to value because of the variety of components and the banks issuing them take a yardstick of the credit rating agencies' valuations of each part and calculate the "fair value" accordingly. The slower US housing market is now highlighting the very poor quality of some of these loans and what was seen as fair value a few months ago is now on offer from a couple of distressed hedge funds for a mere 11% of its original price with still no buyers in sight. This is only one "mythical" product. No mention yet of CEDOs (collateralised debt and equity obligations). No wonder bond markets have been sweating and equity markets are still nervous.
posted by Whispering Walls at 8:25 am
5 Comments:
I have never understood any of these " derivatives"( means it isn't ACTUALLY anything)
"collateralised" ( means it has no REAL asset backing)
" instruments" ( see meaning of two above).
Except, of course, the banks and investment banks have earned billions out of doing whatever is needed to create them, which, I suppose,is their raison d'etre.
Anyone who buys these things is seriously financially challenged mentally. It's one thing to borrow against an asset you can value, it's quite another to buy something, the value of which you actually have no way of knowing. However, in the cycle of things, the big banks haven't lost mega for quite some time ( Sovereign debt? Countries can't go bust. Junk bonds? Good as gold. S&L? Government guaranteed - all NOT in each case) so dropping a couple of hundred billion here is about par for the course. And for which we will all pay.
Fascinating !
So you know; most financial jargon is a mystery to me. But the words Bonds and Shares do mean something. They mean not earning the profits promised on one; and losing a lot of money on the other.
A couple of interesting 'siren songs' recently. The yield on 'buy to let' has fallen to the point where it has crossed the increasing yield on bonds.
And the number of flats being built has exceeded the number of houses being built to such an extent that in some areas there is actually an OVER supply of flats, since the demand in those areas is for houses..
Trouble ahead, methinks..
Yes looks worrying
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