Kid Dynamite

Back to FHA Insured Loans: Start by Charging Up-Front Premiums

@ Smalltownbanker:
let's say i buy a house worth $100k. I put down $3500, and now owe $96,500. But i have to repay the mortgage insurance too - let's just call that $1700 - and i'll roll that into my mortgage. Ignore the annual fees for FHA insurance (the roughly 50 bps per annum) that will also be rolled into the mortage.

Now, my mortgage is for $96,500 + $1700 = $98,200.

How much is the FHA guaranteeing? are they guaranteeing my $98,200? or just the $96,500?

Back to FHA Insured Loans: Start by Charging Up-Front Premiums

thanks for the details, Tammy. I'm surprised that the lenders actually pay that fee up front - i would have thought it would destroy their profits, but i guess when they are insured on the mortage, it's a freeroll for them.

regardless, there is still a perverted circular logic embedded in here: the FHA is still insuring the payback of its own insurance fees.

CDS Regulation: Just One Simple Rule

Thanks Tom. I would tend to favor a broader interpretation (than current established case law) of insurable interest when deciding who could buy CDS.

CDS Regulation: Just One Simple Rule

@Mike Dillon - that's a nice analogy, but it's the opposite of what we're talking about. we're not talking about companies plugging investors with crappy assets, we're talking about investors using panic destroy companies - which I am claiming is not how it works.


On Nov 10 12:03 AM Mike Dillon wrote:

> On Nov 09 08:52 PM Kid Dynamite wrote:
> "If my house really WAS on a landfill (MER, LEH, BSC) and my walls
> really WERE made of toxic waste (AIG, ABK), then buyers would realize
> that, and my home value would disintegrate. see?"
>
> The problem with THIS argument (unlike the OTHER argument here: www.blogger.com/commen...;postID=37150780999484...
> KD, is that the buyers wouldn't be any wiser as to the condition
> of your home as long as the environmental report came back good,
> the appraisal had been rigged, the assignments of mortgage fraudulently
> manufactured years after your note was actually lost by the note
> holder to preserve your chain of title, and the coat of paint was
> dry on your toxic waste walls during walk through.
>
> If/when they catch on a year or three later, it's too late for them
> - but YOU'RE free and clear because you were able to liquidate your
> stealth toxic asset - as long as the buyer doesn't have the financial
> means to come after you for damages.
>
> So why DO they call it ABX Index "Protection"? And why would mortgage
> servicers have any need for it?

CDS Regulation: Just One Simple Rule

@Lower89th: mehhh... I don't agree with your example at all. And it's a great example to prove my point. it doesn't matter how many people buy insurance on my house - the value of my house doesn't change. Now, you can try to make up false rumors about my house all you want, lower98th, but your rumors cannot and will never make my house worthless. At some point, Warren Buffett will come in and realize that you're full of it, and buy my house from me.

That's only because you WERE full of it, though. If my house really WAS on a landfill (MER, LEH, BSC) and my walls really WERE made of toxic waste (AIG, ABK), then buyers would realize that, and my home value would disintegrate. see?


On Nov 09 05:59 PM lower98th wrote:

> Naked short selling can push down the market value of a company's
> stock, which can impact the ability of the company to get credit,
> meet obligations, etc. I give you exihibit one - the Fed's desperation
> to pump up the stock value of the financials to a level where conducting
> business was possible. Of course hammering company value matters.
>
>
> So its your house, worth a million. You by insurance, it's prudent.
> I buy insurance and I broadcast that I think its on a landfill.
> Tom buys insurance and lets it be known he thinks there is toxic
> drywall. Now try to sell it, or get it refinanced.

CDS Regulation: Just One Simple Rule

also, Tom, I don't entirely disagree with your summary: "To summarize, CDS should be regulated as insurance, with a requirement of insurable interest for the buyer and adequate capital for the seller. " the key is that just because someone doesn't own debt in Company XYZ doesn't mean they don't have an insurable interest - which you acknowledged in your post. The problem is that defining an insurable interest for supply chain components, or even competitors, is a very SUBJECTIVE task - i'd love to hear your opinions on it. In other words, a firm like GS could make the argument that they have an insurable interes in almost ANY company - as a potential client for banking, advisory capital markets business, etc... that's just one example

CDS Regulation: Just One Simple Rule

Tom,

first of all, thanks for taking the time to write an intelligent comment.

every firm you mentioned has something in common - the business decisions they made before the bubble collapsed resulted in them having liabilities in excess of their assets. The depression we averted was not caused by people buying CDS - I'm sure you don't really believe it was - it was caused by investors paying more for assets than they were worth. It was also caused by AIG SELLING nearly limitless amounts of CDS. The post I wrote above was about buyers of CDS - not sellers. The sellers need to be, and will be HEAVILY regulated. I'm not disputing that.

CDS buyers did not sink any of these firms. Really. It's true. Naked short sellers also did not sink any of these firms. Bad assets sunk these firms.

If CDS did not exist, every firm you mentioned would have had the same balance sheet (except AIG, of course, which had sold a metric crap-ton of CDS) - that is exactly my point, and it's why i mentioned mark to market accounting. abandoning MTM hides the reality of bank balance sheets. Abolishing CDS would be like shooting the messenger - not solving the problem, which was that balance sheets were insolvent.

i think your argument is basically that people woke up to the fact that ponzi financing was going to result in a blowup at some point in that list of toxic firms, and that CDS was a tool used to hasten that effect - bravo then. If CDS makes markets more efficient, and makes it so that INSOLVENT firms cannot continue nonviable ponzi schemes, then so be it - that's a good thing - that's how markets are supposed to work.

You note that GE and GS did not collapse - because the market is efficient ENOUGH, which is my point

CDS Regulation: Just One Simple Rule

@boxed merlot - obviously, i completely agree that the taxpayer should not be backstopping any of this. any CDS regulation will have to make sure that sellers of CDS can't get themselves into trouble like AIG did, where they have written insurance they can't possibly cover, and hit the taxpayer for the bill.

CDS Regulation: Just One Simple Rule

@Captainccs - interesting analogy. I'll give you one quick example of why i hate the "insuring your neighbors home" analogy, and how it transfers to the corporate world:

it would be perfectly reasonable for me to want to protect myself against my neighbor's house burning down, right? if his house burns down and a pile of ashes is left, then it hurts the value of MY home. THUS, it's perfectly reasonable for me to want to buy fire insurance on my neighbor's home even though i don't want to burn it down - maybe the insurance company would give me the magic pill like i imagined, just to make sure i didn't burn it down.

The corporate world has a similar need for CDS that goes beyond "gambling." - the hedging of counterparty exposure - for suppliers, customers, accounts receiveable - there is no reason to prevent corporations from hedging exposure to such counterparty exposure using "naked" CDS (ie, they need not own debt in the underlying company)

it's not always about "gambling"

back to your example - there's nothing theoretically wrong with me, as an insurance company insuring every house twice, or even ten times. PROVIDED that i can make good on the insurance! your analogy is a bit odd, since we're talking about the BUYERS of insurance in this case... In the real world, the buyer cannot take out extra insurance on his house because of the exact perverse incentives i explained in this piece - but in the theoretical world where the homeowner takes the magic "can't burn down my house" pill, there's no reason why he couldn't over-insure


On Nov 09 09:29 AM captainccs wrote:

> >>>Warning: this post will require you to be able to intelligently
> ponder philosophical concepts and theories, and perhaps try to forget
> some assumptions you may already have. <<<
>
>
> Say there are 100 houses worth $1 million each and you expect 1%
> (one house) to burn down each year. To come out even, you need to
> collect $10,000 per house per year.
>
> Insure one house twice, collecting an extra $10,000. If that house
> burns down, you have a loss of $990,000. The solution is to never
> pay more than the real loss which in this case would be one house,
> $1 million and not $2 million.
>
> Suppose you insured every house twice thereby eliminating the loss.
> It would not be insurance, it would be gambling. Insurance is defined
> as the transfer of risk. If you don't have an insurable interest
> if you don't have risk to transfer.

CDS Regulation: Just One Simple Rule

also, "the exemption from regulation of CDS was a primary cause of the fiinancial crisis" is a partially true statement - but the regulation needs to be on the SELLERS of CDS - not the buyers. the problem, clearly, was that sellers of CDS (like AIG) issued far too much insurance for them to make good on. The problem was not investors buying CDS.

finally, Tom, there are plenty of reasons to buy "naked" CDS that have nothing to do with "gambling" - all of them are related to hedging counterparty exposure. CDS is the best way for one firm to hedge its counterparty exposure to another firm - and that exposure may have nothing to do with owning debt in the second firm.

On Nov 09 05:31 AM Tom Armistead wrote:

> CDS levels affect the perceived creditworthiness of a company and
> their cost of funds. Financial companies that rely on credit can
> literally be put out of business by these perceptions. CDS were
> widely used in conjunction with naked short-selling in short and
> distort manipulations to take down financial firms leading up to
> the meltdown.
>
> Naked CDS are gambling contracts, and contrary to your apparent belief
> system Wall Street is an inappropriate location for a casino operation.
>
>
> Lack of insurable interest creates a motive to cause a loss - something
> that can be done be spreading rumors. The exemption from regulation
> of CDS was a primary cause of the financial crisis.
>
> The correct "one rule" is a requirement of insurable interest: you
> have to own the bond in order to buy the insurance.

CDS Regulation: Just One Simple Rule

Tom - please name one case where what you say has happened.

your views are a common misconception; they just don't reflect reality. although markets are clearly not perfectly efficient, they are efficient ENOUGH that perception does not put companies out of business - REALITY does. a nice example for my claim is what we saw during the panic last year with Buffett's bailouts of GS and GE - at the right price, for a company that has a valid business model, there will be someone who steps in.

similarly, BSC and LEH did not collapse because of either naked short selling or CDS panice. They collapsed because they were insovlent, and the market recognized that.

rising CDS levels in fragile companies are the symptom - not the problem, and banishing CDS would be like abandoning mark to market accounting - hiding the problem doesn't make it go away


On Nov 09 05:31 AM Tom Armistead wrote:

> CDS levels affect the perceived creditworthiness of a company and
> their cost of funds. Financial companies that rely on credit can
> literally be put out of business by these perceptions. CDS were
> widely used in conjunction with naked short-selling in short and
> distort manipulations to take down financial firms leading up to
> the meltdown.
>
> Naked CDS are gambling contracts, and contrary to your apparent belief
> system Wall Street is an inappropriate location for a casino operation.
>
>
> Lack of insurable interest creates a motive to cause a loss - something
> that can be done be spreading rumors. The exemption from regulation
> of CDS was a primary cause of the financial crisis.
>
> The correct "one rule" is a requirement of insurable interest: you
> have to own the bond in order to buy the insurance.

A Sit Down with Treasury Officials (Part I)

another point, Thofler - it's not BLIND FAITH in MTM - but MTM gives a more realistic picture of the facts than hiding the data does! Ritholtz had a post about this today:

www.ritholtz.com/blog/.../

the key quotes:
"The aggressive lobbyists are pushing for less transparency, less accurate reporting, less accounting oversights."

"The view of the bankers is that the financial crisis did not stem from the fact that the banks made lots of bad loans and invested in dubious securities; it was caused by accounting rules that required disclosure when the losses began to mount.”"


On Nov 05 11:09 PM THofler wrote:

> Nice, keep up the good work. I complete disagree with your blind
> faith in the value of mark-to-market accounting though. I also think
> some the more talkative short sellers like Einhorn are selling a
> particularly devious brand of dishonesty.
>
> You really should carefully read Buffett's March 09 Berkshire letter
> to shareholders. Summary: He loves MTM because it causes stupid
> sell-offs in share price. He thinks MTM should NEVER be connected
> to regulatory requirements.

A Sit Down with Treasury Officials (Part I)

yeah, Merkel's point was a good one where even if you're not going to require mark to market, you still need to require capital increases when asset values decrease - that's key.

I don't know why you bring in Einhorn as a bad guy - if only we'd listened when he warned us very early about Lehman, perhaps some of this could have been avoidable


On Nov 05 11:09 PM THofler wrote:

> Nice, keep up the good work. I complete disagree with your blind
> faith in the value of mark-to-market accounting though. I also think
> some the more talkative short sellers like Einhorn are selling a
> particularly devious brand of dishonesty.
>
> You really should carefully read Buffett's March 09 Berkshire letter
> to shareholders. Summary: He loves MTM because it causes stupid
> sell-offs in share price. He thinks MTM should NEVER be connected
> to regulatory requirements.

Does Anyone Actually Believe in Market Efficiency?

i believe markets are efficient in the sense that YOU (with YOU being anyone who doesn't do an extreme amount of work) can't beat them. MOST active managers fall under the category of "YOU." there are SOME who go out in the field and do their own channel checks, instead of talking to the company or the sell side - and these managers may be able to beat the market.

Interestingly, I claim that the recent financial debacle proves that markets are MORE efficient, not less - in the sense that many many managers who appeared to be generating tremendous excess returns in the preceding decade were exposed - and brought right back to at or below market average returns when they blew up. Perhaps their excess returns were generated not by alpha, but by leverage.

A Sit Down with Treasury Officials (Part I)

i understand your point, and another attendee, Steve Waldman, mentioned that in his recap, here:

interfluidity.powerblo...


On Nov 05 08:57 AM greaterdepression wrote:

> They have begun your "capture". You probably enjoyed your visit with
> these polished people in their impressive conference room. They will
> invite you back, and you will start to look forward to this "access",
> and the story which you can write upon your return. You may see photos
> of the children of these Treasury people, and share some personal
> stories. You may begin to moderate some of your statements to avoid
> losing this access and avoid offending these "nice people".
> You have been captured.