Sell_Everything

How UBS Lost Money on Super-Senior Bonds

Vikram and ETFnerd are both right in part.

UBS owned the last loss tranche in the Super Seniors (w/ the exception of the X tranche created to cover closing fees). They were always rated Aaa and typically had at least one more Aaa tranche below them and sometimes even two Aaa tranches below them in terms of loss priority. Below these were Aa's, Baa2's, and sometimes Ba2's. Below these were the equity tranches, which were first loss.

When UBS says that they bought protection on 2-4% of the "nominal position," I assume they're referring to 2-4% of the entire CDO. UBS seems to have been doing the opposite of what large hedge funds were doing at the time. Large hedge funds were buying equity tranches and shorting the Aaa's meaning they made money on the two extremes, if the CDO performed great and if the CDO performed very poorly.

UBS, on the other hand, was making the most money somewhere in the middle. By selling protection (and yes, they were selling protection using CDS) on the lower-rated tranches, they were making money if those went bad and still earning interest (albeit only 20-30bps) on the entire principal of the super senior tranches. This worked if the losses were between 0-40% of the portfolio. Once losses exceeded this amount however (which is 100% less whatever % the super senior makes up of the deal), they had only a 2-4% cushion, because of the short hedge they had made on the lower tranche. After that, it begins eating into original principal.

As for increasing bonuses from selling protection through CDS contracts, that does not come into play in this case. More than likely, they bought protection at or near the money, which would mean that they didn't receive much if any NPV upfront. Also, in this market, that typically only works if you sell protection. To make money upfront off of buying protection, one would need to write the contract with a spread under the original spread on the bond with that being the market spread, and since spreads have only be widening, that was never possible.

The Housing Crisis: Personal Responsibility and Wishful Thinking

Human behavior rarely changes in the aggregate, so while blaming this on people's poor decision making is mostly correct, just hoping that people learned from their mistakes and won't do it again is a little naive.

It's like throwing bags of money into a river with piranhas under the water and not telling everyone the piranhas are there. Sure, you can blame the people for not being suspicious and at least checking it out by slowly inching in or waiting until other idiots went in and got eaten, but it's human nature to initially want to go in after it. While the people who watched other people get eaten firsthand will probably think twice about doing it next time, there are still other people that will jump right in next time there is "free" money in the water.

My point is that in a free market, things like this must happen from time to time. If there was no risk in the market and no downtime, then our upside would be limited as there would never be risk premia. The only way to regulate human behavior is to take away access to those things that drive that human behavior, and I'm not a fan of a strong central government and excessive regulation.

Microsoft Succeeds in Making Vista Even Worse

"If I were a Microsoft employee".....

Yeah, nice try. Only a Microsoft employee or a large investor would be so defensive of a company with so many recent troubles between its Xbox 360 repair bills and monumental operating system failure. I seriously doubt that a person with the grammar of a retarded chimpanzee would be a large investor or a high-level employee, so you must be a brainwashed mailroom clerk.

Regarding MSFT's P/E being different five years ago, I believe that a publicly traded corporation's mission is to increase shareholder wealth. The fact that they are paying an average dividend (1.58% projected for 12 mos) with a stock price appreciation of 3.01% annually for five years does not prove to me that they are increasing shareholder wealth more so than they would have by investing in risk-free securities. Stock price is all about future cashflows, and it appears the market doesn't believe Microsoft can produce those future cashflows at these valuations.