Cayne Fires Spector?

[Guest Jlall]

http://online.wsj.com/article_email/SB1186...NjMwNDY0Wj.html

[pclayton]

Oo this makes great drama...

 

"Jilted Spector takes dead aim at Cayne team for Reisinger....."

[mike777]

Yes some article. Bridge was also mentioned on CNBC.

 

I see wsj says Spector "won" the nashville tournament. ;) Well he won an event.

But then look how many here on bbo talk about how they won 10 or 20 or 30 regional tournaments.....

 

Credit crunches are always scary, lets see if the Fed steps in with some open market operations.(buying securities) to flood the system with money.

[TimG]

I see wsj says Spector "won" the nashville tournament. ;) Well he won an event.

But then look how many here on bbo talk about how they won 10 or 20 or 30 regional tournaments.....

A local reporter came to a New England Regional once upon a time to do a story. One of the questions he asked was "who is winning?" or something along those lines. Telling him that over 100 people would go home from the tournament able to say they won a regional event did not make for good news. Between stratifying, flighting, bracketing, and senior events, our five day regionals often have over 100 "winners".

[mike777]

http://online.wsj.com/article_email/SB1186...NjMwNDY0Wj.html

This whole issue is complicated but here a few facts for starters.

 

1)Bear Stearns is famous and makes most of its money, trading bonds or debt instruments. But think trading in general. It also makes money doing other stuff. Trading is risky of course.

2) They borrow billions ok.....billions and billions short term and long term....Not uncommon to borrow 30 billion very short term to trade. I think they are down to only 12 billion now and rest is "longer term" now.

3) If you are going to lend 30 billion or 15 billion even short term you want your money back. Your reputation is everything.

4) These mortgage hedge funds were leveraged with borrowed money and non Bear Stearns money. These funds can go bankrupt and cost bear stearns little on its balance sheat because Stearns has little money in them and does not guarantee the loans, the fund seperately does. ok?

5) JP Morgan and others told Stearns, Spector they need to put Stearns money in the funds, Spector said no.

6) The funds went down, Stearns repuation was hurt, not its balance sheet.

7) A week later in response Stearns loaned a few billions to the hedge funds and lost the money a few weeks later.

8) Why did the fund lose money so fast, in a word liquidity. It bought alot of risky or semirisky mortgages, people stopped paying on some of them and lost their homes, etc.

9) Traders stopped buying them...the prices plunged.....leverage hurt more, instead of losing 5 or 15% your loses multiply.

10) Stearns reputation got hurt, banks got frightened to lend Stearns cheap billions on the short term.

11) Stearns needs cash to trade, they need to be able to borrow billions and billions cheaply and overnight.

12) If they can they will survive.

13) Btw this is how the whole banking, finance industry works. They borrow money cheaply, often on the short term, leverage it up, and repay their debts.

 

btw. Spector made 32 million last year and has a great reputation, I think he finds a new job very fast.

[Winstonm]

Bottom line - stretching for yield.

 

Aside: buying into an idea originally developed by Michael Milken, the Collateralized Debt Obligation.

 

Note: Japan is next to feel the heat.

 

13) ....They borrow money cheaply, often on the short term, leverage it up....

 

This is also how they lose money and lose their jobs and companies....when they have mispriced their risk.

[mike777]

Bottom line - stretching for yield.

 

Aside: buying into an idea originally developed by Michael Milken, the Collateralized Debt Obligation.

 

Note: Japan is next to feel the heat.

 

13) ....They borrow money cheaply, often on the short term, leverage it up....

 

This is also how they lose money and lose their jobs and companies....when they have mispriced their risk.

1) cdo's have been around for a long time. Long before Milken.

2) Everyone, I repeat everyone misprices risk. Some more than others but that is what makes markets.

3) To repeat if risk is priced correctly, no one makes alpha

[Winstonm]

1) cdo's have been around for a long time. Long before Milken

 

You'll have to argue that point with Bloomberg.com.

 

http://www.bloomberg.com/news/marketsmag/ratings.html

 

Michael Milken, the junk bond king, created the first CDO in 1987 at now-defunct Drexel Burnham Lambert Inc., says Das, author of Credit Derivatives: CDOs & Structured Credit Products (John Wiley & Sons Inc., 850 pages, $120). Until the mid-1990s, CDOs were little known in the global debt market, with issues valued at less than $25 billion a year, according to Morgan Stanley. Drexel and other investment banks realized that by bundling high-yield bonds and loans and slicing them into different layers of credit risk, they could make more money than they could from holding or selling the individual assets

 

And when you are leverage 15 times, as one of the Bear Stearns Hedge Fund was, (the other was only 5 times) you better price risk within a whisker if you want to stay solvent. When you are operating on Ponzi finance, you best have the assets continue to gain else you are left with no seat when the music stops.

[mike777]

1) cdo's have been around for a long time. Long before Milken

 

You'll have to argue that point with Bloomberg.com.

 

http://www.bloomberg.com/news/marketsmag/ratings.html

 

Michael Milken, the junk bond king, created the first CDO in 1987 at now-defunct Drexel Burnham Lambert Inc., says Das, author of Credit Derivatives: CDOs & Structured Credit Products (John Wiley & Sons Inc., 850 pages, $120). Until the mid-1990s, CDOs were little known in the global debt market, with issues valued at less than $25 billion a year, according to Morgan Stanley. Drexel and other investment banks realized that by bundling high-yield bonds and loans and slicing them into different layers of credit risk, they could make more money than they could from holding or selling the individual assets

 

And when you are leverage 15 times, as one of the Bear Stearns Hedge Fund was, (the other was only 5 times) you better price risk within a whisker if you want to stay solvent. When you are operating on Ponzi finance, you best have the assets continue to gain else you are left with no seat when the music stops.

cdo have been around before 1987 trust me...I know...;) They may have had many names....keep in mind all a cdo is, in general, is a chopped up mortgage...we in Chitown chopped up securities in one name or another for years..:)

 

Keep in mind all banking is really:

1) you borrow people monies via savings accounts and checking accounts....(very short term money)

2) you loan it out for 30 years in a mortage...

3) simple yes

[Winstonm]

Mike: Perhaps the author was speaking of the specific CDO where the equity tranches of the RMBS were stripped out to create the CDO? Sounds likely.

 

These CDOs (based on subprime loans) were rated according to repayment risk - maybe quite different than the ones with which you dealt? AAA simply meant that lower-rated tranches suffered loss before AAA - but the underlying loans were the same for AAA as for mezzanine - junk loans. These CDOs were basically tranching streams of loan payments into default risk - first loss=highest yield, etc. Problem was, the lousy loans went bad much faster and at a much higher rate of default than projected - WAY faster and WAY higher.

 

The holders of these CDOs had marked-to-model for leverage purposes, but when the margin call came, the buyers were only willing to pay $.85 on the dollar, and that was for the AAA tranches. The mark-to-market for the CDO was virtually nil, as there was no longer a market for anything less than AAA.

 

Leverage is certainly good on the way up - but it magnifies loss on the way down.

[mike777]

Mike: Perhaps the author was speaking of the specific CDO where the equity tranches of the RMBS were stripped out to create the CDO?  Sounds likely.

 

These CDOs (based on subprime loans) were rated according to repayment risk - maybe quite different than the ones with which you dealt?  AAA simply meant that lower-rated tranches suffered loss before AAA - but the underlying loans were the same for AAA as for mezzanine - junk loans.  These CDOs were basically tranching streams of loan payments into default risk - first loss=highest yield, etc.  Problem was, the lousy loans went bad much faster and at a much higher rate of default than projected - WAY faster and WAY higher.

 

The holders of these CDOs had marked-to-model for leverage purposes, but when the margin call came, the buyers were only willing to pay $.85 on the dollar, and that was for the AAA tranches.   The mark-to-market for the CDO was virtually nil, as there was no longer a market for anything less than AAA.

 

Leverage is certainly good on the way up - but it magnifies loss on the way down.

yes tranches stripped out nothing new sigh..ok

mispricing tranches..nothing new ...sigh

note nonAAA tranches normal.....

[pbleighton]

Btw this is how the whole banking, finance industry works. They borrow money cheaply, often on the short term, leverage it up, and repay their debts.

 

True, but the amount of leverage varies by firm and point in the business cycle.

 

Most of the time most firms are respectable.

 

I worked in the mortgage industry for a couple of years, and one of my bridge partners was my boss at the time, and he's currently number two at a mortage broker. His perspective is that the current situation is a credit bubble. The additional interest premium changed to subprim borrowers has gone down in the last ten years, and the amount of documentation, particularly on income, has gone down as well. Less revenue plus less underwriting = disaster waiting to happen.

 

There's also been a decrease in ethics on the part of subprime brokers, a lot of loans were sold to people who shouldn't have bought them.

 

I agree with Mike that the issue is not the securities or the fact that people with bad credit can get mortgages isn't the problem. The market got greedy, as it did with junk bonds a while back, and there are soemreally bad actors out there.

 

The maximum ratios have also been going up (ratio between income and home expense, and between income and total debt), making even many good-credit borrowers more risky.

 

IMO the bigger issue with mortgages is the proliferation of extremely short term adjustable mortgages. We had better hope interest rates stay low, becuse if they spike up for a few years there will be a LOT of foreclosures, sufficient to push us into a recession all by itself.

 

BTW "Liar's Poker" by Michael Lewis is a great book about a young guy's time at bear Stearns in the 80's. He covers the rise of mortgage backed securities in entertainig detail.

 

Peter

[joshs]

BTW "Liar's Poker" by Michael Lewis is a great book about a young guy's time at bear Stearns in the 80's. He covers the rise of mortgage backed securities in entertainig detail.

 

Peter

Actually it was Salomon Brothers, but it was a great book (although I liked Lewis's Moneyball even more....)

[Guest Jlall]

http://www.nytimes.com/2007/08/06/business...r=1&oref=slogin

 

NY times article on this

[pclayton]

Isn't Alan Schwartz a bridge player too? I swear I've seen his name. Maybe not the same guy.

[alansc]

Y, thats not me. I am a meteorologist