Saturday, March 10, 2007

"Hypo"-Thetical Phone Calls (as in "hypothecate")

It is becoming increasingly obvious that the real estate/mortgage story is paralleling in many ways the dotcom crisis of 2000-03. The same signs of bubble, malfeasance and excess are rapidly morphing into a virulent process of sudden asset price drops and risk readjustment.

What looked like a going concern just three months ago has now become a "sudden death" candidate heading for bankruptcy. What started as a nervous twittering of lone voices in blogs, is now literally exploding across the mass media: Bloomberg reports that Fed Governor Susan Bies says sub-prime defaults are "the beginning of the wave", New York Times in its front page declares that a "Crisis is Looming in Mortgages" and Reuters reports that CDO issues are not finding buyers - to mention but a few stories. The news cannot be ignored or swept under the carpet any longer.

If you are a hedge fund manager holding such mortgage-related paper, what would you do now that the news is breaking hard? You know that within just a few days, if not hours, your more astute customers will be calling with questions like: "What is your exposure to this stuff?" and "What are you planning to do?" or, even worse, "What's the current mark-to-market on your mortgage-related portfolio? No, Jim I don't mean the indicative price on some banker's screen, I mean what's the goddam BID for the whole thing, right now!..No, Jimbo, you can't call me back after lunch. Go ahead and call ABC and XYZ investment bank while I wait on the line and get live bids. Better yet, put me on a conference call with them."

You see, the customer is likely a pension fund manager himself, who has to answer to his bosses and they are ultimately answerable to politicians who will be looking for witches to burn and scapegoats to skin. It's true: "it" rolls downhill.

Better hit the bid right now, painful as it may be, so when the phone rings you can put on your super professional voice and say: "Yes, we had a position, but we managed to get out at a small loss - better safe than sorry, eh Howard? Tsk, tsk, yes it is snowballing...I agree with you...what? You are worried about Bob's fund, too? Well, I better let you go then - you will want to make a call to him ASAP I guess. Always a pleasure speaking with you, Howie - let's do lunch soon, OK?"

Pheeewww...dodged that bullet.

Now, are we all getting ready for the CDS bullets?


  1. Will this rotting extend to/affect money market funds? I worry about this because I see alot of MBS in my MMF prospectus (and unfortunately also alot of corporate bonds from big investment banks ...).
    Thanks for your thoughts.

  2. Are you sure you own a MMF? I ask because, by definition, MMF's only hold very short term paper like CD's, BA's, and commercial paper, of up to 180 days maximum maturity. If you see a lot of longer-term MBS and straight corporate bonds, maybe you own a bond fund instead of a MMF?

    There are MMF's that invest only in government securities like treasury bills and repos backed by govt. bonds. They are considered very safe, although they usually yield less than regular MMF's.

    Talk to your investment professional, he/she should be able to steer you in the right direction.