Shiny new AAA securities! Hooray!

[phantom power]

We are so doomed.

:rofl:

....A hypothetical example cited in research by Barclays Capital said that a $100 million asset that required $2 million in capital at a triple-A rating may require $35 million if downgraded to double-B-minus. At triple-C, the capital requirement might rise to 100%, or $100 million.

In a re-remic, three-fourths of the same asset may regain a triple-A rating, requiring just $1.5 million in capital, Barclays said. The remaining one-quarter may require 100% capital, but the total capital requirement would fall to $26.5 million.

...."There is $350 billion to $400 billion in market value of securities with no natural buyer due to their rating," Barclays said in a June report. "The re-remic market provides a way out of this gridlock by creating new AAA securities, which are likely to be viewed as attractively priced."

Shiny new AAA securities! Hooray! And there's more! Ratings for re-remics come from the same ratings agencies that bollixed up the original ratings. And investment banks pocket fat fees for performing the financial alchemy. What could possibly go wrong?

http://www.motherjones.com/kevin-drum/2009/09/wall-streets-latest-trick

[dixiegrrrrl]

1. The gyrations they are all going thru to keep the ball in the air.

[econoclast]

2. Not alchemy. Just common sense.

Let me propose an example ....

Chamonix France. A mountaineer's paradise. Lots of great climbing. Lots of risk too. There is a very experienced French search and rescue operation that exists to pluck unlucky or foolish climbers from the peaks if they get in trouble. But rescue is not free. Once on Terra firma, they also charge a hefty fee to each rescuee. It is so expensive that there is actually rescue insurance that climbers can buy - just in case. Only costs 100 euro a person or so. But if you need rescue, the French whack you for 10,000 euro. The insurance is highly recommended.

Suppose there is a party of 10 climbers. If they buy the insurance it costs them a total of 1,000 euro.

They decline.

Near the summit of their climb there is an accident. Three members are hurt. Things look very dodgey.

If the healthy try to carry the injured down there is a good chance they won't make it and all ten will require rescue. Total tab for rescue of all 10 is 100,000 euro.

If the seven uninjured try to climb out alone there is a good chance they''ll make it. The injured will have to be rescued. Total tab in that case is 30,000 euro.



That is the basic idea behind the Re-remic. There is not enough cash flow to pay the whole asset class. But there is a good chance that there is enough to pay 75% in full. That 75% can get AAA rating. The remaining 25% not even the talented and brave French search and rescue folks will be able to help.

[pokercat999]

5. Did you forget the

:sarcasm: ???

[A HERETIC I AM]

3. Phantom Power, I'm really curious to know if you have any idea what a "REMIC" security is.

Either before or after you read and then linked the article.

The reason I asked, is because after only a few minutes of reading, it's clear to me the concept is not completely understood by the author of the piece.

That being said, the :rofl: smiley causes me to wonder whether or not you even understand what it is you are "rolling on the floor, laughing" about.

[phantom power]

4. How about this: I'll tell you what I think it is...

The banksters are trying to re-factor mortage backed securities from Big Shitpile. They want to consolidate performing debt into legitimately high-rated securities. AAA ratings, etc. Then they can localize the underperforming debt and reduce the liquidity they are required to keep on hand.

Which seems like a pretty reasonable activity. But since the last year's economic cluster-fuck hasn't left me feeling very charitable, I'm assuming until further notice that the banksters are going to use this as yet another opportunity to try and keep their splendid Ponzi scheme going for another round. And why not? None of them have been held accountable yet.

That's my version. What's yours?

[A HERETIC I AM]

6. To post a factual explanation, complete with appropriate definitions..

links and critique of the article in question as well as the Wall Street Journal article the Mother Jones author cites would take me several hours to cobble together. I'm not really in the mood to do that tonight. I would much prefer to provide facts instead of giving you a "version".

As a start though, I would point out that your statement;

They want to consolidate performing debt into legitimately high-rated securities.

dances around the major point raised, but does not grasp the situation properly.

This statement;

Then they can localize the underperforming debt and reduce the liquidity they are required to keep on hand.

Makes no sense. I'm not sure what you intend to mean by the expression "localize the underperforming debt" and you follow it up with a misuse of the term "liquidity". That tells me the task of providing you an understandable explanation for what it is the "banksters" are trying to do is a daunting one.

I'm not trying to be glib here, nor am I trying to insult your intelligence. However, what has become clear to me regarding many of these types of stories is that often the author of a given article does not understand completely the subject on which he is commenting. I think this is definitely the case with Mr. Kevin Drum of Mother Jones. In his piece he quotes from and links to a Wall Street Journal article which goes into some detail on the subject matter. I think it is important to carefully read the WSJ piece and understand what is being said instead of simply jumping on a "The crooks are at it again" bandwagon that is by now, completely overcrowded.

[phantom power]

7. Wait a minute -- you think I don't know what I'm talking about!

Since I'm talking about economics and finance, that's frequently true. Anyway, if you see fit to post some kind of explanation, I'm sure I would read it.

Tangentially -- if the financial industry, as a whole, does not want people like me prematurely jumping on the hatin' bandwagon, I helpfully propose that they should adhere to better behavior, and avoid crashing our economy while harvesting vast personal fortunes. It makes people angry and twitchy, even if that isn't fair.
:shrug:

[truedelphi]

9. "Mother Jones" failed to realize the talents possessed by one Michael Moore

And fired his "sorry ass."

Lucky break for most of us Americans. If Moore was still handing in copy for MJ, few of us would have heard of many of the many fine points he makes.

Instead, after being fired, he went on to learn about film making, and the rest is history. He is now worth probably a good fifteen times what MJ is worth.

And I am now off to read up on the WSJ article.

[truedelphi]

8. They totally missed mentioning how my new firm

WUWUGIUPME Financial Ratings Plus (The acronym stands for "Whatever You Want You Get If You Pay Me") now offers rating up to AAA to the fifteenth exponent!!

I probably don't need to tell you how great my business has been lately.

And if you wanna subscribe to my monthly list of A-to-the-gazillionth-rated firms, drop me a PM and I'll let you know where your check for $ 495 a month needs to be sent!

(Of course, Mother Jones totally missed how much of a genius Michael Moore was, so I stand in great company of the other Mother Jones misses!)

[jakeXT]

10. Dennis is at it again

Update: Just got a call in response to this post from Rep. Dennis Kucinich's (D-OH) office. They forwarded me a letter he sent to the Treasury today to bring this issue to its attention. He's concerned that many of these re-remics are outside of the jurisdiction of the SEC.

http://business.theatlantic.com/2009/10/re-remics_really.php