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PrimeX Update: It's On Like Donkey Kong

Tyler Durden's picture

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Tue, 10/11/2011 - 13:34 | 1761649 GeneMarchbanks
GeneMarchbanks's picture

Sub-zero out there...

...when you think about it, everyone wants to spot the next Black Swan and here it is... housing... again!

BTW I love that fuckin' monkey.

Tue, 10/11/2011 - 13:50 | 1761725 Dr. Richard Head
Dr. Richard Head's picture

Question: So how many more tax payer shoulders do we need for this upcoming bailout? 

Answer: All of them.

Love your fiat masters and everything will be ok.  Here, just take this Prozac.

Tue, 10/11/2011 - 14:27 | 1761881 I think I need ...
I think I need to buy a gun's picture

its quiet almost too quiet

Tue, 10/11/2011 - 14:23 | 1761863 Popo
Popo's picture

It's like some Pavlovian experiment.  

I see the monkey and get wood.   



Tue, 10/11/2011 - 16:13 | 1762411 wiscofund
wiscofund's picture

Now that's funny!

Wooden barrels, getting wood. Monkey - a double pun for a double dip

Tue, 10/11/2011 - 13:34 | 1761661 csmith
csmith's picture

How much of the weakness in PrimeX is due to speculation of a massive Federal refi program taking out the premium mortgage paper?

Tue, 10/11/2011 - 13:48 | 1761719 topcallingtroll
topcallingtroll's picture

I would bet a lot.
Someone tell us what has happened to convexity since 2008.

Tue, 10/11/2011 - 13:36 | 1761670 ZeroPower
ZeroPower's picture

Enjoy your coverage on PrimeX ZH crew, but remember, this is as illiquid of an 'asset class' as it gets.

250mm notional traded today is actually quite decent - week prior we saw under 200mm and the week before 550mm in about 60 trades. So yes, any desk trading this obviously knows the risk involved. If getting clobbered involves hitting the bid to get some inventory out there, many people would be willing to take a loss on an already shitty supply.

Tue, 10/11/2011 - 13:42 | 1761694 Tyler Durden
Tyler Durden's picture

250MM by one desk. Hopefully one of the smaller desks, because the last thing MS needs is to be a PrimeX in addition to French bank exposure derivative. Also, what is the underlying Jumbo Prime notional? Feel free to arb it if you think the synthetic is too "illiquid"

Tue, 10/11/2011 - 13:50 | 1761724 GeneMarchbanks
GeneMarchbanks's picture

I want charts. MS exposure to BnP will be enough to have them 'discovering' new losses for another taxpayer backstop.

This... is just the cherry on top.

Tue, 10/11/2011 - 13:53 | 1761738 Dr. Richard Head
Dr. Richard Head's picture

Hard to chart the shadow banking system and its interconnectivity when one does not even know the notional derivative exposure related to these assets, no?

Tue, 10/11/2011 - 14:01 | 1761774 redpill
redpill's picture

And it's even harder for those of us that don't know what half those words really mean!

Tue, 10/11/2011 - 14:12 | 1761806 Dr. Richard Head
Dr. Richard Head's picture

I am a good copy paster.

In the end, I believe, no one really knows (or is telling the public) who owns what and what/how many bets are against those assets. 

Tue, 10/11/2011 - 14:34 | 1761901 Quadlet
Quadlet's picture

Also, the notional amount is almost useless.  I buy 10 SPY puts to short 1000 SPY shares, notional amount $119,650.  The transaction was $200.  Anyone using notional amount is trying to make a bigger deal out of it than it actually is.

Tue, 10/11/2011 - 15:27 | 1762115 spartan117
spartan117's picture

Notional becomes real when you exercise or settle.  SPX goes to zero and someone needs to pay you $119,650.  That's pretty real to me.

Tue, 10/11/2011 - 14:30 | 1761890 Quadlet
Tue, 10/11/2011 - 13:54 | 1761742 Captain Willard
Captain Willard's picture

It's possible that the ass-whipping in CMBS and the last few months' widening in RMBS is creating margin calls across the entire asset class. Maybe the pain has just arrived to jumbo prime. It's already visited everything else.

Tue, 10/11/2011 - 13:54 | 1761748 slewie the pi-rat
slewie the pi-rat's picture

"jumbo prime whack-a-mole"

poirot & sherlock depend on tyler where "illiquid" syntetics are concerned

the game is afoot, BiCheZ!

Tue, 10/11/2011 - 13:59 | 1761764 ZeroPower
ZeroPower's picture

$11bn gross notional on PrimeX.


I sincerely hope MS mortgage traders are the final straw that broke...

Tue, 10/11/2011 - 14:07 | 1761791 Coxxy
Coxxy's picture

I hate to agree, but this story seems overdone. This is the definition of dealer to dealer as well.  The idea of arbing the collateral is the banks balance sheet exposure and although there are ARM CDO's it is a very hard arb as the CDO's are balance sheet driven as well. 

The losses in CMBS are real losses among the "retail," sans not dealer inventory losses and they are greater over the last three months than $PX which is down, what, $6 off the highs...

Tue, 10/11/2011 - 15:03 | 1762016 Tyler Durden
Tyler Durden's picture

The gross notional is what is reported to DTCC. Incremental billions can be created (and destroyed) at a whim. Once again: 1) the question is how big is the underlying, and 2) how liquid it is. If it was simply a question of liquidity driven mispricing it would have been arbed 20 ways from Sunday first thing on Monday.

Tue, 10/11/2011 - 15:19 | 1762046 Coxxy
Coxxy's picture

The underlying hasn't been liquid in 3 years, why would it be liquid and be able to be arbed 20 ways on Monday?

The balance sheet CDO market is dead and the seasoned tranches that the $Px represents are illiquid. 

Still a hard trade trying to find someone with 2003/2004 or 2006/2007 underlying.  Not that it can't be done but the bid/offer is going to kill the arb there...

$Px was setup for interdealer hedging from the start, no?

Again besides a frantic BBG msg from a BCS trader, the losses in AAA/AJ/AA CMBX/ABX HE  over the last two months should be the story...

Tue, 10/11/2011 - 15:29 | 1762128 spartan117
spartan117's picture

Again besides a frantic BBG msg from a BCS trader, the losses in AAA/AJ/AA CMBX/ABX HE  over the last two months should be the story...

Can you shed some more light on this for those of us without a bloomberg terminal?

thanks in advance.

Tue, 10/11/2011 - 16:58 | 1762759 Captain Willard
Captain Willard's picture

Exactly. That was the point I was trying to make above in my response to Tyler.

The whole mbs complex is getting margin calls.

Tue, 10/11/2011 - 13:46 | 1761709 traderjoe
traderjoe's picture

The discussion of these trades just shows how far wall street has gone from actually producing anything. Steepeners? Blah blah blah. A rigged casino hell bent on the next bonus - and the shearing of clients. And the creation of credit to facilitate the fiat debt-money beast.

Tue, 10/11/2011 - 14:10 | 1761803 Coxxy
Coxxy's picture

With steepeners and flatteners you get multiple trades to bid/offer instead of only one. 

Made the street go nuts when fly's becamse the norm on Treasuries because you lost out on the multiple trades.

Tue, 10/11/2011 - 13:36 | 1761672 Enceladus
Enceladus's picture

newly renamed EX-Prime its a buy!!

Tue, 10/11/2011 - 13:42 | 1761673 gorillaonyourback
gorillaonyourback's picture

off setting winnings with loses?  how long?      or arbing 1st and 2nd tranche?

Tue, 10/11/2011 - 13:38 | 1761681 Glasgow Gary
Glasgow Gary's picture

You know all that high-end real estate which was built around the end of the 19th C, and you can see it in many of America's former industrial towns? And you know how alot of that stuff now serves as rooming houses, dentist offices, or has been bought by govts for offices or simply lies fallow? Yeah, that's what I'm taking about.

Because the inventory of million dollar+ homes in this country is gargantuan, and the system is no longer producing a new army of buyers for that tranche of single family RE.


Tue, 10/11/2011 - 13:45 | 1761705 rocker
rocker's picture

 The way America is going everybody will be millionaires.  Just like in Zimbabwe. 

 That's how capitalism works, right? 

Tue, 10/11/2011 - 13:54 | 1761749 Dr. Richard Head
Dr. Richard Head's picture

Of course it does.  Capital comes from a printing press.  Saving is for pussies. 

Tue, 10/11/2011 - 15:45 | 1762224 topcallingtroll
topcallingtroll's picture

Saving in cash is definitely for pussies.

Speculating in cash is different.

I have occasionally "speculated" for up to three or four months at a time.
Or would that be short term savings? Haha

Tue, 10/11/2011 - 13:41 | 1761692 BadKiTTy
BadKiTTy's picture

I love ZH - but there are some posts that I read and realise I might as well be someone from Congress voting on the new fin reg. It looks like it should mean something ....... but I really dont know what! 



Tue, 10/11/2011 - 13:47 | 1761716 Melin
Melin's picture

Same here but I think of it like an immersion into a foreign language.  It's the fastest way to learn and googling is a great assist.

Tue, 10/11/2011 - 13:56 | 1761756 Dr. Richard Head
Dr. Richard Head's picture

Read the prior article hyperlinked in the text of this one. Just think subprime of 2008 fallout and multiply that by a shit ton. 

Tue, 10/11/2011 - 14:55 | 1761974 Nobody For President
Nobody For President's picture

+1 Yep, working for me.

Tue, 10/11/2011 - 13:51 | 1761727 Problem Is
Problem Is's picture

That is why you come here to read and learn...

So in life, you don't end up like a douche-hole clueless politician...

Tue, 10/11/2011 - 14:04 | 1761778 MeanReversion
MeanReversion's picture

What it means is this.  Some of the first chinks in the armor of the housing boom occurred when the ABX, and index that tracks that performance of subprime mortgage backed securities, began to decline below face value and significantly below face value over time.

Well, now we are seeing this same behavior with PrimeX, which tracks the performance of prime mortgages.  Thus, what we have is a situation where problems that were limited to subprime mortgages are now reaching prime mortgages, mainly because more borrowers are in negative equity along with the fact that you have 16.5% unemployment and underemployment. 

Now, take it one step further.  The PrimeX measures the performance of 'private label'  mortgage backed securities.  This means that it tracks the performance of mortgage bonds issued by banks like Citigroup and JPMorgan.  If the loans in those deals are having problems, it begs the question whether the same applies to the trillions in prime mortgages owned by Fannie Mae and Freddie Mac. 

We are potentially on the cusp of a much more terrible phase to the financial crisis.  Subprime was relatively small relative to the total supply of mortgages.  Well, prime mortgages are not so small.  They are HUGE. What happens when these prime loans start defaulting.  The U.S. fully backs Fannie and Freddie principal and interest payments on those mortgage backed securities.  Disaster in the making that could make 2008 look like a walk in the park.

Tue, 10/11/2011 - 14:08 | 1761794 Coxxy
Coxxy's picture

PrimeX is jumbos as well.  Don't forget this key...

Tue, 10/11/2011 - 14:16 | 1761831 MeanReversion
MeanReversion's picture

Correct, which makes the potential for losses that much worse.

Tue, 10/11/2011 - 14:40 | 1761920 ZeroPower
ZeroPower's picture

+1 to Coxxy, and the only thing id add to your analysis MR is that this time i believe it is quite diferrent in the sense that rates won't be increasing until at least mid 2013, as per the Fed. Seeing as how subprime went to shit due to r increases, i dont imagine $Px suffering until at least those first rate increases come to fruition.

Tue, 10/11/2011 - 15:15 | 1762063 hack3434
hack3434's picture

Most Jumbos and Prime loans originated in CA!!

Tue, 10/11/2011 - 14:18 | 1761841 Village Smithy
Village Smithy's picture

Nice summary, people like you who take the time are really important in raising awareness out there.

Tue, 10/11/2011 - 15:23 | 1762089 no es bueno
no es bueno's picture

This may or may not shed more light for newbies, like myself:


Tue, 10/11/2011 - 14:21 | 1761859 GeneMarchbanks
GeneMarchbanks's picture

Basically, it could be strategic default by the sheeples or an actual problem to pay. Either way if it continues it'll be epic.

Tue, 10/11/2011 - 14:58 | 1761991 sagerxx
sagerxx's picture

Thanks mucho, MR, for the 'splaining.

Tue, 10/11/2011 - 17:56 | 1763057 o2sd
o2sd's picture

I know you have to dig a long way down before finding the actual underlying to these derivatives of derivatives (i.e. actual mortgages), but don't the bulk of the underlying mortgages reset this year?

I know BB has been pushing down the curve, residential mortgage 30yr fixed is 425bps (which is insane BTW), but even that will probably cause repayment stress to those on teaser or introductory rates.

Does this mean the Fed is about to embark on a Prime MBS purchasing program?


Tue, 10/11/2011 - 14:08 | 1761797 end da fed
end da fed's picture

me too. i read somewhere that 2/3 of ZH readers are traders so it must make sense to them. funny thing though, even when i don't know what the hell TD is talking about either he or a commentator makes me laugh

Tue, 10/11/2011 - 14:16 | 1761833 johngoes
johngoes's picture

Same here AND I sure would love to know how to make a buck off the information. Can I buy PrimeX directly? Is this one of those option plays? It's as if all the info is geared to seriously experienced traders.

So far, I've made some small profits off of investments in ETF's directly like SDS, SKF, etc. But that's directly purchasing those instruments. I know folks make serious gains using option trading, and I've read about puts and calls in general, but haven't made an option trade yet, even though it seems like ZH has good information on which to take a risk or two.


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