PrimeX Update: It's On Like Donkey Kong

Tyler Durden's picture

On Friday, Zero Hedge broke the story of the "next ABX", in the form of PrimeX, or the game of jumbo prime whack-a-mole. It appears that was indeed the beginning. Here is today's update from Morgan Stanley in a market which had gone suspiciously silent since our post, and has now gotten quite vocal again with a vengeance.

From MS sales:

On a day where most macro indices point to bullish sentiment, PRIMEX is getting clobbered again.  Last week, it felt like px action was driven by dealers hedging cash inventory/unwinding index longs, with retail providing a bit of a short-covering bid.  Today, however, it seems that the short-covering bid has gone silent, and the marginal buyer can't be located under his desk.   Given the move in ABX over the past few weeks, and the high (2 premium tranches!) $px in PRIMEX makes it an appealing target for both hedging and new entrants to the space setting shorts.  One "risk sentiment neutral" trade we like here is the ARM1 vs. ARM2 steepener, as you pick up 5c of CE and 12% less DQ for ~11 points.  With ARM2 already taking losses, anyone looking at the product (from the short side) for the first time might be attracted to the less negative carry implied by that tranche, against the 2-3 year multiple you achieve in ARM1s to a 5-8% writedown in those.  Outright, however, until we see retail come in to set new longs, it's look out below in PRIMEX.  We have traded ~250mm on the day. 

the actual markets:

                      Cpn          Bid      Offer   Chg from Close  Factor               
PrimeX.FRM.1   442    103-16 / 104-16      -0-120           0.47               
PrimeX.FRM.2   458    93-16  / 94-16       -0-206            0.49               
PrimeX.ARM.1   442    99-08  / 100-08      -0-223           0.41               
PrimeX.ARM.2   458    88-08  / 89-08       -1-152            0.44

And graphically:

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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.

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.

Popo's picture

It's like some Pavlovian experiment.  

I see the monkey and get wood.   



wiscofund's picture

Now that's funny!

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

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?

topcallingtroll's picture

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

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.

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"

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.

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?

redpill's picture

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

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. 

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.

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.

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.

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!

ZeroPower's picture

$11bn gross notional on PrimeX.


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

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...

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.

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...

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.

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.

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.

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.

Enceladus's picture

newly renamed EX-Prime its a buy!!

gorillaonyourback's picture

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

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.


rocker's picture

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

 That's how capitalism works, right? 

Dr. Richard Head's picture

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

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

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! 



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.

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. 

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...

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.

Coxxy's picture

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

MeanReversion's picture

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

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.

hack3434's picture

Most Jumbos and Prime loans originated in CA!!

Village Smithy's picture

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

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.

sagerxx's picture

Thanks mucho, MR, for the 'splaining.

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?


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

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.