Structured Finance

Live blogging the S&P conference call. The Q&A session will be critical. A rather interesting one: "Did the Federal Reserve Board's program of quantitative easing contribute to your decision to revise the outlook to negative? Answer - No. We find that risks of deflation in the U.S. have lessened and that there are few indications that inflation expectations have become untethered. Although it will be challenging to sequence the unwinding of these operations while raising policy interest rates once the recovery has become firmly rooted, we believe that the credibility of monetary policy will continue to be a credit strength for the U.S."

When we reported on some peculiar action in MBIA CDS back in February, we said that one of the reasons for the massive tightening in MBIA CDS which ripped from 55 pts up to 37 pts in the span of two weeks was possibly on CDS commutation speculation (this in addition to ongoing aggressive litigation by MBIA against mortgage originators who may be commutating CDS in a quid-pro-quo fashion to achieve prompt settlement). But whatever the reason for the move, one thing was certain: one bank more than anyone, will be hurt materially by the move - Morgan Stanley. As we said "According to a source, Morgan Stanley was short risk the monoline after it had obtained protection on a static pool of CMBS via an MBIA-related entity called LaCrosse Financial. And as LaCrosse wrote protection against the static pool that was non-transferrable by Morgan Stanley, the bank hedged its counterparty risk by purchasing protection on MBIA itself. So while CDS was blowing out, MS was profiting. Then over the past two weeks, the bank has seen hundreds of millions in paper P&L evaporate through the window. The only question is when will Morgan Stanley close its now underwater protection (which continues to bleed a substantial amount of theta), especially since the actual credit event may have just been pushed back indefinitely. In other words, those who are short the MBIA CDS may wish to wait just a little longer, and see just what the breaking point on Morgan Stanley's collateral call is." Well, per another source, and per Euro Money magazine, that breaking point has been reached and MS has now been forced to close its exposure, at a loss that some speculate could be in the billions.

Q: Is it fair to say that financial regulators are both a source and perpetuator of financial instability? Yes. Financial regulators have a unique position. They are the only financial market participant who can see the current asset and liability level data at any financial institution.

Yves & Tom of Naked Capitalism continue to blame those who shorted housing and housing-derivatives for driving the demand for the structured credit derivatives that almost ruined the financial system. That's like blaming the U.S. for the acts of Nazi Germany during WWII: It's just doesn't make any sense.

Some Sunday food for thought on state budgets, education and jobs...

Steve Abrahams, Head of MBS and Securitization Research predicts home prices to drop nationally another 5-11% through 2012 (Florida of course will take much longer.) Oooo, fun!

With the release of the FCIC report we're seeing a new wave of reasons (excuses) for the Financial Crisis. Somehow, no one seems to place any blame on the rating agencies and the lazy institutional investors who outsourced their due diligence to them. Enough of that BS. What the report should have said is "Here's a simple rule: If you can't analyze a security yourself DON'T FREAKING BUY IT!"

Ever heard the joke "How many European Economists does it take to come to the wrong conclusion about the cause(s) of the American housing crisis?" No? Really? Well, anyway, the answer, it seems, is three:

PIMCO, which was one of the firms spearheading the putback push against BofA, has put together a useful and rather objective analysis though Executive Vice President, Global Structured Finance Specialist, Rod Dubitsky, titled "Foreclosure Flaws Trigger New Round of Uncertainty." While not surprisingly the baseline case presented by PIMCO is a moderate one, as the asset manager claims the most likely impact is "moderate" it does acknowledge that there is a possibility for substantial complications (although Fannie's recent bail out of BofA pretty much takes cares of that). The two main adverse consequences are "corrupted title" - a topic beaten to death previously, and, more importantly, "Tax issues relating to RMBS issuance entities" on which PIMCO says "Some have argued that assigning the note for the mortgage loan so long after closing would run afoul of REMIC rules, which could subject RMBS deals to adverse tax consequences." Of course, as an escalation of these developments would bring the entire $8 trillion RMBS structured finance industry to a halt, we are fairly confident that as more and more settlements are instituted, that the whole fraudclosure issue will be very soon completely forgotten.

What's the Fed hiding?

With the recent realization that virtually the entire residential mortgage securitization system in America is hinging on fraud, as few if any of the recent structured finance packages actually were in possession of the necessary mortgage promissory notes (which were often improperly retained by seller banks as has been made all too clear after rounds of sworn and recorded servicer testimonies) we have seen a veritable explosion in the discussions, papers, essays and op-eds that claim that the existing housing system in America is based on a legal lie. Yet despite what has become glaringly obvious, the administration and the banks simply refuse to deal with the issue: that is to be expected as the damaging discoveries would result in a collapse in trillions of structured finance products leading to a fall out far worse than anything in the post-Lehman days. Furthermore, since banks now have recourse to trillions in fungible excess reserves the backdoor schemes to fill capital deficiencies will allow banks to pad the funding holes for the indefinite future. Additionally, rumors that the banks are pushing hard for a class settlement with the various attorneys general who have not yet been co-opted, bribed and otherwise converted to the fold indicates that it may only be a matter of time before this topic, which has lead so many in the blogosphere to the edge of hysteria will soon be buried. So is this merely another open and shut case which will disappear soon, and banks will continue with life and record bonuses as they know? Perhaps not. Bloomberg's Jonathan Weil suggests that instead of going after the banks and the legal system, which is now obviously beyond repair, those who seek justice should instead go after what could be the weakest link in the entire fraudclosure chain: the (well paid) auditors of these banks who may have committed fraud by signing off on their financial statements.

The fallout from Ambac's bankruptcy is not necessarily what many may think. The robo-signing plaintiffs and associated lawsuits will now get to see what happens when the spurned money of the big boys joins the fray!

We may be forced to start taking real fundamentals into consideration, battling the Fed and QE. Shadow inventory will push heavily in the favor of fundamentals - or to put it more plainly, beware the return of reality!

But taking into consideration the somewhat disquieting news from China, I am wondering just how fast is a petaflop, exactly how fast is a high frequency trade (take automated scalping for example) and how does one visualize it in comparison to the processing speed of the average SEC porn surfer.

An excellent commentary by the director of "Inside Job"