[THS] Karl Denninger: A Random Look at RMBS And The Economy
psalience at fastmail.fm
Wed Mar 10 00:15:07 CET 2010
Tuesday, March 9. 2010
Posted by Karl Denninger in Editorial at 13:22
A Random Look at RMBS And The Economy
>From The Forum:
Bond Cusip 60+
ACCR 2007-1 M2 00438QAF1 35.8
CARR 2007-RFC1 M2 144526AF7 48.5
CMLTI 2006-WFH3 M1 17309QAE4 40.3
CWL 2006-10 MV2 12666PAW4 61.0
CWL 2006-18 M1 23243WAE8 60.5
CWL 2006-20 M2 12667HAG6 62.4
CWL 2006-22 M2 12666BAG0 60.2
CWL 2006-25 M2 12667TAG0 62.9
CWL 2006-26 M2 12668HAG5 60.0
CWL 2006-3 M1 126670WC8 57.4
CWL 2006-BC4 M1 12667NAE8 64.6
CWL 2007-1 M2 23245CAG5 64.4
CWL 2007-10 2M1 23246BAM3 56.6
CWL 2007-10 2M2 23246BAP6 56.6
CWL 2007-10 2M3 23246BAR2 56.6
CWL 2007-10 M5 23246BAT8 56.4
CWL 2007-11 2M3 23247LAK4 56.6
CWL 2007-11 M5 23247LAM0 56.3
CWL 2007-7 M1 12669VAF5 56.2
CWL 2007-8 M1 12669WAG1 57.0
CWL 2007-8 M5 12669WAL0 57.0
CWL 2007-9 M1 12670FAF7 57.9
CWL 2007-9 M2 12670FAG5 57.9
CWL 2007-9 M3 12670FAH3 57.9
CWL 2007-9 M5 12670FAK6 57.9
JPMAC 2006-CH1 M2 46629TAG5 37.6
JPMAC 2006-CH2 MV3 46629QAZ9 47.5
JPMAC 2006-CW2 MV2 46629BAU3 65.5
JPMAC 2007-CH2 MV2 46630MAY8 42.2
JPMAC 2007-CH2 MV4 46630MBA9 42.2
JPMAC 2007-CH3 M1 46630XAG3 46.5
JPMAC 2007-CH3 M2 46630XAH1 46.5
JPMAC 2007-CH3 M3 46630XAJ7 46.5
JPMAC 2007-CH4 M1 46630CAF1 42.9
JPMAC 2007-CH4 M2 46630CAG9 42.9
JPMAC 2007-CH4 M3 46630CAH7 42.9
JPMAC 2007-CH5 M2 46631KAG0 46.6
JPMAC 2007-CH5 M4 46631KAJ4 46.6
A random assortment of 2006 and 2007 securitizations from our friends at JP Morgan
and Countrywide (mostly.)
The last number is the 60+ delinquency percentage.
A lot of this is Home Equity lines.
Remember my Ticker yesterday and my rant on Blogtalk regarding Barney Frank and
the outrageous hidden losses being carried by our banks? That none of this is being
pursued, yet every week we see proof of it in FDIC bank seizures and the loss ratios?
That this sort of book-cooking, were you or I to engage in it in a public company,
would lead us to be criminally charged, and in fact this is exactly what Ken Lay and
Jeff Skilling were charged over doing?
Folks, this is endemic through the financial system. The best performing issue in that
list has a 60% delinquency rate of 35.8% and a material number of them have more
than half the loans in hard default.
Every home equity line behind an underwater first that is also not being paid is worth
zero. There is no recovery. This is not like most bonds, where there is a meaningful
recovery percentage after the default happens. This is subordinated debt that is
worth exactly bupkis if the senior lien cannot be fully satisfied from a foreclosure on
These bonds are literally everywhere. They're in pension funds. They're on bank
balance sheets. They're held by The Fed through the garbage Fannie and Freddie
paper they bought. Foreign governments and foreign banks hold them.
Yet we have banks that are carrying very similar portfolios of loans on their books -
second liens, either home equity or "silent seconds" used to get around various ratio
requirements such as PMI on loan origination, and essentially none of them are being
carried at anywhere close to these levels of loss.
There has been no - and I do mean no - recovery of balance sheets in the United
States when it comes to financial companies, pension funds or anyone else holding
this crap. Zero. Zip. Bupkis.
Servicers have in some cases, it appears, even co-mingled funds in order to advance
coupon payments, which has the effect of hiding these delinquency rates from
For a while.
Cash flow always wins though folks.
I continue to hear "look, the market has a year under its belt now from the low, this
means that it's a long-term bull market and will go higher for years to come."
Ok, let me ask you one question, and I will not provide the answer: You will, by doing
your own work, because if you don't, then you won't take responsibility for your own
outcomes - and if you're in that camp then stop reading The Ticker right now and
start watching Jim Cramer on CNBS.
In every previous recession and market swoon post WWII by the time we have
gotten a year from the bottom whatever it was that ailed the economy going in had
been resolved. Let's go through a few of them:
The S&L crisis, at this point, was under control - the S&Ls were under FDIC
control, people were being sent to prison by William Black (and others), and we had
a dimension on the losses and who had done what to whom (those loss estimates
turned out to be way low, but at least we knew where they were.)
In the 1970s by this time oil prices had relaxed and the risk of the embargo was
Post-1981 recession interest rates were on their way down; the back of inflation
had been broken.
Post early-1990s the California military bubble had popped and was mostly
By the end of 2003, most of the Internet companies that had no business being in
business were gone and buried; their bogus claims had led to their demise, and they
had filed bankruptcy.
Now let's contrast this with today:
The credit default swap monster has not been caged. In fact, there has been no
change whatsoever in how these are traded and written. Nor has anyone in the
banks been indicted even when there is evidence of blatant bribery (as in the case of
Jefferson County Alabama.)
All of the large banks, and a lot of mid-sized banks have enough second line
exposure on their balance sheets written in the bubble states, carried at or near full
value, to severely damage their capitalization ratios if not outright force them into
receivership. Not one of these institutions is marking their second line exposure
anywhere near what the delinquency rates in these securities implies about their
recovery values. Yet these losses are both real and the overwhelming evidence says
that impairment is permanent.
Existing home sales numbers have flattened at an extremely low level, even with
the $8,000 tax credit. This implies that the value of this credit has been reached in
the marketplace, and that no actual recovery in housing is or will take place in the
near term. Yet the entirety of the premise that the economy has turned the corner -
some 20% of GDP is housing related - rests on the belief that it has.
We are told that the auto industry has "recovered" with an estimated annual sales
rate of 11 million cars. The peak of the auto production cycle was seventeen million.
Even if half of that is recovered it will leave some 17% of that capacity idle and those
people who used to man it unemployed. Where are they going to go for jobs?
The labor employment rate (of all employable adults) is back to levels last seen
when we had less than half the consumer and industrial debt in the system we have
today as a percentage of income. This sort of job loss into ramping debt has never
happened before in the post-Depression era. How are the interest payments going
to be made?
The lockup in credit markets and economic malaise that followed occurred as a
direct result of fraudulent balance sheets - that is, claims that firms had liquidity and
assets that in fact were false. When that falsehood was unmasked they failed
instantly, as occurred with ENRON and MCI. Do we, today, have balance sheets that
accurate reflect the valuation of all assets by firms across the economy - not only in
banks, but also in firms like GE and CISCO?
The government is literally providing 9% of GDP via deficit spending that exceeds
the records set during the 2003-2007 years. That is, they've replaced a full nine
percent of the economy's final demand since 2007, and despite the claim that the
economy is recovering the amount of replacement activity they're supplying has
increased since the spring of 2009 and continues to do so. If the government is
going to supply this replacement for the indefinite future and that is necessary to
avoid the recognition of an instantaneous economic Depression (defined as a 10%
contraction in GDP) can the government continue to do so on an indefinite forward
The entirety of the market rally from March of 2009 to today, and its sustainability on
a forward basis, is dependent on the above - especially the government being able
(and willing) to continue in its new role of providing 9% or more of GDP (beyond
what it used to provide!) along with the continuing ability to mark assets that are
worth little or nothing well above their actual market prices.
DO YOU BELIEVE that this can and will occur on an indefinite forward basis?
If you do, then you should be fully invested here and now, because indeed, profits
will continue to advance, revenues will continue to advance, and the market will
continue to advance. We have a new bull market predicated on The Government
legalizing balance sheet fraud and indefinite forward support of nearly half of GDP
all-in (add up State and Federal spending - its close to 50% of GDP), with the
additional 9% added for the last two years continuing into the indefinite future (and
likely expanding too, especially with "health care" reform.)
If you do not then you should be hiding under the desk, because just as occurred in
2000 and 2008 when the breakpoint comes it will occur without warning, without
recourse, and without the ability for you to get to the exit in time, and since the
amount of the fraud and bogosity exceeds both the 2000 and 2007 levels by far so
will the reaction - when it occurs.
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