Steve Rhode
Steve Rhode is the founder of Myvesta Foundation in the United States and the Chairman of Myvesta UK in the United Kingdom.
CDOs
Just watch, the entire sub-prime fiasco in the US and soon to raise its head in the UK and other countries will be the fault of borrowers or so that’s what the banks will say as they duck and run for cover. Rather than exercise good and prudent common sense to limit borrowers from economic downturn, the banks did nothing more than lend themselves into a corner by competing with riskier and riskier products.
I was just reading about the Collateralized Debt Obligation (CDO) called Carina. In early November the Carina CDO started liquidating its $450 million portfolio filled with bonds backed with subprime mortgages and pieces of other CDOs. What makes this domino failure of the CDOs interesting is that as the underlying collateral is devalued so must the CDO that bought it. More and more CDOs are or will find themselves in technical fault. Can you say "House of Cards"?
Don’t become complacent that the subprime meltdown is over, my friends, we have not yet begun to melt.
While technical default might sound like not a big deal, it is. When a CDO falles into technical default, investors in the top tier of bonds usually get additional rights. They can collect interest payments for themselves, leaving other investors with nothing. So who are the small investors in CDOs? This is according to my friends at Business Week.
Are CDO investors just the guy on the street? Sorry, these junior investors in CDOs are hedge funds, investment banks, and other CDOs.
What people are forgetting is that 2008 is going to bring a whole new wave of mortgage interest rate adjustments with another wave or a continuing wave of mortgage defaults. You’ve got to remember that the wave of mortgage defaults is not caused by an economic downturn; it is caused by reckless lending and rates adjusting upwards. What follows next is the downturn with more and more consumers to get sucked into that.
CDOs aren’t just relegated to mortgages. For years, credit card companies have been generating debt and packaging them up as CDOs and selling them. Most people don’t understand how easily a CDO can be played by a credit card company. They can manufacturer debt out of basically thin air and then sell the CDO up or down the river depending on how you look at it.
Here is how easy it is to build a scam credit card CDO as explained with a great couple of paragraphs from the Mortgage Blues site. "Bubba applies for a credit card and gets one with a $300 credit limit at 10% interest. They charge Bubba $99 for issuing the card, $99 as an annual fee, and Bubba can actually buy one tank of gasoline without going over the limit. Bubba gets a bill, pays it immediately, and the payment gets processed one day after the due date. Bubba’s rate goes to 29.99%, he gets a $39 late fee, a $39 overlimit fee, and a bad attitude.
The bank, however, has a false $350 credit card asset, rolls it into an asset-backed security along with 100,000 other cards like Bubba’s, and sells $35 million as asset-backed securities. The problem is there are no assets to back the security. There is no collateral.
Recognizing that they have been scammed, twenty percent of the Bubba account holders don’t even send a second payment. After six months, 40% of the Bubba accounts quit paying. The rest pay off the account immediately and talk bad about the bank for the rest of their lives."
I was just reading about the Collateralized Debt Obligation (CDO) called Carina. In early November the Carina CDO started liquidating its $450 million portfolio filled with bonds backed with subprime mortgages and pieces of other CDOs. What makes this domino failure of the CDOs interesting is that as the underlying collateral is devalued so must the CDO that bought it. More and more CDOs are or will find themselves in technical fault. Can you say "House of Cards"?
Don’t become complacent that the subprime meltdown is over, my friends, we have not yet begun to melt.
While technical default might sound like not a big deal, it is. When a CDO falles into technical default, investors in the top tier of bonds usually get additional rights. They can collect interest payments for themselves, leaving other investors with nothing. So who are the small investors in CDOs? This is according to my friends at Business Week.
Are CDO investors just the guy on the street? Sorry, these junior investors in CDOs are hedge funds, investment banks, and other CDOs.
What people are forgetting is that 2008 is going to bring a whole new wave of mortgage interest rate adjustments with another wave or a continuing wave of mortgage defaults. You’ve got to remember that the wave of mortgage defaults is not caused by an economic downturn; it is caused by reckless lending and rates adjusting upwards. What follows next is the downturn with more and more consumers to get sucked into that. CDOs aren’t just relegated to mortgages. For years, credit card companies have been generating debt and packaging them up as CDOs and selling them. Most people don’t understand how easily a CDO can be played by a credit card company. They can manufacturer debt out of basically thin air and then sell the CDO up or down the river depending on how you look at it.
Here is how easy it is to build a scam credit card CDO as explained with a great couple of paragraphs from the Mortgage Blues site. "Bubba applies for a credit card and gets one with a $300 credit limit at 10% interest. They charge Bubba $99 for issuing the card, $99 as an annual fee, and Bubba can actually buy one tank of gasoline without going over the limit. Bubba gets a bill, pays it immediately, and the payment gets processed one day after the due date. Bubba’s rate goes to 29.99%, he gets a $39 late fee, a $39 overlimit fee, and a bad attitude.
The bank, however, has a false $350 credit card asset, rolls it into an asset-backed security along with 100,000 other cards like Bubba’s, and sells $35 million as asset-backed securities. The problem is there are no assets to back the security. There is no collateral.
Recognizing that they have been scammed, twenty percent of the Bubba account holders don’t even send a second payment. After six months, 40% of the Bubba accounts quit paying. The rest pay off the account immediately and talk bad about the bank for the rest of their lives."