Derivatives discussion

Question

I found this article on MSN money and needless to say I am a guppy in a pool of sharks when it comes to this stuff-

READ

On the second page are several links to other resources and I could spend hours reading this stuff, maybe I will.

I understand the CDOs, the meat of the issue, but I didnt understand (rather I underestimated) how levered companies like MBI and ADK were, how they could issue policies on such terms and get away with it.

I guess the part of the argument I dont see coming to fruition is the underlying assets falling apart like this guy thinks they will..so Lehman buys insurance in case of default on these CDO's and the firm cannot pay a policy, they lose that premium and protection..but the underlying asset STILL has to go bad..and I just dont see how THAT large number of mortgage based assets can go bad?

Another article

Maybe this deep stuff isnt meant for a sports website, but if anyone is interested and versed, we should discuss this.. it would be very educational.

wallstreetcappers · Answer

I found this article on MSN money and needless to say I am a guppy in a pool of sharks when it comes to this stuff-

READ

On the second page are several links to other resources and I could spend hours reading this stuff, maybe I will.

I understand the CDOs, the meat of the issue, but I didnt understand (rather I underestimated) how levered companies like MBI and ADK were, how they could issue policies on such terms and get away with it.

I guess the part of the argument I dont see coming to fruition is the underlying assets falling apart like this guy thinks they will..so Lehman buys insurance in case of default on these CDO's and the firm cannot pay a policy, they lose that premium and protection..but the underlying asset STILL has to go bad..and I just dont see how THAT large number of mortgage based assets can go bad?

Another article

Maybe this deep stuff isnt meant for a sports website, but if anyone is interested and versed, we should discuss this.. it would be very educational.

claycourtlesson · Answer

Exacty why I only do comon stock trades.

KOAJ · Answer

what i hear is that the insurors and ratings agencies will throw it back on the banks as "them not doing due diligence and defrauding the other parties" in allowing these subprime cdo's to have AAA ratings like muni's and other "good" debt

wallstreetcappers · Answer

Well after reading the article it looks like these products are complex and not evaluated correctly, that involves more than the banks..it looks like the credit rating agencies didnt do enough homework and the regulatory agencies didnt either.

In a given CDO since there are multiple "levels" or traunches as called, the senior traunch can be considered AAA and safe, and they really are, even now..the middle and equity levels are the toxic ones.

To me the way that the insurers were able to book insurance on such high multiples, even higher than I thought, that is the issue..and the article mentioned that Ambac hasnt been called on their obligations because they would have declared BK instead of honor the obligation..or use some BS reason like credit environments or loopholes to not be responsible.

I was also interested that they had credit swaps out there..which if I understood correctly, gave investors the opportunity to be the insurer "bank" or invest with the company (MBI) and in return they got a piece of the insurance premium that the insured pays, or you could be against it too..very interesting.

Oh and from what I gathered, this has nothing to do with the municipal arena..rather corporate debt and RMBS insruments (mortgages).

KOAJ · Answer

wall - this stuff is so amazingly complicated and i would bet that even the analysts who cover these companies dont know what the heck they are up to

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