Tuesday, October 31, 2006

The Smart Money Is Betting Against the Fast Money

This article originally appeared in Monday's Wall Street Journal. It basically describes the way hedge funds are playing the anticipated decline in home prices. Also, it partially explains why Wall Street has had such a huge appetite for mortages that often show a larger than average probability of default. In short, the hedge fund manager is able to buy the mortgage and insurance at the same time. When the risks of holding a mortgage that could default can be mitigated by buying insurance, then the true risk of default is not reflected in the price of the mortgage.

NEW YORK -- Bryan Whalen and Ike Spirou have never met. But through the world of modern mortgage finance, their fates are inextricably linked.

Mr. Whalen, who manages a multibillion-dollar mortgage-bond portfolio at Los Angeles-based Metropolitan West Asset Management, stands to gain if Mr. Spirou, a financially stretched homeowner in New York City, reneges on his mortgage loan. That's because Mr. Spirou's $360,000 loan was packaged with thousands of others into a bond, and Mr. Whalen has entered a newfangled derivative contract -- similar to an insurance policy -- that will pay off if enough loans in the bond go bad.

Full article...

9 Comments:

Anonymous Anonymous said...

the whole bubble period reads like a big scam

Wednesday, November 01, 2006 2:02:00 AM  
Anonymous Anonymous said...

When is the 3rd quarter Otteau Report released?

Wednesday, November 01, 2006 9:09:00 AM  
Anonymous Anonymous said...

The sheer weight of the unsold mountain of "Tulips" on this "Ponzi" type scheme Cart will soon callapse crushing the sellers and injuring the bystanders.

Wednesday, November 01, 2006 10:41:00 AM  
Anonymous Anonymous said...

And people called Clinton's years a smoke-and-mirrors bubble? At least businesses retooled, bandwidth and infrastructure were installed, etc.

Now? Lax policies and safety nets for the supply-siders.

Wednesday, November 01, 2006 1:14:00 PM  
Anonymous john said...

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Wednesday, November 01, 2006 5:19:00 PM  
Blogger lindsey said...

A very succinct explanation of the hedgers actions, thank you.

Of course they should be worried about the fact that all those failing mortgages are going to overwhelm the insurers.

What was Keyne's line, something like "The important thing for bankers is not to go broke, but to go broke in a way that they really can't be blamed for."

I think that will apply to the hedgers as well.

Thursday, November 02, 2006 2:03:00 PM  
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Thursday, November 09, 2006 1:48:00 AM  
Anonymous Anonymous said...

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Sunday, November 12, 2006 6:52:00 PM  
Anonymous Anonymous said...

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Sunday, November 19, 2006 8:13:00 PM  

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