"On the accusation that we are merely ‘talking our book’: we are not short any of the ABX indices or, for that matter, do we travel in these circles from a trading standpoint at all. We are simply trying to understand the credit marketThe quote above from John Succo and Scott Reamer in the Minyan Mailbag. It's a great read and sheds some understanding into why the stock market was spooked Friday by the on going difficulties at Bear Stears and its collapsing hedge funds.
dynamics of these instruments because we have believed for the past two years
that the credit bust we see coming will originate from these murky waters. The
troubles that the Bear Stearns hedge fund has had over the last two weeks speaks
directly to this risk. The ‘’fat tail’’ potential in this area, given the amount
of leverage utilized in this sector, is enormous. Who’s to say if the trade is
crowded or not? Since crowded can’t be quantified, we prefer to stay away from
conjecture and merely focus on the facts. We find that the very entities exposed
to losses in credit derivatives are buying more assets to "prop" up prices is
The broader issue remains the cat getting out of the bag about CDOs and how they are grossly mispriced. Attempts by Bear creditors to sell some of the "assets" was met with offers of 10-cents on the dollar. Scary stuff.
"According to the Securities Industry and Financial Markets Association, aggregate global CDO issuance totalled USD 157 billion in 2004, USD 249 billion in 2005, and USD 489 billion in 2006."