The second wave of the credit crisis

[diggy70]

Vallejo California is the first city of many to go bankrupt in the US. With US housing with not even close to a bottom. This means lower property taxes to fund the municipalities therefore bankruptcies.

As you see more towns and cities going bankrupt, there could be a potential huge problem in the bond market with defaults. What does this really mean to the guy on the street? Well, it could mean a lower dollar, as much as 20 % against the Euro and other currencies. Higher prices for us all. If you are a trader do some research and maybe short some bonds.

Also houses could fall 50 to 60 percent in some markets and lower % in others. This many not be just a US problem. Credit is starting to tighten everywhere so housing could far every where in the g8 countries. We also have credit card problems that will show their there ugly head in this second wave. What does this mean for the guy on the street; well don’t be surprised if they star moving credit limit down (i.e. 10000 to 2500) or something like that. If you owe 4400 this mean you can’t use it till you get under you new limit. And yes the credit card company can do this, it’s their money they can do what they want.

[The Central Scrutinizer]

I think I'm going to run out and buy gold. :rolleyes:

[rjwould]

Vallejo California is the first city of many to go bankrupt in the US. With US housing with not even close to a bottom. This means lower property taxes to fund the municipalities therefore bankruptcies.

As you see more towns and cities going bankrupt, there could be a potential huge problem in the bond market with defaults. What does this really mean to the guy on the street? Well, it could mean a lower dollar, as much as 20 % against the Euro and other currencies. Higher prices for us all. If you are a trader do some research and maybe short some bonds.

Also houses could fall 50 to 60 percent in some markets and lower % in others. This many not be just a US problem. Credit is starting to tighten everywhere so housing could far every where in the g8 countries. We also have credit card problems that will show their there ugly head in this second wave. What does this mean for the guy on the street; well don’t be surprised if they star moving credit limit down (i.e. 10000 to 2500) or something like that. If you owe 4400 this mean you can’t use it till you get under you new limit. And yes the credit card company can do this, it’s their money they can do what they want.And then the credit card companies will most likely try to charge over credit limit penalties and late fees....:eye-poppi:eek::mad:

[diggy70]

credit default swaps, real thinks what you have to say when this stuff starts to unwind????

i'll tell you poop hitting the fan!!!!!!!!jonny five any comments on this thread????what do you think ??

[JoeEllison]

If you think THIS is bad, just wait a couple of years, since the same geniuses behind the current credit problems are the ones responsible for the current record-high gas prices... and when THAT one crashes, America can say goodbye to any meaningful future.

[diggy70]

oil will never be cheep again.....if it crashes then you are right that mean all moeny has become hyperinflated..

[Francesca R]

credit default swaps, real thinks what you have to say when this stuff starts to unwind????I don't think you know what a CDS is. Do you?

[Travis]

So we should start building bunkers and preparing for that inevitable complete breakdown of society and decent into a bloodbath of anarchy......right? Or is exuberant extrapolation just trendy?

[JonnyFive]

credit default swaps, real thinks what you have to say when this stuff starts to unwind????

i'll tell you poop hitting the fan!!!!!!!!jonny five any comments on this thread????what do you think ??

Awww, you're thinking of me.

Vallejo California is the first city of many to go bankrupt in the US. With US housing with not even close to a bottom. This means lower property taxes to fund the municipalities therefore bankruptcies.

Possibly. That really depends on the composition of the municipality and the way its taxes are arranged. Generally speaking, I think you might be painting with too broad a brush.

As you see more towns and cities going bankrupt, there could be a potential huge problem in the bond market with defaults. What does this really mean to the guy on the street? Well, it could mean a lower dollar, as much as 20 % against the Euro and other currencies. Higher prices for us all. If you are a trader do some research and maybe short some bonds.

Again, I think you're speculating a lot here. I'm not that familiar with the market for munis, so what percentage of the market do they make up? The munis are evaluated individually, so you'd probably see municipalities where housing default is a risk get downgraded. "Bonds" in general wouldn't necessarily be downgraded, because the underlying investments differ.

In terms of valuation, the hard hit would be to the specific munis that are invested in sensitive areas.

The funny thing is that it could actually benefit some investors if the increased risk bumps the rate of return and the municipality manages to continue to pay its obligation.

Also houses could fall 50 to 60 percent in some markets and lower % in others. This many not be just a US problem.

This is kind of a meaningless statement. Any particular theories you'd care to address? Specific markets? Specific market indicators you think will affect this?

It's a global economy, so the problems of one major industrialized nation are rarely the problems of that nation alone.

Credit is starting to tighten everywhere so housing could far every where in the g8 countries. We also have credit card problems that will show their there ugly head in this second wave. What does this mean for the guy on the street; well don’t be surprised if they star moving credit limit down (i.e. 10000 to 2500) or something like that. If you owe 4400 this mean you can’t use it till you get under you new limit. And yes the credit card company can do this, it’s their money they can do what they want.

I don't think the companies would do this in a blanket way. Why in the world would I knock their credit limit down by 75% when they're at 44% credit utilization if they're able to continue to pay off their minimum charges plus interest? Do you know what options card companies have available to freeze credit and/or try to collect payment? Also, do you know of any precedent for reduction of already extended credit on a large scale?

As far as knocking the limit down and charging an overcharge fee on it, I think that would probably run afoul of consumer protection laws. You'd have to ask a lawyer with some experience in the area, I suppose.

[JonnyFive]

I don't think you know what a CDS is. Do you?

I'm not that familiar with the technical aspects of CDS derivatives (i.e. I know what they are, but I couldn't calculate valuation or risk evaluation on them), but it doesn't sound like he does, no. My understanding is that CDSs are effectively similar to insuring a credit issue from a third party (only without the insurance contract, obviously).

Given a crappy credit market, I don't see how a CDS would be particularly more common so much as it would change the composition of the CDS investments. The CDS requires an investor willing to agree to pay out if the credit issue defaults, and a higher default rate would generally mean a higher rate paid to the seller by the buyer in exchange for accepting that increased risk.

I don't know enough about the CDS market to speculate further on the implications of that, but I don't see where diggy is going with this.

Diggy, not to dump on you, but you seem to like to toss out key words and assorted "issues" without explaining what you're specifically asking and why. Could you maybe clarify what you're asking when you do that, rather than making this into a kind of word association thing?

[diggy70]

ok do you think the bond insurers have the cash if there is a run them? There is no Fed to back them?? ie bear streans!!

[Corsair 115]

And then the credit card companies will most likely try to charge over credit limit penalties and late fees...Meh, it's easy to stiff any credit card company: pay your bill on time and in full every month. Do that and they won't make a dime off you (outside of any annual fee you may pay to have the card in the first place).

[Francesca R]

I'm not that familiar with the technical aspects of CDS derivatives (i.e. I know what they are, but I couldn't calculate valuation or risk evaluation on them), but it doesn't sound like he does, no. My understanding is that CDSs are effectively similar to insuring a credit issue from a third party (only without the insurance contract, obviously).Well it's just that CDSs are usually mentioned in the context of "buying protection", such as hedging the risk of a dodgy bond or a basket of high risk bonds, or taking an outright negative exposure. So they tend to go up in value for the buyer when "this stuff starts to unwind"

ok do you think the bond insurers have the cash if there is a run them? There is no Fed to back them?? ie bear streans!!There has been a run on monoline bond insurers already. You can look at the share price of ABK (Ambac) and MBI (MBIA) since about a year ago and see that they have fallen 95%, and the credit default swaps (as above--used to hedge/short these names) currently trade at spreads of more than 8% above equivalent government bonds--which is extraordinary for paper that is rated AAA. The consensus market view is that the ratings of these companies are a worthless sham, but the problem is that if ratings are cut then some institutional investors become forced to sell.

The underlying muni bonds (and others) that monolines insure have traded at a discount that, well, discounts the insurance premium since last year too. Few expect them to be able to "pay out" on insurance of muni bonds, but there is little reason why they should have to.

Municipal bonds tend not to be a very attractive investment to people outside the US who do not get the tax exemption anyway.

[JonnyFive]

Well it's just that CDSs are usually mentioned in the context of "buying protection", such as hedging the risk of a dodgy bond or a basket of high risk bonds, or taking an outright negative exposure. So they tend to go up in value for the buyer when "this stuff starts to unwind"

That makes sense, and fits in with what I do know about CDSs. Thanks for the info.

There has been a run on monoline bond insurers already. You can look at the share price of ABK (Ambac) and MBI (MBIA) since about a year ago and see that they have fallen 95%, and the credit default swaps (as above--used to hedge/short these names) currently trade at spreads of more than 8% above equivalent government bonds--which is extraordinary for paper that is rated AAA. The consensus market view is that the ratings of these companies are a worthless sham, but the problem is that if ratings are cut then some institutional investors become forced to sell.

Such a difference in spread is due to the increased risk of the underlying credit issues actually defaulting, or something else?

Municipal bonds tend not to be a very attractive investment to people outside the US who do not get the tax exemption anyway.

Yeah, without that tax exemption there really isn't much of a reason to buy munis.

[dudalb]

If you think THIS is bad, just wait a couple of years, since the same geniuses behind the current credit problems are the ones responsible for the current record-high gas prices... and when THAT one crashes, America can say goodbye to any meaningful future.

Which you look forward to because it means we will finally have The Revolution.....

[Francesca R]

Such a difference in spread is due to the increased risk of the underlying credit issues actually defaulting, or something else?Because the dominant ("preferred") trade is to buy protection, which means buy a CDS that will pay out if ABK or MBI defaults. The price of buying that (because "everyone wants to") is to pay the high spread over treasuries.

It is more to do with the monolines being in trouble (because they have insured "toxic waste" in addition to munis) than the munis themselves.

[JonnyFive]

Because the dominant ("preferred") trade is to buy protection, which means buy a CDS that will pay out if ABK or MBI defaults. The price of buying that (because "everyone wants to") is to pay the high spread over treasuries.

It is more to do with the monolines being in trouble (because they have insured "toxic waste" in addition to munis) than the munis themselves.

Ah, I see. Considering the other issues those bond insurers are dealing with, it makes a lot more sense.

Diggy, if you're still reading, please try to articulate your points a little more thoroughly.

You know, like "I am concerned that the bid/ask spread on the CDSs of monoline bond insurers signals an underlying weakness in the municiple bonds they are insuring. I believe that their financial situation may worsen if we see continued troubles with municipalities defaulting on bond obligations due to a decrease in property taxes. Do you believe that this is an issue of concern?" instead of "credit default swaps, real thinks what you have to say when this stuff starts to unwind????" which frankly doesn't really us much about what you're thinking.

[diggy70]

Ah, I see. Considering the other issues those bond insurers are dealing with, it makes a lot more sense.

Diggy, if you're still reading, please try to articulate your points a little more thoroughly.

You know, like "I am concerned that the bid/ask spread on the CDSs of monoline bond insurers signals an underlying weakness in the municiple bonds they are insuring. I believe that their financial situation may worsen if we see continued troubles with municipalities defaulting on bond obligations due to a decrease in property taxes. Do you believe that this is an issue of concern?" instead of "credit default swaps, real thinks what you have to say when this stuff starts to unwind????" which frankly doesn't really us much about what you're thinking.


Just trying to make it simple. there are like 50 trillion swaps out there,if some of these bonds default do the cdo's have he cash you pay out on the insurance? and this market is not real regulated by the sec.
http://video.google.com/videoplay?docid=8278100526242917072&q=&hl=en