Grant's Interest Rate Observer on the fragility of the CDO market (2007)

We are the first to admit our shortcomings in knowledge about structured mortage finance. But, then, we have found - colleague Dan Gertner, our man on the case, can attest to it - that ignorance about CDOs and ABS is far-reaching. In fact, it reaches far into the population of CDO investors. A subscriber who has made a study of the subprime market - he is a long-short equity investor by trade - e-mails to share his observation that "somewhere in the neighborhood of 70% of CDO buyers rely almost entirely on the ratings because they don't have the time or expertise to evaluate the underlying collateral and structure." It follows, our reader points out, that "once the rating agency integrity is gone, so is the CDO market, it would seem."

~ Grant's Interest Rate Observer, "Wheezing CDO machine," March 9, 2007

RBS Securities analyst on the return of synthetic CDOs

Synthetic CDOs are sort of the natural evolution, and in many respects the final frontier, of investors’ search for yield against a backdrop of historically low interest rates. I think the big takeaway here is, ironically, the Fed and regulators are forcing investors to the darkest corners of the structured finance market and the structured credit market to find yield.

~ Richard Hill, RBS Securities analyst, "Behold the Ghosts of Bubbles Past," Bloomberg Businessweek, April 1, 2013

Jim Bianco on the potential for massive CDO fraud in 2007

We've seen more of this coming and that's really what's going on that if we're going to criminal-- alright, I shouldn't say criminalize. But if we're going to say that the selection of these loans was fraudulent, that's going to be the game-changer because everybody used some kind of bias in selecting these loans. Were all those biases disclosed? Probably not in most of the cases. And if the SEC is going to say that that's what's happened, then all of these 2007-deals are going to have to be reviewed.

~ Jim Bianco, Bianco Research, CNBC Street Signs, April 16, 2010

XL Capital Assurance on the beneficial role of the bond insurers in the CDO market (2002)

Monoline insurers not only benefit the investors and sponsors of CDOs but are often the key to the successful execution of innovative transactions... Monoline insurers have the resources, expertise, and financial wherewithal to understand underlying assets, conduct due diligence, provide feedback to the structuring institutions, interact with rating agencies and work for long periods on newer and more innovative transaction structures.

~ Iftikhar Hyder, XL Capital Assurance Inc., "Collateralised Debt Obligations and the Role of Monoline Insurers," September 24, 2002

XL Capital Assurance on the importance of diversification to the performance of CDOs

Although CDOs are now 14 or so years old, structural innovation continues unabated and more innovation usually translates into more involvement by the monoline insurers. While it is important to have a strong structure, perhaps nothing helps a CDO transaction, or a portfolio of CDO investments, more than diversification. The best of managers cannot consistently beat the market or avoid defaults. Many CDO investors know that concentrations are little more than expensive wagers. If there is one lesson to be learnt from the performance of CDOs of various cohorts and types, it is this: Diversify.

This lesson has not been lost on the monolines.

~ Iftikhar Hyder, XL Capital Assurance Inc., "Collateralised Debt Obligations and the Role of Monoline Insurers," September 24, 2002

Marc Faber on recent bubbles

When the Nasdaq began to decline in 2000, most market observers - and especially the apostles of the "new economy" concept- remained convinced that there would be only a brief correction. When US housing stocks began to turn down in 2005, the view was that the US housing sector remained fundamentally sound. Not surprisingly, hardly anyone envisioned the problems in the sub-prime lending industry, with the exception of - among a few others - my friends at Bearing Asset Management. Real problems among the sub-prime lenders emerged in the Fall of 2006. But - aside from Jim Grant and Doug Noland, and my friends at Bearing Asset Management - hardly anyone became concerned about the CDO market.

~ Marc Faber, Publisher, The Gloom, Boom and Doom Report, "Capital Markets Becoming Less Hospitable," August 2007

Bill Laggner on CDO implosion

We had what is now getting called the 20/90 Model. It had been priced at $0.90 on the dollar when in fact it is worth $0.20 on the dollar.

The real question for [financial service] is, do we get together and write this stuff down at once—collective solidarity? Or does it happen piecemeal, with the hope the Fed will cooperate?

It does not matter what The Fed does. It is not a liquidity problem, it is a solvency problem.

First it was the homebuilder and lender. The next to leave the denial stage and go into panic mode was the mortgage insurer. But who is the owner of the paper? Where does it reside? Well, with hedge funds and on the balance sheet of the finance sector.

~ Bill Laggner, Bearing Asset Management, "Armageddon Time For The Finance Sector?", Hedgefund.net, October 29, 2007

Jim Grant on CDO market's dependency on ratings

A subscriber who has made a study of the subprime market - he is a long/short equity investor by trade - e-mails to share his observation that "somewhere in the neighborhood of 70% of CDO buyers rely almost entirely on the ratings because they don't have the time or expertise to evaluate the underlying collateral or structure." It follows, our reader points out, that "once the rating agency integrity is gone, so is the CDO market, it would seem."

~ Jim Grant, "Wheezing CDO machine," Grant's Interest Rate Observer, March 9, 2007