so what really happened?
So here is my quick and dirty analysis (my keyboard is not working well - so cant write details):
1. Subprime loans were made to folks who never should have gotten them - sub par FICO scores, no income, no doc, 0% down... comon!! (2006 vintage was esp bad - you know, like rotten wine)
2. Home prices (on a national level) nose-dived for the first time since great depression - leading to massive defaults. Why does the subprime guy care - he leaves the keys with the bank and drives away in his truck - his home just lost 10$ of value - he has -ve equity, and he cannot refinance!
3. HEL deals had a capital strcuture - 0-5% equity, and above it sat the ignominious BBB- bond!! (ah here comes the catch). The losses (historically below 5% were now being projected in the 10 to even 15% range. The BBB- bonds were toast...
4. All this would have been still ok - i mean about 30bn losses...
5. But enter the ABS CDO market (a 250 bn issuance market), which recycled the BBB- bonds into another tranched product - if your underlying bonds are toast - guess what happens to even highly rated tranches? Result- ABX indices skydive like there is no tomorrow. (go to Markit website..)
6. Who's to blame - i think... the rating agencies (who made a bundle before all this mess).
1. Subprime loans were made to folks who never should have gotten them - sub par FICO scores, no income, no doc, 0% down... comon!! (2006 vintage was esp bad - you know, like rotten wine)
2. Home prices (on a national level) nose-dived for the first time since great depression - leading to massive defaults. Why does the subprime guy care - he leaves the keys with the bank and drives away in his truck - his home just lost 10$ of value - he has -ve equity, and he cannot refinance!
3. HEL deals had a capital strcuture - 0-5% equity, and above it sat the ignominious BBB- bond!! (ah here comes the catch). The losses (historically below 5% were now being projected in the 10 to even 15% range. The BBB- bonds were toast...
4. All this would have been still ok - i mean about 30bn losses...
5. But enter the ABS CDO market (a 250 bn issuance market), which recycled the BBB- bonds into another tranched product - if your underlying bonds are toast - guess what happens to even highly rated tranches? Result- ABX indices skydive like there is no tomorrow. (go to Markit website..)
6. Who's to blame - i think... the rating agencies (who made a bundle before all this mess).
posted by Quantjock at 7:21 PM
8 Comments:
Thanks for the very informative and supporting blog (I start my MFE training next March). Your posts are very encouraging as I began to believe that it was not humanly possible work, prepare for CFA test, take online classes and participate in pre-program activities at the same time.
Any posts/comments about future career paths and first impressions at new workplace would be highly appreciated. I hope you’ll continue updating the blog.
Hey! I am currently in my final year of engineering and am seriously considering applying for a financial engieering program. I have a few queries reagarding the same and would appreciate your point of view since you've been down this path.
a) Which are the good colleges which offer Financial Engieering Degrees?
b) Is it better to apply for such a course right after college or work and apply with work experience
c) I've already written my GMAT and scored 760. However there are some universities which accept GMAT scores and some which don't. Which are the top uni's which accept gmat scores?
My email address is: surirohan@gmail.com
Would really appreciate a response!
dude, why blame the ratings agencies...the i bankers knew the ratings were a arbitrage....they knew it all the damm way, and everyone talked about it..
they made far more money than ratings agencies..
actually Vivek - that is true - the i-banks were surely in the know- now of course they are paying for it - just ask O'Neal and Chuck Prince...
Hello quantjock,
I am an FE student at Columbia and we've been told to not limit ourselves to applying for positions or even internships to the US branches of I-Banks but to explore opportunities in Asia and Europe. The general feeling is that although the banks are not openly admitting it there may be hiring freezes doing the rounds in 2008.
As someone who can see the recruiting cycle from the inside, how valid a point do you think this is?
What's the full time job situation look like? Are you and your classmates getting full time offers from the companies you are intering at?
helo
am a2nd year engineering student from india and am pretty serious about takin up financial engg at my masters level...can u please tel me about the good schools and how should i go about it??
nice articles i must say..
cheers
nishit!!
Yes, I agree with the dirty analysis..
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