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Shame on the News Media

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December 24, 2007 – Comments (6)

Today I caught the clip of a news story about repayment of this mortgage asset backed paper.  It was something to the effect about investors will get their money back. 

There are some estimates that losses will amount to the range of a trillion dollars because of how banks have re-packaged debt with their fancy programs that ensured the risk was minimized, spread out and controlled and sold it to unsuspecting investors.

So, news of investors getting their money back should be a top story and a well explained story.  First, trying to find any follow up was difficult and this is the rubbish news story I eventually found, http://www.cbc.ca/money/story/2007/12/24/loonie.html.

This story is so vague, it isn't worth bandwidth it uses.

I follow this stuff and I follow Canadian news media as well as US.  I have zero awareness of what this story is about, who has had investments frozen, any kind of details of this restructuring, etc., etc., etc.

No wonder people live their lives in a Glory of Ignorance when you consider people's main source of information is so disgracefully inept at explaining what this is and what it means to everyone.

Looking around some more, I found a better story, but I stick to my assessment of media reporting.  I have been following this stuff closely for the past year and I haven't seen anything about the degree to which Canadian pensions and companies have been hit.  How can people possibly know how serious this stuff is when it receives so little attention?

6 Comments – Post Your Own

#1) On December 24, 2007 at 1:36 PM, dog1350 (75.94) wrote:

World economies cannot survive this news,so everyone has put their head in the sand.I'm sure through the next year bits and pieces of info will pop up and be dealt with on a first come first serve basis.This is the only way to deal with this huge crisis.I cannot believe our governments will allow total chaos.I do not know how.Some one brighter than me knows how it is just the when and where?

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#2) On December 24, 2007 at 1:54 PM, cubanstockpicker (20.57) wrote:

The future money will be made with investment firms buying the ASSET backed paper at a serious discount. They are unpopular now, but the fact is, not everyone will go into foreclosure. The banks always package their loans with a standard defualt (foreclosure rate) risk rate and price it accordingly. The foreclosures that are usually at 4% have risen to about 7-8% nationwide. WHomever is buying these securities at .60 on the dollar or around there is getting set to make a killing in the future.

 News media almost never explains correlations of news and events in the financial world, because they themselves ont understand it. So they end up typing in there integillent (mispelled on purpose) sounding info with no real NEWS. SOrt of like a sunday football analyst that gives such breakthrough analysis like 

"If you want to win games, you have to score touchdowns"  Or along those lines.

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#3) On December 24, 2007 at 5:07 PM, dwot (42.57) wrote:

Cubanstockpicker the problem is that the banks did not price in the risk, nor did their model consider that prices might decline.

Looking closer at the story, they are doing a Japan, or at least what I understand Japan did in response to their housing bubble.  They aren't writing off the losses but just leaving it there to hopefully be repayed over the long term.

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#4) On December 24, 2007 at 7:28 PM, MakeItSeven (32.23) wrote:

The news is only related to about 32B worth of ABCP in Canada.  That's probably why it's not well-covered.

The ABCP is short-term corporate debt that is made up of a bundle of loans like credit card receivables and car loans.   Since they can't be sold right now, the new plan restructured them into long term notes which mature in 5 to 8 years.

And the various entities have to cough up collateral for the notes.   14B collateral on 32B is pretty stiff but I suppose that's the only way to reassure investors in the notes that they can get their money back if they need it so the ABCP holders can sell the notes:

Under the restructuring plan, a $14-billion margin funding facility has been arranged through a combination of investors, dealer bank asset providers and banks.

The new structures are expected to reduce the risk of the notes triggering margin calls — calls from creditors demanding their investments be repaid.

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#5) On December 25, 2007 at 2:50 AM, StockSpreadsheet (71.62) wrote:

The news media often won't follow stories like this because there is so much unknown and unknowable about it, it will transpire over a long period of time and it takes intelligence to figure it all out.  All of these work against the major media covering the story.  It is the same as analysts not rating a company unless they are spoon-fed data by the company.  If a company won't give forecast numbers and exclusive interviews to analysts, then analysts won't follow the company because they would actually have to do work.  (Read the 10k's and 10Q's, listen to conference calls, visit a few stores or call up major customers to see how much product is being sold, check on competitors to see if they are selling more or less, etc..  All of this takes time and effort, and the analysts have been spoiled over the years, (before Reg FD), where they got spoon-fed exclusive data that made them feel important and gave them value as the exclusive pipelines of information.  They can't adjust to their new role as having to work for a living, so they just don't cover anything that would cause them to exert effort.)

That being said, it isn't all their fault.  Banks don't want to admit how much crap they have on their books because it would show off their stupidity for buying a lot of this stuff when they should have known better.  (After all, they should have had access to the credit scores of the people who took out the toxic waste loans, had intimate knowledge on how the CDO's and MSB's were structured, known the extent that the ratings agencies were being paid off to overrate the securities, (since they were among those paying off the ratings agencies), etc..  They would have to admit ignorance, and that wouldn't be good for their image.  (After all, would you go to a financial advisor if they told you they don't know what a bond is nor what market cap means?  That is the level of ignorance I think that was displayed by some of the banks that set up this toxic waste and then got burned by the monster they created.)  

Also, nobody knows when the appetite for risk will come back.  That is something that is not under the control of the banks or the brokerages.  We can state that as investors our appetite for some of this paper won't come back until the banks come clean on how much of this crap is on their books, when the ratings agencies have been forced to reevaluate this crap and assign true ratings on it, (and maybe pay penalties for conflict of interest, breech of fiduciary duty, whatever), and see how bad the foreclosure rate gets when most of the mortgages have gone through at least one rate reset, but there are a lot of investors out there who are not being so candid in their outlooks, (and I don't know if any of the banks or brokerages read the blogs here to get an idea of what us little investors are saying).  Until the appetite for risk comes back, most of this toxic waste is dead.  If they can't sell it, they can't establish a market price for it.  They could write it all off as a 100% loss, (which I have said before they should do), but they don't want to do that due to their looking stupid, (my above explanation), plus it would run them into all sorts of problems regarding lack of loan loss reserves to cover the losses, the lack of reserves mandated by law that they need to keep to cover short-term redemptions, (among other things), and a whole bunch of regulatory and legal problems they would run into if suddenly 1/4 of what they list as assets suddenly disappear from their books as total losses.

Also, this is a story that will transpire over a long period of time.  (After all, the resets on subprime continue until late next year, the Alt-A resets continue until 2009, and there is the other set of loans, (reverse amortization and interest only, among others), that will be resetting I believe until 2010.  This stuff will take years to unwind, and the media doesn’t like to cover stories that transpire over long periods of time any more than people like to sit around and watch paint dry.  The media wants the big headline, (a run on a bank, mortgage company declares bankruptcy, etc.), and the story that is over in a day or maybe a month.  Any longer than that and they have to devote a decent amount of assets to cover the story, compare what happened today to the forecasts of last year, etc., and the media doesn’t want to do that, (and they claim that readers/watchers would get bored with the story and change the channel or read another paper, which would hurt their bottom line at a time that the major media is already losing customers/viewers to other media sources, (such as the internet)).  

Finally, I don’t think there has ever been a bubble in housing and ridiculously relaxed lending standards as we have been through over the past few years, and all of the CDO’s, CDO Squareds, and all this other crap has never existed before, so nobody knows how this will all play out.  There are no historical precedents to base it upon.  We could base it upon the Tulip Mania craze, or the overleverage during the 1920’s, but neither of these dealt with housing, so this time it is a different animal.  Due to this, there are no historical precedents to base their opinions on, so they are reluctant to report on this mess.  

I think all of the above limits how much the major media wants to report on this mess.  We will see how it plays out over time.  Until then, I think we are on our own and it is up to floridabuilder, cabuilderboy and others to illuminate us on how bad things are, how long it will take things to play out, and what needs to be done to get us out of this mess.  Occasionally, there will be some new reports in the major media to add some new data that we can depend on, but for the most instance, I think we will have to rely more on the CAPS blogs than we can on major media to report on how this crap will play out.  Most of the reason is due to how the major media is set up.  The rest of the problem is due to how the media views the average investor, (whether right or wrong).  Eventually, as all this plays out, the major media will once again get on board, (as this crisis nears its end), and we will have new information we can rely on.  Until that time, I think we are on our own.  

I could be considered a bear in this matter, but I don’t think that appellation really applies.  I think I am more realist than bear.  But that is just my opinion.  You will need to form your own.  Merry Christmas and happy New Year.  May all your picks be winners.

Craig

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#6) On December 26, 2007 at 6:52 PM, dwot (42.57) wrote:

Craig, there was a very large housing bubble in the 1929 crash.  It was both housing and stocks that crashed. 

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