T
TRGLDTE
Guest
Am I mistaken or is this a thread regarding OIL speculators?
Bear, Freddy and Fannie are subprimer issue. Different.
GOP blocking the Speculation bill
- Thread starter Chapdog
- Start date
Am I mistaken or is this a thread regarding OIL speculators?
Bear, Freddy and Fannie are subprimer issue. Different.
uscitizen
Villified User
Bear and Stearns is a mortgage company ?
hedge funds ring a bell ?
And you have repeatedly demonstrated your partisan spun deciet.
T
TRGLDTE
Guest
Bears Stearns was huge buyer of the CDOs that were backed by mortgages.
Yes. Very different. They are bailed on a Mortgage issue and he pretends it is because of Hedge Funds? *sigh*
uscitizen
Villified User
Read it and weep "experts"
Dissecting The Bear Stearns Hedge Fund Collapse
by Investopedia Staff, (Investopedia.com) (Contact Author * Biography)
The headline grabbing collapse of two Bear Stearns hedge funds in July 2007 offers fascinating insight into the world of hedge fund strategies and their associated risks.
In this article, we'll first examine how hedge funds work and explore the risky strategies they employ to produce their big returns. Next, we'll apply this knowledge to see what caused the implosion of two prominent Bear Stearns hedge funds, the Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund.
A Peek Behind the Hedge
To begin with, the term "hedge fund" can be a bit confusing. "Hedging" usually means making an investment to specifically reduce risk. It is generally seen as a conservative, defensive move. This is confusing because hedge funds are usually anything but conservative. They are known for using complex, aggressive and risky strategies to produce big returns for their wealthy backers.
In fact, hedge fund strategies are diverse and there is no single description that accurately encompasses this universe of investments. The only commonality among hedge funds is how managers are compensated, which typically involves management fees of 1-2% on assets and incentive fees of 20% of all profits. This is in stark contrast to traditional investment managers, who do not receive a piece of profits. (For more in-depth coverage, check out Introduction To Hedge Funds - Part One and Part Two.)
As you can imagine, these compensation structures encourage greedy, risk-taking behavior that normally involves leverage to generate sufficient returns to justify the enormous management and incentive fees. Both of Bear Stearns' troubled funds fell well within this generalization. In fact, as we'll see, it was leverage that primarily precipitated their failure.
Investment Structure
The strategy employed by the Bear Stearns funds was actually quite simple and would be best classified as being a leveraged credit investment. In fact, it is formulaic in nature and is a common strategy in the hedge fund universe:
* Step #1: Purchase collateralized debt obligations (CDOs) that pay an interest rate over and above the cost of borrowing. In this instance 'AAA' rated tranches of subprime, mortgage-backed securities were used.
* Step #2: Use leverage to buy more CDOs than you can pay for with capital alone. Because these CDOs pay an interest rate over and above the cost of borrowing, every incremental unit of leverage adds to the total expected return. So, the more leverage you employ, the greater the expected return from the trade.
* Step #3: Use credit default swaps as insurance against movements in the credit market. Because the use of leverage increases the portfolio's overall risk exposure, the next step is to purchase insurance on movements in credit markets. These "insurance" instruments are called credit default swaps, and are designed to profit during times when credit concerns cause the bonds to fall in value, effectively hedging away some of the risk.
* Step #4: Watch the money roll in. When you net out the cost of the leverage (or debt) to purchase the 'AAA' rated subprime debt, as well as the cost of the credit insurance, you are left with a positive rate of return, which is often referred to as "positive carry" in hedge fund lingo.
In instances when credit markets (or the underling bonds' prices) remain relatively stable, or even when they behave in line with historically based expectations, this strategy generates consistent, positive returns with very little deviation. This is why hedge funds are often referred to as "absolute return" strategies. (For more on leveraged investments, see Leveraged Investment Showdown.)
Can't Hedge All Risk
However, the caveat is that it is impossible to hedge away all risk because it would drive returns too low. Therefore, the trick with this strategy is for markets to behave as expected and, ideally, to remain stable or improve.
Unfortunately, as the problems with subprime debt began to unravel the market became anything but stable. To oversimplify the Bear Stearns situation, the subprime mortgage-backed securities market behaved well outside of what the portfolio managers expected, which started a chain of events that imploded the fund.
First Inkling of a Crisis
To begin with, the subprime mortgage market had recently begun to see substantial increases in delinquencies from homeowners, which caused sharp decreases in the market values of these types of bonds. Unfortunately, the Bear Stearns portfolio managers failed to expect these sorts of price movements and, therefore, had insufficient credit insurance to protect against these losses. Because they had leveraged their positions substantially, the funds began to experience large losses.
http://www.investopedia.com/articles/07/bear-stearns-collapse.asp
Dissecting The Bear Stearns Hedge Fund Collapse
by Investopedia Staff, (Investopedia.com) (Contact Author * Biography)
The headline grabbing collapse of two Bear Stearns hedge funds in July 2007 offers fascinating insight into the world of hedge fund strategies and their associated risks.
In this article, we'll first examine how hedge funds work and explore the risky strategies they employ to produce their big returns. Next, we'll apply this knowledge to see what caused the implosion of two prominent Bear Stearns hedge funds, the Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund.
A Peek Behind the Hedge
To begin with, the term "hedge fund" can be a bit confusing. "Hedging" usually means making an investment to specifically reduce risk. It is generally seen as a conservative, defensive move. This is confusing because hedge funds are usually anything but conservative. They are known for using complex, aggressive and risky strategies to produce big returns for their wealthy backers.
In fact, hedge fund strategies are diverse and there is no single description that accurately encompasses this universe of investments. The only commonality among hedge funds is how managers are compensated, which typically involves management fees of 1-2% on assets and incentive fees of 20% of all profits. This is in stark contrast to traditional investment managers, who do not receive a piece of profits. (For more in-depth coverage, check out Introduction To Hedge Funds - Part One and Part Two.)
As you can imagine, these compensation structures encourage greedy, risk-taking behavior that normally involves leverage to generate sufficient returns to justify the enormous management and incentive fees. Both of Bear Stearns' troubled funds fell well within this generalization. In fact, as we'll see, it was leverage that primarily precipitated their failure.
Investment Structure
The strategy employed by the Bear Stearns funds was actually quite simple and would be best classified as being a leveraged credit investment. In fact, it is formulaic in nature and is a common strategy in the hedge fund universe:
* Step #1: Purchase collateralized debt obligations (CDOs) that pay an interest rate over and above the cost of borrowing. In this instance 'AAA' rated tranches of subprime, mortgage-backed securities were used.
* Step #2: Use leverage to buy more CDOs than you can pay for with capital alone. Because these CDOs pay an interest rate over and above the cost of borrowing, every incremental unit of leverage adds to the total expected return. So, the more leverage you employ, the greater the expected return from the trade.
* Step #3: Use credit default swaps as insurance against movements in the credit market. Because the use of leverage increases the portfolio's overall risk exposure, the next step is to purchase insurance on movements in credit markets. These "insurance" instruments are called credit default swaps, and are designed to profit during times when credit concerns cause the bonds to fall in value, effectively hedging away some of the risk.
* Step #4: Watch the money roll in. When you net out the cost of the leverage (or debt) to purchase the 'AAA' rated subprime debt, as well as the cost of the credit insurance, you are left with a positive rate of return, which is often referred to as "positive carry" in hedge fund lingo.
In instances when credit markets (or the underling bonds' prices) remain relatively stable, or even when they behave in line with historically based expectations, this strategy generates consistent, positive returns with very little deviation. This is why hedge funds are often referred to as "absolute return" strategies. (For more on leveraged investments, see Leveraged Investment Showdown.)
Can't Hedge All Risk
However, the caveat is that it is impossible to hedge away all risk because it would drive returns too low. Therefore, the trick with this strategy is for markets to behave as expected and, ideally, to remain stable or improve.
Unfortunately, as the problems with subprime debt began to unravel the market became anything but stable. To oversimplify the Bear Stearns situation, the subprime mortgage-backed securities market behaved well outside of what the portfolio managers expected, which started a chain of events that imploded the fund.
First Inkling of a Crisis
To begin with, the subprime mortgage market had recently begun to see substantial increases in delinquencies from homeowners, which caused sharp decreases in the market values of these types of bonds. Unfortunately, the Bear Stearns portfolio managers failed to expect these sorts of price movements and, therefore, had insufficient credit insurance to protect against these losses. Because they had leveraged their positions substantially, the funds began to experience large losses.
http://www.investopedia.com/articles/07/bear-stearns-collapse.asp
We are talking about Oil speculation. Stop talking now. You are embarrassing yourself.Ohh they were not speculating on subprime mortgages at all were they ?
they just bought them to be patriotic.
uscitizen
Villified User
As the above article by real experts states buying CDO's were a hedge fund strategy.
this has to be embaressing to you and damo.
Let the attacks on me begin.
Cancel 2016.2
The Almighty
It is a complete knee jerk reaction. Notice how no one was bitching about speculators when they kept oil prices below fair value in the 1990's. Or do you honestly think oil (a diminishing resource) actually was worth $10 a barrell back then?
If you want prices to go down, give the markets a reason to expect future supply increases in energy.... whether it be via more domestic drilling or from a push into more alt energy production. Watch how fast the bulls turn to bears.
Trying to "control" speculation in the market via regulations is friggin idiotic.
Side note... "speculation" allows me to protect my clients against higher energy prices. They have benefitted greatly from it.
Again, the conversation is about oil speculators, not mortgage speculators. Please, stop talking. You also used them as an example of oil speculators that were bailed out during the downtime in oil pricing. It didn't happen. Stop digging. You are far too deep already.As the above article by real experts states buying CDO's were a hedge fund strategy.
this has to be embaressing to you and damo.
Let the attacks on me begin.
Cancel 2016.2
The Almighty
Amen.
Hey, uscit. My position has been the same throughout. We are talking about oil speculators when you jump in with a "gem" about how they are all bailed out like Bear and Stearns. They aren't. Nobody cared when the speculators lost during the 90s. Nobody saved them with legislation, nobody bailed them out, nobody was outraged that real people lost money that owned their stocks.
None of the people you listed were ever bailed out because of oil speculation. You have no idea what you are talking about and need to shut up.
Cancel 2016.2
The Almighty
This is the part that so many who lack a fundamental understanding of the markets seem to think. FUTURE prices of commodities are driven in large part by the relationship of future demand vs. supply growth.
If you design plans to either increase supply (ie... more domestic production) or to decrease demand (ie... increase alt energy use) then you will see the oil futures drop in value, which will also push down current spot prices in oil.
It will have a much quicker impact than anything else.
What do you think has been the root of the $20+ drop in oil from $148?
It will lower dependency. Why do you fail to understand that it is important to seek being less dependent on others when we can supply ourselves? I imagine a time when we no longer care about the ME beyond our regular amount because we do not need to ensure oil flow....
Why must we be so fricking blind we can't see past today?
Cancel 2016.2
The Almighty
Really? So the US currently produces more oil than it uses? How the hell can you justify that comment?
Side note: Oil prices are driven by WORLDWIDE demand vs. supply. Even if your moronic statement were true, it would not change that dynamic.
T
TRGLDTE
Guest
Ohh they were not speculating on subprime mortgages at all were they ?
they just bought them to be patriotic.
I don't think that we should have bailed out Bear Stearns, and I never claimed they had any motive other than profit.
No Bear Stearns did not hold subprime mortgages. They held Collateralized Debt Obligations that were derivatives of the subprime mortgages.
Subprime mortages were bundled into pools and the pools backed the CDOs. CDOs were sold in tranches. The entire pool was divided into a series senior-subordinate layers (tranches), that is AAA, AA, A, BBB, BB, and B, where the best grade was AAA. Each subordinate layer is set up in such a way that the lower grade takes all the 'hit' first. "B" paper is referred to as the "first loss cut." B paper is only protected by the equity in the properties. With the widespread issuance of 100% financing, we can easily see the crisis looming. I know that you, like I, have been pointing pointing this out for YEARS.
A major problem is that 90% of the tranches offered into the secondary market were rated AAA, with the subordinates only accounting for the remaining <10%. As the subprimes foreclose we see that there is a default rate in excess of 10%, so even the (supposed safest!) AAA CDOs are getting hit.
While the average Joe can't really look at an investment like a AAA CDO and realize there is inordinate risk, a company like BS, chock full of MBAs, must have had at LEAST one guy or gal looking at the macro situation (90% AAA) and had a clue that there was something very, very wrong.
T
TRGLDTE
Guest
You did a nice job of regurgitating the url.
As to #48 above -
As the above article by real experts states buying CDO's were a hedge fund strategy.
Buying AAA paper, the best rating, is baaaaaaaddd.
(Addendum): I know that individuals engage in the same type of interest rate arbitrage as Bear did. Refi the house, take equity, buy a higher returning investment. And these are the smart ones. The dumb ones buy a fancy car. Should we bail out these folks when judgment day comes? Seems "we" are on track to do that to the tune of $300Billion dollars as the first installment.
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uscitizen
Villified User
In a way we do. We do export some domestically produced oil.