Here We Go Again: AAA-Rated Bond Loses 26%.

Investors in the AAA tranche of a $308 million note backed by the mortgage on the 1740 Broadway building in NYC got crushed. May 28, 2024 [WEBSITE]( | [UNSUBSCRIBE]( Here We Go Again: AAA-Rated Bond Loses 26%. SEAN RING AAA-Rated MBS Tranche Loses 26% Think of the financial markets as a skyscraper. The least risky securities make up the foundation. The most dangerous stuff is on top. When the foundation starts shaking, it’s only a matter of time until the top of the skyscraper is visibly vacillating in the moonlight. We’ve just seen the first signs of a new crisis. Its sudden downturn is a warning sign that the entire financial structure is at risk. The news is the good tranches (it means “slices” in French) of mortgage-backed securities are wobbling. But before I delve into the current situation, let’s revisit some history. If you’ve seen The Big Short, you’re already familiar with the 2008 Financial Crisis. If not, I’ll guide you through it, as it holds crucial lessons for our current market. MBSs and the 2008 Financial Crisis The 2008 financial crisis, a monumental event in the history of global finance, is often remembered for the dramatic stock market crash in October 2008. However, the roots of the crisis lie deeper in the collapse of mortgage-backed securities (MBSs) well before the market fell. The Housing Boom and Subprime Mortgages In the early 2000s, the United States experienced a significant housing boom fueled by low interest rates and a surge in subprime lending. Subprime mortgages were loans given to borrowers with poor credit histories, typically at higher interest rates, to compensate for the increased risk. Do you remember NINJA loans? NINJA stood for No Income, No Job or Assets. Banks and financial institutions, seeking higher returns, aggressively issued these asinine loans with the government’s eager help. The Mechanics of MBSs MBSs are financial instruments created by pooling various home loans and selling the resulting cash flows to investors. (Commercial MBSs package corporate real estate.) This process, known as securitization, was designed to spread risk and provide liquidity to the housing market. However, the increasing inclusion of subprime mortgages within these securities introduced significant risks into the system that the idiot quants thought would cancel each other out. Housing Prices Peak and Begin to Decline By 2006, housing prices had reached unsustainable levels. As prices began to decline, homeowners with subprime mortgages couldn’t sell their homes, leading to a rise in mortgage defaults. The decline in housing prices crushed the value of MBSs, causing significant losses for investors. The Collapse of Bear Stearns In June 2007, Bear Stearns, a major investment bank, announced the collapse of two hedge funds heavily invested in subprime MBSs. This event was one of the first major indicators of the looming crisis and highlighted the vulnerabilities within the financial system. The Domino Effect IndyMac Falls IndyMac Bank, a major mortgage lender, faced a similar fate. Specializing in risky home loans, IndyMac was heavily exposed to the subprime market. In July 2008, the bank was seized by federal regulators after a bank run, marking one of the largest bank failures in U.S. history. The failure of IndyMac underscored the widespread risks within the mortgage lending industry. The Lehman Brothers Bankruptcy Lehman Brothers, another major investment bank, was heavily exposed to MBSs. As the value of these securities plummeted, Lehman struggled to stay afloat. In September 2008, the bank filed for bankruptcy, marking the largest bankruptcy filing in U.S. history. The collapse of Lehman Brothers sent shockwaves through the financial system, leading to a severe liquidity crisis. Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson let Lehman fall without knowing the knock-on effects. And you wonder why we don’t trust the “experts.” [External Advertisement] Secret Partner... This Is The New AI Chip Powerhouse]( I bet you've never heard of it... but this newly public company is set to become key to Nvidia's seat on the AI throne. And for now... you can get in while it's still cheap. [Details Here!]( [Click Here To Learn More]( The Broader Impact The Role of Credit Rating Agencies Credit rating agencies played a significant role in the crisis by assigning high ratings to MBSs despite the underlying risks. These ratings misled investors into believing the securities were safe, exacerbating the eventual collapse. The failure of credit rating agencies to accurately assess the risk of MBS was a critical factor in the spread of the crisis. If you saw The Big Short, you may have laughed that they portrayed [the credit ratings agency lady as visually impaired](. If you want to read about my old girlfriend at S&P and how she taught me about all this, read “[Credit Ratings and Old Flames]( from the June 2, 2021, edition of the Rude. Government and Regulatory Response The U.S. government and regulatory agencies took several measures to address the crisis. The Federal Reserve provided emergency funding to struggling financial institutions, while the Treasury implemented the Troubled Asset Relief Program (TARP) to purchase toxic assets and inject capital into banks. These measures aimed to stabilize the financial system and restore confidence. It also blew out the Fed’s balance sheet. The Bailout of AIG AIG, a global insurance giant, faced enormous losses due to its exposure to MBSs and credit default swaps. In September 2008, the U.S. government stepped in with an $85 billion bailout to prevent the company's collapse, highlighting AIG's systemic importance and the financial system's interconnectedness. Lessons (Not Really) Learned and Reforms Dodd-Frank Wall Street Reform and Consumer Protection Act The U.S. Congress passed the Dodd-Frank Act in 2010 in response to the crisis. This comprehensive legislation aimed to prevent future financial crises by increasing regulation and oversight of the financial industry. Key provisions included the creation of the Consumer Financial Protection Bureau (CFPB), stricter capital requirements for banks, and enhanced regulation of derivatives. The Volcker Rule The Volcker Rule, a key component of Dodd-Frank, prohibited banks from engaging in proprietary trading and limited their investments in hedge funds and private equity. The rule aimed to reduce risk-taking by banks and protect consumers from the fallout of risky financial activities. Did any of this work? Ongoing Challenges and Future Outlook Current State of MBSs For about five years after the crisis, the MBS market was dead. Nothing was happening. Then, the banks realized the Fed was “never” going to raise rates. Despite flirting with rate hikes at the end of 2018, the Fed didn’t commit to that strategy until 2022. While the market for MBSs has recovered, the structure and regulation of these financial instruments have changed significantly. Stricter underwriting standards and increased transparency aim to prevent a repeat of the 2008 crisis. And yet… What Just Happened According to [Bloomberg]( For the first time since the financial crisis, investors in top-rated bonds backed by commercial real estate debt are getting hit with losses. Buyers of the AAA portion of a $308 million note backed by the mortgage on the 1740 Broadway building in midtown Manhattan got less than three-quarters of their original investment back earlier this month after the loan was sold at a steep discount. It’s the first such loss of the post-crisis era, according to Barclays Plc. All five groups of lower ranking creditors were wiped out. Market watchers say the fact the pain is reaching all the way up to top-ranked holders, overwhelming safeguards put in place to ensure their full repayment, is a testament to how deeply distressed pockets of the US commercial real estate market have become. Here we go again. My esteemed colleague Jim Rickards said after the March 2023 bank crisis that we were in the eye of the storm and not out of it yet. Once again, he called it correctly. If we take the time from the first failings of MBSs during the crisis to the stock market capitulation of October 2008 and apply that to now, we should see a market crash in about a year. There’s no guarantee of that, of course, but it means we may have time to harvest upside gains thanks to a “crack-up boom” before we hurry to the sidelines. Wrap Up The 2008 financial crisis was a complex event driven by the collapse of MBSs and the interconnectedness of the financial system. It highlighted the dangers of excessive risk-taking, inadequate oversight, and the failure of critical institutions. While significant reforms have been implemented to prevent a repeat of the crisis, they have yet to prove successful. MBSs, once seen as a tool for spreading risk, became a catalyst for one of the most significant economic downturns in history. The lessons we didn’t learn from the crisis continue to plague our economic policies and market regulation. We could see a repeat of the 2008 mess, only worse, in the coming year. But that doesn’t mean to sell right now. It means to keep a weather eye out for trouble. Hold ‘em, don’t fold ‘em. We’ll need to run in a bit, though. All the best, Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( Rate this email Like Dislike Thanks for rating this content! Looks like something went wrong. Please try to rate again. In Case You Missed It… All Hail the Great MAGA King! SEAN RING Greetings on this fine Monday. I wrote this just over two years ago, and since we’re off today, it’s worth revisiting. It’s completely relevant to the upcoming election in November. Enjoy your day and see you tomorrow! --------------------------------------------------------------- Let’s turn our attention to the “adults in the room.” Yes, that lame excuse of an executive team known as the Biden Administration. Don’t worry, I’ll get to all the reasons I think Trump screwed up and ultimately lost the presidency in 2020. But as I thought back to [my bar conversation in Rome six weeks ago]( I still have no idea how anyone can think the US in particular, and the West in general, are in a better position than they were under Trump. It’s a staggering bias, and as my good friend and Rude reader Michael said, “Eventually subjective value is trumped by reality.” We’ll know for sure in November, I suppose. So today, let’s have some more fun at the expense of What’s-Left-of-Joe. Why Trump Lost First, we need to get something straight. As much as I hate to say it, DJT deserved to lose the 2020 election. His own bias - he’s scared to death of germs - allowed him to make the dumbest decision of all: to shut down his own country. You could tell his initial inclination ran against it, but like UK Prime Minister Boorish Johnson, he was frightened into doing something utterly contrary to his own instincts. Then he backed the vaccines, about which we’re only now finding the real truth. Here’s what he should’ve done: told the sick, infirm, and immunocompromised to stay home without fear of getting fired, and the healthy to go to work, perhaps get sick, get better, and then get back to work. This health “crisis” would have been over years ago. Literally. On that mistake alone, he should’ve been - and was - shown the door. But he also blew out the deficit, increased the national debt, and allowed his incompetent Federal Reserve Chairman - yes, the one who just got another four-year term - to poop the bed and cut rates when he should’ve continued to hike them. Again, this economic and financial crisis wouldn’t be as massive as it is today. As for his “mean tweets” and the “untruths,” I couldn’t give a toss about them. As if any politician has ever told the truth! With all that said, how have we done with the “adults in the room” back in charge? [The "X" Chip]( This AI microchip is so powerful…. It’s powering NVIDIA’s success… And the future of AI itself… Which will send the current Wealth Window into OVERDRIVE… Positioning one stock for a 10,000% run in the coming years. [Watch this video for the full details.]( [Click Here To Learn More]( Since Biden Took the Reins It’s safe to say Joke Biden is the single worst president since that bastard Woodrow Wilson. (Wilson is the one who got America into World War I for no good reason at all, only to increase state power.) Biden closed the Keystone XL pipeline to appease the arts majors who have no idea how things work. Biden left Afghanistan a complete mess and gifted $85 billion in military equipment to the Taliban. Inflation has been utterly insane under Biden. No, this isn’t the “Putin Price Hike.” No one bought that lame excuse anyway, further proving the point that “the left can’t meme.” Biden’s odious position on Russia/Ukraine - essentially, fight to the last European - is the main price driver in the world economy right now. This may starve millions of poor people who depend on Russian and Ukrainian wheat to feed themselves. Oh, and we can’t get any of the goodies that Russia exports in bulk, like potash, vanadium, cobalt, palladium, and nickel. And, oh yeah, oil and gas. His policies are not only asinine, but insanely expensive. The Imposition of Costs And this is where it gets sticky for Uncle Joe. His policies are costly. In a democracy, people long ago figured out that you can vote for a greater share of the public purse. And they’ll surely do “vote harder” this November. What that will entail this time around may not be a direct acquisition of public funds. It may be a demand for policy changes that lower costs for consumers. Potentially demanded policy changes may include a complete opening up of the economy without hindrance, a return to “normal” interest rates regardless of a stock market hit, and a u-turn on America’s costly Russia policy. I’ve written many times: you can do whatever you want with interest rates at zero. There’s simply no penalty for wrong moves. That’s why zero rates are so attractive for incompetent politicians and businesspeople. But as the bond market vigilantes return, this position is becoming untenable. Biden doesn’t want to be forced into making these changes, so he’s gone on the attack. The Great MAGA King Misfire And like so many times before, Joe Biden took aim and shot himself in the foot. At a Democrat fundraiser on a Friday over two years ago, in a bumbling, rambling speech, Biden referred to Trump as the “Great MAGA King.” Of course, the left thinks it’s a genius insult. Politico writers, and other people who laugh without moving their mouths, think Biden “sharpened his attacks.” Yeah, his attack was about as sharp as a marble. Inevitably, Trump took the grapefruit Biden tossed him and smashed it out of the park. As Google is a crap search engine now, I used the Brave Search to find this: Credit: [Brave Search]( Great MAGA King merch litters the t-shirt shops right now. On Truth Social, Trump himself posted this: Credit: [Twitter]( (ironically) Why Biden and his crew think he landed a punch with this is beyond me. More than once, I read the comment, “If Trump is the Great MAGA King, then I’m his loyal servant.” And this sentiment will only become more prevalent as Powell hikes and the middle class’s economic pain becomes more acute. The likeliest scenario is that Biden gets his head handed to him in November. This opens the door for a Trump/DeSantis or Trump/Vivek ticket for the Republicans in 2024. Trump can play golf while his Veep runs the country. Then, he’ll take over in 2028 and get two terms. It’s a plausible scenario that gives the Democrats the vapors… and for good reason. Conceivably, they wouldn’t - and perhaps couldn’t - get back into the White House until 2036. Wrap Up Though his Yes Men are telling him how pithy his comment was, President Biden gave 45 a rallying platform and a massive lift by naming him the Great MAGA King. It was stupid to say if only by directing his attention to his vanquished predecessor. There was no reason for it - call it an unforced error. And now, Biden will have to deal with the consequences of his own goal until November 2024. All the best, Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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