General Trading Chat

[siddhant4u]

we have seen mortgages bundled together and sold to hedge funds, pension funds, colleges, govts where hundreds of mortgages were sliced and diced and bundled together to the point that no one knew which area it covered and what asset quality they represented. It's like buying separate coloured lego pieces and then mixing them together and dividing in equal parts.

Now some clever guy came up and said, what if any of these default? Good question, one should buy insurance in this case. Comes CDS (Credit Default Swap). Sort of insurance to pay in full in case mortgage papers default. or your Derivative papers default.

So Bank A, bought 1million $ bonds of say Corp X from Bank B and went to Bank C and bought insurance in case Corp X could not repay. Its not clever bank C, has no exposure, but since everyone was happy, wrote insurance document and received premium of $100,000. Bank C said, its Free Money, as Corp X not going to default. Now what. It's not joke, Bank C started selling these insurance premiums bundled together to hedge funds and other financial institutes. Now everyone wanted to buy insurance on top of insurance bundle !!

CDS square is born.

AIG went down due to naked selling CDS without any risk assessment or hedging. Lehman brother went down bcos they couldn't repay either. Total due on Lehman was 400 billion $

market for CDS was 15 trillion USD, more then world's total forex market.

There are other 'exotic' instruments too such as 'synthetic CDO' whatever it mean.

 

[siddhant4u]

Coming to India, Indian banks provide money for home loan, they are stuck with this repayment promise and don't have more money to give it to other lenders coming through door. They went to RBI, RBI refused to allow packaging the home loans and selling it to others. This saved India from sub-prime crisis. And this is why we need strong RBI and SEBI without govt interference. But alas, those days are over.

 

[siddhant4u]

the best part of CDS I forgot to add, Hedge Fund A, could buy CDS (default swap insurance) from Lehman Brother that Citibank will default its obligations. Even though Hedge Fund A doesn't have any bonds or exposure to Citibank !!! so pay 100,000 $ for a year or two if you are sure of default coming soon, and get 1 million $ free

apane Riskyman would be buying bucket loads of CDS if they come to Indian market

 

[Newbie Day-Trader]

It's very easy to blame banks, everyone does it but the main culprit was Federal Reserve for keeping interest-rates too low, & the U.S. government & politicians for pushing banks to loan money to less than capable borrowers & lowering the borrowing-standards by way of regulations.

 

[Newbie Day-Trader]

Even Rakesh Jhunjhunwala lost 102 crores in DHFL
https://www.businesstoday.in/market...wala-q4-loss-kapil-wadhawan/story/364370.html

and he lost 1600 crores in 2016
https://m.economictimes.com/markets...rore-in-just-16-days/articleshow/55467835.cms

How on earth do you loose so much - but how much do they make...

Looks like Jhunjhunwala didn't follow his rule of not averaging losers.

 

[siddhant4u]

Cement shares ke liye buyers line laga kar khade hai...

ACC pre-market up 4.3%

 

[timepass]

That's a lot on CDS, but you seem to be right about the rating agencies.

IL&FS hosted top executive of credit agency, got high ratings
https://indianexpress.com/article/b...ve-of-credit-agency-got-high-ratings-5836964/

Will try to explain the crisis in easy terms

As right pointed out above, Banks were giving mortgage to anyone who comes knocking on the door.

Now that banks have lent money to buy house for next 30-40 years, they don't have any more money left to mortgage. What they could do to get more money so they could give more home loans to people who don't need it?

Banks started selling these mortgages to anyone who wanted to buy. Mostly Pension funds were customers who wanted secure AAA rated Mortgage receipts. Now problem was AAA ratings, if you are selling bundle of mortgage there is bound to few which would default but here is the catch, throw a stripper party and rating agencies will give any ratings !! These papers were sold to pension funds, and hedge funds. Hedge funds sold these to others for profit.

Now we all know that in ideal world only real things should have any value. Like company shares which are traded are real, as you own a part of company which you can buy/sell. But banks/brokers want more money flowing so they create new instruments "Derivatives". Which are not real and just derive prices based on Stock value. Banks started buying selling derivatives of Mortgage papers from above!

Everyone wanted a slice, so banks started innovative ways to generate new instruments. Can anyone guess what it would be? Derivative of Derivative. It's like Future contract tracking future prices of a stock. That's Derivative Square.

now back to mortgages, sub-prime loans, i.e. loans to people who barely can repay. sweepers were given loans to buy house worth half a million usd. These were combined together. Anyone would say Junk + Junk = Maha Junk. But NO. Beloved Rating Agencies gave AAA ratings to collateralized debt obligation (CDO's) !!!

now these junk papers were traded as CDO, CDO square based on these junk CDO's and some says cube etc were floated too.

These didn't stopped here.

 

[timepass]

Once again, Sensex has open = high.

 

[timepass]

Once gain, CG Power seems to be heading for 10% upper circuit - for 3rd session in a row. Any idea why ?

 

[Arindam Bhattacharjee]

Today looks good for trading, a lot of stocks are going up.
https://docs.google.com/spreadsheets/d/1n2ZtPgvDmW5BnHXVVioaZd4r6Wln1PLfXnoPz2NfJVc/edit?usp=sharing
Nifty might swing to 11581