How credit cards become asset-backed bonds
Brad Robideau of American Public Media says:
I thought your readers might be interested in Marketplace’s latest “The Marketplace Whiteboard” video making the financial crisis easier to understand.Mortgages aren't the only financial instruments that get turned into securities. In this video, Marketplace Senior Editor Paddy Hirsch explains how companies make money by buying credit card debt and bundling it.
All of “The Marketplace Whiteboard” videos can be accessed at www.marketplace.org and are part of "Fallout: America's Financial Crisis," Marketplace's comprehensive coverage of the current financial crisis.
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Brad Robideau is probably from APM, not NPR. They're competitors, and Marketplace is from American Public Media, not NPR. Can't imagine anyone at NPR promoting APM stuff.
Zed? Is he a Soviet Canuckistani?
That leaves me with a coupl'a questions.
If these are asset-backed securities, or collateralized obligations, what's the asset/collateral? The CC debt? (Which can vanish if I pay off my card, or become a liability if I go bankrupt?)
And if people decide to pay off their cards in full and start living within their means, that *also* blows this structure out of the water, doesn't it? Hence the lower rating of the lower tranches, I guess.
The asset is the debt, yes. If you pay off your card, the asset is that payment. If you go bankrupt, your part of the fund is nixed, yes, but there are lots of other people's cards in there. It can be averaged out.
I think the idea of people not using credit cards (whether they're living within their means or not) can be written off as fantasy. At least for the foreseeable future.
@ #1:
I'm sure I don't fully understand the relationship between NPR and APM, but my local NPR station carries both Marketplace and Prairie Home Companion, two APM programs. Possibly others at times I'm not listening. I had always assumed APM produced shows which NPR then bought, but never really looked into it.
APM and NPR are competitors. They both produce programs for public radio stations. The vast majority of stations around the country buy and broadcast programs from both APM and NPR, as well as the third major source of programs, Public Radio International (PRI).
There are also a few smaller organizations out there that offer just a few programs, and a bunch of organizations and individuals that just make and sell one program to stations.
Although I don't work on the investment side of the house, I think there's one more piece here.
Those lower traunches can actually be insured with the likes of credit default swaps. So the fund manager purchases the swaps to cover the case where there's more defaults than were originally anticipated. This allows the traunch to actually be rated low risk, even though the underlying securuties suck, though of course the cost of the swap means the effective interest rate will be very low.
What happened with AIG is that even the insurer was going bankrupt so that the swaps were in essence worthless, meaning these highly-rated ABSs were crumbling in value.
He forgot to mention that the "champagne glasses" on the bottom are bigger, so the have more risk but they also have a bigger return.
Consider if you will, that government bonds have become the exclusive patronage of Wall St. banks/brokerages, and that they apply interest rate swaps to government issue paper, just like the tranches on credit cards. The notional value (champagne glass structure) of the corporate bonds issued on Wall St. against government issue around the world is ~ a quadrillion.
Many of the different types of corporate debt issued under iTraxx have collapsed beyond 60%, which is into the BB status, but are still AAA under TARP.
I resent the term "Soviet Canukistani" when America, the bastion of capitalism has spent more money propping up its banks in the short period of the third quarter using gubmint money than Canada. Canada is now more capitalist than America.
SUCK ON IT, DUDES!!!!!!
stinking frostbacks
http://ca.youtube.com/watch?v=tkDupTqyNaU
actually, we just spell it "zoviet" up here, is all. the rest is correct. carry on.