Re-Remics: Wall Street's Old Bad Ideas Are Back

http://tr.im/xhJc
funny - and horrible

Hey kids, remember how once upon a time, a bunch of smarty-pants Wall Street types decided that they could reap a crap-ton of magical treasure by repackaging good mortgages and bad mortgages and snips and snails and puppy-dog tails into massive collateralized debt obligations, presented them butter-side-up to various ratings agencies, earned AAA-ratings, then launched a series of high-stakes bets on their financial performance, leveraged out the ass, with AIG covering everybody's bets? It was a brilliant idea that only hit a teensy little hitch when the housing market didn't keep expanding, forever, like the universe, and the whole infernal house of cards collapsed? GOOD TIMES.

Anyway, those good times are set to roll again! Enter the Re-Remic, which stands for "resecuritization of real estate mortgage investment conduits." Now, WTF does that mean, exactly? Sam Jones at FT/Alphaville calls it "mutton dressed as lamb." "Or," he says, "in the patois of the international back-office banking shameless: recooked CDOs."

A re-remic is - to all intents and purposes - a CDO. A collateralised debt obligation. It's a CDO with a few structural quirks like low granularity or sequential capital repayment that are supposed to convince investors it's a different thing entirely.

A re-remic though...targets a specific bond, and then rejuices it. Take, for example, a subprime CDO triple-A tranche. Said tranche may rather have suffered of late. So why not re-remic it? Take the suffering triple A bond (perhaps its now AA) and then put it through the CDO tranching machine again: carve out, from that single bond, another set of tranches, one of which, according to subordination and other tricks, will be triple-A once more.

Does any of this seem familiar? Unless you are, say, the main character from the movie Memento, you might, like the Awl's Alex Balk, recognize Re-Remics as something that looks "a lot like the collateralized debt obligations that helped bring about the recession in the first place." That's because that's exactly what they are! But, as Balk gently snarks, "this time it will be different, because the only thing that could go wrong is that the housing market loses further value, and we all know that can't happen, because of, I dunno, magic!"

So, as long as nothing happens to the housing market, everything will be fine! Say, how is the ol' housing market projected to perform in the next few months?

The New York Times, August 26, 2009:

As the housing market seeks a bottom, option ARMs, which accounted for $750 billion in mortgages made from 2004 to 2007, according to the industry newsletter Inside Mortgage Finance, remain a risk, especially because many are not eligible for refinancing. About a third are already in default, according to analysts.

Compared with subprime loans, option ARMs are fewer but tend to have larger balances. Resets on option ARMs in recent years have often doubled the payments.

"Everyone's been focused on subprime, but we're more concerned about this," said Todd Jadlos, managing director of LPS Applied Analytics, which analyzes data for the financial industry. "By the time subprime defaults had increased 200 percent, in June and July of 2007, option ARMs had gone up 400 percent. People just didn't notice because the overall numbers weren't as high."

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First American CoreLogic anticipates 600,000 option ARMS will reset within four years.

Yikes! That does not sound good for the health of the housing market, does it? Oh well, at least we have Benjamin Bernanke, and his solid history of watching over the derivatives market, to fall back on!

Anyway, the word is "Re-Remic," and it rhymes with "pandemic."

and cynic. and triaminic.