How far will gold and silver fall?

The money is going into their reserves. They are undercapitalized. One would hope that selling off assets would result in a gain.

 

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What are you using as reference to the "under capitalized" statement you make other than someone's reposting of the Henry Blodget blog? Or is it just an opinion?

 

Countrywide does not own most of the mortgages they made, they securitized them This securitization is the forefront of the lawsuits against them, hence their only real exposure will be the lawsuits, not the foreclosed properties.

FWIW I was a Director at their major competitor so I understand the industry.

Chris

 

If gold goes down it should only go down $100 and not much more. You can bet on two things. One is that we've never been in this good of a market before and we should all be happy about it and if you're waiting for prices to go down then you better not wait too long because it's not gonna happen. Not in this economy. just my 2 cnts.

 

Oh their liability is much more than these lawsuits.

What they sold were securities based on income from the mortgages. Once a property is foreclosed, and/or the owner stops making payments, this income disappears and now becomes a direct liability to the bank. Not only are they liable for the dividends and initial capital on the security, but now they have a property that is costing them money. (taxes, upkeep, utilities, hoa dues, court costs, fees, etc). The fact they can't foreclose and have landed in court has further compllcated the issue for them as they have no remedy against defaulting buyer.

So the bank has a liability to the owners of the securities and a liabilty of the property itself and no remedies. Oh and they are also being sued by AIG and other insurance agencies for having lied about the quality of the mortgages and hence the quality of the securities they sold. It does not matter that Countrywide did this. BofA integrated them and hence the countrywide problem is now a BofA problem.

BofA itself is a retail bank. At one time 1 out of 2 banking customers had some sort of relationship with them. Now 1 out 7 Americans are on foodstamps, 10s of millions have lost their jobs, many have too much credit and are having a hard time paying, so forth and so on. This is BofA's primary market for making profits. This in itself should give anyone some concern who knows anything about banking. No wonder they are selling off assets.

 

I am sorry Fatima but every single thing you write here is wrong regarding a CMO or securitized bundle of mortgages. It is so wrong I feel you are simply are making it up and have absolutely no experience in CMO's or any other type of mortgage securitization product. I won't even go into how wrong this is, except to state nearly every word in this is incorrect. The only instance where this is correct is for the one half of one percent of origniated loans with problems, and even those frequently were bundled and offloaded to others. Originators NEVER keep any interest in the mortgage, they are in it for the servicing rights. I know, I handled the one half of one percent loans of a company that at the time was LARGER than Countrywide.

Others don't have to believe me, (I know Fatima won't), but I was in this industry, and did my final MBA paper on this very subject. Not bragging, just explaining my background.

Chris

Edit: Sorry if that sounded harsh Fatima, (you just seem to bring out the "best" of me), but I could write a book, (have written a 120 page paper in fact), on this subject. If you wish for me to explain the machinations of mortgage securitization, its transfers of ownership, its obligations of and to the originators, the reason Countrywide may have a lawsuit issue but not a foreclosure one, Why Countrywide originates mortgages at all, PM me and I can go through the boring details. I just wanted the board to know this isn't the true legal landscape countrywide finds themselves in vis a vie defaulted or foreclosed homes.

 

You can give a long paragraph say that it's wrong and also to put into question my credibility, but it shouldn't take much to read that in that parapraph you did not say how it is wrong. As I said before personal acnedotes don't fly much with me as you may have written many papers on this, but it's irrelevant to the point. I'd rather you get to the point rather to make long posts about me on a personal basis, your academic credentials, and making apoligies to the forum. It's all irrelevant.

We are talking specifically about BofA and you said their only exposure is these lawsuits. The fact remains that BofA (via CW which they absorbed) sold securities based on the income producing from the mortages. If it is your contention that BofA is not liable for any of that, beyond the lawsuits from the disgruntled, then it would be interesting to hear. BTW, BofA also directly sold mortgages as well as it is the largest retail bank in this country and they don't make money without selling debt.

 

Unless I see details or sources on this discussion from both sides my viewpoint isn't going to change much. We can argue all day about the business model, but there are insolvent banks around the world, and that doesn't seem to have much impact on keeping the doors open in the current climate as long as it's too big to fail.

Meanwhile the latest dip is over for the time being. Silver very briefly dropped under $39 but has been strong above $40 since then. Gold was hovering just under $1800, but both metals got an added boost today from comments by the President of the Chicago Fed.

 

I asked you to PM me if you wanted the details, but you insist on discussing it here. Ok, here we go:

In a CMO you take the underlying securities and develop tranches of the debt. THese tranches can be structured however you like, usually with senior and subordinated shares. The legal structure that owns the securities is the entity responsible for the payments. THe originator donates the mortgages in exchange for shares in which the legal structure then cashes out as tranches are sold. Based upon how CMO's have been structured since the early 90's the originator does not keep residuals, and sells the remainder tranche the market for a severe discount.

That is about as simply as they can be explained, and there are tons of details regarding the tranche structuring.

Happy Fatima? How much of this structuring is subrogatable to the originator? None, except to the extent that there is incomplete underwriting and then just to the extent the originator gets to replace with a like kind security.

This is the background and knowledge of what you are actually talking about that I said was lacking in your posts. THis is not any personal anecdotes, this is a quick lesson in actual mortgage securitization process.

Now, I await your rebuttal of this structure and how the legal entities are broachable or unwindable.

 

Inflexion, I hope so, but so far if Gold is mentioned as a "have to have in portfolio" and with "GLD" more than physical such as coins or bars, the weak hands buy in and it sets up for a possible reversal until the weak hands are sheared. However, if it does drop at a time when the news on Europe and domestic financial seem positive, the money could go back into stocks. Today it seemed like each hour, CNBC had a special on about gold, gold mining, CEO of Goldcorp, and that makes me a little nervous. Gold miners did fairly well today also.

 

I've been hearing about gold mining stocks being the place to get into because they are undervalued, and I am also a little bit leery of any consolidated effort like you've described by the media. I would agree if the overal investment mentality is directing people into gold then the chances of a significant dropoff increase, although offset slightly by the gradual buildup. There is room to fall in this bull market without falling off the track, but I don't think the media alone can buck the overall trend. I'd guess that the demand in China and India overshadows what we're doing over here.

 

Rebuttles imply debate, yet debate doesn't consist of 90% of the post listing your acnedotal qualifications. So here is the question again boild down. It should be answerable in just a few lines relative to your contention.

"If someone stops paying their underwater BofA mortgage originated by Countrywide and walks away, which institution takes the loss?"

It's a simple enough question and one when answered will demonstrate that BofAs liability to this mess is much more than the lawsuits filed by a few entities.

 

This require a good bit of research here on the individual companies as a number of mines sold their below ground gold at far lower prices than today's price for gold. It might be more interesting to look at companies that are opening long closed mines because the price of gold potentially makes them profitable again. I've heard of a mine re-opening in SC (in the Charlotte area) that operated before the Civil War.

 

The securitization structure, not Countrywide. These structures are separate legal entities.

Here is a simpler way to explain it. Countrywide, (CW), sets up a legal entity. They donate mortgages are equity. These get cut into tranches. Lets make it simply, say there are 3 tranches for interest, first 5 years, second 5 years, and last 20 years. Then there is a principal tranche, and a residual, (equity) tranche. When a payment is made, CW makes money from servicing, then the rest of the money goes to the entity. In this case the 1st interest tranche would get the interest payment, and the principal tranche gets the principal. If a mortgage is paid off early, that is great for the principal tranche, bad for the interest tranches. Creating these tranches costs money for legal fees and credit opinions, but these fees are more than offset by the added value by creating the tranches. Therefor, CW will receive more than face value for the mortgages. All originators used to keep the residual piece, but because this puts them on the hook for what happens to the entity, so for the last decade of so most residuals, (equity), of the entity is sold off cheap.

Bottom line CW is not responsible for what happens to the mortgages, that is the reason for this structure. However, the lawsuits are contending that CW lied while it was still setting these up, a charge that could be a liability to them.

Chris

 

I find this all relatively confusing as I am not in finance as a profession, but this Wikipedia entry helped me understand a little bit better.

http://en.wikipedia.org/wiki/Tranches

I have seen the term ring-fencing before when talking about derivatives, but I'm not sure entirely what it means. I think the credit default swap piece is key here, as it is a form of insurance or protection against default.

As per http://en.wikipedia.org/wiki/Credit_default_swap

I find this last quote a little bit contradictory though. First it says a CDS can be held by someone with no insurable interest in the loan itself, which seems to imply an outside investor is on the hook, but then it goes to say that the buyer (investor) receives a payoff from the seller (bank) if the contract defaults.

Also per http://en.wikipedia.org/wiki/Credit_event

In this case it seems to be the latter example which would indicate that at minimum the impact here is an increase in the derivatives market. This may explain why it's so large to begin with, but does seem to support that the bank itself is not on the hook.

 

These are talking about a somewhat different issue, and is getting into stickier ground. I would be happy to explore these issues with anyone, but I seriously doubt 99.9% of the people on CT give a rip.

My original point was that originators effectively sell off mortgages keeping the servicing rights. That is the entire basis of the industry. Therefor, Countrywide can have issues of misrepresentation to buyers of tranches, but not really any exposure to the mortgage performance itself. That is why I disagreed with Fatima's post that BAC will have all of those costs from homeowners walking away.

Man, this is like 8 degrees separated from PM, so I will not post any more about it. Anyone can PM me if they really are interested in securitization issues.

To respond to posts about Gold stocks, I would simply say be careful. Gold stocks are used as contra assets by asset managers. Traditionally gold stocks are overvalued versus their return because of the nature of stock performance to the market, this aspect being valuable to reduce volatility. Bottom line is that there are a ton more things going on with the price of gold stocks, and it would be easy for a new investor to get blindsided if he did not understand these issues. Just a friendly warning about those securities to do your homework, and not just invest because you like gold. If you simply like gold, buy gold. Easier to understand.

So......to get the conversation back on track, anyone have any fresh thoughts on where PM is going from here?

Chris

 

Good idea to get back on thread.

What time frame Chris? Short term 1 day to 6months ~ very volatile, possibly 10-20% +/-, due to current unstable Euro , middle east, Asia ( Japan mainly), but China also along with US. Mid-term about 2 years, higher average POG, but still 5-10% corrections possible. Beyond that if the world recovers, as I think it will, the end of the bull market of PM becomes more likely as many put funds from PM to other investments. IMO, as of course, No one knows for sure as we may not survive past 12/21/12 . It will become a lot easier once the fear factor is mainly gone.
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I believe similarly, though I think it would take quite a while to work out higher prices out of the system. Humans to me seem to have about 5 year memories, and if PM's lost their luster I believe it would be a very slow retreat, maybe a quick correction at first but then slow.

I am hoping in two years some other asset class looks attractive Jim! That would be some hope for the economy worldwide at least. Its not that I hate PM, its just that since they are contra assets, they usually do well in poor environments.

 

Well kid, you're going to have to decide whether you believe BAC can't pay it's bills -- or if Buffett's investment is a risk free trade. It can't be both, which is why this is proof you don't understand the issue.

 

Considering that the recent budget cuts put our debt projection for the next 10 years at $24 trillion instead of $26 trillion, I find it hard to see metals going anywhere but up over the long term unless something changes, which it certainly could. It appears that QE3 is being priced into the market due to the recent Fed comments and subsequent spike in prices this week, which would further dilute buying power as well as further inflate the bond bubble. As long as the debt remains unaddressed and monetary easing is in effect I believe we will continue to see 30%+ yearly gains in precious metals. If the debt is addressed, or if monetary easing subsides then I think we will see a deflationary scenario either way, or else hyperstagflation, but either way I still like the outlook for PM's because typically they still improve in buying power even as the price drops in such cases.