Winner's Tilt

[peterbirks]

To the Empire last night for a dinner in Chinatown with Mr Young. No sign of Dr Pauly and I've mislaid the mobile number i had for him. I may pop back tomorrow afternoon when it will be much quieter.

The change in the professionalism of the whole thing, even since last year, was staggering. If you remember (as I do) the desultory cash spent by ESPN on the Main Event in 2003, the sight of overhead cameras, fixed cameras, mobile cameras (although no steadicams as far as I could see, possibly useful if Mike Matusow blew up), spotlights everywhere, was like a step into another dimension.

Had a chat after dinner with a guy at the IP Network and another guy wo is at Betfred. Interesting to learn that Titan was the biggest site within IP. They've never even impinged on my consciousness. Victor also remembered Cromwells from the early 1980s. Long time passed and long times past.

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I'd been running spectacularly well this month (a glance at my Sklansky dollars in a downloaded trial version of Holdem Manager showed that my all-in EV was actually below the amount that I had really won -- an unheard of scenario -- and I'm running at 13.3 BB/100 over 21,000 hands). This brought on a famed case of "winner's tilt", although I reined myself in before too much damage was done.

The problem is that, when you run well for 20,000 hands or thereabouts, the inevitable eventual regression to the mean makes you feel that things are not going as well as they should, so you start pushing rather more marginal situations (these are often moves that would be right in the right circumstances, but the circumstances aren't right).

I decided to try to cure this by forcing myself to 6-table on Stars this morning with a half-buy-in. In effect this stops you making any "speculative" moves because your stack denies you the implied odds. It's a much simpler game to play, although it's rather more boring and it has a lower long-term EV. I ended up losing a dollar over 500 hands in 90 minutes, but this included three pre-flop all-ins against small stacks where AA lost to 76s, AK lost to JJ and JJ lost to AQ on a board of KTxxJ.

Pokerstars doesnn't flip the cards up in all-in situations in cash games, so here was I cheering the Jack on the river, only for it to be one of the 8 cards that cost me the pot. :-). Anyway, at least the Sklansky EV was well above real dollars. Normal service resumed :-)

I think it's good to switch buy-ins and strategies occasionally on sites that have Pokertracker enabled.It keeps the more aware opponents on their toes. But I can't bring myself to play short-stacked.

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If, as expected, Bradford & Bingley is nationalized later today, with the mortgage book being shuffled over to Ron Sanders at Northern Rock, while the deposits are sold on to another financial institution, then we have an interesting toxic sludge scenario.

A few years ago a company called Resolution came up with the bright idea of buying closed life assurance books. The idea was that a number of companies had left the life business, but that still had to administer their old books. Indeed, my own Sun Life of Canada policy is one of these. So, Resolution took over the running of these books with the theory being that, as a specialist in this kind of operation, it could make more money from it than companies which saw closed life books as a non-core nuisance. And the fact that the companies saw them as a non-core nuisance meant that Resolution got the businesses cheap.

Clearly that situation couldn't last for long, and the margins quickly narrowed as other players spotted the potential.

So, the next move was to buy up pension funds. The principle was the same. A number of companies ran final salary pension funds that were closed to new entrants and would have loved to offload them. So, new companies come along as specialist closed pension fund operators.

It occurred to me that these toxic mortgages are exactly the same. They are long-term instruments that still generate income (members of pension fund who have not yet retired, subscribers to life policies who have not yet died, mortgagees who have not yet defaulted) but which require gazillions of capital to operate. It is, in essence, a classic run-off operation ("run-off" is a technical insurance term about a business where nothing new is being written, there is bundles in the bank, but you don't know what your long-term liabilities will turn out to be).

Northern Rock has, almost by default, become a kind of Resolution/Pearl Assurance run-off vehicle for mortgages. But, and this is the point Geoff has emphasized, these mortgages have a value. We just do not know what that value is (which is the same as with closed pension funds and closed life books).

The situation is ripe for a a new Resolution-like operation (indeed, perhaps the newly emerged Resolution Mark 2 will do this) to buy up toxic sludge. The problem is if, as is the case with some Irish banks, the amount that the new vehicle is willing to pay bears no relation to the fictitious value at which the mortgages are still sitting on the banks' books. But that's just a temporary situation. It would solve any "liquidity" problem fairly quickly.

What it would not solve is a situation where, if the banks write the value down to the price that Resolution Mark 2 is willing to pay, the bank becomes insolvent. But I would have thought that if this was a marginal insolvency, the mere ability to offer finality to investors would make it far easier to raise extra capital.

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Comments

Do I have to pay them back then?

[geoffchall.livejournal.com]

I have to confess a vested interest here since I am a Bradford & Bingley mortgage customer. I currently owe £110,000 to them and, somewhat immodestly, my chance of defaulting on this in a way that would have cost B&B money might as well be zero. That mortgage is worth £110K and there is no problem with B&B's lending business. They aren't exactly sub-prime specialists and in any event sub-prime means a different thing in a British context - it just means self-cert or high multiples. Even in the bad old days, self-cert was usually held back to 90% LTV or better.

This valuation thing in itself is a simple piece of maths and any actuary worth their salt should be able to quantify the value of a collection of mortgages, ranging from mine to the unemployed bloke whose mortgage is now 110% of equity who hasn't made a payment. But it isn't valuing the mortgages that's the problem, is it? It's the CDO's and all that shit.

That's the whole nexus of the thing with the American bail-out. If the US Treasury goes in with it's $700Bn and buys stuff up at market value then fine. But if the banks and friends start bleating that this isn't reflective of the true asset value, they should be left to hang out to dry. As is the case with Northern Rock and B&B. The former's value is still being argued about (and I'm delighted to say seems likely to work out at zero), whilst the B&B shares stood at 20p on Friday. A twinge of sorrow for those who have shares from privatisation though.

Incidentally, what happens to a short-sold share which is then privatised? Or in any set-up where it's impractical to produce a matched bargain?

Re: Do I have to pay them back then?

[slowjoe.livejournal.com]

I confess that I'm not an expert on the subject, but I believe that among UK banks, B&B have the biggest proportion of their mortgage book lent to Buy-To-Let investors.

There is a concern (and it was flagged before there was any hint of drop in house prices) that mug BTL punters have been lured into off-plan flats at inflated prices. This was sufficient of a concern that the mortgage lenders trade body had SERIOUS words with the builders and surveyors about inflated prices. Anecdotally, some of these off-plan properties are fetching less than 50% at auction.

It seems reasonable that B&B would take the biggest hit if the BTL sector does blow up. That's the fear. It isn't that there is exceptional risk in their residential mortgages to people like you.

Re: Do I have to pay them back then?

[peterbirks.livejournal.com]

Many many years ago there was a tale Mr Oakes told me about a guy who knew that a company was in trouble. He shorted a huge amount with a plan to 'getting out' before settlement date. Unfortunately the share was suspended the following day. This meant that our friend had to come up with the collateral. In the long run, he would be quids in, but in the short run, he was in troule.

As far as I am aware, if you naked short a share which in effect goes bust, you make your entire short (i.e., eventual match-up is zero) but only in the long run, after the liquidators have determined that there is nothing left for the shareholders. If something IS left for the shareholders, then you make your short less that distribution.

The problem here is that it becomes a totally illiquid market, and you just have to sit there waiting for PwC or whoever to determine how much money you have made. So you do make a lot of money, but it takes time. You'd be far happier shorting at 20p and then getting out at 1p the day before the company went bust.

That's my understanding of it, anyway.

On your previous point, I fear that it is the valuation of the mortgages that is the problem with B&B. It's not derivatives at all in this case. B&B cannot fund its book by going to the wholesale markets (because they have shut down), and so that's the end. The problem is, no-one wants to take on the debt book. So I have to disagree with you Geoff. It isn't a simple bit of maths, and I suspect that the actuaries are saying "we don't know; we have never been here before". This is why the situation is superb for the likes of Resolution.

PJ

Re: Do I have to pay them back then?

[peterbirks.livejournal.com]

A couple of comments on Robert Peston's blog (the BBC) cover Geoff's point: From sagamix:

I don't understand why a reasonably accurate price can't be put on the mortgage book. It's just a bunch of loans, each with a term and an interest rate, secured on a piece of property. You just need to make some realistic assumptions on default rates and property prices, and then PV the future cash flows at an appropriate discount rate ... this latter to depend on the expected outlook for interest rates.

Given the data, and a couple of days to work on it, I could value the portfolio quite easily ... I could get it to a confidence level of inside 20%, no problem at all. So, why no private sector buyer? ... doesn't make sense to me.

And this reply from Frank Castle:

Say someone lends 50 billion from the money markets, in order to lend that to people wanting a mortgage in expectations of a 100% return and a repayment premium of 50% of the original amount.

Now people stop re-paying their mortgages, and any properties are hard to sell (doubly so in the buy-to-let market, as many invested in apartments which are currently difficult to sell) and the ones that do are at less than the mortgage value.

You're left with a bank owing 75 billion and no reasonable expectation of getting the original 50 billion originally lent out, let alone the extra 25 billion required to cover their own repayment premium.

Even the repossessed properties won't cover the costs - if they won't sell, they're not worth anything to the bank holding the keys.

No private company is going to take that kind of exposure on. They'll wait for the bank to fail, or be nationalized, and then swoop for the profitable parts.

Make of that what you will
PJ

Re: Do I have to pay them back then?

[(Anonymous)]

If actuaries are standing around going 'dunno guv' then they are in the wrong business and always have been. Quantifying the worth of a mortgage debt individually is difficult. In my case, there is are hazards to my keeping up payments on my debt to B&B - protracted illness, almighty cock-up dragging business to bankruptcy. But there's enough equity for house prices to halve and still be comfortable within LTV limits.

But as a generality, it's all quantifiable. Someone in regular employment has a 96% chance of continuing to be so, a 92% chance of avoiding major illness, blah blah. Across 100 mortgages it should come to X% chance of default factored with Y% LTV. So a higher chance of default becomes less relevant when the LTV is 30%, although such defaults do have admin costs.

Actuarising a mortgage default should be no more difficult than actuarising a life. What seems to happen is that there's an outbreak of financial chicken flu and actuaries flap their wings and fret over their inability to quantify the risk. Either that or thery're shit-scared because they've previously cocked up their calculations of risk based on a relentlessly rising property market.

I can't quite believe the deal with Banco Santander or maybe I'm getting it garbled. BS take on the B&B deposits of £20Bn in exchange for £18Bn while the government takes the £41Bn loan book and gives the shareholders a pittance. So UK Govt buy $41Bn of debt for £23Bn? With an 'unexpectedly' high default rate of 5% on buy-to-let mortgages, that sounds too good to be true. I presume there's some inter-bank lending in there which UK Govt is taking on.

Damned LiveJournal

[geoffchall.livejournal.com]

too easy to click Post.

Re: Do I have to pay them back then?

[real-aardvark.livejournal.com]

The sense of unreality grows -- this must be what Milan Kundera was talking about all those years ago. Although why he had to illustrate it with a naked girl wearing a bowler hat clambering over a glass coffee table is another question.

My first reaction to the B&B nationalisation was "Why?" Is it politics? Hardly; where's the core constituency? Is it ineptitude? Well, that would be consistent with around eighty years of British monetary policy, dating back to the Gold Standard. I mean, the fallout of B&B going down the toilet has to be relatively innocuous in the current climate. Unless, of course, you want a fried tomato with your breakfast tomorrow morning.

This, however, makes sense. The numbers must therefore be wrong. Surely this government, of all governments, can't have backed into what I calculate as a 70% profit, and I can't be bothered to do the amortisation beyond the 5% guess? And you're forgetting the general UK bank liability for deposits, which apparently comes out to a cool fifteen billion. Mind you, that presumably goes to Santander; and, if it does, that'll be one heck of an interesting financial story.

Then again, the (this can't be true) 70% instant profit is immediately wrapped into Northern-Rock-UK-Gilts'R'Us. That will also be an interesting exercise to watch from the sidelines.

Birks may well be prescient (as so often). Resolution 2, UK Government Sinking Fund 1. However, as Microsoft have discovered to their cost, you don't bet against the government. They have fiscal and arbitrary legislative power. You have an army of coiffeured gentlemen with spreadsheets and expensively tailored suits. No contest.

I'm looking forward to the point where Brown reverts to (moron) type and starts to involve PFI in all of this.