Negative Oil Prices

In the wake of a drop-off in the demand for oil, prices went negative for the first time in history. What does this mean? Like any asset, the price of oil is driven by supply and demand. With high supplies and effectively no demand, suppliers are now having to pay users to take oil off their hands since they have too much and nowhere to store it. In fact, on April 20, some oil prices actually closed at -$37.63. So, if you have any place to put it, you could get paid to takes some oil. See article here, Forbes.

Return of Subprime?

While it represents a small segment of the overall mortgage market, so-called "nonprime" mortgages are once again gaining popularity. Although they now have a different name (i.e., no longer subprime), the fundamentals (or lack thereof) are similar to those of prior cycles. The extent of their impact will be determined by the broadness of their reach and whether changed regulations will control their risk profile. See article here, Financial Times.

Synthetic Mortgage Backed Security

Put-Call Parity describes an equality relationship that must exist across call and put options on a given security, assuming the same expiration date and exercise price. Given this relationship, traders are able to create "synthetic" positions. Such positions allow investors to mimic the payoffs of an actual position in the underlying investment. Recently, the lack of available liquidity in CMBS (commercial mortgage backed securities) has led investors to create synthetic positions in these assets. See article here, Reuters.

David Bowie: Finance Genius?

Famous musician David Bowie just passed away. While most people remember him for his music, he is also famous in the finance area. Bowie was among the first to offer an asset-backed security, which in his case was based on future royalties from his songs. In recognition, this type of asset is often referred to as a "Bowie-bond." See article here, Bloomberg.

Jumbo Mortgages and Securitization

After a home buyer secures a loan from a bank (i.e., a mortgage), the bank often securitizes the loans, which means they package them for sale to investors. This process is much easier if the loans are backed by Fannie and Freddie, the government sponsored mortgage agencies. Fannie and Freddie, however, will only back loans below certain values -- the so-called jumbo loans. This amount has generally been capped at $417,000 (although higher in certain high-cost areas). Regulators plan to lower these caps, which means jumbo loans may be harder to come by since it will be more difficult to securitize such loans. See article here, LA Times.

Student Loan Debt

Obviously real estate was the focus of the recent credit (or subprime) crisis. However, many investors believe that student loan debt, which is also bundled and sold (i.e., collateralized), is the next "crisis" area. Student debt has risen substantially, as has the percentage of borrowers in delinquency. See these two articles: Wall Street Journal and New York Times.

Will Lightening Strike Twice?

Just before the real estate crisis really hit, the Fed said that the issue was "contained." As we know, this was not correct. Recently, Bernanke said that the $1 Trillion in asset backed student loans won't cause a crisis. Hopefully he is right this time. See article here, Kansas City Star.

Reputational Capital

Ratings agencies are supposed to provide an independent view on a firm's (or country's) financial outlook. However, their involvement in the subprime crisis (i.e., their AAA rating on defunct MBS securities) revealed that the rating agencies are often more reactive than proactive. Thus, they seem to have lost much of their respect and influence. See article here, Breakout.

Refinancing and MBS

With mortgage interest rates at record lows, refinancings continue to rise. This creates prepayment risk for holders of mortgage backed securities. (See article here, at CNBC.)