Hello, world

Show me a cash flow, and I’ll build you a bond. That was my mantra when I was an early practitioner of the art I called “financial engineering.” Basically, I thought of ways to cut up cash flows so they could be customized for clients like banks, insurance companies and pension funds.

It all started with mortgages, and the earliest “engineered” bonds were simple sequential CMO’s (Collateralized Mortgage Obligations). We called a deal A,B,C,D when the principle from the mortgage borrowers first paid off class A, then B, then C and then D.

Banks would buy the Class A bonds because they more or less matched the stream of maturing CD’s the banks issued. Way out at the other end of the deal, life insurance companies could buy Class D bonds, which came closer to matching their obligations to pay off on life insurance twenty or thirty years in the future.

I call this kind of dividing up cash flows “time tranching,” because it makes different classes of bonds with ascending maturities, each bond beginning to pay principal only after the earlier class is paid off.

After time-tranching, we started prioritizing cash flow tranches using credit losses, interest rates and payment schedules. With just those methods of creating bonds from pools of loans, we had all the tools we needed to cut up cash flows to our hearts’ content, and a way to make money on Wall Street that lasted twenty-five years.

But I get ahead of myself.

My name is Howard Hill, and I spent my career creating bonds, buying bonds, selling bonds and studying bonds. I loved it. I even felt that I was improving the world by making housing more affordable (and I could prove it).

What I couldn’t do was share what I learned with the general public. Except for a brief period on the Yahoo Finance message boards before I got a job that required all public statements be run through the Compliance and Legal Departments, I only shared my insights in office discussions, client calls, industry meetings, and interviews with specialized financial reporters.

You may hate me as an inventor of structured mortgage bonds, but nothing is ever that simple. Over the weeks and months ahead, I’ll tell the story how these creations initially helped but later nearly destroyed our economy.

We won’t get there following a straight line. Instead, I’ll let the events of the day and market forces determine what bit of the big picture gets exposed and discussed in each post.


10 Responses to Hello, world

  1. Jas Jain says:

    Hello Howard,

    You may remember me from the U. Colorado forum Longwaves. You didn’t mention your career in restoring homes. You may want to check out my editorials on debt and economy website link above.

    Best of luck to you on your bloging career.


    • hhill51 says:

      Hi, Jas —

      Good to hear from you. Remember the series of posts I made to the group about debt deleveraging? Only ten years early, but just the cascade I described.

      The turbo-charging came from the CDS hiding in the shadows created by the Commodities and Futures Modernization Act. t law was stuck onto the Federal budget as an enormous amendment in the final minutes of the lame duck session of congress in December, 2000.

      It was (rightly) called the Enron exemption because they used energy swap contracts to hide their scam in offshore unregulated vehicles, but it also created infinite leverage (!!) for institutions that bought or sold credit insurance.

      With theoretically near-infinite return on capital possible, the problem I discussed with the group back in the ’90s was several times larger than all the debt we could see when it finally tipped over in 2007.

      more later,

  2. Rich W. says:

    You have at least one guaranteed daily reader in me, and I’ll point your blog out to many more. Looking forward to more.

  3. dsv says:

    I know nothing about this at all and look forward to learning

  4. Chuck Hinson says:

    Hi Howard, reading with interest as you made me a lot of money with your info and I blew it – hope I am a little smarter next time around.


    • hhill51 says:

      Hi, Chuck —
      As before, I hope to keep my comments about interesting financial and market topics, and not specific investment recommendations. I’m sure some amount of market opinion will creep in, but I’m a big believer that if you teach a man to fish, he’ll be able to tell the same whoppers for years and drink all day in the hot sun. People find that far more entertaining than just eating some fish.

  5. Egor says:

    Hi Howard (aka: the bond guy)

    Long (waves) ago during the internet infancy I was captivated by the Cycles forum — usually Watergating (just listening in), though I may have dared a post or two.

    What comes around? A decade later I have the opportunity to read Goerge Ure (the bear on the boat), Jas Jain, and Howard Hill — again. Someone send a pigeon to Arch Crawford!

    I’m enjoying v2 — thx all,

  6. Millerd1 says:

    Good to hear from you Howard, hope all is well with you.

  7. JS says:

    Thanks for your blog… appreciate the info mixed with your humor..

    can you share your thoughts on the current and future state of securitization? wondering if you think it’s still effective at channeling funds from those who have it to those who need it.

    • hhill51 says:

      I was really disappointed that they decided to make EVERYTHING government guaranteed. I would have rather seen the private system helped, but remain private. The problem is (as my post Black Ice points out, the private securitization market provided half the market’s mortgage financing. Not to mention most of the trade financing, equipment financing, ship financing, etc. etc. Our government, and all the others, stepped in for precisely the reason that without that financing, the world economy was likely to be half its pre-meltdown size, and a whole lot less efficient. It’s got to get going again without government support, or the world will have to get used to being much less busy. We’ll see as the US, UK, and others begin to withdraw their support for CP, interbank lending, etc. Hopefully we won’t repeat 2008, the way Brooksley Born has warned (again) in 2009.

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