Shorting student loans & credit cards (As in ABX-HE-BBB- 06-01)

math_trading_coding · Post by **math_trading_coding** » Fri Dec 28, 2007 6:48 am

How do I short student loan debt and/or credit card debt obligations?

What kind of account does this require?

Does Interactive Brokers handle this?

(The same way the big winners of 2007 shorted subprime loans)

Not equities, but the debt itself.. As in: ABX-HE-BBB- 06-01

An index designed to be a proxy for the lowest investment-grade subprime mortgage bonds sold in the second half of 2005, the ABX-HE-BBB- 06-01, traded as high as 102.19 cents on the dollar when it started in January 2006 and today trades at about 30 cents on the dollar. An index designed to be a proxy for the lowest investment-grade subprime mortgage bonds sold in the second half of 2005, the ABX-HE-BBB- 06-01, traded as high as 102.19 cents on the dollar when it started in January 2006 and today trades at about 30 cents on the dollar.

doobs · Post by **doobs** » Fri Dec 28, 2007 7:02 am

Aren't most Credit Card deals wrapped?

As far as I know, there is no CDS market on cards and Student loans

kr · Post by kr » Fri Dec 28, 2007 12:46 pm

well there is a discussion about what it means to 'short the housing market' i.e. you should probably be more precise than that. Nevertheless there are several public companies whose existence isn't distinct from the originate-service-repack-own residuals business model you had in the subprime mortgage space. I think COF is the most obvious name and has been hit already. On the UK side I don't know the names - is Egg public or private? b/c the Egg securitisations have been smacked already.

monkeyA · Post by **monkeyA** » Fri Dec 28, 2007 5:15 pm

Egg is owned by Citigroup now, has been public in the past.

Chuck · Post by **Chuck** » Sat Dec 29, 2007 6:23 am

FMD and SLM are the only ones I can think of...I'd be interested to see an organized index like the ABX, though.

DrTarr · Post by **DrTarr** » Sat Dec 29, 2007 7:02 am

Marblehead and Sallie Mae are a couple of big ones in student loans. I guess Bank of America (MBNA), American Express and Advanta might be some credit card plays. Not sure how you would short these.

But shorting these stocks is not like shorting housing whatever that means, like KR said.

kr · Post by kr » Sat Dec 29, 2007 12:10 pm

I never know whether it's better to go with the knee-jerk reaction or not. COF is a name I love to hate, even though it used to be junk-grade and has clawed its way back to IG. But on the basis that people don't think much before placing a single-name bet, just by choosing the name you'd be playing the consensus view.

That said, CC operators have some interesting similarities and differences. For one, a lot of banks now own them, so you can't do a pure-play that easily. AXP has tons of other crap going on under the surface - probably a good name to analyse but I wouldn't choose it if you wanted CC exposure. Discover is under MS; MBNA under BAC; Egg under Citi as per monkey's comment... sure there are many others. Clearly you can't get what you want this way. For mortgage originators the process hadn't completed itself so completely but of course a big bit of this year's bank writedowns come from the wholly-owned mtge originators.

On the other hand, the structure is pretty different. There is minimal term component to CC - if the company wants you out then they just keep raising the rate b/c it is fully floating. Similarly, the securitisation structure has a lot of very short-term capital. I believe this has been hit somewhat in connection with comml paper liquidity, but in fact I think it's pretty clear that CC 3m paper is better stuff than ABCP conduit 3m. Also, excess spread is usually quite a bit more generous. If you are the servicer and the equity I think you are in a great position - you have a lot more ability to squeeze. Of course you used to be able to squeeze the person into an arrangement where they took out home equity to pay down the card... guess that's done for now.

For me, if I want to get short consumer, I'd rather look where nondurable demand will fall off. What I think is that a lot of the middle class could do away with their lattes and start to make their mortgage payments. In that direction there are a lot more pure-plays.

doobs · Post by **doobs** » Sat Dec 29, 2007 6:41 pm

Didn't cards and loans perform much better than resi during the last cycle? Not only structurally, but the underlying seems to have better performance. It has been a while, I could be wrong.

HeatOilTrader · Post by **HeatOilTrader** » Sun Dec 30, 2007 1:19 am

Morgan spun off Discover this past summer...I rarely touch equities or anything related but I've been thinking about a similar play lately. DFS is/was on my radar but it's already down 50% since the IPO...

Edit: Several of the upcoming spinoffs of IAC could be potential candidates as well

Randumb · Post by **Randumb** » Sun Dec 30, 2007 9:38 pm

I would love to short consumer credit-cards for all the right reasons.

I have a friend that works in the credit-card delinquency department of BoA, she also worked there when it was MBNA. She says she has never seen credit-card customers in this bad of a situation. Their department is so slammed with work, that they have open-houses nearly every weekend to recruit new people, and current employees are offered $500 to recruit friends and family to work in the collections unit.

But like KR and others have said, it's difficult to find a good pure play. Even-though BoA's collections hiring-spree has only been in the last quarter or two, that information is already in the marketplace and probably not worth shorting.