March 16, 2009

What ARE the CDO's worth?

Well, here's one take...

But now, at long last, one shard of reality has just emerged to piece this gloom. In recent weeks, bankers at places such as JPMorgan Chase and Wachovia have been quietly sifting data trying to ascertain what has happened to those swathes of troubled CDO of ABS.

The conclusions are stunning. From late 2005 to the middle of 2007, around $450bn of CDO of ABS were issued, of which about one third were created from risky mortgage-backed bonds (known as mezzanine CDO of ABS) and much of the rest from safer tranches (high grade CDO of ABS.)

Out of that pile, around $305bn of the CDOs are now in a formal state of default, with the CDOs underwritten by Merrill Lynch accounting for the biggest pile of defaulted assets, followed by UBS and Citi.

The real shocker, though, is what has happened after those defaults. JPMorgan estimates that $102bn of CDOs has already been liquidated. The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent.

Now, there are trillions of dollars of this stuff floating around. My problem with this is that it's a limited sample. And frankly, I don't know what they are considering a recovery. What I want to see is the percentage on the face that's being recovered. In extreme cases, I can see a loss on the subprime credits of 60-70% in an environment that has seen 50% value declines. But 95%?

Something stinks on that number. I don't buy it for a second.

Posted by mcblogger at March 16, 2009 12:47 PM

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