If it will never happen again then October 26 and 29 of 2007 will be recorded in history books like the Biggest Bloody Butchery (BBB) of collaterized debt obligations.
In two days, the AAA-rated credit default swaps protecting the papers linked to non-agency mortgage tranches declined by about 10%. This usually means that corresponding paper loss across the board was roughly the same.
The total outstanding amount of those CDOs is about 1.5-1.6 trillion, where the AAA slice is about 80%, or 1.2 trillion dollars.
The wipe-out of 10% is probably translating into $100-$120 billion in just two days, and papers with that rating are usually sitting in highly leveraged SIVs and various “low-risk” funds. This is not the same as the stock market losses of $100 billion, which happens pretty often. The stock losses are usually spread over millions of accounts where everyone lost few bucks. The CDO losses will hit just couple of involved institutions, few $billions each.
Like I’ve said before, there is a lot of dead fish deep in the waters, just give it a week before everybody will feel that smell…
October 29, 2007 at 10:57 pm
Pretty cool article on K-winter:
http://www.financialsense.com/editorials/bronson/2007/0927.html
October 30, 2007 at 4:32 am
Informative but sort of short. Thanks though…. P.S…There is a great article in the ECONOMIST MAGAZINE dated October 20-26. It Warns of the big uncertainty of the new 100 Billion SIV fund set up by the Banks. The article Warns of all the roadblocks and how many banks will not benefit or be able to participate. Please read and give a comment article if possible. Thanks.
October 30, 2007 at 6:15 am
Looking at the ABX AAA ( 7-2 and 7-1 series ) , , what levels would need to be hit to reflect acceleration events for the SIVs ? Using the Sudden Debt analogy of buckets filling up , we have already seen the decay from BBB- through AA …. what level for AAA is the level where the house of cards collapses ? Thanks for you thoughts. BTW , do you also follow the TABX index and if so , what are your thoughts concerning what that seems to reflect for CDOs ?
October 30, 2007 at 10:33 am
More and more I think economists are cool. Before, I just thought that writers had cornered the market (jk).
October 30, 2007 at 10:35 am
Oh, yeah, I need to learn your alien speach. Economists talk in another language.
October 30, 2007 at 9:03 pm
fredw, good question, thanks. This is my opinion:
If you look at lower tranches, like ABX-HE-BBB- 07-2:
http://www.markit.com/cache/curves/7497189058cb918b2cdffd995ff.png
You will see that it is not as volatile as AAA or AA (recently). This is because the level at which BBB- becomes worthless (exactly zero) is based on strict rules and formulas. There is nothing to speculate about, it’s just a math.
The price of CDS is 19.56%, which means to buy insurance for underlying MBS/CDO you need to pay 80.44% of the face value. I don’t know the exact formula, but it seems like it is priced in that it will be worthless in 2-3 months. The BBB just few days later and “A” couple of weeks later.
Once all of them will be wiped out the damage will spread to AAA. Right now AAA bonds are paying 100% of required interest because money are drained from lower tranches. Once they are gone it will start paying less than before.
The 10% decline (ups, it’s already more than that) of AAA means something like 10% decline in payments is already priced in.
If a certain SIV holding thos “AAA” papers is leveraged 5:1 than the liquidation event (50% loss) is triggered. I suppose it is about to happen to some of them.
I hope someone will correct me in details.
October 30, 2007 at 10:40 pm
Thanks for the responsne… with AAA on the run at 79.53 and the 7-1 series at 79.28 , clearly something is cracking wide open… I just don’t know whether the number is 75 or 70 ( as reflected in the AAA’s to reflect acceleration events have been triggered , but we’re getting close. No doubt about that. As for the TABX , what are your thoughts on that ? Thanks again. I don’t see many folks discussing this index or what it may reflect but the declines across the various series are eye-opening at least to me . BTW , is there any truth to rumors about GS coming forward with a big writedown tomorrow ? Their Tier 3 assets which have increased dramatically seem dubious at best and their quarter was inconsistent with the rest of the Street….. Thanks again !
October 31, 2007 at 4:13 am
Looks like acceleration events are underway.From Reuters , Axon Financial Funding , a structured investment vehicle had its issuer credit rating slashed from AAA to BBB or 8 notches.CP cut from A-1 to A-2. Medium term notes cut from AAA to BBB and Mezzanine capital notes cut two notches. reasons given : deterioration of market value of Axon’s portfolio , realized losses from asset sales , Axon decrease in NAV below 40 ( acceleration event ) and Axon’s failure to meet certain tests triggering an enforcement event ( forcing liquidation of the SIV.) Further downgrades may occur said S&P. Also, As per today’s FT , Cheyne Finance SIVs refinancing by RBS is in doubt…. that 6.6 billion in assets that may also be forcibly sold . Coupled with Fitch and Moody’s recent comments concerning bigtime rating cuts to CDOs , the stuff could get fugly real quick.
October 31, 2007 at 7:58 pm
fredw, no, I never followed TABX. I think it’s just extra information, redundant to some point.
I also do not pay much attention to ABX indices below A. They are equivalent to foreclosure stats as they are directly calculated from foreclosures. 80% of outstanding ABX CDS are in AAA (silly rating).
November 2, 2007 at 7:17 pm
” T ” , Somewhat off topic : I recall Moody’s was supposed to release a comprehensive review of CDOs which was to completed by the end of this week . Have you seen their report and if so , could you clue us in as to said report ? Thanks !
November 3, 2007 at 12:29 am
fredw, I’m not a financial analyst, I just can’t track all that stuff. The Moody’s actions usually pops up on Calculated Risk as soon as they happen – this is my primary source of info about rating agencies.