CDOs Backed by Risky Mortgages now Worth 5% of their value

Remember those toxic assets and how the government was going to buy them up, sell them later to recover their value?

You must read this Financial Times article:

Here is the Magic Secret Decoder Ring to translate:

CDO - Collateralized debt obligations
Mezzanine - Underlying asset is subprime, "risky" mortgage
ABS - Asset backed securities
Tranche - Slices of risk levels within a bundled group of securities

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.

60 Minutes repeating itself

Like me you might have watched 60 Minutes tonight as they did an episode on Wall Street derivatives. The episode explained that what blew up Wall Street was nothing more than a gambling system that was outlawed in 1907.

Just in case you might have been under the false impression that we are learning our lessons, here's a blast from the past. 1995 to be exact.

Hear Comes the Hearings - Investigations Start on Credit Default Swaps

U.S., Cuomo Open Credit Default Swap Investigation:

The U.S. government and New York Attorney General Andrew Cuomo opened a joint investigation into the $34.8 trillion credit-default swap market, the top federal prosecutor in New York said

Might be a scapegoat witch hunt though for they are targeting short sellers.

New York Times:

Mr. Cuomo and Mr. Garcia are investigating whether investors drove up the price of swaps in transactions that were reported to data providers but never actually completed, according to people briefed on the investigation. If so, that would have helped anybody who sold short financial shares. In a short-sale, investors sell stocks they do not own in the hopes of buying them back later at a lower price.

Derivatives Ticking Time Bomb


a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession.
Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements, the world's clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier's window at a racetrack or casino, where you'd place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.

Origins of Subprime crisis: derivatives

Subprime Crisis & Derivatives: Origins

by niccolo caldararo

The origins of the present subprime crisis can be found in the Nixon Administration when his appointment to the SEC, Mitchell, removed the prohibitions to trades in futures and similar "bets" that has made our markets so unstable.   A number of academics including Fisher Black, created a series of formulas by which traders could manipulate the markets and make huge profits. The result of this behavior would led to our crisis by creating the impression that risk could be eliminated.