tag:blogger.com,1999:blog-30643134.post4085846757611502448..comments2023-12-26T01:10:26.319-05:00Comments on Accrued Interest: Merrill Lynch: We can pay you 2,000 now...Accrued Interesthttp://www.blogger.com/profile/05096191765979971184noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-30643134.post-33913498343338944072008-08-01T14:36:00.000-05:002008-08-01T14:36:00.000-05:00Alright I wrote a nice little post about collapsin...Alright I wrote a nice little post about collapsing CDS, but unfortunately, Google has flagged AI as a "Spam Blog" and I need to wait for them to realize that it isn't before I can post anything. Weird...Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-7180277959438019752008-08-01T11:47:00.000-05:002008-08-01T11:47:00.000-05:00Asphalt:That's not the right way to think of termi...Asphalt:<BR/><BR/>That's not the right way to think of terminating a CDS. <BR/><BR/>Actually I'm going to write a whole post on this right now. <BR/><BR/>Josh:<BR/><BR/>I think MER held the ABS CDOs as an investment.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-72833809682189871612008-08-01T11:29:00.000-05:002008-08-01T11:29:00.000-05:00I have another dumb question, I think I understand...I have another dumb question, I think I understand the idea that the underlying loan is not getting the haircut.<BR/><BR/>When I read, "$3.7 billion notional of CDS in exchange for $500 million in cash." I read that some kind of contract that insured $3.7B has been voided (or something like that) for $500M. There appears to be quite the destruction of wealth. How much of the $3.2B loss is marked to market?asphaltjesushttps://www.blogger.com/profile/08765332584479590400noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-33456941357117951742008-08-01T10:48:00.000-05:002008-08-01T10:48:00.000-05:00Thx for the explanation.Do we know how MER came to...Thx for the explanation.<BR/><BR/>Do we know how MER came to hold this CDO? Were they in the process of syndicating it? Or did someone actually put it on as part of a trade?JoshKhttps://www.blogger.com/profile/17028441526311718240noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-87503331170510631322008-08-01T08:29:00.000-05:002008-08-01T08:29:00.000-05:00Josh: Yes the Super Seniors were originally rated ...Josh: Yes the Super Seniors were originally rated AAA.<BR/><BR/>Just so that everyone is clear. It was very rare that an ABS CDO would be made up of just RMBS. Usually they threw in other ABS, like auto loans or credit card loans.<BR/><BR/>They also usually used ABS (originally) rated A and AA mostly as collateral. So given the ratings agency models, the "Super Senior" didn't need a lot of subordination. I saw deals where there was only 10% or so subordination!Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-52811555173758879222008-08-01T08:19:00.000-05:002008-08-01T08:19:00.000-05:00Oh, I see. So super senior is really = the most se...Oh, I see. So super senior is really = the most senior part of the juniors... What was the point of this structure, btw? It would seem to me that you are then two levels away from a lot of risky loans and that it would have to be hard to model what is really underlying your super-senior. Was this originally high-rated?JoshKhttps://www.blogger.com/profile/17028441526311718240noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-12958887473756394932008-08-01T07:28:00.000-05:002008-08-01T07:28:00.000-05:00On FSA... just got away from me. Sorry. I wish I c...On FSA... just got away from me. Sorry. I wish I could just blog for a living, but alas...Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-10615972199161387972008-08-01T07:27:00.000-05:002008-08-01T07:27:00.000-05:00Josh: Here is what you are missing. Say you have a...Josh: Here is what you are missing. Say you have a simple home equity securitization. And say that there are three tranches. Senior is 70%, Junior is 20% and Sub is 10%. Senior can take something like 30% losses before it even gets touched. So even in some really bad securitizations, the Senior is going to get most of its principal back.<BR/><BR/>But what if they did a re-securitization of a whole bunch of Junior tranches? That's what an ABS CDO is. Now say the losses reach an average of 20%, and to make the math simple, let's say that wipes out half of the Junior tranches. Well now our entire ABS CDO portfolio has 50% losses. The Super Senior is going to get hit very hard.<BR/><BR/>Note that its almost impossible for the Super Senior to be worth zero, since every dime of cash flow goes to the Super Senior. That's why I'm not all that excited about the fact that MER financed their sale to Lone Star.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-38798966278893064062008-07-31T21:03:00.000-05:002008-07-31T21:03:00.000-05:00Sorry if I'm being obtuse, but I just don't get th...Sorry if I'm being obtuse, but I just don't get this. Since this is super senior it should have less risk than the entire batch of loan underlying, right? They are first in line to get principal and interest. Just to make it simple, assume there are 2 tranches, 80% super-s and 20% junior. If this would sell @ 100, that can support 20% default, as it is absorbed by the junior. Now if this is selling for 22, then that means they expect something like 15% of the loans to actually pay. That just seems nuts.JoshKhttps://www.blogger.com/profile/17028441526311718240noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-5297704275283130482008-07-31T18:57:00.000-05:002008-07-31T18:57:00.000-05:00AI, you were going to do an analysis on FSA's port...AI, you were going to do an analysis on FSA's portfolio. What happened? With FSA bonds really tanking lately, it would be timely info. Thanks.Dave M.https://www.blogger.com/profile/16326160553575004144noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-39492593912049424772008-07-31T16:12:00.000-05:002008-07-31T16:12:00.000-05:00No. I'm not saying the financing is meaningless me...No. I'm not saying the financing is <I>meaningless</I> merely that it doesn't suggest the value of all ABS Super Seniors is $5.5. Merrill sold the securities for $22. <BR/><BR/>Put it another way. If the securities wind up paying out $50 in principal cash flow, Merrill doesn't participate. If it winds up paying out $15 in cash flow, Merrill <I>probably</I> doesn't get hurt. Now if it winds up being worthless in a hurry, MER probably takes 75% of the pain. But that's unlikely. Remember that the super senior is getting every dime of cash flow in the whole structure. So the odds that its worth zero are very low.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-58762749157974650362008-07-31T16:01:00.000-05:002008-07-31T16:01:00.000-05:00"Its common for dealers to fund client investments..."Its common for dealers to fund client investments, and I don't think that should have a bearing on the valuation of the securities."<BR/><BR/>But is it common for dealers to also limit recourse to the specific asset whose purchase was financed?ccmhttps://www.blogger.com/profile/13703444786016220763noreply@blogger.com