tag:blogger.com,1999:blog-30643134.post7379649731665427239..comments2023-12-26T01:10:26.319-05:00Comments on Accrued Interest: Fear will keep the local systems in line...Accrued Interesthttp://www.blogger.com/profile/05096191765979971184noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-30643134.post-49151899711248856932007-03-05T07:50:00.000-05:002007-03-05T07:50:00.000-05:00That's interesting that you assumed 35% on RMBS. W...That's interesting that you assumed 35% on RMBS. What that on 2nds? I've never bot ABS CDO's because of the correlation problem. At least for the moment, I'm feeling good about avoiding the sector. Anyway, I know I was pitched deals where the recovery was projected to be in the 70's. Obviously a sales document is going to be optimistic.<BR/><BR/>As far as how many defaults they can withstand, its still a question of how fast they happens. If you worked on a CDO desk, you know that these deals can build subordination over time, so it really does make a difference.<BR/><BR/>I'm re-reading the Bear Stearns research I mentioned the other day that estimated a fair value of $90. They assumed around 15% defaults at 55% recovery. The problem is that the loss rate on the deal vs. the loss rate on the CDS isn't linear. In other words, BS is expecting like 8% losses (15% defaults, 55% recovery) in the deal, and that makes the CDS worth around $90. It isn't like 10% losses makes it worth $88. It should accelerate the decline in value of the CDS. So in order to justify a price of $70, losses may only need to be around 15-20%. I'm guessing because I don't have access to all the subordination in all the deals, but you see where I'm going.<BR/><BR/>So if we say 15-20% losses, and 35% recovery, we're probably looking at 23-31% defaults. Whether you think that's realistic or not, up to you.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-82712847845481984472007-03-04T13:09:00.000-05:002007-03-04T13:09:00.000-05:00Hey Tom. Now that I've thought about it some more,...Hey Tom. Now that I've thought about it some more, I have even more doubts about the 70% recovery number for HELs that would potentially make buying the ABX a good trade.<BR/><BR/>When I worked on a CDO desk, we used to assume 35% recovery for RMBS. Assuming 35% recovery rate, what's that saying about the implied default probability on the ABX?Apoliticalhttps://www.blogger.com/profile/16305786346100392027noreply@blogger.com