Well, we don't really have to worry about whether the worst of the CDOs will get dumped, because there's no bid for them anyway -- no transaction = no money changes hands -- one of the many perverse aspects of Wall Street trading mechanics.
What I can see coming is widespread liquidation of the 10% investment-grade CDO components that still have some realizable value, i.e. the AAAs that are not getting much of the attention, like series other than 2005 and 2006 (which everyone knows are already impaired). Aside from forced sales, I expect a continued run on the "good stuff", even by non-distressed holders, because not many gunslingers managing third party money are going to want to show anything at all related to CDOs on their books at 9/30 if they want to keep their accounts and their jobs. No doubt that vulture shorts are also already in there trying to do some selling ahead of the crowd.
And as things devolve on the CDO front, those holding the ultimate counterparty risk (the sellers of volatility via CDS) are going to see their contingent liabilities suddenly crystallize into real claims on their assets. Burned CDO holders will soon be in a position to legally demonstrate their CDO loss experience, thereby triggering CDS obligations, and those holding the sunny side of CDS "puts" will come looking for their money back.
And like a post hurricane or post 9-11 situation, those counterparty CDS claims are going to promulgate the sale by those on the hook of assets of all stripes in order to pay up. Will it be $50 billion worth? $100 billion? $500 billion? The $2 trillion figure you see bandied about? More? Yikes.
I continue to be amazed that even now there still seems to be plenty of opportunity to get out of Dodge at good prices (e.g. SPX 1500+) despite the fact that IMO the writing is already on the wall, emblazoned in large letters in bright red neon reflective paint.
It's as if people seem to think none of this is going to happen, or perhaps they believe that the Fed or somebody is going to save the day -- the complacency is surreal.
If this exercise for now remains largely a mess of accounting write-off entries rather than a transacted sell-off and repatriation of the invested capital back to Asia and/or Europe, then we may not see any appreciable short-term effect on the dollar directly -- but it sure might change the psychology, and that could have an even bigger effect on the dollar's trading value than just the transactions themselves |
