Absolutely, re Remics are a big reason that PPIP has been reduced from $1 trillion to $40 billion. Big banks can repackage a CDO at a low price, put a 50% credit enhancement behind it, and blow it out to a hedge fund for a 5 to 10 points higher than where the CDO was trading.
The key to re remics is that CDO prices had to get sufficiently low for them to spliced apart. They work great for the banks if they also have some offsetting gains, which I suppose is why zero interest rates are so important right now. It enables the banks to make profits off positive carry trades to offset the losses from the CDO sales that were improved through the re remic redistribution.
It's pretty much the same thing Investco and the rest of the PPIP guys are trying to do, which is to pick up some assets at low enough prices where they still make a profit above and beyond some of the losses they will have to write off.
So, the vulture's game is beginning, as private equity, banks, and hedge funds try to pick off the low hanging fruit from the credit crunch and figure out a way to make some money. It's their risk and their capital, and something has to be done with these bonds.
It's better to do something than watch the PPIP take care of the firesale for the big banks. At least it's a sign that the securitization market is coming back to life again. It also seems to reflect the fact that the hedge funds are becoming less risk adverse and figure out that they have to do something with their cash.
If housing prices stabilize through the end of the year as GDP begins to pick up, these things are going to probably work out pretty well. The good thing about the re remics is that it will continue to add to bank liquidity. Whether they fail or not doesn't really matter. If a bank can get a better price for a CDO that was going to fail, it was going to fail. However, the banks are getting smarter by only enhancing a fraction of the credit risk, so if the loan gets put back to them at 50 cents on the dollar, they could still recover most of the loss with a 69% recovery on the original loan amount. Most banks are getting about 69% of the loan amount when they sell a property in foreclosure.
After 3 years, most of the really bad properties have already been disposed. Frankly, I wouldn't be shocked to see the banks abandoned foreclosures for homes that fall below a certain threshhold. It costs them more to foreclose and maintain a property that can't be resold. |
