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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Hawkmoon who wrote (8954)	3/15/2008 7:04:01 AM
From: stomper	Respond to of 33421

<<Or do the banks have any obligation to the holders of these CMO/CDOs...and should the value of these assets be restored, even to 50% of their original value, does this mean that the balance sheets of the banks that now hold them will jump 50%?>> Ahhh, therein lies the rub. These CDO's are so ridiculously dark, I don't beleive the banks know (remember Paulson coming out last fall and admitting he had never even heard of a couple of the exotics that were out there). When you have a single CDO composed of the following... -derivatives linked to bonds -bond slices from other CDO's at varying levels of "credit worthiness" -actual sub-prime mortgage bonds ...and that CDO is sliced and diced, with multiple ratings on different tranches of the same instrument, and bought in part for other CDO's and releveraged with derivatives...there is just NO WAY to value them. Everyone is talking about "oh, the credit market is falling apart, no one wants to trade with other banks b/c they don't know who is solvent, etc...". I think it goes way beyond that. They don't want to trade because there are trillions in these instruments out there, and Wall Street is realizing that there simply is no ultimate counterparty or realistically discenrable value to all this stuff. It's not a coincidence that Bear is the first to bite it, as they had the highest derivative leveraging of any of the majors on the Street. Giant game of musical chairs, the first round of music stopped, and Bear was left without a seat. Most of the money center banks bought into their own mirage and own the super-senior slices on these issues thinking they were insulated. Now that the credit rating fallacy has been exposed for the fraud it is, and the RE markets are falling to earth, they are all panicing and realizing they have no recourse, there is no final payor, and there is no way to figure out exactly what they own. It was a Ponzi scheme from the get go. So eventually the banks will straighten out what the realistic remaining intrinsic value is of these asset backed securities and then reapply that to their balance sheets They may come to some conclusion amongst themselves with the help of the Fed and Commerce Dept, but it will hold no relation to what they are actually worth. It will be done to stop the collapse of the System. Securitization in its' latest iteration is dead...ultimately, this will all be hoovered up by the Fed/Fannie/Freddie and paid for by the United States tax payer.

To: Hawkmoon who wrote (8954)	3/15/2008 11:26:56 AM
From: The Ox	Respond to of 33421

I think you will need someone with greater understanding in the MBS/CDO/CMO/et al.. arena then I have to get the proper answers to your questions. I believe that whoever is holding the paper at this point can sue everyone down the line that was involved. The problem is that most of the originators (those who truly would be the root cause of the problems) are no longer functioning companies, so there is no one to left to sue. Well, you could still sue but there's probably no recourse. No doubt the ratings companies have played a huge part in this mess and they deserve a large portion of the blame for their lack of due diligence and rubber stamping, simply to get the fees for making their ratings. As to the recovery of written down assets, yes, the banks could reap great returns down the road if they have written off assets that eventually have a value in the future. As many are pointing out, the issue is probably not so much with the underlying assets as its with the way these assets were sliced and diced and repackage, then leveraged many, many times. There are trillions of dollars in paper that were created out of 'thin air'. I'm guessing that much of this will simply vanish as write offs.