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

To: Hawkmoon who wrote (10085)	9/26/2008 6:39:24 PM
From: John Pitera	Read Replies (1) \| Respond to of 33421

Interesting Bloomberg article, I would like to see future updates of this article to see if they ammend it. This article makes it sound that when the investment banks structured the Collateralized Debt Obligations they increased their cash flow streams by writing Credit Default Swaps on various financial entities such as WaMu. If this article is mixing up CDO's and CDS in some of it's analysis is shows the complexity of the situation and if the article is accurate that CDO's where writing Credit Default Swaps as part of their income/ yield model; that makes this situation exponentially more difficult to value. I know I have been *describing 2008 as The Year of the Centipede market* the more companies that collapse in bankruptcy keeps increasing the loses and CounterParty Mismatches on this ocean of Credit Default Swaps. CDO's are described at the end of the article in only the context that they generate revenue from CDSwaps. As we know the ongoing story of CDO's is that they were pools of mortgages, leases and other credit instruments that were then broken down into pieces that were virtual zero coupon bonds, that had various seniority, in terms of what was repaid first. Strips where incorporated in CDO's where it was the monthly interest payments where the assets of the CDO and then more blended mixes of various synthetic credit instruments where also put into these. John --------------------------- WaMu to Have `Significant' Effect on CDOs, S&P Says (Update1) By Shannon D. Harrington Sept. 26 (Bloomberg) -- The failure of Washington Mutual Inc. will have a ``significant'' effect on collateralized debt obligations that made bets on the lender's creditworthiness, Standard & Poor's said. Pieces of 1,526 synthetic CDOs worldwide sold default protection on Seattle-based WaMu, S&P said in a statement today. WaMu was seized yesterday by regulators after customers withdrew $16.7 billion over the past 10 days. After JPMorgan Chase & Co. bought WaMu's bank branch business, the holding company is likely to file for bankruptcy protection, S&P analyst Victoria Wagner said in a separate statement today. Sellers of credit-default swap protection must pay the buyer face value in exchange for the underlying securities or the cash equivalent after a bankruptcy filing. Synthetic CDOs already have been roiled by last week's bankruptcy of Lehman Brothers Holdings Inc., which was included in 1,889 deals globally, and the government's takeover of American International Group Inc., which was downgraded three grades to A-. S&P said 1,619 CDOs made bets on AIG. Many of the deals also will lose payments and loss cushions from contracts linked to Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the government this month. The takeovers triggered a technical default on the credit swaps. Of the CDOs that sold WaMu default protection, 514 were in the U.S., 752 were in Europe, 122 were in Japan and 138 were elsewhere in the Asia-Pacific region. The CDOs sell notes to investors that are repaid using the proceeds of credit-default swap premiums. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. To contact the reporter for this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net Last Updated: September 26, 2008 16:46 EDT