Sunday, February 01, 2009

Bad Bank, Bad Pricing.........

When you combine my initial thoughts ( see Is There Anybody Out There Believing That There Will Be A "Transparant" Bad Bank........? ) with the latest insight from Naked Capitalism & add the example from the NYT to the mix i think the cartoon describes very well the model that will be used from the governments around the world to justify the inflated "market prices" for the purchases or guarantees of the assets that will cost the taxpayer around the globe trillions.....

Denke wenn man sich meine letzten Vorhersagen ( siehe Is There Anybody Out There Believing That There Will Be A "Transparant" Bad Bank........? ) und das Posting von Naked Capitalism ansieht und das mit dem folgenden Beispiel der NYT kombiniert dürfte klar werden das die Regierungen weltweit "Berechnungsmodelle" analog dem Cartoon nutzen werden um die hyperinflationierten "Marktpreise" zu rechtfertigen zu denen die Positionen letztendlich erworben bzw garantiert werden. Die weltweiten Steuerzahler dürfte diese "Kreativität" Billionen kosten.....

Risks Are Vast in Revaluation of Assets NYT
The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency.

The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

> This conclusion from Calculated Risk & sums it up

> Diese Feststellung von Calculated Risk umschreibt das Desaster treffend.....

To be worth even 38 cents on the dollar, this must be a senior tranche. The lower tranches have absorbed most of the losses so far, and that is why S&P is currently valuing the bond at 87 cents on the dollar, but any higher default assumptions, and the value of this bond will plummet. I'm amazed, given that these are no money down 2nds that the loss severity is only 40 percent.

The bond analyzed by S.& P. is just one of thousands that the government might buy or guarantee should it go forward with setting up a “bad bank” that would acquire $1 trillion or more of toxic assets from banks.

The value of these securities is based on the future cash flow they provide to investors. To determine that, traders have to make assumptions about the housing market and the economy: How high will the unemployment rate go in the coming years? How many borrowers will default? What will homes be worth?

The Standard & Poor’s group, Market, Credit and Risk Strategies, which operates independently from the company’s credit ratings business, has been studying troubled securities for investors and banks. The bond that is trading at 38 cents provides a vivid illustration of the dilemma in valuing these assets.

The bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A.

> Finally Joseph Stiglitz via Jesse´s Cafe Americain

Obama’s administration is moving closer to buying the illiquid assets currently clogging bank’s balance sheets and preventing them from boosting lending, people familiar with the matter said this week.That amounts to swapping taxpayers’ "cash for trash,” Stiglitz said yesterday


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Blogger jmf said...

ECB to lay out ‘bad bank’ rules

The ECB is drawing up guidelines for European governments that are considering “bad banks” to house lenders’ toxic assets, while Germany is moving closer to approving legislation that would help its banks set up individual bad banks, reports the WSJ. The ECB is also working on guidelines for governments that plan to guarantee toxic assets remaining on banks’ books, and hopes the guidelines can help prevent ‘one-upmanship’ across the 27-nation EU. Both sets of guidelines are being drawn up together with the EU’s executive arm, the European Commission.

10:34 PM  
Blogger jmf said...

MOre on "valuation" models via Bloomberg

Accounting Changes

Accounting changes at both Mizuho and Sumitomo Trust in calculating the value of some securities could “undermine market confidence” and defer potential losses, according to Credit Suisse’s Ina.

Sumitomo Trust reclassified 380.3 billion yen in overseas asset-backed securities as investments that it will hold until maturity.

Mizuho also changed its valuation method for some overseas asset-backed securities, allowing management to calculate the value. Mizuho reclassified 326.8 billion yen in European loans.

11:40 PM  
Blogger jmf said...

Still very little talk of a significant hairut from the debtholders.....

Breaking Views

Whatever version of bad bank is used, the same problems that bedeviled the Bush administration’s plan still need to be addressed. First, assets shouldn’t be insured (or bought) at deliberately inflated prices. That is just a straight handout from taxpayers to bank shareholders.

Second, banks should pay a reasonable price for their insurance policy. Third, if they don’t have enough capital to pay for such insurance, they may still need further capital injections.

In addition to creating bad banks, governments should change the global rules that determine how much capital banks have to hold. The current Basel accord encourages banks to lend with abandon in the good times and slam on the brakes in bad times.

A simple solution is for the authorities to raise minimum capital requirements when they see credit growing too strongly — and to lower them, as at present, when credit is shrinking. In regulators’ argot, this would be an “anticyclical” framework.

11:56 PM  
Anonymous don said...

great articles

4:39 PM  
Anonymous Barley said...

Wow, just wow!

7:41 AM  
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11:17 PM  

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