A new monoline exposure for banks: CLO negative basis trades

Another day another problem for banks, "pirate equity" and financials...... It feels like more and more pillars of the "alchemy of finance" are crumbling down.....

Ein neuer Tag und mal wieder neue Probleme für Banken, "Pirate Equity" und Finanzwerte im allgemeinen.... Es sieht so aus als wenn immer mehr Pfeiler der "Finanzalchemie" beginnen wegzubrechen....

FT Alphaville Banks’ exposures through bond insurers, or monolines, is far from limited to mortgage-related MBS and muni bonds. There’s a third big exposure - to leveraged buyout loans - that banks will have to deal with if monolines hit the rocks.

Negative basis trades have been around for a while. A bank buys a bond - say it’s AAA - and then it takes out a CDS against that bond with a monoline. Since spreads in the CDS market for such tranches have been typically much lower than in the cash market, the bank pockets the difference.

But as well as banks’ much-dissected CDO exposures, there have been two other big markets for that kind of trade: on infrastructure bonds and - most interestingly - in structured finance, on CLOs (collateralised loan obligations) - CLOs being the vehicle of choice in which to park massive buyout loans.

Monolines, of course, are no longer in a position to be writing new contracts for banks to use as one half of their negative basis trades. The consequence of that has been that banks have stopped buying AAA tranches of CLOs. Unable to sell those, CLOs have faltered and banks in turn, have found themselves with lots of big buyout loans stuck on their books. No new financing is available for private equity deals.

According to Euroweek, 90 per cent of all CLO AAA-tranches have been bought and then wrapped in negative basis trades. Which begs a second question. What of all the AAA CLO and infrastructure paper that banks already have on their books? None of it, of course, shows up as exposures in filings because, net, there is no exposure. Assuming, of course, your CDS counterparty is safe. Err…

> Deutsche Bank was very optimistic in yesterdays call to unload all the € 21 bln loans with no losses. They argue that the quality of the loans is high and that it is and has always been the policy from Deusche to take 10 percent of the structured loans onto their books to signal that they have full confidence in their underwriting standarts. I think they are way too optimistic.....

> Die Deutsche Bank has sich gestern in der Analystenkonferenz extrem optimistisch gezeigt das sie die knapp 21 Mrd € an Unternehmenskrediten die sich in Folge des Private Equity Übernahmewahnsinns angehäuft haben ohne Verluste weiterreichen kann. Argumentiert wird das die Qualität hoch sei und das es seit jeher Politik der Deutcshen Bank ist jeweils 10 % der so strukturierten Verkäufe in die eigenen Bücher zu nehmen. Damit soll unterstrichen werden das man vollstest Vertrauen in die Kreditprüfung hat. Löblich...... Denke trotzdem das hier sicher noch einige gewaltige Abschreibungen kommen werden.

Even if monolines don’t crash and burn, banks will still have to make writedowns on these trades. As the value of the CDS written by the monoline decreases, so, too, will banks exposure to CLOs, and through them LBOs, have to increase. And higher exposures will also, of course, put pressure on capital.

And one final point: having set up one negative basis trade, it hasn’t been uncommon for banks to take out a CDS against the CDS counterparty in that trade. As Paul J Davies points out in today’s FT, through negative basis trades, banks’ monolines exposures have often been hedged with other monolines.

Update: The WSJ has an interesting number crunching piece on the state of the LBO industry - and the amounts banks are finding themselves stuck with.

S&P Lowers or May Cut $534 Billion of Subprime Debt

Looks like the rating agencies have finally updated their model for subprime.... Next stop Monolines ( see MBIA: Another morning, another monoline crisis… or Open Letter On Bond Insurer Transparency From A Short Seller. )....

Es sieht so aus als wenn zumindest im Bereich Subprime die Schadensmodelle der Ratingagneturen endlich in der Realität angekommen sind.... Nächster Halt dürften dann wohl die Kreditversicherer sein ( siehe MBIA: Another morning, another monoline crisis… oder Open Letter On Bond Insurer Transparency From A Short Seller. )......

This comment from Calculated Risk sums it up

Dieser Kommentar von Calculated Risk faßt das Ausmaß wunderbar zusammen

According to the Fed Flow of Funds report, household have $10.4 rillion in mortgage debt. S&P's announcement today alone is for about 5% of that debt.

Jan. 30 (Bloomberg ) -- Standard & Poor's said it cut or may reduce ratings of $534 billion of subprime-mortgage securities and collateralized debt obligations, as home loan defaults rise.

The downgrades may extend losses at the world's banks to more than $265 billion and have a ``ripple impact'' on the broader financial markets, S&P said.

The securities represent $270.1 billion, or 47 percent, of subprime mortgage bonds rated between January 2006 and June 2007, S&P said today in a statement. The New York-based ratings company also said it may cut 572 CDOs valued at $263.9 billion.

The downgrades may increase losses at European, Asian and U.S. regional banks, credit unions and the 12 Federal Home Loan Banks, S&P said. Many of those institutions haven't written down their subprime holdings to reflect their market values and these downgrades may force their hands, S&P said.

``It is difficult to predict the magnitude of any such effect, but we believe it will have implications for trading revenues, general business activity, and liquidity for the banks,'' S&P said. The ratings company will start reviewing its rankings for some banks, especially those that ``are thinly capitalized.''

S&P downgraded $50.1 billion of subprime-mortgage securities, none rated higher than A+. More than 69 percent of the AAA rated subprime securities from 2006 and 46 percent from the first half of 2007 were placed on review.

Didn't See It
``This one, I didn't see coming,'' said Mark Adelson a consultant at Adelson & Jacob Consulting LLC in New York, and a former asset-backed bond analyst at Nomura Securities.

Some of the largest global banks have already taken ``significant'' losses and they aren't likely to have more writedowns, S&P said.

Under accounting rules, many smaller banks haven't been required to write down their holdings until the credit ratings fell, enabling them to avoid the losses that have crippled Citigroup Inc., Merrill Lynch & Co. and UBS AG. The world's largest banks have reported losses exceeding $133 billion related to mortgages, CDOs and leveraged loans.

``If you're holding a AAA piece and it's now downgraded to AA, you might have to write it down, even if you're holding it for an investment,'' Gary Gordon, a bank stock analyst at Portales Partners LLC in New York, said. ``The longer it goes on and the higher the credit rating of the instrument downgraded, the wider the pain.''

Societe Generale reports $7.1 bln trading loss from "fraud"

ice internal risk management...... In the end this is probably good news. ( You know that times are really bad when an € 5.5 billion capital infusion at fire sale prices is been widely seen as good news.....) There were rumors crashing the stock and the entire sector that they would have a big write down. But this write down seems (at least that´s what i hope) to be company specific. And some still wonder why banks don´t trust each other.......Probably the most important part is that SocGen is starting to write down some insurance from monolines and from a total of € 550 mio and only € 50 mio is coming from ACA! ( watch page 10 on the presentation )

Nette Risikokontrolle..... Unterm Strich dürfte das aber trotzdem für eine große Erleichterung sorgen ( Der Umstand das eine massive Kaitalspritze von üver 5,5 Mrd € zu Ausverkaufspreisen als gute Nachricht angesehen wird sagt eigentlch schon alles aus...). Speziell in den letzten beiden Tagen hat das Gerücht um eine riesige Abschreibung den ganzen Sektor zerlegt. Das die Abschreibung jetzt größtenteils nur auf einen "Betrug" und damit hoffentlich nur isoliert zu betrachten ist sollte beruhigen. Relativ gesehen natürlich....Kein Wunder das die Banken sich gegenseitig nicht über den Weg trauen..... Ein interessanterter Aspekt ist das auch SocGen damit angefangen ist wertlose Versicherung der Monolines abzuschreiben ( von den 550 Mio stammen lediglich 50 Mio von ACA / Details auf Seite 10 der Präsentation) . Passend zum Thema hier ein Ranking vom Spiegel über die größten Fehlspekulanten Börsenschwindler, Seiltänzer, Hochstapler

You cannot make this up. FT Alphaville is reporting that Societe General has won the award for the " Best Equity Derivatives House" .....

Das ist wirklich kaum zu toppen. FT Alphaville berichtet das ausgerechnet Societe General den Preis fpr das "Beste Derivatehaus für Aktien" gewonnen hat.

“We managed the existing book very well because we decided some time before the crisis to be long volatility and be less sensitive to correlation, so the losses were minimal. We suffered on our statistical arbitrage trading activity, but that was just for one month, and minimal compared to some hedge funds or other banks. Overall, our trading activities will be approximately flat compared to last year, which is a good performance,”

Qutote: Christophe Mianne, SG CIB’s head of market activities, covering equity, derivatives, fixed income, currency and commodities in Paris

Make sure you read the Societe General Presentation for some more interesting details !

Empfehle die Societe General Präsentation für die mehr als interessanten Details zu lesen !

Live blogging the SocGen conference call via FT Alphaville

Marketwatch
French bank Societe Generale loss after an "exceptional fraud" committed by someone who usually trades plain-vanilla and European stock index futures.

It also said it was taking a 2.05 billion euro write-down, with 1.1 billion euros coming from U.S. residential property, 550 million euros coming from the U.S. bond insurers and 400 million euros in additional subprime-related risks. It will earn between 600 million and 800 million euros for the year.

The board rejected the resignation of CEO Daniel Bouton. It's going to issue 5.5 billion euros in preferred securities to J.P. Morgan and Morgan Stanley to boost its capital

The story is reminding of Nick Leeson & Barings

Erinnert mich irgendwie stark an Nick Leeson & Barings

Here is a good take from Barry Ritholtz Fed's Folly: Fooled by Flawed Futures? suggesting ( i think correctly ) that this poor trader has lead to the emergency cut

Hier eine wie ich finde zutrefende Einschätzung von Barry Ritholtz Fed's Folly: Fooled by Flawed Futures? der unterstellt das dieser durchgeknallte Trader es geschafft hat Bernanke zum größten Notzinsschritt seit Jahrzehnten zu bewegengrößten Notzinsschritt

Merrill Lynch & Financial Guarantors & Counterparty Risk....

Besides the $ 14.6 billion write down i want to highlight this topic in the release..... When watching MBIA, AMBAC & Co ( see Downgrades ahead: monolines still don’t have enough cash &MBIA, Ambac Tumble, Default Risk Soars After Losses ) i assume the next wave of massive write downs in almost every other bank balance sheet should be coming very soon.... This is to my knowledge the first release from a major institution that views lots of the insurance as "worthless". Unfortunatley they don´t say from wich company thy bought the guarantee ( maybe ACA ? / Update : It´s ACA) . I think we can thank the new CEO for coming clean on this issue. Other will have to follow ....

Neben den 14,6 Mrd Abschreibungen verbirgt sich u.a. auch die nachfolgende Passage in der Veröffentlichung von Merrill . Und das ist eine mit erheblichen Sprenpotential........ Wenn man sich den freien Fall von MBIA, AMBAC & Co ( siehe Downgrades ahead: monolines still don’t have enough cash & MBIA, Ambac Tumble, Default Risk Soars After Losses ) ansieht dürfte hier die nächste gigantische Abschreibungswelle in Stein gemeißelt sein. Der hierfür verantwortliche Versicherer ist ACA ... Das ist meinem Kennnisstand die erste große Bank die klipp und klar sagt das eiin Großteil der abgeschlosenen Absicherung im Prinzip wertlos ist. Ohne neuen CEO wäre das so deutlich sicher nicht gesagt worden. Denke das die anderen nun kaum glaubhaft einen anderen Standpunkt vetreten können.

Merrill Lynch Eranings Report Financial Guarantors:
During the fourth quarter, credit valuation adjustments related to the firm’s hedges with financial guarantors were negative $3.1 billion, including negative $2.6 billion related to U.S. super senior ABS CDOs.

These amounts reflect the write down of the firm’s current exposure to a non-investment grade counterparty from which the firm had purchased hedges covering a range of asset classes including U.S. super senior ABS CDOs. Please see attachment VIII for details of related exposures.

Live-Blogging the Merrill Earnings Call via the WSJ

Adding up Merrill’s $16.7bn writedowns FT Alphaville

Cramer on Monolines Is this really Cramer? This is one of the very rare times he makes sense....MUST SEE!

WSJ on Counterparty Risk

S&P: Bond Insurance Losses Likely Much Higher Calculated Risk

France Bails Out Monoline Insurer.......

Here we go..... After Germany balied out IKB & Landesbank Sachsen, UK Northern Rock now France is joining the parade..... To be continued.......... Too bad that ACA isn´t a French company...... ;-)

Der nächste bitte.....Nachdem Deutschland die IKB & Landesbank Sachsen, UK Northern Rock rausgehauen hat beglückt uns nun Frankreich mit einem Bailout erster Klasse...... Eines ist sicher.....Frankreich wird nicht das letzte Land sein das in das Marktgeschehen eingreifen wird.... Zu dumm das ACA keine französischen Wurzeln hat..... ;-)

Natixis's Bond Insurer to Get $1.5 Billion in Capital
Nov. 22 (Bloomberg) -- Natixis SA's bond-insurance unit, CIFG Guaranty, will be taken over by the French bank's controlling shareholders in a $1.5 billion rescue to preserve its top credit rating.

> It will be interesting what the private owners will do with FGIC.....

> Es wird spannend zu sehen sein was die privaten Eigner bei FBIC machen werden....

Marketwatch

Privately held FGIC has been in discussions to raise new capitals from its existing investors, which include Blackstone Group , Cypress Group, PMI Group , General Electric and CIVC Partners, the newspaper reported, citing people familiar with the matter

Naked Capitalism / WSJ

Private-equity firms Blackstone Group and Cypress Group each bought 23% stakes in FGIC in 2003, while mortgage insurer PMI Group Inc. owns a 42% stake. General Electric, FGIC's former owner, retained a 5% stake while CIVC Partners, a Chicago private-equity firm, owned 7%.

Natixis rose as much as 19 percent in Paris trading after Groupe Banque Populaire and Groupe Caisse d'Epargne, French mutual banks that jointly control Natixis, said today they will provide the capital and assume full ownership of CIFG. They said the purchase will be completed ``as quickly as possible.''

CIFG was named by Fitch Ratings and Moody's Investors Service as among the likeliest bond insurers to face ratings downgrades after turmoil in the fixed-income market hurt the value of the debt they insure. Bond insurance allows municipalities and companies to gain top credit ratings on their debt, and to pay lower interest rates. Fitch affirmed its AAA rating on CIFG after the announcement today.

Under Review
Fitch on Nov. 5 said it would start a six-week review of bond insurers to ensure they had enough capital to warrant their top ratings. CIFG was insuring $85 billion of bonds as of June 30, according to figures on its Web site. The entire bond insurance industry has guaranteed more than $1 trillion of debt, allowing borrowers to use the insurers' AAA ratings.

``Natixis has been hurt by subprime,'' Franck Hennin, a fund manager who helps oversee about $5 billion in assets with Richelieu Finance in Paris, said yesterday. ``Its CIFG subsidiary in the U.S. is suffering enormously as a result of credit defaults.''

Moody's and Fitch are also examining AAA-rated insurers including MBIA Inc., Ambac Financial Group Inc. and FGIC Corp. to see if they have enough capital.

Blue Pill Accounting At ACA Hits The Wall......

I suggest to read this post from July first ACA Capitals "Preferred Measurements Of Income" or "Blue Pill Accounting" & this from just a few days ago ACA "Hypothetical Speaking....." . In hindsight lots of comments from management, rating agencies & analysts are looking like they really live in the Matrix....... Amazing! Maxedoutmama has also a very good summary on ACA Hell's Bells Ringing On Wall Street

Ich empfehle im Vorwege dieses Post vom Juli ACA Capitals "Preferred Measurements Of Income" or "Blue Pill Accounting" und dieses von vor einigen Tagen ACA "Hypothetical Speaking....." zu lesen um deutlich zu machen wie planlos sowohl das Management, die Ratingagenturen und selbstredend auch die Analysten durch die Welt laufen...... Maxedoutmama hat eine weitere erstklassige Umschreibung zu diesem Thema Hell's Bells Ringing On Wall Street

ACA hits trouble - squared FT
More bad news from the world of structured finance. Lancer Funding II - a $1bn CDO squared - has entered an “event of default”, making it the first CDO squared to hit the wall.

CDO squared are, like the name suggests, CDOs of CDOs. A CDO squared defaulting then, is perhaps significant, since it acts as a litmus test for the broader CDO universe.

And Lancer is also part of a bigger grim picture at ACA Capital, its management company. They reported their Q3s on Monday and joined the banking big-league with a $1.7bn writedown. ACA are a big manager of CDOs and also a leading provider of CDO default insurance policies - which strikes us a pretty shortsighted combination.

Considering that ACA’s prime line of business is in structured finance, a $1.6bn writedown is hardly surprising, but it’s still worthy of note for several reasons:

Firstly, relative to ACA’s size, it’s a very big hit.

Secondly, the writedown ACA has taken may yet be a lot worse. The main cause for concern here is the fact that ACA’s Q3 results only cover the period up to September 30. And the very worst month for CDOs was October. Testament to that the fact that Lancer has now entered an event of default.


And thirdly, as a monoline insurer, ACA’s problems are not just ACA’s problems. The security of their insurance - on billions of dollars of CDO paper - is dependent on the safety of ACA’s own rating. And in the light of such a big writedown and the prospect of more trouble ahead, S&P has put the group on review.

ACA has been used as a “dumping ground” by subprime securitizers says Barrons, and that might now come back to haunt them. Wall Street does indeed seem keen to prop ACA up. According to filings with the SEC, a consortium of banks has provided liquidity facilities to the company. In spite of disastrous performance, banks have also continued to take out ACA insurance, unwilling perhaps, to pull the rug from under ACA’s feet.

Barrons

ACA has long been a convenient dumping ground in which major subprime securitizers like Bear Stearns (BSC), Citigroup (C), Merrill Lynch (MER) and some 25 other prominent dealers could pitch billions of dollars of risky obligations for modest premiums.

That let them gussy up their balance sheets and shift any potential mark-to-market hits to ACA.If ACA Capital were to founder, more than $69 billion worth of CDOs, including the $25 billion in subprime paper, would come rumbling back to the Wall Street banks, and likely with heavy attendant losses.That's why Wall Street has continued to do a brisk business with the beleaguered firm.

In the third quarter, ACA insured some $7 billion of subprime collateralized-debt obligations. Even if the company survives for only another couple of quarters, that would stave off the recognition of billions of dollars of losses.

All of this, of course, is immaterial, because October has happened and its presumably now just a question of time before ACA ‘fesses up to the damage already done. Little wonder that the company’s share price has just gone down and down and down. It stopped just short of collapsing through the dollar mark on Tuesday at $1.09.

ACA "Hypothetical Speaking....."

Four Month after this post the chart doesn´t look good....... What a surprise!

Vier Monate nach diesem Post hat sich die Lage offensichtlich nicht gerade verbessert...... Was für eine Überraschung!

ACA Capital Reports Financial and Economic Results

ACA Capital Holdings, Inc. (NYSE: ACA) today announced a third quarter 2007 net loss of ($1.0) billion, or ($29.42) per diluted share. The net loss was primarily a result of ($1.7) billion, or ($1.1) billion after tax, of net unrealized mark-to-market losses on the Company's portfolio of Structured Credit transactions.

Nice to see that they have still money to buy back shares.....

Schön zu sehen das immer noch genügend Geld vorhanden ist um Aktien zurückzukaufen.....

During the quarter, ACA Capital Holdings purchased 2.1 million shares or $14.9 million of its outstanding shares of common stock in open market transactions. The stock repurchase program began on July 27, 2007 and may be suspended or discontinued at any time without prior notice.

The quote from ACA and this Q+A “Understanding correlation is critical to everything we do” from a few month ago is just brilliant comedy if you are not a shareholder or even worse have bought billions of insurance from this company.....

Dieses Zitat und dieses Q+A File “Understanding correlation is critical to everything we do” von vor einigen Monaten ist nahe an guter Comedy wenn man nicht gerade Aktionär oder noch schlimmer einer derjenigen ist die Mrd an Absicherung von ACA erworben haben

ACA Capital’s Structured Credit business provides credit protection, using credit default swaps, on tranches of credit portfolios. We are primarily a seller of credit protection on tranches where the risk of loss is greater than that of the “AAA” rated level. We will sell credit protection below the “AAA” rated level but only when we see unusually strong value. The credits that underlie the portfolios on which we sell credit protection include corporate bonds and loans and mortgage and asset-backed securities

What was only a hypothetical question on the Nov. 7 th in the conference call what will happen after a downgrade from the single A rating the management said that ACA would face (hypothetical speaking....) an immediate liquidity call of $ 1.7 billion...... Now after S&P has finally eliminated the "hypothetical" just 2 days later and put ACA on the list for a possible downgrade from A this scenario described from Michael Panzner So Much For Being Hedged could lead to big trouble on balance sheets from banks and insurers.... And with actions like this Fitch Downgrades $37.2B Of CDOs, Slashing AAAs to Junk the pain is spreading fast......

Nachden noch am 07. November in der Telefonkonferenz die vollkommen abwegige Frage diskutiert wurde was denn passieren würde wenn ACA sein A Rating verlieren sollte und das Management daraufhin geantwortet hat das dann sofort eine zusätzliche Geldspritze von 1,7 Mrd $ notwendig wäre kann man nachdem S&P nur 2 tage später AVA auf die WL für ein downgrade gesetzt haben schon mal auf Betteltour gehen. Wahrscheinlich ist das dieses Szenario das Michael Panzner beschreibt So Much For Being Hedged einigen Banken und Versicherungen üble Löcher in die Bilanzen reissen wird. Und mit Meldungen wie diesen Fitch Downgrades $37.2 Billion of CDOs dürfte sich das Problem rapide weiter verschlimmern......

Here is one example from the German insurance giant Allianz. The have hedged one part and bought insurance from monolines for another ( I assume not ACA, they have bought from one the least weaker players like MBIA, I hesitate to rate anyone strong....)

Hier ist ein anschauliches Beispiel der Allianz. Die haben einen ganz gewichtigen Teil Ihrer Engagements entweder durch Shortpositionen und den Kauf einer Garantie abgesichert. Ich bin mir sicher das die Allianz niemals von ACA gekauft hätte. Sie haben sicher von einen der wenigen schwachen Spieler wie MBIA gekauft. Richtig stark auf der Brust ist aber keiner......


The WSJ has a related story Buffett Gets OpeningAs Bond Insurers TurnTo Berkshire for Succor

Das WSJ hat passend dazu heute Buffett Gets OpeningAs Bond Insurers TurnTo Berkshire for Succor eine passende Geschichte

Fundamentals, not liquidity conditions, are behind MBS crash

Good luck to all the banks and especially the monoline insurers that still think that the ABX Indices ( see also The AAA Trap via Sudden Debt ) are not reflecting the market price....... But as long as they can convince the auditors.......

Viel Glück all denen die die immer noch glauben das die ABX Indizes ( siehe auch The AAA Trap von Sudden Debt ) nicht den wahren Wert wiederspiegeln..... Aber solange die Buchprüfer diese Zahlen abnehemen......


Fundamentals, not liquidity conditions, are behind MBS crash / FT
Many banks, if not financial institutions in general, would have you believe that the current rout in mortgage-backed debt is largely being driven by irrational fear. A few bad subprime debts buried around the structured universe are scaring buyers out of markets.

But, said CreditSights, in a note to clients on Wednesday, current pricing levels reflect fundamentals, even for the most highly-rated debt. Mortgage securities across the board are overrated and overvalued:

The harsh truth about the outlook for the AAA tranches - necessary downgrades, if not defaults - should put the lie to the argument that current low prices in AAA RMBS tranches - let alone AAA tranches of mezzanine RMBS CDOs - are somehow the victim of poor liquidity conditions, and do not reflect the true fundamentals of the situation.

CreditSights publish the results of a survey they have conducted on “188 individual relatively large RMBS deals”. The outlook, by all accounts, is grim.

Hat tip to Barry Ritholtz who has also more on this topic Financials: Worse than they look?

Dank an Barry Ritholtz der zum Thema ebenfalls treffendes zu sagen hat Financials: Worse than they look?

At root, CreditSights calculate a severity loss ratio for lenders on individual defaulting subprime mortgages based on mortgage market data collected over the past few weeks. The survey results indicate that such loss severity rates on mortgages are “painfully high”. They range from 24 per cent to 55 per cent - with a weighted average at 35 per cent. And they’re expected to rise. For second-lien mortgages - that is, second mortgages on a property, the loss severity rates average 94 per cent.

> By the way MBIA is on the hook if the losses for their RMBS CDO´s are greater than 22-28 percent.........

> Ganz nebenbei bemerkt ist MBIA ab Verlusten von 22-28 % bei Ihren RMBS CDO´s in der Haftung.....

So how do those figures translate into the capital structure of structured mortgage-backed debt? Foreclosure rates are rising higher and higher - which means the number of occasions when the above loss severity ratios have to be applied are increasing.

And it doesn’t look like the blame can be pinned on any particular vintages of MBS. Here’s a graph of foreclosures on vintages since 2004:

According to CreditSights, that should “up-end the idea that the 2004 vintage was perhaps sufficiently seasoned and composed of loans that had enjoyed enough home price appreciation since 2000, to avoid any further erosion.”

As it is, foreclosure rates are hovering at around 13 per cent on 2005 and 2006 mortgage debt. But CreditSights say there is “no end in sight” when it comes to that figure rising.

Consider then the outlook for delinquancy rates - a measure of mortgage loans not yet in foreclosure, but in trouble:

Add the 7 per cent delinquency rate for the 2006 vintage to the 2006 foreclosure rate at 12.6 and it’s already close to 20 per cent.

How then does that translate into the world of structured finance, and those RMBS tranches?

To trigger a default on the most secure subprime RMBS debt - rated AAA, and structured with a typical 18 per cent attachment rate - foreclosure rates would have to reach the 30 per cent.

As can be seen from the results of CreditSights’ survey, that scenario is indeed becoming “less and less unthinkable”. Adding the foreclosure and delinquancy rates takes us close to 20 per cent. Both are set to increase. Then there’s those painfully low severity loss ratios. Add it all together and that AAA debt is far, far, far from safe.

And we haven’t even mentioned prime tranches lower down the structure.

Far from mispricing RMBS, CreditSights even go so far as to suggest that actually, the ABX indices (which list AAA RMBS debt at around 80 cents in the dollar) are throwing up some pretty appropriate figures.