American Enterprise Institute financial regulation maven Peter Wallison sees light at the end of the toxic-asset tunnel that has eluded two administrations and Congresses: allow the banks to sell their bad assets to the government at "net realizable value." PW shows how he thinks we can get around mark-to-market write-downs without encouraging chicanery. Worth a read, but check this out.
The cost of credit default obligations (CDOs) is rising. A The Naked Capitalist offers this:
But now, at long last, one shard of reality has just emerged to piece
this gloom. In recent weeks, bankers at places such as JPMorgan Chase
and Wachovia have been quietly sifting data ....
From late 2005
to the middle of 2007, around $450bn of CDO of ABS were issued, of
which about one third were created from risky mortgage-backed bonds
(known as mezzanine CDO of ABS) and much of the rest from safer
tranches (high grade CDO of ABS.)
Out of that pile, around
$305bn of the CDOs are now in a formal state of default, with the CDOs
underwritten by Merrill Lynch accounting for the biggest pile of
defaulted assets, followed by UBS and Citi.
The real shocker,
though, is what has happened after those defaults. JPMorgan estimates
that $102bn of CDOs has already been liquidated. The average recovery
rate for super-senior tranches of debt – or the stuff that was supposed
to be so ultra safe that it always carried a triple A tag – has been 32
per cent for the high grade CDOs. With mezzanine CDO’s, though,
recovery rates on those AAA assets have been a mere 5 per cent.
Thus, most bad stuff may now have been tossed out. NC calls for market price discovery.
AIG needs more federal bailout funds on top of the $150B it has already taken, $30B already on request according to the NY Times. The feds might be tempted to shaft creditors, except that the Lehman bust-up last September, which triggered the meltdown, involved creditor losses, and thus the feds fear creditors will react badly again. However, the feds shafted Citi's preferred shareholders last week, including the government of...Singapore. Having gotten the city-state to invest in Citi last fall as part of the bailout, the government decided that no good deed should go unpunished. Citi's stock, worth $277B at year-end 2006, is now, at $1.50 per share, worth $8B, a nosedive of over 97 percent!
Perhaps the feds might ask Wallison for advice?
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