This thread looks like a good spot to post this little gem.
Time for the ol' one-two sucker punch?
Much has been made of the sub-prime/alt-a CDO derivatives
kamikaze dive, but another, possibly larger group of derivatives
based on corporate debt is starting to tank. ==Note that the
notational/face value of these "investments" is about twice the
value of the sub-prime/alt-a CDOs.==
BANZAIIIIIIIIIII
===============
CDO Cuts Show $1 Trillion Corporate-Debt Bets Toxic (Update1)
By Neil Unmack, Abigail Moses and Shannon D. Harrington
Oct. 22 (Bloomberg) -- Investors are taking losses of up to 90
percent in the $1.2 trillion market for collateralized debt
obligations tied to corporate credit as the failures of Lehman
Brothers Holdings Inc. and Icelandic banks send shockwaves
through the global financial system.
The losses among banks, insurers and money managers may spark the
next round of writedowns on CDOs after $660 billion in
subprime-related losses. They may force lenders to post more
reserves against losses after governments worldwide announced $3
trillion in financial-industry rescue packages since last month,
according to Barclays Capital.
snip
Some synthetic CDOs, tied to credit-default swaps on corporate
bonds, are trading at less than 10 cents on the dollar, according
to Sivan Mahadevan, a derivatives strategist at Morgan Stanley in
New York.
CDOs parcel fixed-income assets such as bonds or loans and slice
them into new securities of varying risk, providing higher
returns than other investments of the same rating.
The synthetic variety pools credit-default swaps, which are
derivatives based on bonds and loans and used to protect against
or speculate on defaults. Should a borrower fail to meet debt
agreements, the contracts pay the buyer face value in exchange
for the underlying securities or the cash equivalent. An increase
in the agreement's cost indicates a deteriorating perception of
credit quality.
About $254 billion of CDOs tied to mortgages for borrowers with
poor credit histories have defaulted, according to Wachovia Corp.
Tracking defaults on those linked to corporate bonds will be
difficult because the market is largely private, said Mahadevan.
snip
Demand for synthetic CDOs pushed the cost of default protection
to record lows in 2007, driving down company borrowing expenses.
Sales surged to $503 billion in 2006, from $84 billion five years
earlier, according to Morgan Stanley.
High Return
Bankers loaded the securities with bonds and swaps offering the
highest return for a given credit ranking, indicating additional
risk. An AA rated European issue offered an average yield of 50
basis points over money-market rates when sold in 2006, according
to UniCredit SpA analysts in Munich. Similarly rated corporate
bonds paid 9 basis points. A basis point is 0.01 of a percentage
point.
``The maths ended up driving the way CDO portfolios were put
together,'' said Nigel Sillis, a fixed-income and currency
analyst at Baring Asset Management Ltd. in London.
==The banks that structured the securities and investors both
failed to do ``fundamental credit analysis,'' said Janet
Tavakoli, president of Tavakoli Structured Finance in Chicago.
``They were using correlation models, they were using spread
models, but they weren't doing analysis on the underlying
corporations.''== {SO SOON OLD, TOO LATE SMART...}
Fitch downgraded 422 classes of CDOs on Oct. 13 after seven
financial companies defaulted or were bailed out since September.
The company didn't disclose the total number of classes it rated.
snip
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for complete article click on
http://www.bloomberg.com/apps/news?p...4yc&refer=home
These are numbers from astronomy, not finance!!!
Unka' George [George McDuffee]
-------------------------------------------
He that will not apply new remedies,
must expect new evils:
for Time is the greatest innovator: and
if Time, of course, alter things to the worse,
and wisdom and counsel shall not alter them to the better,
what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman.
Essays, "Of Innovations" (1597-1625).