[OPE] FT's Gillian Tett on the data about the CEOs, oops... CDOs

From: Jurriaan Bendien <adsl675281@tiscali.nl>
Date: Thu Feb 26 2009 - 17:18:12 EST

Gillian Tett, "Time to expose those CDOs", FT February 26, 2009

(...) In recent weeks, bankers at places such as JPMorgan Chase and Wachovia
have been quietly sifting data trying to ascertain what has happened to
those swathes of troubled CDO of ABS ["collateralised debt obligations of
asset-backed securities"]. The conclusions are stunning.

>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 [i.e.
67.8%] 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 [i.e. 22.6%] has already been

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% for the high grade CDOs. With mezzanine CDO's, though,
recovery rates on those AAA assets have been a mere 5 per cent.

I dare say this might be an extreme case. The subprime loans extended in
2006 and 2007 have suffered particularly high default rates, and the CDOs
that have already been liquidated are presumably the very worst of the pack.
Even so, I would hazard a guess that this is easily the worst outcome for
any assets that have ever carried a "triple A" stamp.

Complete story

On the day I was born, the nurses all gathered 'round
And they gazed in wide wonder, at the joy they had found
The head nurse spoke up, and she said leave this one alone
She could tell right away, that I was bad to the bone
Bad to the bone
Bad to the bone
B-B-B-B-Bad to the bone
Bad to the bone

- George Thorogood and the Destroyers, "Bad to the Bone".

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Received on Thu Feb 26 17:21:44 2009

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