In light of this morning's UBS $10 billion writedown, does anyone have any predictions for this week's earnings releases for U.S. I-Banks.
I want to know how close this website's readers can get to the actual writedowns that are going to be taken by GS, MS, BS, and LB this week?
If you work at one of this four or have any particular insight, I would love to hear it.
Seperate dicussion:
During college I worked in a regional banks Asset Backed Securitization group on RMBS. However, in light of Etrade's firesale (27 cents on the dollar) to Citadel of their MBS portfolio does anyone know how exactly banks "price" them. For example, if you securitize $100 m of prime home loans and sell them how (on what metric) is the price based (i.e. credit risk, interest rate risk, prepayment risk) vs. how a CLO/CMO backed by the same loans would price. What I don't understand is how CLOs are priced differently (I know they aren't not truly collaterilzed by the loans). $100 M of prime loans with an expected default of 2-5% is not going to sell for 27 cents on the dollar, but yet a CLO can. I understand the tranching structurally, but not in the sense of pricing (waterfall effect, ect). Anyone ever sold or priced these two different products and have some insights?
CLOs are securitizations of corporate loans so the credit risk being priced is completely different from that of ABS CDOs, which can be backed by various types of RMBS, consumer ABS, etc. - pretty much anything.
CDOs/CLOs don't incur the same prepayment risk that a CMO does - any prepayments from the underlying assets are reinvested in similar loans/ABS for the first few years of the deal. Interest rate risk, at least with a CLO, is also generally a non-issue, as both the underlying assets (the loans) and the liabilities are floating-rate. Therefore the pricing on CDO/CLO tranches is based on the credit risk of the underlying portfolio.
These days, nobody is really sure they know how to properly assess this credit risk, meaning investors are afraid to buy CDO/CLO debt. Lack of liquidity/general fear of a larger-scale credit crunch has led to ridiculously low prices on these assets.
generally trade on a NPV basis (of the cash flows) when they market is focused on fundamentals.
but... given the current structured finance market, they trade on IO today.
it's a little misleading, but the press has taken the ABX to give an indication of ABS CDO pricing levels. it's really the cost of protection on select MBS tranches, but it's an easy proxy that the masses can unnnastand.
Thanks you two thats a good background.
What I am struggling with is with the CMOs that Citadel bought. I assume they bought the entire obligations/vehicles (all tranches from equity to super senior). Assuming that the super senior tranches are backed by sub-prime mortgages, deriving their AAA or AA rating from overcollaterilization, how can they still sell at 27 cents on the dollar? I can see if they bought some of the lower tranches with the higher exposure to credit risk, but they bought the entire obligation, right? Thus assuming a worst case scenario of 5% default rate, you lose those cash flows, but you retain 95% of the rest. Not only that, but due to the waterfall effect if the lower tranches are eaten away by defaults the super senior tranches get paid more quickly, right? I can see the significant risk of buying certain tranches, but I can't see how the 27 cents is justified if you buy the entire obligation. Any thoughts?
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