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Sunday, March 1, 2009

Ben and Tim's bogus journey

Large US banks are essentially paralyzed by the toxic assets on their books, particularly collateralized debt obligations, the complex securities that managed to turn shitty mortgages into AAA-rated milk-chocolaty goodness.

But when investors began to realize that the chocolate was, in fact, shit, they no longer wanted to chow down. This led to the collapse of off-balance sheet vehicles banks were using to unload these things and landed them right square on their plates. Any solution to the financial crisis requires getting them off. Hence today’s dilemma.

The Treasury's plan for them is to center on finding private buyers, which is an indication that, after all this time, they still think the problem is a lack of liquidity. True, ascertaining what value, if any, they have has been near impossible given the credit crunch, but Gillian Tett reports on some recent efforts. They are, let's say, less than comforting:
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 [asset-backed securities].

The conclusions are stunning. From late 2005 to the middle of 2007, about $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, about $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 CDOs, though, recovery rates on those triple A assets have been a mere 5 per cent.

The covered years are admittedly at the height of the lending frenzy so losses are unlikely to be that great for earlier periods. Still, we can be generous and assume recovery rates on AAA tranches of 50% and still be stuck with a massive hole in banks' balance sheets.

Moreover, as Tett points out, these assets were rarely traded to begin with, so merely finding new buyers will do nothing to improve the underlying performance of these securities. But that is exactly what folliclely-challenged Ben Bernanke and Treasury douche Tim Geithner are proposing as a solution--trying to lure in buyers with subsidized government finance and hope they're worth more than they are.

As I pointed out earlier, Ben and Tim have been arguing that banks are solvent and that there is no need for nationalization, while at the same time they acknowledge that no one has a fucking clue how much the CDOs are actually worth, which means they have no idea if banks are solvent or not, and all the while they nurse at America’s Tit of Freedom.

Well, we now have our first glimpse of their real potential losses, which puts the inadequacy of the Treasury's plan into stark relief. But even supposing banks' actual losses are realized and they fail their stress tests, the Treasury has allotted a 6 month window in which they can try to raise capital and close the gap in their finances.

Given the state of the global economy, it's frankly unforgivable to let the uncertainty continue for that long. The government is so heavily exposed as it is that it might as well just take all of the banks' losses and get on with it, so long as it's actually communicating a definitive, if stupid, strategy.

But no, more dicking around. Heinous.

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