Saturday, February 28, 2009

Even Triple-A Rated CDOs Have Only a 5% Recovery Rate


According to the Financial Times:

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.***

I would hazard a guess that this is easily the worst outcome for any assets that have ever carried a “triple A” stamp. No wonder so many investors are now so utterly cynical about anything that bankers or rating agencies might say these days.

Since the credit default swap and CDO market are so closely linked, this could also spell trouble for CDS.

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1 comment:

  1. maximusMarch 1, 2009 at 2:50 PM

    Great post--hadn't seen this....

    In addition to the basic fact that
    many of the super senior tranches are improperly rated, as time goes on the administrative, collection and legal costs buried in these CDO's could easily take their value to zero.

    it amazes me to hear continued projections that there will be "mark ups" on CDO's down the road--I don't see any takers for that bet as of now, unless you want to count the Fed or the Treasury....

    maximus
    http://4best4worst.wordpress.com/
    searching for the truth....

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