Thursday, Sep 03, 2009
Garbage bonds repackaged into AAA CDO's
Bloomberg: Barclays Said to Repackage Top-Rated Bonds From Downgraded CDO
Banks are turning downgraded securities into new investments with top credit ratings, seeking to create more valuable debt to sell or to restructure investors’ holdings.
“Critics of this practice have argued that it appears to be the creation of something from nothing -- in effect ‘alchemy,’” Moody’s analyst Leonid Mogunov wrote in an August report. “Such repackaging can in fact produce at least one class of notes more creditworthy than the underlying CLO tranche"
Posted by mrb @ 07:08 PM (406 views) Add Comment
5 Comments
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1. refusetobuy said...
"Barclays Capital is selling $77.25 million of securities backed by leveraged loans with AAA rankings from Standard & Poor’s and Moody’s Investors Service"
Rated AAA by the rating agencies got it right last time...
Although if they are selling $77.25 million of securities for £50 then I might take a punt. Everything has a price.
2. paul said...
It's with initiatives like this that one realizes that the whizkids on Wall Street never actually were.
Refried CDOs? These people really do think their customers are idiots. These banks are socially useless, economically bankrupt and now, technically incompetent.
3. inbreda said...
...and why not... it was so profitable first time round...
4. mdmick said...
People talk about tighter regulation of the banks.
A while back, there was a lot of focus, in this blog, on the need for ratings organisations to be regulated.
If they could mark such an investment as not being AAA then surely that would go some way towards reducing risk and huge downward asset revaluations.
For a product where a fall in value of stock has a strong feedback on the revaluation of most of the rest of the stock, such as with the repricing of houses, how should rating agencies mark that on the product?
If all goes well in a market then the risk is low but once the propagation effect happens then value dives.
Maybe some sort of supermarket logo could be used.
5. uncle tom said...
It is tempting to be cynical, but I suspect they are being pragmatic.
The original ratings scandal arose from investment vehicles that were deliberately made too complex for the ratings agencies to evaluate. The ratings guys took far too much on trust. I would be amazed if they got suckered into that again, so soon after the event.
There is a perfectly sound and reasonable case for de-constructing these securities (where possible) into components that are sufficiently transparent for the ratings agencies to make a sound evaluation - separating the sound elements from those of moderate risk, and then dumping the rest for a nominal amount.
Across the whole spectrum of the structured investments, there is still a great deal of value; but not knowing, and not knowing why a vendor wants to sell, is almost certainly depressing their market value excessively.