Hi All

Among the many things I do not understand is:

Karl said (in fridays ticker): "Many of these organizations are in fact insolvent. That is, they have tens if not hundreds of billions of dollars of paper that is in fact worth zero! These CDOs in particular are worth zero according to the market - there is no bid!"

OK I get that - seems reasonable. Yet further down the page is a seemingly ever decending MarkIt chart of A paper mortgage bonds. Does this not imply that the CDO's are worth roughly 58% of face value. Or is this chart showing a different thing? I'm a bit lost on this.

If anybody could offer up some clarification as to where they get the figures for this chart and how it relates to the CDOs that seem to be so hard to value it would be very much appreciated.

Cheers
NewB

You can't use the ABX charts for exact values on MBS or CDOs. They are just a sort of sentiment indiactor for the rest of the market. The ABX is a basket of home equity securities. When they fall, you can assume the MBS and CDO tranches of similar rating are falling too, you just don't know exactly how much. So, use it as a indicator, but don't take the exact value to mean anything outside the home equity sector.

One commentator on Taking Stock said that a large problem with the marking to market right now is that the holders of the sludge do not believe that the ABX reflects a reality. He said that it would require a depression era collapse in home prices in order for the ABX to be right. So there is still a lot of denial out there about how much housing in the hardest hit areas is going to go down. Once that denial works its way through the system, it will be easier for the holders of the sludge to mark it down.

The problme with the fraud though is that it doesn't really matter if they're right or wrong longer-term.

If I buy some PUTs and they currently have no bid, they're worth zero - right now. I can hang on to them but my account balance reflects a zero value. If they perk up later then they have value and I can mark that.

What I object to is holding onto a "high" value when in fact the market suggests they're worth nothing. IF the market is wrong, then in the future these are great investments with a huge capital gain (from here), but right now you ought to be FORCED to mark them on your balance sheet at the midpoint of the bids you can get for them, and if that answer is "no bid", then zero is the correct book entry.