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Thursday, December 27, 2007

Wall Street Wizardry = Junk

Items of interest:

Carrick Mollenkamp & Serena Ng / Wall Street Journal:
Wall Street Wizardry Amplified Credit Crisis -- A CDO Called Norma Left 'Hairball of Risk'; Tailored by Merrill Lynch

In recent years, as home prices and mortgage lending boomed, bankers found ever-more-clever ways to repackage trillions of dollars in loans, selling them off in slivers to investors around the world. Financiers and regulators figured all the activity would disperse risk, and maybe even make markets safer and stronger.

Then along came Norma.

Norma CDO I Ltd., as its full name goes, is one of a new breed of mortgage investments created in the waning days of the U.S. housing boom. Instead of spreading the risk of a global home-finance boom, the instruments have magnified and concentrated the effects of the subprime-mortgage bust. They are now behind tens of billions of dollars of write-downs at some of the world's largest banks, including the $9.4 billion announced last week by Morgan Stanley. [...]

WSJ: The Making of a Mortgage CDOFitch Ratings - Non-Investment Grade (also known as junk bonds) - BB and lower
Myron Shlapak / Seeking Alpha:
Subprime Root Cause Analysis

Washington Post:
It's Not 1929, but It's the Biggest Mess Since -- What we know now, of course, is that the investment banks and ratings agencies underestimated the risk that mortgage defaults would rise so dramatically that even AAA investments could lose their value. One analysis, by Eidesis Capital, a fund specializing in CDOs, estimates that, of the CDOs issued during the peak years of 2006 and 2007, investors in all but the AAA tranches will lose all their money, and even those will suffer losses of 6 to 31 percent. And looking across the sector, J.P. Morgan's CDO analysts estimate that there will be at least $300 billion in eventual credit losses, the bulk of which is still hidden from public view. That includes at least $30 billion in additional write-downs at major banks and investment houses, and much more at hedge funds that, for the most part, remain in a state of denial. [...]
Subprime Crisis: Many Unhappy Returns -- America's big financial firms will find no relief from the subprime crunch at the start of the new year.

Goldman Sachs analyst William Tanona predicted big write-downs for Citigroup, Merrill Lynch, and JPMorgan Chase. "Although we have seen many firms take the appropriate actions in recent weeks as they relate to write-downs and capital raises, we still believe it will be a couple of quarters before the current credit crisis is fully digested by the markets," he said. [...]

Calculated Risk

MishTalk - Mike Shedlock

Paul Krugman - NY Times

The Big Picture - Barry Ritholtz

naked capitalism - Yves Smith

Pragmatic Capitalism

Washington's Blog

Safe Haven

Paper Economy

The Daily Reckoning - Australia