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Wednesday, December 05, 2007


more cdo liquidation, with marks

we already knew that investor-forced and event-trigger CDO liquidations had begun. now we start to get a picture of the liquidation values. via calculated risk:

Standard & Poor's Ratings Services today lowered its ratings to 'D' on the senior swap and the class A, B-1, B-2, C, D, and E notes issued by Adams Square Funding I Ltd. The downgrades follow notice from the trustee that the portfolio collateral has been liquidated and the credit default swaps for the transaction terminated.

The issuance amount of the downgraded collateralized debt obligation (CDO) notes is $487.25 million.

... Based on the notice we received, the trustee anticipates that proceeds will not be sufficient to cover the funded portion of the super-senior swap in full and that no proceeds will be available for distribution to the class A, B, C, D, or E notes.

Today's rating actions reflect the impact of the liquidation of the collateral at depressed prices. Therefore, these rating actions are more severe than would be justified had liquidation not been ordered, in which case our rating actions would have been based on the credit deterioration of the underlying collateral. Across the cash flow assets sold and credit default swaps terminated, we estimate, based on the values reported by the trustee, that the collateral in Adams Square Funding I Ltd. yielded, on average, the equivalent of a market value of less than 25% of par value.

each CDO is a unique entity, so the liquidation value of any one is not universally applicable. but you can bet that they won't be so different from one another as to render this case strange. take 25 cents on the dollar here along with e*trade's whole loan portfolio mark of 27 cents, and the picture is clearing up.

to be sure, the SIV losses are very definitely coming, and they are going to be unbelievable to many. there's a reason citi is fighting so hard to keep the super-SIV plan operational, in spite of signs that the plan in already failing.

but even if citi does nothing to back their SIVs, this sort of marking -- at an early point in the unwind, mind you, when only a few early buyers have been burned, before house prices have really even fallen significantly on a nationwide basis -- can be applied to this estimate of exposure to approximate that citi is faced with an as-yet-unannounced $32bn in writedowns on their CDO portfolio alone.

further imply from widely-reported subprime delinquency rates in excess of 15% on citi's whole loan portfolio of $17.3bn to arrive at another $2.6bn in writedowns. then losses on RMBS, and one gets in the neighborhood of $40bn in writedowns.

then consider that we haven't included anything about citi's near-prime and prime mortgage portfolios, which are an order of magnitude larger and will therefore produce writedowns, while at a lesser rate, on a larger absolute scale. not to mention the rest of their huge consumer loan book.

the inescapable conclusion is that citi -- and not citi alone -- is suffering every bit of the existential threat forecast by the likes of cibc's meredith whitney. if economic conditions come with any speed to the deflationary credit event i anticipate, it's hard to imagine citi surviving in anything like its current form.

UPDATE: per bloomberg, barclay's is taking the point of these unwinds:

U.S. mortgage assets in collateralized debt obligations have lost so much value that the top classes of the securities may be worth as little as 20 cents on the dollar in a liquidation, Barclays Plc analysts said in a report.

About 20 percent to 30 percent of principal would be covered for the ``super senior'' portions of mezzanine asset-backed bond CDOs, which mainly contain mortgage bonds and other CDOs initially assigned low investment-grade ratings, Barclays said in the report yesterday. The senior-most classes of CDOs containing highly rated asset-backed bonds would recoup 30 percent to 65 percent, it said.

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