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Friday, July 25, 2008


where we're headed

macro man notes along with others that the writedowns announced by national bank of australia may take on outsized dimensions before the pain in the financial sector is finished.

For Macro Man, the most interesting recent developments have come from Down Under (and Just Over). While it has yet to garner too many substantial headlines, the news that National Australia Bank (NAB) has written down its US RMBS portfolio to 10 cents on the dollar could send shockwaves through the financial system.

Much of NAB's book was made up of AAA securities, so to mark them down so drastically certain suggests that "the model", whatever it is, is broken. Now, when you consider that a whole host of banks are either marking this stuff much higher on their balance sheets, or have moved it to the limbo of "Level 3" make-up-whatever-price-you-want assets, a publicly-disclosed 90% write-off on similar assets could represent a rather unpleasant dash of cold water in the face of much larger fish than NAB. No doubt a host of banking execs are cursing NAB into their Cheerios this morning; after all, nobody likes a whistle blower, especially when there's plenty of other bad news to deal with.

from the original source:

The move, which means NAB has written down about 90 per cent of its former $1.2 billion portfolio in US residential mortgage securities, plunged banking stocks into the gloom again, with National Australia Bank falling almost 13 per cent to $26.81 before recovering to $26.96 in early afternoon trading....

The head of NAB Capital, John Hooper, said the bank had moved to adopt a "worst case'' view on the bank's collateralised debt obligations, which hold the US housing mortgage investments, because of recent bad news from the deteriorating US housing market.

He said while losses on the portfolio stood at only 2 per cent at present, the stock of houses for sale in the US market now added up to 10.6 million, partly due to large numbers of forced sales and foreclosures.

This was leading to houses being sold at prices that only recovered 45 per cent of the outstanding loan.

On top of this, out of 10 CDO investments, NAB is only ascribing value to two "super senior'' issues.

NAB has moved to write off the entire value of eight "senior'' CDOs because the structure of the debt means it is unlikely to receive any money at all from the distressed sales of US houses.

Mr Hooper said the $4.5 billion in other loan assets was held in a better structure, and was backed by corporate loans that were not experiencing the huge dislocations occurring in the US housing market.

i've spent the last couple days ruminating on how we might get out of this mess and how we can't. but it must be said that if THIS how triple-a RMBS and CDOs end up being marked, the scale of the problem is far greater than anyone has yet dared to estimate -- and we will surely be seeing debt deflation run stronger and further than most anyone expects as much of the american banking system ends up insolvent.

UPDATE: more via reuters.

[NAB] have pulled the pin out of a grenade; there’s no going back now.

and the aussie business spectator.

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