Thanks for the mention and back at ya…

http://naybob.blogspot.com/2007/07/100-year-storm-part-ii.html

The Nattering One

Thanks for your comment, and apologies for not being clearer.

While quite a few subprime-related CDOs have clearly been carried at considerrably higher values than they were worth (and therefore also overvalued as collateral), there is now actually an open question as to whether the recent sales represent fair value or not.

While mark to market is the only sensible way to run a trading business (it’s much more arguable for banks), when the bottom drops out of a market, as it has thanks to the Bear liquidation, paper can trade at very distressed prices, lower than its intrisic value, yet no one will buy it because the supply/demand imbalance may appear likely to worsen in the near term. No one wants to catch a falling safe.

Look at it another way: the only natural buyers of the riskier Bear assets are likely to be actively managed CDOs and hedge funds. But given the severity of the move down, no one is likely to step forward to buy in meaningful amounts until they have some confidence that another shoe isn’t about to drop.

Mind you, I am not saying that some of the Bear paper was sold at less than its economic value. I am not in that market and have no way of knowing. But given that a lot of supply hit in an illiquid, hard to value corner of the market, it is within the realm of possibility. In the wake of the LTCM failure, swap spreads took a full year to return to historically normal prices, even though the crisis was well in hand within a month and no other players were in distress.

Now I happen to be pretty negative on the prospects for housing, so I’d bet on paper in this sector deteriorating in value regardless…..

Seems to me you’re conflating two issues here. 1) it is (just) possible that no other funds will be forced to the wall as Bear Stearns has; but 2) every fund with a portfolio of CDOs – and obviously mortgage products in particular – will be affected by a re-evaluation of the riskiness of those assets.

There is just no way to put a good face on the sale results, and all the public worrying about how to avoid any additional distressed sales only makes matters worse. What, are we supposed to believe that these assets would have been okay in somebody else’s portfolio? -That they were fundamentally sound, but not really intended for use as collateral?