Comments on: The Role of CDOs in Merrill’s Losses (Updated and Expanded Version) http://www.nakedcapitalism.com/2007/10/role-of-cdos-in-merrills-losses.html Sun, 22 Nov 2009 03:53:33 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Yves Smith http://www.nakedcapitalism.com/2007/10/role-of-cdos-in-merrills-losses.html#comment-1237 Yves Smith Thu, 25 Oct 2007 20:11:00 +0000 http://www.nakedcapitalism.com/2007/10/the-role-of-cdos-in-merrills-losses-updated-and-expanded-version/#comment-1237 Anon of 1:28 PM,<br/><br/>With all due respect, the point I made was that the discussion of the role of the financial guarantees does not at all relate to the main thrust of the argument, which is that Merrill was holding on to increasing amounts of underwritten paper which it could not sell. <br/><br/>I read the section again and still find it to be poorly drafted. The authors have introduced a second thread about financial guarantees that does not relate to their main argument. The writers may have intended to make the point you made, <i>but they didn't</i>. <br/><br/>The writers are also talking specifically about financial guarantors, meaning companies like MBIA and Ambac, which have been providing credit enhancement, and not insurers generally.<br/><br/>And finally, as I stated above, the article said the paper Merrill was holding was rated AAA. It had <i>already been rated</i>. The credit enhancement had already been provided, whether via guarantees, overcollateralization, or credit default swaps. So making a point that the financial guarantors were stepping back reads as being moot. Anon of 1:28 PM,

With all due respect, the point I made was that the discussion of the role of the financial guarantees does not at all relate to the main thrust of the argument, which is that Merrill was holding on to increasing amounts of underwritten paper which it could not sell.

I read the section again and still find it to be poorly drafted. The authors have introduced a second thread about financial guarantees that does not relate to their main argument. The writers may have intended to make the point you made, but they didn’t.

The writers are also talking specifically about financial guarantors, meaning companies like MBIA and Ambac, which have been providing credit enhancement, and not insurers generally.

And finally, as I stated above, the article said the paper Merrill was holding was rated AAA. It had already been rated. The credit enhancement had already been provided, whether via guarantees, overcollateralization, or credit default swaps. So making a point that the financial guarantors were stepping back reads as being moot.

]]> By: Anonymous http://www.nakedcapitalism.com/2007/10/role-of-cdos-in-merrills-losses.html#comment-1234 Anonymous Thu, 25 Oct 2007 17:28:00 +0000 http://www.nakedcapitalism.com/2007/10/the-role-of-cdos-in-merrills-losses-updated-and-expanded-version/#comment-1234 Financial guarantors write protection on the super-senior pieces of the CDO so that the bank itself does not hold on to that risk. Insurance is another way to 'long' credit risk, so the insurers are a type of investor. Since insurance contracts don't require upfront payment to take on the exposure (unlike bonds, which have to be paid), low yielding tranches are typically 'sold' to insurance companies in this manner. The reporter makes a very valid observation that is typically ignored in most non-industry articles. Financial guarantors write protection on the super-senior pieces of the CDO so that the bank itself does not hold on to that risk. Insurance is another way to ‘long’ credit risk, so the insurers are a type of investor. Since insurance contracts don’t require upfront payment to take on the exposure (unlike bonds, which have to be paid), low yielding tranches are typically ’sold’ to insurance companies in this manner. The reporter makes a very valid observation that is typically ignored in most non-industry articles.

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