Some Subprime Debt Valued at 5 Cents on the Dollar

Gillian Tett has an intriguing little piece in today’s Financial Times, in which she reports on the first public valuation of particular structured credit instruments.

The odd bit (and theories by those that may have insight are welcome) is that JP Morgan apparently elected to make these prices public. JPM needed to value the securities for a court filing; perhaps it decided it had nothing to lose by sharing its pricing and thought it might encourage other banks to similarly disclose value estimates in legal cases in the hopes of encouraging more transparency.

But as the article makes clear, the markdowns from face value, even of the top rated instruments, were considerable.

From the Financial Times:

The first public price estimates for specific structured credit securities to have emerged since the start of the credit crisis show that values have fallen sharply.

Some securities have lost almost a third of their value – even though many were considered to be so safe that they carried top-notch ratings from the credit ratings agencies.

Meanwhile, some subprime mortgage-linked securities issued by groups such as UBS have lost almost 95 per cent of their value.

The price estimates were made in a legal filing following a decision by JPMorgan Chase to ­publish detailed securities valuations in a Canadian court. The securities are linked to commercial loans and medium-grade mortgages.

The estimates are likely to be scrutinised by auditors and regulators since they come at a time when the issue of security pricing has become controversial.

Banks are under pressure from regulators to book losses they have incurred on such instruments. However, trading has virtually dried up in many corners of the credit markets, and it is hard to compare prices for these instruments between banks.

Many regulators and investors fear that banks are still varying in the degree to which they have booked losses on their credit instruments in recent months – not least because it is hard for auditors to compare internal estimates with external benchmarks.

The figures have emerged because the US bank is leading an effort to restructure a group of 20 Canadian structured investment vehicles that issued $32bn of asset-backed commercial paper.

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  1. Alan Greenspend

    Yikes. They’ve potentially poisoned the well.

    This to me is the key quote-

    “The estimates are likely to be scrutinised by auditors and regulators since they come at a time when the issue of security pricing has become controversial.”

    Since when have we had functional auditors and regulators in the highly leveraged derivative market?

    Actual mark to market…

  2. Anonymous

    Why make public…Maybe to demonstrate how much they’ve progressed in the write downs, trying to boost confidence in their bank

  3. UrbanDigs

    so what does this mean? The rest of the portfolio’s out there get marked to this recent market transaction?

    Does this mean:

    1) more write downs
    2) the end is near
    3) transparency is coming whether we like it or not
    4) nothing, its done already

    I would love if we can get a YVES OPINION on each of these topics so the less educated, like myself, can understand what this NOW MEANS!

  4. Marcus Aurelius

    “…following a decision by JPMorgan Chase to ­publish detailed securities valuations in a Canadian court.”


    This was a “decision”? Typically, the court orders the disclosure of such information during the discovery process prior to hearing a civil matter. No one gets to “decide” what they will, or will not, disclose.

    Unless JPM is being charitable – releasing information not pertinent to the trial (in which case, they open the door to a charge of obstruction) – they had no choice in the matter.

    I guess the jig is up, up.

  5. Yves Smith

    Anon of 8:08 AM,

    Sorry, I’ve e-mailed my tech guy, but the podcast is via a service, Talkr. They may be having a problem.


    I wish I could say more. Tett’s phrasing implied the disclosure was voluntary. If so, I’d say this was an effort to promote transparency. But a number of deals are being unwound in Canada. Even if not by choice, it may lead to a wee outbreak of transparency if (as Marcus Aurelius believes) this is court mandated and other courts follow suit.

    As noted, a lot of this paper doesn’t trade; some CDOs were never intended to be traded. The ABX isn’t a great proxy, but it’s the only game in town now re a pricing benchmark.

    Marcus Aurelius,

    You may be right, but I had a different line of though (and I may be reading too much into Tett’s turn of phrase), I wondered whether JPM could have satisfiied the court by providing less specific valuations, such as the weighted average per rated security. That would have met the need to provide a valuation (remember, this is for investors in SIVs, so this is to tell them why they got, rather than a more detailed breakdown). Other SIVs have been liquidated, admittedly in other jurisdictions (I think pretty much all other ones so far were in the UK) but whatever reporting obligation they had to the court and investors evidently did not trigger disclosure of prices for specific securities.

  6. Anonymous

    Relax The Fed is buying:

    Under the plan, the homeowner would be able to refinance the mortgage with the U.S. Federal Housing Administration, based on the current value of the home. So instead of a US$240,000 mortgage, he would now have a US$198,000 mortgage (we’re assuming US$2,000 was paid in cash).

    The FHA would buy the US$240,000 loan from Bank ABC, giving it US$200,000 and a “negative equity certificate” for the remaining US$40,000. Were the homeowner to eventually sell the home, the FHA loan would be paid off first, then the original lender, up to the value of the certificate. Any money left over would go to the homeowner.

    The homeowner wins because he is now paying down a smaller debt and if interest rates are the same or lower than when he first bought the home he also has lower monthly payments.

    Bank ABC wins because it gets most of the money back from the original loan and may still recover the rest. This is far better than the borrower walking away from the now-onerous original mortgage, as a growing number of homeowners are currently doing.

    “It beats foreclosure,” Jaret Seiberg, an analyst at Stanford Policy Research, told the Washington Post.

    This will help lenders limit their losses and avoid an “avalanche of borrowers who choose to walk away from the mortgage,” Scott Polakoff, the OTS senior deputy director, told Bloomberg News.

    The “negative equity certificates” would be tradable, and creators of the proposal anticipate there would be a market for them. Initially the certificates would be worth pennies on the dollar, but as the housing market recovers and home values rise, so too would the value of these certificates.

    How does this help solve the subprime mess? It affixes a known value to mortgages that are in the greatest danger of going into default.

    Huge investment vehicles have been built around such risky mortgages, and because no one knows what they’re really worth (their value will keep declining as long as home values fall), financial institutions around the world are facing hundreds of billions of U.S. dollars in potential losses.

    Even if these mortgages end up being worth 83 percent of their face value (as in the example above), it at least has a known value. And with “negative equity certificates,” there’s also a chance the mortgages could end up being worth more.

    The White House and members Congress have yet to comment on the proposal.

    “We have got some good initial indications of interest and we are just hoping for this to be part of the solution,” an OTS spokesman told the Financial Times.

  7. Ginger Yellow

    Be wary of reading too much into Tett’s piece – she has a tendency to get important details wrong. For a start, they’re not actually structured investment vehicles. They’re non-bank asset backed commercial paper vehicles. There’s a big difference, although less so in Canada than in other jurisdictions.

  8. Ginger Yellow

    Most of the court documents can be found here. The asset pricing details, alas, seem to be in a confidential data room for investors only.

  9. Patrick

    Yves, interesting post. Would you be interested in syndicating your content on the home page of my site? It’s an online community of finance professionals ( ). I could add an RSS feed that will allow me to promote your blog posts to my home page (when i think it will lead to a good discussion and/or is appropriate), but I wanted to make sure you were comfortable syndicating first. The syndicated post would have a link back to your original post. Thanks, Patrick (you can reach me at if you have any questions)

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