Remember those toxic assets and how the government was going to buy them up, sell them later to recover their value?
You must read this Financial Times article:
Here is the Magic Secret Decoder Ring to translate:
CDO - Collateralized debt obligations
Mezzanine - Underlying asset is subprime, "risky" mortgage
ABS - Asset backed securities
Tranche - Slices of risk levels within a bundled group of securities
From late 2005 to the middle of 2007, around $450bn of CDO of ABS were issued, of which about one third were created from risky mortgage-backed bonds (known as mezzanine CDO of ABS) and much of the rest from safer tranches (high grade CDO of ABS.)
Out of that pile, around $305bn of the CDOs are now in a formal state of default, with the CDOs underwritten by Merrill Lynch accounting for the biggest pile of defaulted assets, followed by UBS and Citi.
The real shocker, though, is what has happened after those defaults. JPMorgan estimates that $102bn of CDOs has already been liquidated. The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent.
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