This was interesting reading - kinda technical though ?

[RadioPatrol]

http://www.survivalblog.com/2007/07/cdo_pik_satisfaction_guarantee.html

CDO PIK: Satisfaction Guaranteed or Double Your Trash Back

When I attended the U.S. Army Northern Warfare School back in 1980, I was amused to see that all of the trash dumpsters at Fort Greeley, Alaska were stenciled with "Satisfaction Guaranteed or Double Your Trash Back". I was reminded of this slogan the other day when I was doing some reading about the unfolding derivatives fiasco. I'll get back to the quip about trash near the end of this blog entry.

Let me start with some background: Just like in the traditional bond world, with Collateralized Debt Obligations (CDOs) it is always the holder of the highest rated ("senior") paper that gets paid first. Each grade level, "class", "slice" or "tranche" has its own risk level. Starting from the bottom, the lowest level tranche and then moderate risk "mezzanines" have to successively support the more senior tranches. The very lowest level tranches (called "junk" or even "toxic waste" in the bond world) are the riskiest. In a default situation, those investors holding paper in the lower level tranches will probably get nothing, or perhaps 5 cents on the dollar if they are lucky.

Now here is where it gets interesting: Some of the folks that have established the tranche ratings for CDOs for the past few years have played a little fast and loose with their terminology, effectively over-rating them. A lot of "B" rated CDO paper really should have been rated "BB", or even "BBB". Indirectly, this has made the investments even riskier, because lower rated tranches have higher margin ("leverage") requirements. When an investment goes bad, the degree of risk is directly proportional to the amount leverage employed. Highly leveraged investments can "go south" in spectacular ways. It isn't unusual in the CDO world for some tranches to\ use 25-to-1 or even 30-to-1 leverage.

 

[somdrenter]

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYI2UsYtBtQU&refer=home

CDO Losses May Be $52 Billion, Credit Suisse Says (Update4)

By Neil Unmack and Sebastian Boyd


A foreclosure sign in front of a house July 9 (Bloomberg) -- Investor losses on bonds backed by U.S. subprime mortgages may total $52 billion, according to Credit Suisse Group, the low end of estimates, as analysts begin to determine the fallout from rising delinquency rates and foreclosures.

Subprime defaults are ``clearly a huge problem'' for investors in collateralized debt obligations, Credit Suisse analysts led by Ivan Vatchkov in London wrote in a report. ``But we do not think that they are a systemic one.''

Hedge funds will be damaged more than banks because they typically hold the parts of CDOs first in line for losses. Banks will probably lose between $5 billion and $15 billion from their investments in CDOs, the report said.

``Investment banks operate in this market day and night and they know it better than most,'' Vatchkov said in an interview today. ``The market's been turning for the past 12 months, so I think they saw it coming.''

Estimates on the fallout from the subprime slump range between $75 billion from Pacific Investment Management Co. in Newport Beach, California, to as much as $90 billion from Deutsche Bank AG, based on mortgages made to last year to borrowers with poor or limited credit records or high debt burdens.

 

[somdrenter]

http://www.marketwatch.com/news/sto...x?guid={DFBA4993-031E-4E88-8F56-5B08FD9AA07D}

S&P finally says subprime is mostly junk
Commentary: New methodology is death knell for the troubled industry
By MarketWatch
Last Update: 12:51 PM ET Jul 10, 2007


WASHINGTON (MarketWatch) -- Standard & Poor's just drove a huge harpoon into the heart of the mortgage credit bubble, and it's going to take a long time to clean up the mess once the beast finally dies.

S&P, one of the three main credit-rating agencies that served as enablers of the subprime-mortgage boom, announced Tuesday that it would lower its ratings on 612 bonds, a small portion of the mortgage-backed securities it had given its seal of approval to. See full story.

But the bigger news is that S&P isn't going along with the charade anymore. S&P said it would change its methodology for rating hundreds of billions of dollars in residential-mortgage-backed securities. And it would review its ratings on hundreds of billions of dollars in the more complex collateralized debt obligations based on those subprime loans.

A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money.
S&P's announcement is a death warrant for the subprime industry. No longer will mortgage brokers be able to help buyers lie their way into a home. Fewer stressed homeowners will be able to refinance their mortgage, thus extending and exacerbating the housing bust.

"We do not foresee the poor performance abating," S&P said.
Prices will fall, and foreclosures will rise. More mortgage fraud will be uncovered as the tide goes out.

And hedge funds will have to find another way to beat the market -- if they survive this blow, that is.

 

[GURPS]

so how bad was it ............