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Subprime, SIVs, CDOs … oh my!!!

January 17th, 2008 at 07:51 am

Merrill reported their earnings and just like Citi, the reports were not good. Merrill had a write off of $15 billion, which lead to a net loss of $9.83 billion. Or, $12 a share.

Since May, the banks and Wall Street have written of over $100 billion since May. Greatest quote - Chief Executive Officer John Thain called the results “clearly unacceptable”'. Do you think?

$11.5 billion was for subprime and $3.5 was related to bond insurance contracts when ACA Capital Holdings Inc’s ratings were sent to CCC (junk). When ACA got slashed, Credit Agricole and CICBC took write downs of over $7 billion combined. The culprit was bond insurers branching out from guaranteeing municipal bonds to getting in the structured finance products, like CDOs (basically a collection of mortgages, loans, and other things).

All the major bond insurers (MBIA, FGIC and Ambac) have been put on notice by the major rating agencies. MBIA just got an injection of $1 billion from Warburg Pincus. So what does this mean, if you have insured muni bond funds, they just got a lot riskier.
“Many CDOs were downgraded by Standard & Poor's and Moody's Investors Service as an increasing number of borrowers fell behind on home-loan payments, sending prices on some of the securities plunging to as little as 30 cents on the dollar.” (Source: Bloomberg)
Citi also took a writedown of $18 billion and reduced the dividend by 40%.
So to recap the last 6 months, we have had write downs of over $100 billion because of subprime, we have had cash enhanced and cash plus funds caution about trading below a $1, we have CDOs write downs that could affect bond insurers and hence muni insured bond funds.
At the moment, cash is king. I am and will continue to stay away from the financials. I think there will be more write offs around CDOs. In other words, I don’t think all the bad news is out there yet.
Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aWfl7kVEmU_k&refer=home

Source: http://www.tradingmarkets.com/.site/news/Stock%20News/939115/

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