The cut runs deep

So the US congress have agreed upon an economic stimulus plan. Now comes the real rocker - how to value bonds that have no takers?

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Getting this right will not be easy.

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The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of S&P, the credit rating agency.

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The financial institution that owns the bond calculates the value at 97 cents on the dollar but S.& P. puts it at 87 cents, based on the current loan-default rate. It could be worth 53 cents under a bleaker situation if say, the defaults double. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

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Both Washington and Wall Street ecognize that there are no current market prices for these toxic securities. But bond dealers say most kinds of securities can be valued and are being traded, but trading has slowed as sellers and buyers disagree about what that the price should be.

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The value of these securities is based on the future cash flow they provide to investors. To determine that, traders have to make assumptions about the housing market and the economy: How high will the unemployment rate go in the coming years? How many borrowers will default? What will homes be worth?"

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To them normally one would suggest go by the realizable value of underlying assets. But even that is a problem if the bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A.

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Holy Fuck !!!

When risk gets taken to the extremes...

I have always admired intelligent risk takers. The `intelligent' is the operative - take it to mean the faculty to figure out how much to commit to an adventure that leaves sufficient sustenance in the end if things were to go horribly wrong. And we thought high networth entrepreneurs are too good at it.

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I stand corrected after reading about Adolf Merckle, the wealthy German businessman with a networth of over 9 billion euros committed suicide by hurling himself before a speeding train. The billionaire, 74, was said by his family to have been “broken” by the sight of his business empire, which ranged from pharmaceuticals to cement, crumbling. He died on Monday evening, apparently hit by a train a few hundred metres from his home in southern Germany.

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What a horrible end...!

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