I am a bank.
So, I have a loan, an ABS on a home 300K at 4%
it's a performer, made to a borrower paying back at full value.
is it toxic?
Well the value of the home is now 230K, but the borrower is still paying it back at 3%.
so that is $1432 coming in every month.
But... at best it has to be written down to .76 on the dollar.
Now it still is $1432 coming in every month..
but the thesis is, I need to get rid of it.... "Get the Toxic Asset off my books"
Mark to market....
If I take 230K... the value of the bond, which pays 230K at 3% over 30 years.
Right now I can buy Corporate debt AA at 6.86% over 20 years
Which means that the Market rate for my Money the 230K is Twice what it is in my ABS, and the credit risk is much less.
so if the Market rate for my money is twice that of what I'm getting. Then my ABS at .76 cents on the dollar... Is solidly 10-20% below .76 So now the Fair value is .60cents on the dollar.
So if I sell it, I get...$180,000, but it is returning $1400 per month over 30 years. That is $515520 Yield to maturity.
I'm taking 30% of it's yield to maturity value.... Why would I do that??? to make the market happy.
this is very simple look. and there are Tranches, and some mortgages that are not performing, and some ABS that are not at full yield, and will probably only return half of the money. There are some Very bad assets...
but the real problem is that the Value of money has come up, and that instead of bonds at 3% yield, we now have better quality borrowers who will now borrow money at 6-9%. That is where this "Mark to market" thing isn't working.
It's one thing to let the vultures feed, and it's another to Kill someone to Let them feed.
Financial history doesn't repeat itself, but it often rhymes. You can't be stupid enough to trade off anything I say.... I'm lucky they let me out of the straight-jacket long enough to trade.
Tuesday, February 24, 2009
I am a bank.