Comments on: Financial Alchemy at Morgan Stanley: Greywolf A3 CDOs now Aaa bonds

By: crabsofsteel

crabsofsteel — Thu, 09 Jul 2009 19:08:00 +0000

Edward,

Your analysis is pretty good. The whole point of the transaction is that there is some portion of the underlying collateral which the ratings agencies will label as money-good, even if the collateral is rated single-A. It might be miniscule, but it still allows you to create some portion of AAA from single-A collateral. The tradeoff is that there is no secondary market for resecuritized CDOs. MS could care less as they are making arbitrage profits but you better be aware that if buy this stuff you are holding on to it forever.

By: Edward Harrison

Edward Harrison — Thu, 09 Jul 2009 17:03:00 +0000

I never implied it was underhanded to begin with. Morgan Stanley is just looking to make money out of securitized assets. It is the rating agencies who must decide if those assets qualify as Aaa. It seems highly suspect that th asset pool gets downgraded, yet assets from that same pool now qualify as Aaa.

Who is buying the schlocky assets left over that got this CDO pool downgraded to begin with? What is it rated? Is MS forced to hold onto it? This re-packaging raises a lot of questions of that nature.

By: Nathan

Nathan — Thu, 09 Jul 2009 15:47:00 +0000

Usually the way these things work is that they write down the principal in order to boost the rating. People would rather have $87 million notional of a AAA-rated tranche than, say, $150 million notional of a A-rated tranche. No changes to the underlying loan pool are required. The logic is actually fairly simple and transparent because you’re more likely to get back $87 million than $150 million. That improvement in odds gives you your better rating. There’s nothing really underhanded or mysterious about it.

By: To

To — Wed, 08 Jul 2009 20:23:00 +0000

Ed,
It would seem to me that this isn’t all that unreasonable. Asset values have declined, the downside is probably much less than it was originally and there isn’t any reason you can’t take a CDO or any other securitization and retranche it. You could even argue that now might be the time to pick up something like this if the return is respectable.

I would take some issue with your comment that it’s substantially the same loan pool. It seems to me it’s a loan pool that’s been totally reworked.

One other observation. Investors should know by now what the risks are in these deals. If they don’t do their own due dilligence at this point in time, they really deserve no sympathy if this goes poorly.