Friday, April 18, 2008

Free TOUR inside Ambac and MBIA portfolios

The purpose of this tour is to see how much MONEY does Ambac and MBIA make by investing in a "Super Senior AAA" CDO, which is backed by a BBB subprime bond (well it was BBB two years ago before turning to CCC three months ago).

I picked one of the ABX BBB- 2006-2 bond from the venerable issuer Goldman Sach. Yes, the GSAMP 2006-HE3 series, bond M9.

Using software built to analyze such bonds under different assumptions of refinancing speeds (CPR), the default rate (CDR), and a severity of 40% (upon default the mortgage loans has 40% deficiency - common assumptions for subprime loans), here are the result:

The number in the intersection, -5,553, is the amount of spread in basis points over Libor, which will be realized assuming 18% default rate and 15% annual refinancing rate, which I deduced is more than very lenient, given how the collateral is performing as described in the other graph (Bankrupt, REO, and Foreclosure as of March is already 22%+, not including the delinquency rate - as noted in the second picture).

Yes, as in -55% under Libor (which is like 2.7%). That is a yield of roughly -50% a year.
This great investment, will wipe out 50% of a fully funded investment ($100 per par) of the AAA CDO within a year.
If however, the investors in question leveraged up (say 5-10x) and only has 10% of the notional value in reserve, you can clearly see how we can arrive at
  • An ENTIRE LOSS of equity
  • PLUS Debt loss the size of 4x the equity
within ONE YEAR of Investment. (which I think was in 2006 and 2007)
That is, ladies and gentlemen, the TRUE state of Balance Sheet in Ambac and MBIA.
I hope you enjoy your tour today.


Penn said...

Thank you MTGSPY. That is a great piece of information. It is common knowledge that ABI/MBK are screwed but seeing the performance of actual securities in their portfolio still managed to astonish me. If these companies are the cornerstone of the US Financial system, god help us!!!

Anyway thank you for all you do. Time to forward this article to the naysayers of this world

MTGSPY said...

I have sent it to dick bove (who doesn't have bloomberg) and donald luskin. :D

Penn said...

Your avatar (the graph) perfectly encapsulates Dick Bove's "Generational Buy" comment. Buy now - your positions are sure to be profitable by the time the next generation rolls around :-)