CDO Scaremongering, Ebola Edition

Tim Price is some

kind of genius:

The role of the rating agencies has now been called into question. Leading

industry analysts suggest that the agencies have failed to disclose the true

risk of CDOs, which are a type of sub-strain of the Ebola Zaire virus. A typical

CDO causes an investor’s internal parts to liquefy – typically

during a broader-based market crisis – and then detonate violently. Holders

of the investment grade portion of CDOs, rated ‘Super Lovely’

by agency Duff and ‘Angel Delight’ by rival Substandard and Poor,

are deemed only moderately likely to have their major organs forcibly removed

by anonymous surgeons. Holders of second-tier ‘Mezzanine’ tranches,

rated ‘Ocean breeze’ by Duff and ‘Fields of soft, waving

grass’ by Poor, run a slightly higher risk of holders being tossed over

a cliff onto jagged rocks. The ‘Equity’ tranches, hitherto variously

rated ‘Piquant’ and ‘Saucy’ carry a fairly high risk

of holders having their body parts crushed with small hammers and then being

ripped apart by choreographed attack dogs.

Go read the whole thing. Right now, there’s only one story to be told in the

financial press: insufficient regulation in the subprime mortgage market →

delinquency, default, and foreclosure → Subprime Meltdown → massive

deleveraging → a self-reinforcing credit crunch, a rash of corporate defaults,

and the end of the world as we know it. Or something along those lines.

In reality, credit spreads haven’t widened out very much; the Bear Stearns

hype seems to have been overblown;

there’s still huge amounts of liquidity in the loan market (if not quite as

much as there was a few months ago); and the credit bubble seems on track to

deflate gently rather than burst disastrously. Of course, it’s always possible

that things will go horribly pear-shaped from here on in. Indeed, sooner or

later, something bad is bound to happen: it’s a statistical inevitability. But

right now, the doom-mongers are in dire need of a Tim Price skewering like this.

Thank you, sir!

(By the way, talking of doom-mongers, the incomparable Nouriel Roubini

is today talking about "$100

billion plus of losses for banks, financial institutions, hedge funds and

investors once these CDOs and subprime mortgage backed securities are marked-to-market".

$100 billion, as Michael Milken reminded

us in April, is the amount that Intel stock alone fell in one day

during the dot-com bust. Or, to use a present-day example, it’s less than one

tenth of China’s foreign exchange reserves. Let’s keep things in perspective

here, people.)

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