On Valuing Toxic Assets and AIG Bonuses

Today we will deal with two diverse but intertwined topics, both of which annoy me greatly as I read the headlines.

The current financial 'situation' appears tailor-made for the media; it impacts everyone, immediately commands attention, and is complex enough to offer endless avenues for obfuscation.

The most obvious examples are the "impossible to value toxic assets". This completely bogus claim belies the fact that the government has subpoena power. At the root of these assets are mortgage-backed securities which are far from hard to value. The component mortgages are simply performing or not. With record low interest rates, in the near term, the key prepayment rate driver is the default rate. Subpoena the records from the loan servicers and see which are delinquent. Factor into the valuation calculation that the delinquent loans will default to err on the conservative side. Look at late payments and make an adjustment for what percentage of these loans are likely to go into default. Here you have an estimate of the value of the base securities which should be accurate within 5%.

Now onward to the more esoteric CDOs and CDSs. I will assume here that the reader is aware of the means by which a CDS is used to create a CDO. A credit default swap is nothing more than a bet. Wall Street was allowed to run a bookmaking operation for most of the new century. Let's bring in the experts here. I will offer even odds to anyone reading this that if the top dozen bookmakers in Las Vegas were given the relevant data (by subpoena) and asked to value the individual credit default swaps at the core of this problem, their valuations would not differ by 5%. Certainly not perfect, but enough to form a basis for Secretary Geithner's plan to engage private capital to finance the assets in question. This rough estimate of valuation should insure that the taxpayer's interests are not completely abrogated in the proceeding. How's that for transparency?

On the matter of AIG bonuses; was common sense made illegal in the last few months? Bonuses are not paid to unemployed people. Why are the very people who stoked this debacle still employed? I am losing co-workers every week to prepare us for the slowdown and my employer netted a few hundred million last quarter. For Larry Summers to say "We're not a country where contracts just get abrogated willy nilly," or for Barney Frank to say "We can't just violate law, legal obligations" belies the fact that the very individuals who are wanting bonuses at AIG should by now be unemployed and this should be a non-issue.

If companies which are still making money are laying employees off to prepare for the next few quarters it is incomprehensible that a company on government life support still retains the very employees who put them there.

Comments

[szkandy:]

This is right, small stocks are so power in this market

Here's top 10 Stocks for the Recovery from America's Leading Advisors.
[url=top5stocks.blogspot.co... ]Top 10 Stocks For 2009 [/url]

Mar 16 09:29 AM

[RUFUS2008A:]

If the Congress, Treasury, Fed, and White House will stop grandstanding and pointing fingers, the solution is simple.

Re: AIG employee bonuses.

Set up Employee executive bonus trust fund, collateralize with assets of portfolio consisting of MBO created during the bonus earned period, payout of fund over future time is contingent upon liquidation values of the MBO and to the extent that such portfolio ultimately realizes the original AIG valuation on the securities. Have all execs sign releases of any other liability of the corporation and agreement to the trust payout as a requirement for continued employment as well as a new going forward employment agreement negating any future bonus plans until the corporation is back functioning profitably(essentially the same waiver as execs signed in Nov. 2008 on original TARP doc.).

Will satisfy legal problems with contracts, put the execs bonus contingent upon the value of the business they generated for AIG during the measurement period of the bonus itself, and prevent the payout of taxpayer funded bailout money.

Mar 16 09:34 AM

[WMBANZAI7:]

BUGGER OFF YOU BAILOUT BASTARDS
(Bugger Off, Irish Drinking Song)
WilliamBanzai7

HAPPY ST PATRICK'S DAY 2009

Sing along: www.youtube.com/watch?...

Chorus:
So bugger off, you Wall Street bastards bugger off! (Fook Yu!)
Bugger off, you deadbeat bastards bugger off! (Fook Yu!)
Like a herd of bloody swine that refuse to leave the trough
You'll get no more this evening so you bailout bastards bugger off

AIG you've been a lovely bailout zombie, but oh the time does pass.
So don't you all be bettin' the Feds won't kick you in the ass.
You've been a splendid bailout basket case, but enough is enough.
We'd take it very kindly AIG if you'd all just bugger off!

Chorus

Here's to all the bankers and lawyers who've been servin securitized beers,
and puttin up their knoxious greed and their stupid drunken schemes.
So leave your money on their table when you go,
tomorrow you'll have a sorry head and nothin left to show

Chorus

Here's to all them bailout bag ladies who might be waitin with pans in their hands,
and thinkin one of them might make a charmin one night stand.
Please don't be offended girls this song is not for you.
Uncle Sam will be happy to oblige you to get this nasty job through.

Chorus

So Timmy G you've been promisin these bailout bag ladies a night of lovin bliss,
but truth be told your far to drunk on bailout swill to stand up straight and piss.
So give it up you lousy sod you'll not be gettin laid.
and the sooner that you're out the door the sooner Uncle Sam will get repaid.

Chorus

So bugger off, you Wall Street bastards bugger off! (Fook Yu!)
Bugger off, you deadbeat bastards bugger off! (Fook Yu!)
Like a herd of fooking swine that refuse to leave the trough
You'll get no more this evening so you bailout bastards bugger off

Mar 16 12:28 PM