Insiderman

Why Banks Write Down but Don't Sell Subprime Loans

Wow. That was easy. The only problem is that with a CDO you don't necessarily know what assets are in it. Recall that the CDO may be built using MBS, ABS and just about anything else the originator throws in to enhance credit quality.

Therefore, you don't know what the credits are that are in the CDO. Since CDSs are built to offset risk of CDOs, you don't really know how the CDSs should be priced.

Now, think about the logic of your spreadsheet. The discount rate for each cash flow stream should be adjusted for risk.

Makes it a little more challenging, and that ain't the half of it.

WaMu Leads Regional Banks to Painful Sell-Off

And let's say an acquirer buys at 0.27 on $1 par (which Citadel paid earlier in the year). They show the assets at cost and write down only if necessary. This 0.27 assumes a 73% failure rate. Does anyone think that 73% of loans will fail?

WaMu Leads Regional Banks to Painful Sell-Off

Seems to me like an international firm could purchase WM without having to write to market under IAS 39 (see exception "a"):

"After initial recognition, an entity shall measure financial assets, including derivatives that are assets, at their fair values, without any deduction for transaction costs it may incur on sale or other disposal, except for the following financial assets:
(a) loans and receivables as defined in paragraph 9, which shall be measured at amortised cost using the effective interest method;
(b) held-to-maturity investments as defined in paragraph 9, which shall be measured at amortised cost using the effective interest method; and
(c) investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments, which shall be measured at cost (see Appendix A paragraphs AG80 and AG81)."