Andrew

Money Center Banks - The Greater Fool

Good comments. To me, it's still too early to tell how deep the ultimate value of a lot of these debt securities are worth. Much of it still depend on overall housing value. If home prices continue to drop then expect another step down on these security values due to higher default risks. At this point though, its safe to say that CDO's based on 2nd and 3rd mortgages are basically worthless.

At least two other things would worry me if I was a bank (money center and shadow):

- as Mr. Hill stated, all the buyers have left the market. U.S. debt security market has suffered significant and wide spread damage. Even the most cash rich investors such as Chinese and Middle Eastern oil countries will not buy these securities, and they will take much lower stakes in future secuities created (i.e. a shift in total demand). In turn this will hurt the ability of banks to generate new credit, which will then hinder the recovery of the real estate market. Remember, most people buy based on net payments not overall price. Next to the broad exportation of these securities, the lead-paint toys that China has exported to the U.S. pales in comparison.

- Threat of inflation: most of these 04-07 vintage securities are at pretty low interest because there was very little risk premium built in (most were sold as AAA securities). As the reality of how much inflation U.S. is facing due to commodity inflation and weakening $ due to stretched balance sheets (both government and consumers) hits the market, the entire yield curve is going to shift upwards. This is going to shrink the nominal value of the 04-07 vintaged securities, which is a double whammy from write-down of their intrinsic values.

I guess this is why analysts are saying C and MER need to raise more capital.