Found this in the FT, via Naked Capitalism. (I'll link to Naked Capitalism as it is non-subsciption.) Collateralised Debt Obligations, rated as AAA, the best rating by the agencies, should have a default rate of near zero according to the classic interpretation of what AAA means. Turns out to have been a little bit optimistic.
"The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent."
Given that 450 billion of these have been issued, we can expect to see losses to my mind of 300 billion at a conservative estimate, and up to 440 billion in the worst case. Remember, this is the stuff rated triple AAA.
The reason that this is interesting, if that is the word to be used for the epochal collapse of the financial system, is that the banks currently have this on the books at a much more optimistic price, so the red ink has not even begun to flow on this.
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