75% of Lloyds owned by us, £260B of toxic debt is ours too

mewbie_2

chucky wrote: »

it's some are so complex...

I've realised why I couldn't see why this stuff was complex. It's because I don't have the first idea about investment banking. Hmmm. Could be my best chance for a banking peerage then.

Thrugelmir

ad9898 wrote: »

My fear here is the banks think/know these assets are bad. This insurance policy that the government have given the banks, in layman's terms, seems to work like this.....

You have a car with no insurance, you have an accident and write it off, in a panic you ring Norwich Union and say, 'I have no insurance with you and I have just written my car off, if I now pay a premium of £200, will you insure my written off car ? '

Now we all know that they wouldn't and would probably laugh at you before hanging up, however this is exactly what the government seems to have done.:rolleyes:

Banks are required to value their assets at realisable values. Which may not be the same as their actual worth once the asset is finally turned into cash.

Say your house is currently worth £200k. Given 3-6 months to sell it and the market remains stable that's what you would sell it for.

Given the scenario that you need to sell your house tomorrow for cash. What would you get sell it for? A lot lot less.

Good quality CDO's containing A+++ mortgage securities are currently being traded at 30% to 40% of nominal value. Whereas it is expected that they will eventually return at least 70%. As mortgages are long term liabilities no one knows how these securities are going to unwind on an individual basis.

chucky

Thrugelmir wrote: »

Banks are required to value their assets at realisable values. Which may not be the same as their actual worth once the asset is finally turned into cash.

Say your house is currently worth £200k. Given 3-6 months to sell it and the market remains stable that's what you would sell it for.

so does that mean that realisable value in say 5 or 10 years would mean a profit on these assets if property values went up?

Thrugelmir wrote: »

Good quality CDO's containing A+++ mortgage securities are currently being traded at 30% to 40% of nominal value. Whereas it is expected that they will eventually return at least 70%. As mortgages are long term liabilities no one knows how these securities are going to unwind on an individual basis.

a good quality CDO - what is good value?
i'm interested to know where you got your 30% to 40% of nominal value from?

Wookster

Thrugelmir wrote: »

Good quality CDO's containing A+++ mortgage securities are currently being traded at 30% to 40% of nominal value. Whereas it is expected that they will eventually return at least 70%. As mortgages are long term liabilities no one knows how these securities are going to unwind on an individual basis.

That almost sounds like its worth investing in.

mrposhman

i'm glad theres some on here that actually post when they know something about what they are talking about.

The mark to market calculations are what are the problem and if you have seen an article on cnbc the americans are considering this reporting measurement which will help banks.

Some assets have a value to the banks (ie. repaying etc) but are not deemed to be worth anything on the market therefore are written down to an asset value of 0 but could well be written back up again in the future.

Unless the recession gets way worse than it is now then the taxpayer will not see anywhere near the losses that have been quoted.

Whats more if current shareholders like the deal then the taxpayer will receive £4bn in cash straight away, aswell as receiving an annual 7% dividend (minimum) on their £15.6bn (which isn't cash by the way, this is the cost of Lloyds participating in the scheme.

This scheme also sets aside a clear exit strategy for the government and in my opinion is a good deal for both parties.

Those who post very little about the scheme on here clearly have not read it.

chucky

mrposhman wrote: »

i'm glad theres some on here that actually post when they know something about what they are talking about.

The mark to market calculations are what are the problem and if you have seen an article on cnbc the americans are considering this reporting measurement which will help banks.

Some assets have a value to the banks (ie. repaying etc) but are not deemed to be worth anything on the market therefore are written down to an asset value of 0 but could well be written back up again in the future.

why would people want the facts to get in the way of another story?

the same posters come on and ignore the facts and tell everyone that the UK is doomed bla bla.

Thrugelmir

chucky wrote: »

so does that mean that realisable value in say 5 or 10 years would mean a profit on these assets if property values went up?



a good quality CDO - what is good value?
i'm interested to know where you got your 30% to 40% of nominal value from?

The value of property supports the underlying security. As of course there will be a level of default. The key issue is the ability of the majority to repay their mortgages until redeemed.

I read it quoted somewhere about 10 days ago. The clever guys at Lehmans mixed different grades of debt into the same packages. Investors ie Banks thought that they were buying all say A+++ graded debt but weren't. So no one really knows how the CDO's that were issued are going to unwind. So the market is discounting for a risk factor that can't be quantified.

Wookster

mrposhman wrote: »

The mark to market calculations are what are the problem and if you have seen an article on cnbc the americans are considering this reporting measurement which will help banks.

Totally agree with this. There was a good article on this by Jeremy Warner in the Independent a couple of weeks ago. It is a very contentious issue though, the valuation of a banks debt assets as future events play an enormous part in the yield those debts will crystallise.

chucky

Thrugelmir wrote: »

The value of property supports the underlying security. As of course there will be a level of default. The key issue is the ability of the majority to repay their mortgages until redeemed.

I read it quoted somewhere about 10 days ago. The clever guys at Lehmans mixed different grades of debt into the same packages. Investors ie Banks thought that they were buying all say A+++ graded debt but weren't. So no one really knows how the CDO's that were issued are going to unwind. So the market is discounting for a risk factor that can't be quantified.

i understand how they work - i'm querying your statement about CDO's being traded at 30% to 40% of their value. if a CDO was at risk of default the trading price would increase due to the increased risk and not be traded 30% or 40% of their nominal value. currently CDO's are expensive and not the best instrument to trade due to this fact.

also CDO's would not necessarily unwind if their was a default or even a number of defaults on them. a CDS would be settled if their was a default or event on them but not a CDO.

Generali

mewbie wrote: »

This is something I still fail to grasp. People bought loads of stuff which they didn't understand and couldn't value properly. Even after months of this they still don't know what it consists of. It's not as if they bought some impenetrable scientific equation - they bought some financial stuff, mortages and things. It's surely pretty basic.

There are a couple of problems with valuation.

Firstly, there are 2 ways you can value this stuff - mark to market or mark to maturity (aka mark to model).

Mark to market means that you value it on the basis of the value you'd realise if you sold it today. This model is used for stuff that the banks are trading - buying to hold for a few months and then selling - or something that has been bought as a hedge - some shares bought as a hedge against a derivative the bank has sold for example.

Mark to maturity (aka mark to model) is used to value an asset on the basis that you plan to hold it to maturity. This is usually done using discounted cash flow (basically you add together the present value of the cash you expect to receive from the asset).

If a bank plans to hold a securitised debt product until maturity then it is definitely the correct model to use to value it, IMO.

The next problem is what cash flow are you expecting to receive from the CDO/RMBS/CMBS/CDO^n? What happens to self certificated borrowers' repayment records from Las Vegas when the housing market collapses (Vegas is down > 50% I think) and the economy implodes? Not nice things clearly but you need to quantify how 'un-nice' it's going to be. That's the hard part.