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

chucky

but that's the problem Generali you can't NPV a CDO

you either use the models that the banks have created or come up with a better option.
currently the better option is the mark-to-market option that is down valuing them

i'm not sure that is the best thing as it's creating some massive write-downs

Wookster

Generali wrote: »

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.

DCF is definitely the way to go though much of what goes into it is open to question and can easily be manipulated.

Generali

chucky wrote: »

but that's the problem Generali you can't NPV a CDO

you either use the models that the banks have created or come up with a better option.
currently the better option is the mark-to-market option that is down valuing them

Personally, I don't see why not. You have a series of cash amounts you believe you can reasonably expect the investment to throw off and you NPV those. It is very hard of course but I just don't see mark to market as being a valid way to value this stuff as there really isn't much of a market and what there is seems to be central banks. Mark to market could easily over state the value of this crud.

chucky

Generali wrote: »

Personally, I don't see why not. You have a series of cash amounts you believe you can reasonably expect the investment to throw off and you NPV those. It is very hard of course but I just don't see mark to market as being a valid way to value this stuff as there really isn't much of a market and what there is seems to be central banks. Mark to market could easily over state the value of this crud.

the NPV would be more useful for trades with fixed or known cash flows

for structured products future events will determine the future cashflows, for example the number of defaults for example in one of the particular tranches. if the trade is modelled on the equity tranche then it will be high - for the mezzanine tranche it may be less.

modeling their performance based on historical performance as was being done is definately not the answer - a better solution needs to be found.

Thrugelmir

chucky wrote: »

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.

I don't profess to be an expert in this field..... a mere novice.

From the article I was reading the particular CDO's in question were structured on a cash flow basis. So investors were receiving a repayment of principle and interest from the collateral. So if the underlying collateral was say £100 at cost currently. Then the market is pricing this as having a tradeable value of £30 to £40. Any default of principle from any security held as collateral would cause the value of the CDO to be repriced. As obviously the underlying assets would no longer have a value of £100.

Generali

chucky wrote: »

the NPV would be more useful for trades with fixed or known cash flows

for structured products future events will determine the future cashflows, for example the number of defaults for example in one of the particular tranches. if the trade is modelled on the equity tranche then it will be high - for the mezzanine tranche it may be less.

modeling their performance based on historical performance as was being done is definately not the answer - a better solution needs to be found.

Fair point. A kind of Black-Scholes but for structured debt products.

I guess you could build in something to predict future volatility of cash flows based on past volatility - most likely there's a statistical link that could be made. It would take a better brain than mine to do it though. I'm just a humble ops bloke!

Alternatively, wait until the market has trashed the hell out of the values of this stuff and buy it up with your fingers crossed and some impressive looking but meaningless valuation forecasts. I bet that's what really ends up happening to these products.

Someone's going to make a lot of money off them. I'd be amazed if it's the British taxpayer though.

chucky

Thrugelmir wrote: »

I don't profess to be an expert in this field..... a mere novice.

From the article I was reading the particular CDO's in question were structured on a cash flow basis. So investors were receiving a repayment of principle and interest from the collateral. So if the underlying collateral was say £100 at cost currently. Then the market is pricing this as having a tradeable value of £30 to £40. Any default of principle from any security held as collateral would cause the value of the CDO to be repriced. As obviously the underlying assets would no longer have a value of £100.

no problem, i'm not really an expert either
i worked with them for a while developing an application for one of the banks

the underlying asset may have devalued but the future cashflows are what determines the true value.

currently it's extremely dificult to tell the actual value.
as i briefly mentioned above if a mezzanine CDO tranche is protected from the first 5% of losses then the principal amount will not be at risk until the losses from defaults in the underlying portfolio exceed 5%.

without knowing what percentage is going to default you can't value the trade which is part of the problem now

chucky

Generali wrote: »

I'm just a humble ops bloke!

i think you're a bit more than that

Generali wrote: »

Alternatively, wait until the market has trashed the hell out of the values of this stuff and buy it up with your fingers crossed and some impressive looking but meaningless valuation forecasts. I bet that's what really ends up happening to these products.

Someone's going to make a lot of money off them. I'd be amazed if it's the British taxpayer though.

yes you're right. the governments that are bailing out the banks are not willing to go by anything the banks have priced historically and rightly so. the alternative is to give it a very low value as they have done.

as you know due to the volume and value of these trades this has eaten at the banks cash which is a major factor to the credit crunch.

as for your last point from past experience i don't think the British Govt are the best at making a profit out of these sort of things.

ps - the black scholes pricing doesn't take into account dividends in this case cashflows/coupons so it makes it even more complex for credit type trades

ManAtHome

Thrugelmir wrote: »

So if the underlying collateral was say £100 at cost currently. Then the market is pricing this as having a tradeable value of £30 to £40.

But we (the taxpayers) are apparently valuing this stuff at 2-3 times that - what do we know that the market doesn't..?

mrposhman

ManAtHome wrote: »

But we (the taxpayers) are apparently valuing this stuff at 2-3 times that - what do we know that the market doesn't..?

I assume you are commenting on the LLoyds B shares that have been issued.

Well they have been issued at a price of 42p (may be 44p, I'm doing this from memory) so I'm not sure where you get 2-3 times from. If you are meaning the conversion value of £1.15 per share then yes it does convert to nearly 3 times BUT the government will be receiving dividends on their B shares anyway each year which will be paid before any ordinary shareholder and at a higher rate than ordinary shareholders.

When these convert which if the share price hits £1.50 they will automatically convert at £1.15 I would say that this is a good deal. The government have taken greater dividends than if they had ordinary shares and can convert to ordinary shares at a hefty discount to the current share price if its £1.50.

There has been no additional cash gone to LBG, they have simply converted the payment for the APS into shares and may even receive anywhere up to £4bn back from LBG if the shareholders take up the new ordinary share issue that is part of the package.