The Oil Drum

A new Finance Round-Up by ilargi has been posted at TOD:Canada.

Editorial Note from Stoneleigh: Round-Ups do not always make the front page at TOD. For access to all our work, please check the TOD:Canada site regularly. The last Finance Round-Up (November 29th) can be found here. We intend to publish them twice a week.

It's not that I was wrong when I said we'd see the US economy propped up for one last good Christmas shopping season. It's just that accountants, auditors and ratings agencies have started to feel so much heat, they're afraid they'll be left sitting all alone on the hot cinders around the tree, with a shaky conscience and nothing in their socks to start the new year but pink slips and indictments.

Today, in early December, it's still possible that the worst decay remains buried till 2008, but we can't be sure anymore. What we see is America's largest mortgage lender, Countrywide, hanging on by a thread, while America's, and the world's, biggest bank, Citigroup, may be beyond redemption. After recent securities losses, and $40+ billion more predicted, Citi now admits to a $17 billion write-down on its SIV's, which still leaves another $66 billion of braindead "assets".

Ratings agencies are trying to stay afloat, and increasingly, in the face of congressional investigations, out of prison. To show their good will, they've started downrating companies, bonds, and all sorts of securities. This'll likely be the end for many bond insurers. Is that so bad? Ambac carries $620 billion in structured paper, with $9 billion in cash. ACA insured $61 billion in assets, with $326 million in cash. Isn't it just good riddance?

Well, Ambac are underwriters for paper issued by the likes of Countrywide, GMAC and Lehman Bros, and Ambac's demise will drag down, way down, all the paper they insured, and the clients that issued it.

And it gets worse, with the forced sale of E*Trade's mortgage-backed securities. E*Trade got $2.5 billion from Citadel, a hedge fund, under condition that they sell their MBS. Since nobody trades that stuff these days, for fear of finding out the true value, this sale is a rare glimpse behind the veil. The price they got is 11 to 26 cents on the dollar, a potential 89% loss.

Why is that important? It sets a new rule, law, value, for all remaining mortgage-backed securities, trillions of dollars "worth", that remain in vaults all over the world. For all of them, it just got a whole lot harder, if not downright impossible, to get more than 11 cents on the dollar. Moreover, E*Trade was the only offer in the market when they had to sell. If more, and bigger, parties are forced to unload simultaneously, the price'll go down, so says the free market.