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From the Jokers Who Brought You AAA subprime MBSs...

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March 12, 2009 – Comments (4)

Warren Buffett's Berkshire Hathaway Loses Top AAA Credit Rating From Fitch

Yet these knuckleheads were saying this not long ago...

July 18 (Reuters) - Subprime mortgage bonds carrying the highest, "AAA," rating have not eroded in quality despite price declines in the securities in recent days, Fitch Ratings said on Wednesday.

And subprime mortgage deliquency rates are amazingly high. This is from today's WSJ.

S&P said the smallest month-to-month increase as of the January distribution date was subprime mortgages, which the biggest amount of behind loans, on a percentage basis, are. But the delinquency rates rose no more than 5.2% for the three years. The delinquency rates, though, still range from 42% of current total pool balances for 2005 to 49% for 2007.

Must be a hell of a capital cushion below the AAA tranche for a 49% delinquency rate not to eat into the AAA rating of the top tranche, eh Fitchie? Either that or you're not lowering the ratings for some other reason -- like political pressure, pressure from clients like Citi, who would be double-secret-screwed if it happened.

Naw, must be the magic of finance that can make steak out of dog food.

Sj

4 Comments – Post Your Own

#1) On March 12, 2009 at 11:20 PM, BenG1971 (26.11) wrote:

let's assume that the AAA tranche receives every dollar of cashflow until its periodic interest and principal requirement satisfied, and that it was used to fund 70% of the initial securitization, leaving 30% in other traunches that are subordinate and will not receive a dollar until the AAA is satisfied.  We will negate the effect of insurance and other credit enhancements besides the subordination.

To simplify let us further assume that the AAA earns simple interest @ 4%.  Let us further assume that the WAC of the loan pool minus servicing would pay 8% of the outstanding balance, if every loan was being paid on time.

Let us assume an initial funding of $100M This means the AAA traunch funded $70M.  Lets assume that nothing was paid off.  Lets further assume that all the delinquent mortgages are not paying at all, not just paying late, but not paying at all. For ease of calculation, lets say 50% are delinquent and infact not paying at all.  Can the remaining 50% support the cashflow required by the AAA tranche?

Let us also assume for demostration purposes that the payments to the AAA traunche are paid monthly like the mortgage payments, although this is almost certainly not the case.

$50M x 8% / 12mo = $333,333.33  per month in interest paid in by non delinquent loans

$70M x 4% / 12mo = $233,333.33 per month required to service interest on AAA traunch

 

This is an oversimplification, but it is not magic.  It leaves $100,000 per month to service subordinated traunches and pay down the principal.

Subprime securitizations are certainly an easy target to spout off against, but it woudl be refreshing if instead of just calling everyone knuckelheads... that you did a little more research.

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#2) On March 13, 2009 at 7:51 AM, TMFBent (99.82) wrote:

 Those are interesting assumptions, but are they the least bit realistic? And they assume things won't get worse -- as they continue to...

More defaults? Government-sponsored prepayments?

Tell you what, if Berkshire welshes on its debt before any of the subprime bonds rated AAA by Fitch go south, I'll send a heartfelt note of apology to the knuckleheads at Fitch, as well as S&P and Moody's. 

Sj

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#3) On March 13, 2009 at 9:30 AM, BenGriffin71 (28.05) wrote:

Yes.  The assumptions are realisitc or far too conservative..... such as the assumption that all delinquent mortgages had stopped paying completely when many subprime mortgages that are 30 or 60 days delinquent are likely to continue providing  substantial cashflow.

The point is, anything with the word 'subprime' attached makes an easy target, but not necessarily a good target.

You don't have to take my word for it.

Ask Warren Buffet, a man who certainly does his homework before opening his mouth.

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#4) On March 13, 2009 at 9:52 AM, MrSucrose (< 20) wrote:

Have you noticed that these idiots are so worried about Buffets derivatives contracts only because the contracts are simple enough for them to understand.  If these things were more complicated so that they couldn't quite figure it all out the company would still carry its AAA rating.

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