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Tuesday, July 08, 2008 2:34 PM

Toxic CDOs Renamed

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“What's in a name? That which we call a rose By any other name would smell as sweet.” William Shakespeare, Romeo and Juliet

Bloomberg is reporting Toxic CDOs Renamed Re-Remics, Come to Life With Pension Funds.

Collateralized debt obligations that helped drive banks to $400 billion of writedowns and credit losses are finding buyers under a different name: Re-Remics.

Re-Remic stands for "resecuritizations of real estate mortgage investment conduits,"the formal name of mortgage bonds. They are composed of AAA rated bonds backed by so-called Alt-A mortgages, issued to borrowers with higher credit scores who don't prove their incomes, seek higher debt ratios or buy investment properties.

Holders of mortgage bonds use Re-Remics to separate better- quality from riskier debt. That increases the chance the higher- ranked debt will retain its AAA rating, enhancing its value enough to boost the total worth of the mortgage pool, said Doug Dachille, chief executive officer of New York-based First Principles Capital Management LLC, which oversees $7 billion in fixed-income investments. A bond trading at 40 cents on the dollar could be split into a piece worth 80 cents and another piece that could then be sold cheaply enough to offer returns as high as 20 percent, Dachille said.

Commercial banks and savings-and-loans held more than $370 billion of non-agency mortgage bonds on March 31, according to Federal Deposit Insurance Corp. data. Much of that can only be sold at fire-sale prices after record subprime-mortgage defaults and home-price declines sparked losses on the underlying loans.
ALT-A Garbage Repackaged

All that is really happening here is pools of ALT-A garbage are being further sliced and diced and repackaged with a yellow ribbon with hopes that the buyers will not take a sniff at what's inside.

ALT-A is where all the liar loans are hiding. Those loans are now threatening to bring down Washington Mutual (WM) and Wachovia (WB), which is why the Fed is openly soliciting private equity firms to invest in banks. See Fed Looking To Bend Rules To Aid Banks and Fed's Trojan Horse Offering for more details.

Inquiring minds may also wish to consider a discussion of performance of various ALT-A pools in Is The Inflation Scare Over Yet?

One thing is for certain: Smelly CDOs by any other name will still stink, no matter how many yellow ribbons are tied to the package.

Mike "Mish" Shedlock
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