Dissecting a CDO sausage(by rasputin)

Dissecting a CDO sausage.	rasputin	NEW 11/1/2007 2:31:25 PM
C'mon, admit it. YouREALLY want to know what kind of fat, grissle, and sawdust has beenground into these rotting CDO sausages, don't you? But you're too busyand distracted with trying to maintain your sanity to poke around inthe dark, dank dungeon-like kitchen where these things are constructed. Well,leave it up to Ras to don his surgeons mask and brave the stench to getdo a little “USDR” (United States Department of Rasputin”) inspectionof just one of the ingredients. In this case, we'll examine thecontents of the “Bear Stearns Asset Backed Securities I Trust 2007-HE3”prospectus, which can be found here: Yeah, like I'm SURE that the fund managers read this whole thing before betting the pensioner's money. Mmmmhmmm …and is one of the constituents in the www.markit.com ABX-HE-AAA-07-2 CDO, which can be found here: The whole is even scarier than the sum of its parts Now,let's take a peek under the hood of one of these constituent sausages,shall we? Here is the actual excerpt that describes the loans and theircharacteristics that make up this particular piece To wit: Thefollowing table summarizes the approximate characteristics of all ofthe mortgage loans in loan group I as of the cut-off date (I havehighlighted the most egregious stats): Number of mortgage loans 2,910 Percentage of mortgage loans with 100% Aggregate principal balance $669,452,117 Average principal balance $230,052 Weighted average mortgage rate 8.214% Weighted average original loan-to-value ratio 83.70% Type of mortgaged properties: Single-family dwellings 72.44% 2-4 family dwellings 7.29% Planned unit developments 15.66% Condominiums 4.58% Owner-occupied 94.76% State concentrations (greater than 5%) California 41.34% Florida 8.02% Illinois 6.14% First lien 94.68% Second lien 5.32% Balloon Loans 36.09% Fixed Rate Loans 32.43% Adjustable Rate Loans 67.57% (Ras):Pay careful attention to the state concentrations, the mortgage ratesand the loan-to-values here. Oh, and let's NOT forget that EACH ANDEVERY ONE OF THESE LOANS IS SUBPRIME!!! That's right. In this so-called“AAA” constituent, not ONE loan is to a prime borrower. Doesany one here doubt that the default rate is going to skyrocket on theseloans? Or that the banks (and every sucker that invested in thesesausages) that are exposed to $1.2 TRILLION in these CDOs (plus theleveraged up bets on the side which are probably three times thatnumber) is probably going to be ruined? So, there you have it. Areal peek inside the CDO sausage. And trust me when I tell you thatthis particular piece is one of the BEST credit risks stuffed into the“AAA” casing. The others are even worse. My recommendation: Go vegan…