Schedule A to the Amended Shortfall Agreement, once redacted to the nines, now unveiled, means we don’t have to wait until 2018 to get an inside peak into just which CDO deals, and banks, the US government helped via its bail-out of mega-insurerer AIG.
As guest-blogger Tom Adams over at Naked Capitalism points out, one of the most interesting things here is the relationship between notional value and collateral posted. Since AIG was providing insurance on these deals, it had to post additional collateral as the notional value of the deals declined.
Here’s what Adams says:
For a fair number of deals, the posted collateral is very close to the notional amount of the bonds. In layperson-speak, that means some deals were basically dead already – and they were distributed across vintages and collateral type (excluding the commercial real estate CDOs, which are a small portion of the total). This implies that the other deals were going to catch up at some point. Put another way – if a 2005 high grade deal from one issuer had 80% collateral posting (meaning the counterparty and AIG agreed it was worth only 20% of its original value), odds are high that the other 2005 high grade deals and the 2006 high grade deals are going to get there soon enough (there was enough similarity in structures and underlying assets that the dispersion among eventual outcomes, in most cases, would not be that great).
The fact that some transactions were acknowledged both by AIG and the dealers to be zeros as of the bailout is yet another reason to doubt that these deals would have future upside. That is contrary to both the Fed’s logic in buying the CDOs (see our related post) and its current claim that the deals have traded up despite a massive decay in credit quality.
Anyway, FT Alphaville had a little extra time on its hands, so we’ve knocked up a few rough charts* of the first 60 deals or so listed on the Amended Shortfall Agreement list, to give you a visual of just how collateral posted stacked up against notional value. Here they are, click to enlarge:
More to come if and when we get the time.
*Note: Deal names might be a bit off since we’re copying from a slightly blurry PDF.
Related links:
Schedule A to Amended Shortfall Agreement — The Long Room
[Redacted] – FT Alphaville
AIG and the Fed, not above water, but drowning? – FT Alphaville
The uncomfortable position of UBS – FT Alphaville