It doesn't make sense to mark all AAA down 40 or 50 percent, but it does make sense to do this to the two most junior AAA tranches from 06 and 07. These two tranches make up about 20% of total AAA. That's why 20% of AAA from 05 and 06 were marked down 40% in the outline provided in a previous post. For the remaining AAA, I believe a fair market valuation is around 80-95 cents on the dollar (i.e., a 15%-20% haircut). The math is a pain (and I could have made a mistake), but my independent fair value estimate was within a couple percent of AIG's.
Your posts have been great.
Here's a counter-point to the negative view from the Fortune article featuring Meredith Whitney:
This is where Whitney's critics start licking their chops. Thomas Brown, a veteran bank analyst and co-founder of bankstocks.com (with Hill, coincidentally), disagrees sharply with Whitney's contentions that banks need to rid themselves of problem loans and that their stocks won't rebound until the write-downs abate.
Brown counters that the numbers Whitney keeps trotting out are actually lagging indicators. "During the last credit crisis the stocks hit bottom in November 1990, and the losses and nonperforming assets didn't peak until well into 1991," he says. "Every cycle there's one analyst who races to be the most bearish, and this time it's her. Honestly, I think we'll look back and see that Meredith Whitney's credibility peaked on July 15" - the day many bank stocks hit their low point for the year (so far at least).
Brown goes a step further, alleging that it's "incredibly arrogant" of Whitney to tell banks and investment banks either to unload their problem loans and mortgage securities or to "get real" about how they're valued. He says there's plenty of history to indicate that holding tight may be the wisest course of action. "In the last cycle," Brown says, "Morgan Stanley made a fortune buying written-down commercial real estate assets from banks at 40 cents on the dollar." What peeves Brown most about Whitney is her unwillingness to assign a fair market valuation for the stocks she's trashing: "The only explanation I can see is, she has no idea how to evaluate the possible downside risks."
Yes, it's like selling out of the money puts. Now they're in the money puts.
It is easy to keep track of the "notional" or total amount they could lose though...they publish that. The real estate crash is horrible but it's in the price of the bonds they insure...they've been trashed. And AIG has taken 25B in losses (mark to market) in recognition of that.
Book value doesn't reflect mark-to-market accounting based on current value of their debt holdings.
Remember Bear Stearns had a book value of $80 when they got bailed out by the Fed. It don't mean squat when it comes to financial stocks.