Friday, March 12, 2010

The Toxic Asset that Planet Money Bought

by Bill McBride on 3/12/2010 04:16:00 PM

Earlier I linked to this podcast from Planet Money: We Bought A Toxic Asset! And the story is here: We Bought A Toxic Asset; You Can Watch It Die.

And here is a PDF with the details of the bond (ht daddyo, based on details in story). There are many details in the PDF - a brief excerpt:

At a 1-10 ½ price (bond notation, 1 plus 10.5/32), which is what they apparently paid, and at current 1-month prepayment speeds and severities, this bond will be gone in September. Total cashflows of $957, for an annualized yield of -41%.
...
The bond is very sensitive to your assumptions (not all bonds are like this). At 3m, 6m, and 12m historical speeds, the bond has positive yield. So the question is, do you think things are getting better, or worse? Remember, this is an Option ARM pool with recasts ramping in the summer. When will the default wave occur on the troubled borrowers? If you think it doesn’t happen until after the summer, you’ll be a-ok in this bond.

Also, remember in article, prices on this stuff are all over the place. If it was bought at a 1.8 price, it’s a loss in any scenario, and if it’s bought at a sub-dollar price, it’s a win.
And here is a tracking graphic from Planet Money.