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Banking

CDOs: Super senior is super bad

‘Riskless’ exposure comes back to haunt banks

Banks are facing far bigger write-downs on their ABS CDO business than first thought because they took on super-senior exposure that was supposed to be virtually riskless

There has been only one game in town in recent weeks as far as the structured finance market is concerned – and that is trying to put accurate numbers on just how big the final hit taken by banks from their ABS CDO businesses will be. The realization that early numbers put out by some banks could be wildly off has dawned in recent weeks – primarily since Merrill Lynch and Citi put out write-down figures that seemed an order of magnitude greater than anything that had been suggested before. Although Merrill and Citi were at the top of the league tables for underwriting CDOs, when they revealed potential billion dollar write-downs in the double digits it became clear that something else was afoot.

Comparing the hits that each bank is expecting is a frustrating business because of the inconsistency in their approaches. But the mere fact that the ABX indices have tanked during October (see chart) would suggest that any bank putting out figures in November rather than September would be expected to mark exposure down far more sharply than before.

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