Barron's comes up with obscure assumption for bailout plan

While two more banks struggle and are close to collapse (Wachovia and Fortis) a third one Bradley&Bingley was nationalised by the UK government this weekend.

Excerpt from Bloomberg

Bradford & Bingley, the nation's biggest lender to landlords, is the third major British bank to run into trouble since credit markets seized up around the globe last year. Its shares have fallen 93 percent this year. Northern Rock Plc was nationalized in February and HBOS Plc sold itself to Lloyds TSB Group Plc on Sept. 18.

Barron 's comes up with the title story that taypayers likely will make money from the bailout, which I can not agree on according to the data I have put together.

Excerpt from Barron's article 'Making A Mint'

Despite the public outcry over the bailout bill, taxpayers and the Treasury are likely to come out ahead.

By most accounts, current losses on U.S. mortgage paper -- the difference between face value and current fire-sale prices -- stand at about a trillion dollars. In a sign of the distortions from panic selling, eventual losses on the underlying morgtages figure should be no greater than $250 billion. The market, irrationally, is assuming losses of four times that amount.

Of the $1 trillion presumed hole, $800 billion involve subprime and Alt-A mortgage securities, which are of slightly higher quality than subprime. The remainder of losses is accounted for by under-water prime mortgage securities and unsecuritized mortgage loans.

According to the BIS statistics between 2000 and 2007 MBS (Mortgage Backed Securities) with a volume of 13 tril. were issued of which roughly 3 tril are Subprime or ALT A. They have so called ABX indeces which measure their current value and the tranches for BBB- and BBB trade at 10 cents, single A at 20 cents and AA at 60 cents. Well Subprime and Alt-A are the 10 to 20 cent assets and if we take the average price which is still a generous assumption for 3 tril. we end up with 450 bil. of value and 2550 bil. of losses if the assets would have been marked accordingly. So far banks and other financial institutions only reported for 550 bil. in losses - so we are missing 2 trillion of losses or mark downs.

That is still not the whole truth for 2 reasons - first the AA tranches which might be good for another 4-5 tril are valued at 60 cents. Lets go for 60 cents of 4 tril. thats another 2.4 tril in losses we have not heard about and the AAA at 90 cents gives us another approx. 600 bil. of losses. which brings the total amount to roughly 5.5 trillion of losses acording to the ABX. Secondly another negativ spin on the story comes from a still reluctant rating policy of the agency who rate this tranches and they need to be downgraded by some notches which would increase the losses.

Furthermore this article and the mentioned experts assume a sudden stabilization in the housing market thereby the truth is a running number of 10k foreclosures per day. Lets make the math on that momentum 10000 times an average houseprice of 150000 value is 1.5 bil a day or 45 bil a month. ıf they can recover 50 cents on the dollar through a firesale on those houses with an average processing of 2 years. the monthly loss will be 22.5 bil a month or 265 bil. a year . That assumption was for no further detoriation for the economy.

Summing up the assumptions in the Barrons article that only 1 tril. are at stake makes no sense to me and the assumption of Bill Gross that the Treasury wants to pay 65 cents makes no sense to me as well. With 3 tril. of Subprime and ALT -A issues out there it would request for those alone to have 2 tril. at hand and again we are talking 5.5 tril . of losses which should have been marked according to real money investments. On top we also have 400 tril of derivatives based on interest rate products not all of them are based on mortgage rates but all other are effected to some degree and some huge losses are still hiden somewhere which are easily in the trillion ranks. I am afraid taxpayer will be lucky to come out alive of this deal and that many banks are hiding huge losses on one hand but what is as dangerous is the matter of a fact that their counterparts may mark profits which they will have a hard time to cash in since it may stay a paper profit.