Thursday, September 6, 2007

Holders of the"Bailed-Out" ABCP Could Lose 50%

The Financial Post reported that the majority (about two thirds) of the $35B of non-bank ABCP in Canada is backed by risky bets on credit default rates that are very far underwater. The losses could be 50C on the dollar (quote from ED Devlin from PIMCO). He says the situation is worse in Canada than in the US. The issuers were leveraged so losses are amplified. They are "leveraged up 10 times and then leveraged again".

The so-called Montreal bailout is in doubt because of this levegage, but it seesm the banks involved in the bailout were the ones who would benefit, by forcing the holders of very short term debt to swap it for long term debt. May be not.

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