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Valuing Assets The Government Is Buying

Everyone on the Street is talking about how to value all these assets (largely mortgage assets like collateralized debt obligations (CDOs)) that the Treasury Department will be buying.

For many assets, pricing is already being done, and this is the value of that rule last year that required mark-to-market accounting.

We have recently seen marks on many portfolios of CDOs.

The value of mark-to-market:

  • Citigroup CDOs: $0.53/dollar
  • Sovereign CDOs $0.35/dollar
  • Merrill Lynch CDOs $0.22/dollar

For example:

1) Citigroup recently wrote down the value of its CDO portfolio to $0.53 on the dollar (Deutsche Bank estimate),

2) Sovereign on Friday sold CDOs for $0.35 on the dollar,

3) Merrill Lynchrecently sold much of its CDOs for $0.22 on the dollar.

Portfolios are not all alike, but the point is that there is some basis for negotiation here: prices are floating somewhere between $0.22 and $0.53 on the dollar.

The point is that prices are already being set, and this new deal with the Treasury Department will accelerate the pricing of the securities. Whether it's a good deal for each bank depends on what kind of marks they have already taken.

At the very least, this should put some kind of break on the downward spiral in prices for mortgage-backed securities.

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