time to back up the truck, page-17

Ocker we understand each other

to the second part IMO yes that’s why they have to make provisions and bring it onto the books when a counterparties credit rating falls below a certain level

to your question about bonds, this is I think well founded conjecture on my part, if you listen to Mike he calls it AAA and AA rated debt, he doesn’t actually doesn’t refer to the borrowers as that grade, then he reflects on the 800 borrowers.

What I or believe he is doing is smoothly navigating the bonds he is exposed to, like in sub prime there was allot of blending in the corporate bond market, what blending does is raises the high risk of junk debt to investment grade. The assumption is that being exposed to a few junk debt status parties is much riskier than being exposed to 800 at the same time, so the bond is made up with micro tranches of a wide variety of exposures in order to diversify the risk , because the risk is so diversified Fitch allows the assumption that they all wont go broke together and raises the rating, so combined they have a better rating than individually , this then allows them to be raised to investment grade.

Smith skates very neatly around all this but the clues are distributed throughout his commentary, his emphasis on only actually losing money on this debt in an Armageddon scenario (if its such great debt why does he have to raise a provision immediately his CDS cover becomes junk if its really AAA he wouldn’t have to provision at all), the Armageddon scenario is a direct reflection of the bond structure hes exposed , the 800 number is very high the only way you end being exposed to that many entities globally is through these types of bond instruments (CBO)

These types of bonds were built in the sub prime RE segment, take Jumbo, Prime, Alt A and sub prime, mix em all together in one bond and it becomes investment grade due to sector diversification , when in reality the diversification benefit was way over valued and represented a scam the ratings agencies allowed the investment banks so they could repackage debt, IMO the corporate debt market is potentially just as bad as the sub prime because of this and ANZ has a boot load of these exposures

the next leg of the credit crisis is Alt A, Corporate debt and Muni debt and these sectors are likely to unravel IMO over the next 9 mths , this is the problem with loading up the truck at this stage as the storm is before ANZ not behind.