Wednesday, December 19, 2007

Super bad seniors for Morgan Stanley

(FT Alphaville) The bulk of Morgan Stanley’s latest writedown is, perhaps predictably, again against CDOs. But this is the biggest writedown at MS to date.

Of the $9.4bn Q4 total, $7.8bn is being written down against subprime traded assets.

Of that, $1.8bn is directly against subprime MBS. The remainder, as you can see from page 15 of this supplement to the SEC filing, is with super senior CDO exposure. As of November 20th, MS booked a $7.2bn loss against super senior CDOs for the quarter, with $3.8bn wiped off the value of these assets in November alone.

Super senior CDO holdings aren’t really CDO notes in the proper sense at all. The term relates to being a counterparty in a swap agreement on synthetic CDO assets. Typically, super seniors are attached to large portions of a CDO’s underlying portfolio, giving them a theoretical “super” senior position over regular noteholders, AAA included. Indeed super-seniors have a claim on a synthetic CDO’s assets over and above any of the CDO’s noteholders.

November has clearly been superbad for super seniors. There was, for example, Adams Square - a sythentic CDO whose noteholders, AAA included, were completely wiped out. They didnt get a penny. The super seniors didn’t get all their money either. Indeed, because a synthetic CDO is made up of credit default swaps, liquidation foists CDS counterparty termination fees onto it. The Adams Square super seniors got their fingers burned. Odd, considering that at least on an academic level, super senior debt ranks above government debt.

One other point of note: we’ve heard reports that despite glowing Q4s, beneath the surface, Goldman Sachs had a “horrible” time in November. Perhaps that has something to do with super seniors too. Have a look at Goldman’s 10-Q filing, from back in September. In it, Goldman say they have $12.4bn in exposure to CDOs through “derivatives”. Super seniors, perhaps?

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