Back in 2007 (This is crazy! 10/12 -07) I wrote about the first true purchases of debt backed by subprime mortgages. Citadel Investment Group bought a couple of billion dollars of such debt from E*Trade for 27 cents on the dollar.
The only logical conclusion one could draw from that was that of gigantic future write downs from the big banks when other banks followed suit. I mentioned that in my blog and ended the entry with the words "I hope I am wrong!". Well, by now it is all to obvious that I wasn't wrong! We have now seen write dwons of gigantic proportions in the banking sector and since I wrote the blog entry the average global banking sector stock is down some 30% (the MSCI World -- Banks stock index). And last week we saw a new eye-popping deal when Merrill Lynch sold close to $7bn of mortgage-backed CDOs to Lone Star Funds at a price of 22 cents on the dollar (i.e., a loss of 78% or so).
Now, I am afraid that many banks value their current holding of structured credit products at much higher percentages and that this eventually will be unsustainable which in turn would lead to further massive write downs. With further downward pressure on the entire banking sector stock market valuation. And with further tax-payer bail outs.... etc ... etc ...... Again, let's hope I am wrong!