Banks started to sell their asset back securities to avoid further losses. The selling pressure mounted, the price went down, so more banks tried to sell as they were required under mark to market accounting rules to post the paper losses. And so the price went down again - and again - and again. Morgan Stanley unloaded their last major tranche at 22c to the $. So what is the yield on this stuff now? Its through the roof But is this paper really of so little value? Hardly.
Say 10% of the mortgagees at the risky end default on their payments, their property is only worth 50% of its original value so we need to add on (say) 5% to risk free for default. Let's round that to 10% yield required to cover loss of recoverability and default risk. On a 10 year $100 nominal paying 5% that means we are looking at a value of about $69. At $22 we are looking at an implied yield of 31%! That's right - 31%. No wonder the US wants to buy it up cheap. The banks are their own worst enemy we know - but they are really being ripped off. So the big question is where can I get some?