View Full Version : Why buy real estate if you can get debt at 22 cents on face value?

Brooks Gracie
09-04-08, 05:50 PM
I read that on July 29, Merrill dumped its debt at 22 cents on the dollar. If the underlying real estate has fallen only by 20%-30%, why aren't capital pools forming to arbitrage this spread? Could it be because the CDO's are sliced and diced too thin for an arbitrager to negotiate purchases with the holders? (Since Merrill and other investment banks hold these in their own names, it is easy to negotiate with them-- but if 50 pension funds own a tranch of CDO's, consolidation may be impossible).

Also, I doubt CALPER's foreclosing on its debtors, especially those in the State of California. Foreclosing on the teachers who are the benefiaries of the plan seems politically difficult. However, if pension funds sold their debt to private interests, they wouldn't be blamed or forced to foreclose.

Any help as to this question?

09-04-08, 06:46 PM
Mohammed El-Erian has been <a href="http://www.wealthtrack.com/previous_07-18-2008.php">dropping hints about this</a> for months. I guess you need to have really smart and attentive accountants to sort through the mess of all those asset-backed papers.