Tribune bonds: worthless

Well, nearly worthless. Ben Cole notices this week's auction to settle credit derivatives contracts written on bonds and loans of Tribune Co. Basically, investors sold insurance protection in the event of a debt default. The bondholders who bought into these swaps receive a certain percentage of the face value of the bonds that are guaranteed. How much? In Tribune’s case, those selling protection will have to fork over $98.50 for every $100 of face value. Put another way, Tribune bonds have a face value of 1.5 percent. Yowser! From David Gaffen at Marketbeat:

Standard and Poor’s, a ratings agency, had already suggested that recovery values would be “negligible” for the bonds, at between zero and 10% for secured notes and debentures, senior unsecured debt, and subordinated debt. The auction result for Tribune loan credit default swaps, or LCDS, was only slightly better, setting a price of 23.75% of face value for the firm’s loans. Still, that number was below the 30% to 50% recovery value estimated by Standard and Poor’s in its report in December.

As we know by now, credit default swaps, which are really just a sophisticated version of gambling, have made the financial crisis a whole lot worse. They nearly decimated AIG, whose executives had stupidly relied on them not to explode in their faces. Which of course they did.