Toxic Bear Stearns Mortgage Paper Performing Well

Nov.18.08 | About: JPMorgan Chase (JPM)

Don’t look now, but that $30 billion in toxic Bear Stearns mortgage paper the government guaranteed back in March is cash-flowing nicely, thanks very much. From Reuters:

Speaking at the Reuters Global Finance Summit, BlackRock President Robert Kapito said that "the cash flows are coming in very close to what we had anticipated from the very beginning." 

If this portfolio performs better than expected, it may indicate that investors were wrong to lose faith in Bear Stearns in March.

New questions may also arise regarding mark-to-market accounting, which requires banks to record some assets on their books at their market value. The wider use of this accounting method, which can trigger big losses and capital hits for banks when asset values decline, has grown controversial. 

"That's become a very big issue in the market place, is that you have securities where the cash flow is coming in very close to predicted values, but the current mark to market, because of the illiquidity ... has been a big pressure on companies' capital," Kapito said. [Emph. added]

You mean the market might not be omniscient, after all? Shocking. I’m not going to make a huge deal over this, but will at least stop to dwell on it for a moment, before the next wave of hysteria washes over us all.  

It is conceivable—even possible—that in hyper-stressed environments such as the one we’re in now, where everyone in the world is deleveraging and buyers are thin on the ground, that markets aren’t the unerring arbiters of value that mark-to-market apologists make them out to be. And maybe, too, all those valuation models that have come in for such scorn lately aren’t the purveyors of computerized prevarication their critics make them out to be either. Sometimes—rarely, but sometimes—the model turns out to be right and the market turns out to be wrong. That’s what the people at BlackRock seem to be finding out, at any rate. (And don’t say, by the way, that BlackRock is just talking its book. It doesn’t actually have a book to talk. The government is the one who owns the Bear paper; BlackRock’s just servicing it, and is indifferent as to how it performs.)

In any event, if more people had understood all this sooner, a lot of hassles might have been avoided. Too late now, though.  

OK, now let’s all get back to running around and screaming and waving our arms. . . .