Toxic Bear Stearns Mortgage Paper Performing Well

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. . . .

Comments

[Mookie3:]

Tom--

You are still drinking the Kool-aid....you just don't get it! You have ridden this market all the way down with your bullish stance. How are your subprime positions doing? Oh yea..they all went bankrupt as you kept adding to them. Guess it proves it the 'II' rankings of analysts is a joke.

How much in assets do you have in your fund these days?

Please help the environment and STOP WRITING YOUR CRAPPY ARTICLES. You should had made enough money during your years on Wall Street that you could do something else, something good for society..go volunteer at a food bank, become a teacher, etc...or did you lose all your money in your hedge funds.

STOP WRITING THIS CRAP!!!!!!!!!!!!!!!!!!...

Mookie

2008 Nov 18 08:23 AM

[RK:]

Mr. Brown, I for one am appreciative of your writing. Please continue. RK

2008 Nov 18 09:45 AM

[Mookie3:]

Maybe you should read this before taking advice from this guy:

Reuters - June 10th, 2008
Earth to Tom Brown…..
Give Tom Brown credit for his convictions.

The financial stocks maven and head of hedge fund Second Curve Capital LLC is hanging on to names the market is pummeling. We’re talking such train wrecks as First Marblehead and CompuCredit. And in recent months, Second Curve has picked up bond insurers including Ambac Financial Group and MBIA Inc that have done nothing but fall.

Brown, who regularly appears on CNBC (including Monday night) to talk about the coming turnaround in financial stocks, has seen the value of his holdings fall from $852.7 million as of Dec. 31, 2006, to $139.3 million as of March 31, 2008, according to regulatory filings.

Now Wall Street admires investors who stick to their convictions, particularly if they turn out to be right. But how much do you have to lose of your investors’ and your own money before you decide that the financial stocks rout of the last year might — just might — be more than just a temporary blip?

Yet Brown, the high-profile commentator who operates the Web site Bankstocks.com, sticks to his guns. The market, he says, is wrong. The mortgage credit crisis that brutalized financial stocks seems close to being resolved, says Brown.

“We’ll keep saying it until we’re blue in the face,” said Brown in a June 4 post on Bankstocks.com. “Subprime mortgage loss estimates are too high…. The reason why they’re too high is simple, too. They assume that last year’s credit performance will persist far into the future. Only it won’t.”

Let’s see: the economy is slipping, energy prices are skyrocketing, U.S. government and trade deficits are ballooning, inflation and unemployment is rising, housing prices are falling, consumers are spending less, residential and corporate credit defaults are rising. And Brown is saying that the mortgage credit markets are poised for a turnaround? Defaults have washed through the system?

I don’t know, but if I were a Second Curve investor, I’d vote with my feet.

blogs.reuters.com/reut.../

2008 Nov 18 10:04 AM

[CLH:]

I like your articles Tom.

2008 Nov 18 10:29 PM

[PlentyOStocks:]

Tom, the same pathetic bashers I see. It is amazing they spend so much time reading your posts when they claim they are not worth reading. Pretty Sad. I've met many successful people in my life and they are all optimistic and supportive. Only people who have succeeded at nothing are quick to find fault with others.

The mortgages are just like the Bear Sterns paper. The market says they are worthless, but people are still paying their mortgages.

How can the mortgages be worthless and at the same time the Government is on record that they will bend over backwards to make sure no one has to lose their home.? The answer of course is they cannot, and the government backing means most mortgages will remain good.

2008 Nov 20 09:53 AM

[Bonanza36:]

Let me understand this. The market is wrong and Tom Brown is right. Uh huh.

Mortgages are worth what the market will pay. Brown has lost millions of his customers money but boy is he optimistic.

2008 Dec 04 08:43 AM

[Bonanza36:]

Well now we hear that 39% of ALL subprime loans are in default. Are we supposed to believe that BSC paper is performing any better than the average??

Doubtful.

We should believe what someone at Blackrocks says? So they can sell us their crap sandwiches at a higher price?

Sure thing, you go first.

2008 Dec 06 10:26 AM