Billion $ Question: What Will Mortgage Backed Securities Be Worth? [Housing Tracker]

Seeking Alpha's Housing Tracker is a collection of housing-related excerpts from various sources, grouped by topic. Feel free to post any interesting links on the subject in the comments section below.

Quotes of the Day

"Whatever you think about whether or not there was a need [for a bailout] . . . once the president, secretary of the Treasury and chairman of the Federal Reserve have announced that if you don't do this, there will be a collapse, there's probably going to be a collapse if you don't do it." - Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. (LA Times, Sept. 25) 

“It's nice to have a lot of money, but you know, you don't want to keep it around forever. I prefer buying things. Otherwise, it's a little like saving sex for your old age.'' – Berkshire Hathaway CEO Warren Buffett. Berkshire is buying the stake in Goldman, Paulson's former firm, after three of the investment bank's biggest competitors went bankrupt or were forced into emergency sales. He has already agreed to spend at least $25 billion this year to acquire companies, finance buyouts and purchase securities for Omaha, Nebraska-based Berkshire. (Bloomberg, Sept. 24) 

“The reality is that we are not going to know what the right price is for years. It might be 20 cents on the dollar or 60 cents on the dollar, but we won’t know for years.” - Andrew Feltus, a bond portfolio manager at Pioneer Investments, a mutual fund firm. (NY Times, Sept. 24) 

Banking Subprime Fallout

SEC Presses Hedge Funds.  Sources: The SEC ordered more than two dozen hedge funds to turn over trading information as it ramps up its investigation into whether traders were spreading rumors to manipulate shares. The order… identifies six financial institutions the SEC believes may have been subject to such manipulation. The order is akin to a subpoena... It seeks a wide range of trading data and email communications over a period of three weeks involving American International Group Inc. (AIG), Goldman Sachs Group Inc. (GS), Lehman Brothers Holdings Inc. (LEH), Morgan Stanley (MS), Washington Mutual Inc. (WM) and Merrill Lynch & Co. (MER).” (WSJ, Sept. 25) 

Don’t Worry About The FDIC. “The FDIC does not and will not run out of money. Like all federal trust funds, the FDIC's insurance "trust fund" does not exist. The reserves shown in the fund simply evidence the amount of money contributed by the banking industry into the fund. Like all federal trust funds, the cash raised by FDIC insurance premiums goes into the Treasury's general fund. When the agency needs cash, then the Treasury makes the money available. When the positive balance shown in the FDIC insurance fund is depleted, the FDIC simply runs a negative balance with the Treasury, a loan that the banking industry will repay over time.” (Felix Salmon in Seeking Alpha, Sept. 25) 

Subprime Litigation And Market Meltdowns. “How will the government handle outstanding subprime litigation[?] By one count, there are more than 118 lawsuits related to subprime litigation and 19 related to auction-rate securities and they're spreading… Will the tortious U.S. do the unthinkable and seek to bar such lawsuits the way they have killed off short-selling? Or will the government inherit the toxic assets and litigation that goes with them? Fixing the broken credit markets is no simple task. The only way… Prudy Crawford and the folks restructuring the asset-backed commercial paper market here in Canada… could make that pig fly was by granting legal immunity, which the Canadian courts upheld.” (Fiinancial Post, Sept. 24)

S&P Cuts WaMu, Cites Breakup Concerns. “S&P’s Ratings Services cut its ratings on Seattle-based thrift Washington Mutual further into junk territory on Wednesday, following an earlier ratings cut by rival agency Moody’s Investors Service earlier this week. S&P said it had lowered its counterparty credit rating on Washington Mutual Inc. to ‘CCC/C’ from a prior rating at ‘BB-/B,’ and cut its rating on preferred shares at the bank. But S&P did affirm the ‘BBB-/A-3′ counterparty credit rating on Washington Mutual Bank because of the breadth of its retail franchise — the one strength to WaMu that has potential investors positioning for a potential purchase.” (Housing Wire, Sept. 24)

IMF's Strauss-Kahn Estimates Global Subprime Losses At $1.3 Tril.+ “Financial institutions worldwide may be swamped by subprime turmoil-related losses worth a total of $1.3 trillion (¥138T), International Monetary Fund Managing Director Dominique Strauss-Kahn said Wednesday… His warning came only a few weeks after John Lipsky, IMF's first deputy managing director, came up with a somewhat milder projection on the financial community's subprime-related losses at $1.1T, against an earlier IMF estimate of $94.5 billion.” (TMC Net, Sept. 24) 

FBI Said To Probe Fannie, Freddie, Lehman, AIG. “The FBI is investigating Fannie Mae (FNM), Freddie Mac (FRE), Lehman Brothers Holdings Inc and insurer American International Group Inc, expanding its probe of potential corporate fraud... They said the probe of the four high-profile companies at the center of the current financial crisis… was in the preliminary stage and no criminal charges were imminent… The FBI [is] now probing 26 cases of potential corporate fraud related to the collapse of the U.S. mortgage lending industry. Last week, FBI Director Robert Mueller told the U.S. Congress that 24 cases of potential corporate fraud were under investigation.” (Reuters, Sept. 24) 

Paulson, Bernanke Describe Mechanics of Auction Proposal. “One concern raised by members of Congress… is the potential conflicts of interest among the asset managers who would be hired to run the [$700 billion] program. Some critics worry that the program would create incentives for asset managers -- or a future Treasury secretary -- to benefit institutions with which they have financial or personal ties… Senate Banking Committee Chairman Christopher Dodd has suggested giving a role in the management of these assets to the FDIC, which manages and disposes of assets it takes on after bank failures. Dodd said the FDIC has experience dealing with many of the issues that asset managers for Treasury's potential program might face.” (WSJ, Sept. 24) 

Plan’s Basic Mystery: What’s All This Stuff Worth?  “The difficulty in valuing these assets could result in the government’s buying them for more than they will ever be worth, a step that would benefit financial institutions at taxpayers’ expense… Many of these C.D.O.’s have been selling for pennies on the dollar, if they are selling at all. In July, Merrill Lynch, struggling to bolster its finances, sold $31 billion of tricky mortgage-linked investments for $0.22 on the dollar. Last November, Citadel, a large hedge fund in Chicago, bought $3B of mortgage securities and other investments for $0.27 on the dollar. Citigroup values similar investments on its books at $0.61 on the dollar.” (NY Times, Sept. 24) 

Bernanke: Abandoning Fair Value Would Harm Markets. “Suspending rules that require financial companies to value assets at current market prices would only further erode investor confidence, Federal Reserve Chairman Ben Bernanke said on Tuesday. Mark-to-market accounting, also known as fair value accounting, has been maligned by the financial industry for forcing banks and others to post stunning write-downs as markets for their mortgage-related securities have dried up. Bernanke said banks want to abandon fair value accounting standards and instead use their own estimates of hold-to-maturity prices for these assets, but warned such estimates would be unreliable.” (Reuters, Sept. 23)

                                              

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Comments

[billddrummer:]

Hi Judy,

Great data. Thanks for keeping up on everything!!!

Although I think your headline may be missing some zeroes. This might be a trillion dollar question. I've seen numbers as high as $5 trillion in counterparty risk related to mortgage backed securities, derivatives, and default swap exposure.

But as with all paired trades, the risk is essentially half that number, or $2.5 trillion. And the vast majority of mortgages will ultimately pay out. So the further loss risk is probably in the $1,000,000,000,000 range (boy that's a lot of zeroes!).

Time to keep the powder ready, and dry.

Thanks again for all your hard work!!

2008 Sep 30 05:35 PM

[SA Editor J...:]

Thanks Bill,
I haven't seen a $5T figure yet, but who knows where this will all end??
Sometimes when I read some of this stuff, I can't believe the numbers being thrown around. $1T. It boggles the mind.

What do you think about the bailout plan?

2008 Oct 01 01:54 PM

[billddrummer:]

Hi Judy,

Thanks for asking. Without having studied the plan in detail, and knowing that Paulson's 3-page memo morphed into a 420 page bill, it's hard to say what to think. But here's what I think about the little that I know:

Raising the FDIC insurance limit is a good idea that's at least 10 years late. $100,000 just doesn't go as far as it used to.

Selecting the entities that can offload their bad assets will be interesting, if only to see whether their capitalizations will rise at the expense of the excluded ones.

If the government can make a market in the 'bad assets' that will capitalize the remaining banks so that liquidity is restored to the secondary markets and foster additional lending to middle and small market companies, that will be a good thing.

In addition, I believe that if the program is handled properly, the good assets buried within these pools will be available for securitization again once the dust settles. But doing in-depth analysis of the underlying assets will have to take place--otherwise, nothing will change from the process that got us here in the first place.

If, on the other hand, the new funds simply move impaired assets from banks to the Treasury, then it won't do much good.

But I'm speaking from a position of not really knowing what the package contains, apart from its length.

Your thoughts?

2008 Oct 02 04:17 PM

[Directoy:]

I Dont think that gonna work !

2008 Dec 31 02:48 PM