SHartwell

Thornburg's a Huge Bargain After Monday's Crash

TMA is getting margin calls because the market price of their holdings has been hit - hard. In setting these prices, the market might be stupid. Indeed, with the defalut rate on the mortgages themselves as low as it is, the indication is that the market IS stupid (or that either the default rates will soar). The buyers of TMA are all clearly betting that the market will eventually realize that the default assumptions presently implied by Alt-A pricing are way too pessimistic.

But this isn't the whole story. The main risk TMA investors are isn't whether or not the market is valuing the Alf-A loans correctly. Instead, it's whether the lenders will force TMA to sell these loans at the currently depressed prices due to the company's inability to meet the margin calls. If this happens, the money is lost - even if Alt-A prices do eventually recover.

In rough terms, TMA has $2.0 billion in equity. $825 million is preferred, leaving $1.175 in common equity. If TMA is forced to get out of its $11.5 billion reverse repos at a 10% loss, you're wiped out. This might not happen, but there's a huge risk that it does - even if the prices at which the Alt-A assets are liquidated are "stupid".

So Jack, you might only care about the DEFAULT rate, but the investor who benefits from that low default rate may well be the hedge fund who picks up the asset at a fire-sale price when TMA is forced to sell (as opposed to you).

And to those "if they can't make it" investors: Yes, TMA has a great portfolio of loans. But their huge leverage and asset/liability mismatch make this company effectively the classic "short puts" investment. 10 out of 11 years, shorting puts looks like a great return strategy. In the 11th year you get completely wiped out. This could well be TMA's 11th year.