Jamie Dimon & Co. owe Leonard Blavatnik half the money they lost him on mortgage-backed securities because they called some MBS something other than MBS. But it could have been worse! Read more »
Richard Fisher is no fan of QE3, and he’s worried that his colleagues at the Fed have developed an unquenchable, $85 billion-a-month habit. Much as he finds their addiction abhorrent, he isn’t ready to abandon them to their fate—runaway inflation and the eventual loss of their teeth. So he’s pushing a 12-step program. First, admit you have a problem. Second, stop buying MBS. Read more »
A friend of a friend’s dentist’s cat-sitter told us:
“UBS is evidently exiting the entire MBS business. Friend’s mother just got a call saying that they were closing down the business and she would no longer have a job.”
Luckily, if the rumor about the rumor is true, there’s to be six months severance. But you know how cat-sitters are. Who knows if it’s true.
Decent commentary on the bailout is hard to come by. Certainly most “financial press” fails to fit the bill. It is a pleasant surprise, then, to see Posner describe the issues with something like clarity and aplomb.
A complicating factor was that the value of those securities was and is very difficult to determine, because each security represents a share in pieces of many different mortgages. The bank that owns the security cannot readily determine the value of all those different mortgages, since it has no direct relationship with the mortgagor, having sold the mortgage to the entity that issued the mortgage-backed securities.
If the Treasury pays the actual value (if anyone can determine what that is) of the securities, it will not be injecting new capital into the banking industry, but merely swapping one form of capital for another. If the Treasury pays more than the securities are worth, then it is contributing capital to the industry all right, but it is also enriching the owners and managers of the banks, which creates the familiar moral hazard problem as well as upsetting people by rewarding careless management practices. The more it overpays, the most costly the bailout plan to the taxpayer.
There is a rather serious issue here that has gotten only the smallest bit of attention. How difficult are mortgage backed securities to value? And, given that they are difficult or impossible to value, is it a coincidence that the Treasury seems to be using this opacity to funnel some extra cash.
The $700+ Billion Bailout [The Becker Posner Blog via Broken Symmetry]
Spread on mortgage backed securities over Treasuries tightened today, according to John Jansen at Across The Curve.
Mortgages are closing about 6 ticks tighter to Treasuries and about 3 basis points tighter to swaps.One dealer described the flows as “chunky”. The same dealer noted that the buyers today were from the genus “long term”. Some profit taking emerged late in the day but MBS held its gains.
The move tighter in MBS is especially impressive in light of the stock market meltdown. In the recent past that was a formula for spread widening. The price action today is indicative of broad based buying. It will be interesting to see if the spread improvement can be maintained if stocks should have a Friday meltdown tomorrow.
We’re actually not that surprised by this, given Bill Gross’s words today that Pimco was buying mortgages and the speculation that he may be trying to force the hand of the Treasury into a bailout scenario. Seems like a perfect recipe for an equity decline and a MBS climb.
MBS [Across The Curve]