Can the Market Stay Irrational Longer than the FED can Stay Solvent?
Lost among all the 1 year anniversary musing about the fall of Lehman Brothers was this small snippet from an Ambrose Evans-Pritchard article for the Telegraph (several bloggers picked it up):
As of last week, the ABX index of sub-prime mortgage debt showed that AAA-rated securities from early 2007 were trading at 28 cents on the dollar – AA was at 4 cents, near all-time lows. No one can say that $2 trillion (£1.2 trillion) of sub-prime and Alt-A debt is still trading at panic levels, exaggerating losses. The dust has settled. What we can see is that creditors will never recoup their money.
So a year out from the alleged apex of the "panic" and this kind of mortgage debt is still selling (Who's buying? Look in Mirror for answer) at "distressed" prices.
Karl Denninger sums things up as:
More than a year later, it is clear: There was no panic; this was a JUSTIFIED level of trading and reflects the ugly reality - the investors in those bonds will NEVER get their money back.
So what does this all mean?
On a day when Ben Bernanke is calling the end of the recession, it may be a good exercise to look again at one of the most ardently held tenets by those in the FED and Treasury.
When the credit crisis really blew up, the government players were all very confident that the collapsing prices for mortgage backed paper were fantasy. They were out almost daily explaining that distressed prices were not reflective of real value, and that this liquidity crimp could be relaxed by central bank intervention and Treasury assistance for the banking sector.
It sounds pretty good, and heck, if that were the case you may (I said may) have even persuaded me to go along to help a short term crisis in the markets.
The problem is, and always was, that this mortgage paper is almost worthless. The values reported are very real. When you see mountains of foreclosures, and they are still rising, you know these securities are toast.
So it seems we are stuck at an impasse where the banks continue to hold this paper at almost full par value, and the FED even accepts this stuff as collateral for loans (maybe not the worst stuff, but plenty of the paper was taken. How much? Audit the FED to find out). Now if the assets are held to maturity, perhaps they will recoup some more value, but certainly no where near full price.
And this is the exact game that is on right now. Even a year out from the blow up, things are still looking bad. They will next year as well. I think 2013 will not look much better. Where do you stop? The banks have full backing of the FED and Treasury to hold off on recognizing losses on these assets. They are going to wait it out.
So while many are praising the efforts of all those involved in saving the entire world from collapse, understand they have not really saved anything. All that has been done was sweeping the issue under the rug in the hopes "rationality" came back to the markets. Maybe those values are indeed rational, and the government is irrational. With foreign interest in buying this kind of paper non existent, the FED will have to buy it all eventually. I am glad they are the "Buy and Hold" type.
These pictures of Tornado's are a great distraction:
The astonishing twisters captured by storm-chasing photographer
Have a good night.