Tuesday, October 19, 2010

MBS Fallout: Mark to Market by Other Means?

I have a million things to do before I leave on Friday!

MBS Fallout: Mark to Market by Other Means?
The pyrotechnics were blazing today as news story after news story brought more and more information and developments in the mortgage saga. There is plenty of commentary out there so I just want to add a few thoughts to the debate.

He Said, She Said
The buyers of pooled MBS want the banks originating them to buy them back because they believe they were either mislead on the asset mix covered or the underlying assets were not handled correctly leading to impairment of the whole lot. In either case the banks will say "it was all right there in the literature we provided" and the buyers will say "you did not model the samples correctly vastly overstating the quality of the pool!". He said, she said indeed. How will this settle out without the legal process getting involved?

Even Though You Know How the Movie Ends, It can Still be Hard to Write the Story
There is no way the story will read as:
After moving heaven and earth and a moon sized pile of cash to save the big banks, Bank of America and Citigroup will now be broken up, bond investors dealt a severe haircut, and fraudulent activities will be prosecuted.
Not. Gonna. Happen.

So what will happen? It is way to early to know. I think Blackrock and PIMCO both know very well that BAC cannot buy back all that paper without going to the markets for serious cash. So why did they issue this note today? There is more going on here and only time will give up the answers. I know plenty of bloggers are getting the champagne on ice for the monster bank blow up, they may be waiting a long time to pop that cork.

Mark to Market by Other Means?
By far the most compelling issue to me is how this process will affect what banks hold on their balance sheet. The monster rally in the markets were largely driven by the ability of the banks to scrap mark to market accounting and go with mark to whatever you feel like accounting. If a serious look is performed on the MBS pools to determine how degraded they were and thus need to be bought back, those assets are going to have a well known clearing price! This would be mark to market by other means and thus poses a severe risk to the banks. Needless to say some kind of deal will have to be reached to prevent this.

Final Thoughts
The smoke screen being run by the banks right now is that they want to boil this all done to whether people are being foreclosed on in error. I have no doubt that in 99% of the cases the home mortgage holder is about to be foreclosed upon correctly. That really is not the issue. What is central is how fraud and corner cutting during the boom times left a mess of broken chains and packaged garbage.

Think of where we are right now, I promise it will either make you laugh or cry:
The entire US Banking system will need to have either another massive handout or some way of legalising fraud will have to be put in place to get them off the hook.
That is the condition of our finance system. Well worth saving at the tax payers expense?

Have a good night.


mab said...

I think Blackrock and PIMCO both know very well that BAC cannot buy back all that paper without going to the markets for serious cash. So why did they issue this note today?


Why? One possible reason is that they have a fiduciary responsibility to their clients. Failure to pursue any and all rights of recovery could make PIMPco and Blackrock ultimately responsible for the losses.

Remember, the robo-signing issue is separate from the Reps & Warranty issue.

mab said...

Well worth saving at the tax payers expense?


One more thought. We need a financial system. But we don't need the current financial system which is extractive and founded on fraud.

Bernanke and the other officers of the Fed should be fired immediately and held to account.

There will be debt (defaults).

getyourselfconnected said...

I can see the issue with Blackrock and PIMCO facing serious isues with their own investors due to all this. That would make sense but there must be something else don't you think? I am not saying I know what it is, I am gathering info as it comes, but seems a tad too linear. Then again, I am usually wrong!

scharfy said...

A calm voice of reason in a sea of madness you are, GYSC.

The blogosphere is all ablaze, thats for sure. Anyhow, here's a level-headed look at the robo-signer issue.


As for the securitization lawsuits, methinks we will have an answer on the BP lawsuit before that one. And thats gonna be a while..

The wheels of justice turn slow.

getyourselfconnected said...

great link with plenty of information. I think at this point it will be best to wait for real information and not scream out "The banks owe 250 billion" or whatever.

stop home foreclosure said...

well, it'll be between the two..unless the scenarios were gradually change as days go by..