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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (88284)	10/12/2008 12:43:39 AM
From: Sr K	Respond to of 116555

Do you think those underperforming mortgage bonds are worth $.00 on the dollar)? If not, then why do you think this is "going to waste another $40 Billion a month"? Reuters reported a week ago: Regulator says Fannie, Freddie might sell bad assets Sunday October 5, 2:43 pm ET By John Poirier including this portion: "They are financial institutions that could sell assets," James Lockhart, director of the Federal Housing Finance Agency, said during a C-SPAN television interview. "Whether they will or not certainly the decision has not been made." "Lockhart estimated that between 2 percent and 4 percent of Fannie and Freddie's assets are bad mortgages." ["bad mortgages" does not mean $0 value] Lockhart was the regulator at OFHEO and is still "on the job" at FHFA. Either he knows the assets at each GSE (likely) or he should be fired (less likely). That is what Dawn Kopecki was referring to when she wrote "when the two mortgage-finance companies already hold as much as $210 billion of bad debt that may be eligible itself for the Treasury's relief program, their regulator said Oct. 5." The range of 2% to 4% led to her calculation of 4% of $5.25T or $210M. Since $40B is a small portion of the total, the buys would be a type of reverse auction, and from information out of Washington, the purchases will not be at face value or even "hold to maturity" value that Bernanke suggested. If they each build up a portfolio of mortgage bonds, with a cost of capital of 10% (the rate on the Senior Preferred), keeping in mind that Treasury is ordering them to do this, they have to pay prices that reflect at least a return on the capital of 12%. It could even be 15%. IMO if this weekend's changes don't derail this $40B/month order and plan, they should do this for 2-3 months, and take time to evaluate the bonds and underlying mortgages performance before going forward (which by that time will be under a new Administration and Treasury Secretary). Also, there will be useful feedback by how much interest there is is selling mortgage bonds at deep discounts, and by whom. MOL if there are lots of sellers, the rate of return goes up.