[quote=davelj][quote=analyst]
The ever-worsening default rates, now common knowledge to all who are interested, render the mortgage-backed securities unsaleable, because the price the market will pay would result in losses and markdowns of asset value that would render the selling organization insolvent and out of business. This is the state, variously called inactive or illiquid, which is addressed by the Financial Accounting Standards Board in FSP 157-e, which effectively allows the MBS holder to value the securities according to some “internal model” instead of looking to the market.
The internal model is whatever the MBS-holding organization chooses, until the newly identified 29-year old SEC Chief Enforcement Officer decides to push the issue. Since he is an ex-Goldman Sachs employee, I am not expecting much enforcement.
So while you could argue with the absoluteness of my response to AN which triggered all this, it is true that, for the moment, the big players have been given a reprieve by the revised mark-to-market rules, and can hold up foreclosures, and get to choose how much effect it has on their books. Why else do you think Congress threatened to legislate FASB into at least irrelevance, perhaps oblivion, if the rules were not revised?[/quote]
That’s right, the big assist with the suspension of MTM is with the illiquid mark-to-model MBS. However, recall that… the “big players” can’t really “hold up foreclosures” for their own benefit. If Citi owns a bunch of exotic MBS, it’s the SERVICERS of the MBS – likely not Citi in most cases – that holds up the foreclosure process, not Citi itself. And this applies to the other big banks as well. Although most of the big banks are in the servicing business, to one extent or the other, it’s not as if Citi, for example, can just call up the servicers of MBS that they own and tell them what to do. But, MTM suspension does give them more leeway in how they value these piles of shit. No doubt about that.
Another thing to keep in mind is that a huge pile of the trillions in shitty MBS aren’t owned by US banks – this crap is spread among myriad institutions all over the world. So, the domestic banks have a lot of really horrific MBS to work through, but they own a fraction of the total.[/quote]
Yes, ownership of mortgage-backed securities is distributed around the world in many different kinds of organizations. Since the face value was 7.5 trillion dollars at the end of 2008 according to the Federal Reserve statistics, it does not require a high percentage of them to behave abnormally to have a market-altering effect.
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It is correct that a partial owner of a mortgage-backed security pool does not have direct control. However I am confident that the 100% owner of a mortgage-backed security pool can make whatever agreement between owner and servicer that the owner is willing to pay the fees for. The same would be true if all the partial owners agreed on a course of action.
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Davelj continues to focus on banks.
I have carefully chosen variations of the word “owner” or “holder” rather than “bank”, “lender”, or “investor” for a reason.
The mechanism which matters the most is one I hesitated to go into before, because it is unregulated and its actions are therefore undocumented (to the general public), and proof of any assertion, and rebuttal of any denial, is impossible for an outsider.
The big players bought credit default swaps (CDS) to hedge their financial interests in mortgage-backed securities (MBS). When an entity protected by a CDS suffers a loss on an MBS, and the claim is settled, the settlement may be either of type “cash” or “physical”.
Where there is an active market, the CDS seller pays the CDS buyer the difference between the face value and the market value. For the inactive/illiquid MBS under discussion here, there is no usable market value, cash settlement is not possible, and physical settlement occurs.
Physical settlement means that the CDS seller pays the CDS buyer face value, and takes ownership of the MBS.
AIG was the main player selling CDS coverage to MBS creators and buyers. When the real-estate bubble Ponzi scheme stalled, then collapsed, MBS values were impaired to the degree that massive CDS claims were triggered. AIG became suddenly, hopelessly insolvent. To prevent the effect of AIG failure from cascading through the world financial systems, the federal government took over and arranged for massive amounts of money to flow into AIG to allow the settlement of CDS claims. As usual, the amount of money required was initially underestimated (or at least understated), and multiple cash infusions are now up near a couple of hundred billion dollars. There may well be more in the future.
The settlement of these CDS claims via physical settlement resulted in AIG (read as the federal government) being the sole owner of a massive volume of MBS, now in a position to directly arrange for the managers/servicers of those MBS mortgages to carry out their desired policy.
