New York Fed Getting Out of the Junk Business
One of the greatest economic Rope-A-Dope schemes of all time might be coming to an end. The New York Fed is about to force Goldman Sachs, UBS, Bank of America and others to buy back the nuclear waste the banks foisted on the Fed under the guise of "collateral". The bulk of the garbage was unloaded during the bailouts of Bear Stearns and AIG.
A particularly rancid package of assets was dumped on the New York Fed during the managed rescue of Bear Stearns by JP Morgan Chase (discussed by Magoo on Wednesday). Valued at $30 billion at the time, the loans have continued to go bad over the subsequent two years and the entire package is estimated by some to be worth only $5 billion today.
This won't be a quick process, because literally millions of loan documents have to be gone through line by line. The banks will only be forced to buy back the "irregular" loans, which are loans that never should have been included in the collateral packages to begin with. In other words, the really crappy stuff the banks snuck in under the radar just to get it off their balance sheets. For example, mortgage documents on $700,000 McMansions signed by I.P. Freely, Mickey Mouse, Ben Dover, etc...
Debt buyers and insurers, who can rescind their coverage, are combing through loan documents for faulty appraisals, inflated borrower incomes and missing documentation that can trigger contractual agreements to repurchase ineligible assets as insurers seek ways to void coverage or recoup costs.
Of course, the banks won't be forced to disclose the losses incurred on 10Q's and 10K's. That would be too much like honest accounting. It's still a victory for the taxpayer, however, and victories for the taxpayer have been few and far between throughout this shitshow. I'll take it.
Here's Bloomberg's analysis. They think it's the story of the year:
Comments
This is a good story and it's
This is a good story and it's a shame this won't get as many comments as "What shoes should I buy?"
The guys who are asking what they can do to prepare for a job/interview can follow the markets and news like this. It's stories like these that make for good questions post-interview to show your interviewers that you aren't living under a rock.
So... what shoes should I
So... what shoes should I buy??
The best man always wins.
Very interesting, what if
Very interesting, what if they don't want to buy them back? Is Fed going to discount it to 0.01 on a dollar in order for them to buy back? Sounds like a great deal to them.
I'm wondering how much
I'm wondering how much they'll have to pay
Basically, they're going to
Basically, they're going to be forced to buy back them back at what they were originally valued for, because the assets they'll have to repurchase will have triggered a breach of contract clause.
In other words, if you defrauded an insurer and the insurer could later prove it, you'd be forced to disgorge the insurance proceeds you wrongfully collected. Now, that's an example of fraud and no one is claiming outright fraud in this particular case, but the remedy is the same.
In other words, the Fed was sold assets they weren't supposed to buy under a contract that states the original seller would have to buy them back at the sale price if they triggered a breach of contract somewhere down the line. We're basically talking about non-FHA conforming loans here.
At least that's my understanding of the situation.
How do you see this process
How do you see this process playing out Edmundo? I find it hard to believe the fed is just going to unload these toxic assets back onto the banks, but we will see. I am a little confused on how they plan to do this. Won't it be next to impossible to look at these RMBS and distinguish who the originators were, how to hold them liable assuming they are still in business vs. the investment banks that held these RMBS on their balance sheet? How does the Fed deal with a bank like Citi who the federal government has such a large interest in? Interested to see how this all pans out. I also think it will be hard to value these assets at what they were originally valued for, I mean look at the discrepancies in valuation between GS and other firms. All this "mark to market" accounting for these securities was more like oh shit the mortgage market is going to crash, we need to get our fucking margin calls. I think it will be difficult because so few people understood these CDO's and CDS's that there is no real record of what they were valued at, unless you use the purchase price. I doubt the fed would do this to the banks right now, I mean they are trying to get us out of one hell of a recession. Imagine what the effects would be on the markets if the banks were forced to purchase back these assets. I would love to hear input from some of the older guys...