naked capitalism

Reader Baruch sent us this tidbit from Reuters: Bank Hapoalim, the second largest bank in Israel, sold its entire portfolio of MBS to Pimco for 75 cents on an already-written-dollar (or in this case, shekel). Note that the previous writedowns were at least $90 million on an portfolio valued before the sale at $3.42 billion.

Now why is this significant? Per a report to the London Stock Exchange on March 8, the Bank indicated that its portfolio was almost entirely AAA:

All of the securities in the MBS portfolio of the Bank are rated AAA by the international rating agencies, except for the following: MBS amounting to 60 million US Dollars (this refers to MBS guaranteed by the insurance company FGIC) the rating of which has recently been lowered by the international rating agencies from the level of AAA to A and one MBS amounting to 5 million US Dollars rated AA which was originally purchased with that rating. In addition, MBS amounting to 302 million US Dollars rated AAA are on watch lists of the rating agencies.

Amusingly, the Bank also said that even using “severe” stress tests, the losses expected on its roughly $3.5 billion portfolio should be less than 10%:

Based on the model supplied by the company, the Bank applied an even more severe scenario in which housing prices in the USA (excluding California and Florida) fell by about 30% from their peak (by 22% when compared with the present price level) and in California and Florida by about 40% from their peak (by 28% when compared with the present price level). Given such an severe scenario and assuming that the rate of default by mortgage takers will be about 47%, the accumulated loss from the portfolio is liable to reach about 340 million US Dollars over the life span of the securities. It should be noted that this test referred to the same portion of the portfolio that was tested by the company. It should be noted that the losses calculated in all of the scenarios do not take into account the annual income (after deducting the cost of financing the portfolio) which the Bank is expected to record in the future on account of the MBS portfolio and which is estimated at about 20 million US Dollars per year. Given the average life span of the securities foreseen at the present time, of about 7 years, such income is expected to exceed 100 million US Dollars.

So we have a 25.5% writedown on a portfolio already reduced by at least 2.5%, and you get a net value of roughly 72.7% of original face value.

Contrast this with the marks assigned by US and European banks to AAA-rated MBS from a Morgan Stanley report dated May 13 (click to enlarge):