Readers may recall that AIG had approached the Fed about buying the entirely of its Maiden Lane II portfolio, the off balance sheet vehicle established to hold the non-CDO assets removed from the otherwise bankrupt insurer. The logic appeared to be that the insurer would be able to liquify its equity in the vehicle. It seemed pretty obvious at the time that the Fed could not justify selling the whole book to AIG; if there were any unrealized gains in it, selling it at the current accounting value would be a subsidy to AIG. The bid was also thus a strategy to force the vehicle to be unwound and any gains to be realized (which would lead AIG showing a profit on its position).
The problem is the “profit” appears to have been based on optimistic accounting, something we found to be the case in the Fed off balance sheet we’ve analyzed at length, Maiden Lane III. As Jim Chanos noted by e-mail, “Real transaction prices are not good for some of the ‘marks’ in many portfolios!” Needless to say, this also calls into question the use of Blackrock as asset manager, since the valuations were based on its marks.
From Bloomberg:
Federal Reserve auctions of mortgage securities that the central bank assumed in the rescue of American International Group Inc. are fueling a selloff in credit markets as Wall Street rushes to hedge against losses on stockpiled debt.
Declines in credit-default swaps indexes used to protect against losses on subprime housing debt and commercial mortgages accelerated this month, reaching almost 20 percent in the past five weeks as the cost of the insurance climbs, according to Markit Group Ltd. The plunge this week started infecting everything from junk bonds to the debt of financial companies.
The Fed has been selling the $31 billion Maiden Lane II portfolio piecemeal after rejecting a $15.7 billion bid from AIG for the entire pool in March. Since then, Europe’s sovereign debt crisis has deepened and the U.S. recovery has shown signs of slowing, with unemployment rising to 9.1 percent, the highest level this year, and the economy growing 1.8 percent in the first quarter, less than forecast.
“Dribbling risk into the market makes sense if everything is good and continues to improve,” said Ashish Shah, the head of global credit investments in New York at AllianceBernstein LP, which oversees $214 billion in fixed-income assets. “But when you get yourself into a position where the Street suddenly feels they’re long inventory and the macro backdrop is weaker, now you’re selling into weakness.”
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Okay, finance and Wall Street are (obviously) not my background.
“Blackstone” is deeply connected to Pete Peterson.
Pete Peterson (Reagan admin finance honcho) is deeply connected to deficit hysteria.
I interpret much of the deficit hysteria as: “OMG! OMG!! We all lost Big Big Bets that we can’t even hope to cover! So we’ll have to take it out of the hide of the taxpayers — preferably, before they figure out that we leveraged their pensions for Our Really Big Awesome Bets That Went Souuuuuth…!”
In other words, should I now anticipate an even more shrill and urgent panic tone in the deficit hysteria…?
Is that (part) of what this is all about?
Blackrock and Blackstone are now two completely different entities. Blackrock was created by Larry Fink, who was the head of fixed income at First Boston in the 1980s. Blackstone was founded by Pete Peterson and Steve Schwarzman, investment bankers out of Lehman.
More on Larry Fink and Blackrock:
http://www.vanityfair.com/business/features/2010/04/fink-201004
Sorry to confuse! Thanks for the clarification.
So it’s Accounting Issues Redux:
Accounting issues in the context of a shuddering economic system.
With the 10-year at 2.97, hard for anyone to take deficit hawks seriously.
BlackRock was founded as a unit of Blackstone, then split off.
Yup. I think after nearly bankrupting First Boston in a big bond deal that went sour (First boston was eventually “saved” by a shotgun wedding with Credit Swiss) , Larry Fink was given office space and some startup cash by Blackstone in order to start Blackrock.
But Peterson is a very old fossil that retired from Blackstone long ago. He then founded the Peterson Institute and became a self described philanthropist because he is giving away money to finance think tank BS.
I think the only reason he is still alive is because he gets organ transplants from his harem of stem cells clones.
But one of them could run for president someday, I guess.
Maam;
Does this mean the Fed is going to have a haircut no matter which way it turns? (Greenie Economist Question: Is a haircut automatically the same as a ‘loss?’)
Thanks for your patience.
“Dribbling risk into the market makes sense if everything is good and continues to improve… But when you get yourself into a position where the Street suddenly feels they’re long inventory and the macro backdrop is weaker, now you’re selling into weakness.”
I thought the point of the story was that by dribbling into the market, the price was kept up, while selling larger-than-dribble amounts was driving the price down.
Given the legal difficulties of the underlying mortgages, the economic future of the middle class who pays them, and the future price of houses which justifies them, the risk premium on these has to be close to 100%. Investing in a sure loser might be a good Mel Brooks musical, but is strange out here in non-investor reality.
Yeah. I keep re-reading explanations of CDSs, and still can’t figure out why anyone was willing to write them. A lot of them seem to have been written on things that the rating agencies didn’t give AAA ratings to. I thought everyone knew good insurance has a high cost. If someone wants you to guarantee the value of something won’t go down, why would you want to do that for a small price? I think I’ll take another look in the Tanta archive over at Calculated Risk.
Commodities way up (although oil is dropping), credit market tightening, possible massive legal problems with TBTF financial institutions
Dow dropping and nasdaq dropping
is this a crash all over again?
If selling these assets is making the markets unstable, why doesn’t the government just sit on them and stop selling/auctioning?
Commodities as transportable/stored/risk arb et al, yeah silver got its treatment (poor people get no breaks), gold slowing due to rarefied air, leaves stones last in queue.
The jewelry artisans I know have commented on diamonds move from 1500ish AUD December to now 1700ish AUD w/ a perception for an increasing up swing.
Skippy…if rocks go parabolic…talk about omens.
Skippy;
Considering just how truly monopolistic the diamond trade is, isn’t this evidence for a guild attempt to move the brand along rather then true value?
On a lighter note: aren’t you suggesting the rise of a new commodities bauble?
Yeah, funny things white rocks eh…history (shudder). Still they are the most easy to transport>>>mass to value/price/acceptance.
Guildiness and all, its a narrow market for mid/top self investment grade stuff.
Skippy…Just another sign post on the road to weirdness I guess.
Skippy;
You haven’t been to Ricks Cafe Americain lately have you? Just the other night I overheard one of the ‘buyers’ tell an older couple, “Diamonds are a drug on the market right now.” So, yes, if gemstones go parabolic, the correction can’t be far behind. The Queen Mother of all corrections.
I hope you didn’t get caught with your shorts down playing silver.
Last things on my plate phy Gld w/ more in the ground (perpetuity thingy), had Slv from days gone by but liquidated at peak (all luck), that leaves the my betters stuff and she is a aficionado of stones placed by artisans….soooo, its only the good stuff.
Personally I don’t care about the relative price, more into future value…cough usage…moving forward, off grid stuff.
Skippy…white D is nice but pink D instead, gets me ….lol.
Skippy;
Good For You!
As for white D and pink D, I find they’re all Four D, great for fertilizing a big old crop of Love! “Anita Loos, your agent is calling!”
If only I were a gentleman!
Skippy…half on a good day, I blame the cordite.
This is healthy, its forcing the clearing price on the market. Keep in mind the euro banks still have this stuff as well and have been sellers and this is moving faster. So its not really mis-priced, I think much of what was sold was higher than AIG’s bid for all the assets. But, sometimes its better just to take that bid for the whole, large piece. When a large amount of bonds needs to pass through the market it can have a big impact on pricing at the margin. So this week a portion of the m lane auction failed and now that AIG bid is looking better and better.
This will go away and in the end the assets may (or may not) get sold for more than the AIG bid but this and the Dexia/ euro bank sales put a pretty dent in the cmbs market.
Let me recomend cmbs REIT’slike cxs are getting cheaper as a result of the way this sale was handled…might as well amke a couple bucks of a mistake.
I suppose we should fasten our seatbelts as the beginning of “mark to reality” will now bleed from the real economy into the fictional shell game we have that once passed for a financial sector.
It may be a very bumpy ride. I suspect things are going to get a lot worse before they get better.
In my private efforts to understand MBS and other asset backed securities I was stunned to learn that the trusts I looked at used “gain on sale” accounting of the mortgage value. Gain on sale accounting for a 30 or 40 year mortgage! How was that fictional (predicted value) legal?
That means, if I understand it correctly, that they got to book the sale price of the house before it had collected any of the payments. Some of the trust prospectus’ even stated that it would be 7 or 8 months before the cost of securitization would begin to yield sufficient residual income to cover the costs of the origination and securitization.
So all up and down the real estate food chain there were perverse incentives to RECORD a fictional inflated price for the “asset.”
And some of these people were the highly paid so-called experts with long experience in the industry. And they were the closest to the raw economic risk data, the raw data that showed rising fraud, an absurd ratio of price/median income, and suspicious capital gains on properties held for only a shor time. And that’s just to name just a few obvious indicators of an unhealthy market.
Dear PAN;
You’ve just reiterated the chain of events that created the Enron disaster. “Smartest guys in the room,” my a__e! As for the ‘bumpy ride’, Jamie Dimon’s no George Saunders. Not even Tom Conway.
Paying Attention Now said: “So all up and down the real estate food chain there were perverse incentives to RECORD a fictional inflated price for the “asset.””
What do you mean by the past tense “were”? The food chain is still in place with the same incentives…..wink, wink….nod, nod.
AIG r crooks they screwed me out of my insurance money when the lady hit me from behind
”
in the first quarter, less than forecast.
“Dribbling risk into the market makes sense if everything is good and continues to improve,” said Ashish Shah, the head
”
Depends what you after! You can dribble risk when you trying to slow things down. When you trying to make prices hit bottom for definitive capitulation that will end all capitulations. Is that exactly what we now need to get World back into gear of upswing?
I’ll tell you when the de facto powers will detonate capitulation. September 2012. Timed to re-elect. Timed to perfection.
Incumbents win again
!