I just saw this comment on dealbreaker.com, and I find it interesting. What do you guys think? ------------------------------------------------------------------------------------------------------------------- “That 700B is just a sovereign wealth fund. As long as they don’t pay crazy prices, the US Treasury is going to make a tidy profit because they are borrowing at the risk-free rate to buy distressed assets. The same is true for this commercial paper facility. Right now the Fed can borrow at ridiculously low rates through the Treasury and they are making very low risk loans to corporations at a penalty rate. What a business. We are finally at price levels where FNM and FRE should be supporting the mortgage market. $40B a month is nothing, but if they are paying even 20% below the real FV, that’s $8B / month in potential profits for those two. Sure, this is the government and they are likely to screw it up somehow, but it’s a good gamble for them to take. If they stabilize the market these asset prices will rise and they’ll look like heros and if they don’t, well the US will just have to renege on its debt.” ------------------------------------------------------------------------------------------------------------------- I am not sure if he is right (actually I am not sure of anything these days), but I sort of agree. It seems like everybody is assumming that the value of all the “bad assets” is zero. I guess that will be true for a lot of tranches of several cdos and stuff like that… but buying residential or commercial MBS at such a discount… even if it is subprime… you have to assume that the percentage of defaults is going to be extreme and that the estimated value of the houses behind is like ridiculous… I have a very low knowledge of this kind of securities, so sure I am missing other negative aspects of this, but I am starting to be more bullish about this whole thing. What do you think?
“In the long run, we are all dead.” John Maynard Keynes
It’s really amazing to me that on the one hand I hear all kinds of sanctimonious pronouncements about EMH and then hear all this stuff about how the gov’t can buy these securities at “even 20% below the real FV” (by which I think he means PV or his argument is really screwed up because I will sell him all the zero coupons bonds he wants with no credit risk at 25% below FV). These securities are for sale. You can buy them. Warren Buffett can buy them, but for some reason, Warren thinks he probably shouldn’t. The probability of losses on these MBS is high, the tail is really long and negatively skewed, and in a depression they are trash.