Non-Agency Mortgage Bonds Collapse

Bloomberg is reporting Non-Agency Mortgage Bonds Fall Amid Selling Concern.

Subprime, Alt-A and prime-jumbo mortgage securities reached or approached record lows this month as forced asset sales contributed to the decline in values.

Prices dropped to the "hi-teens to mid-20" cents on the dollar last week on the least protected types of originally AAA rated 2006 and 2007 bonds backed by Alt-A loans with five years of fixed rates, according to a RBS Greenwich Capital report yesterday. The bonds were at the high-20s to mid-30s in early September. "Super-senior" bonds fetched in the "mid-50s to mid-60s," down from 60 to 70 cents, according to the report.

Non-agency mortgage bond prices have also fallen along with optimism about the $700 billion U.S. financial-market rescue plan signed into law on Oct. 3, the report said. Enthusiasm dimmed because the program began with capital injections into banks, instead of mortgage-asset purchases, they wrote.

Super senior securities from 2006 and 2007 created out of pools of "option" adjustable-rate mortgages dropped to 53 to 55 cents on the dollar last week, RBS said, as other types of initially AAA rated debt created from loans with growing balances were in the "low" or "very low" 20s.

The securities fell from 58 to 60 and the "mid-20s," respectively, in early September, according to an RBS report then. Super senior bonds are the types offering investors the most protection against defaults among the underlying loan pools.

Less protected top-rated securities from the past two years of prime-jumbo loans with five years of fixed rates traded in "hi-40s to low 50s," up from the "hi 30s/low 40s," while super-senior AAAs fetched in the "low to mid-80s," down from the mid-80s, the report said.

"It's actually underreported how bad" demand for loans that can't be packaged into those securities has become, he said. Issuance of subprime, Alt-A, and prime-jumbo mortgage bonds fell to $11 billion in the first nine months of this year, from $605 billion a year earlier, according to newsletter Inside MBS & ABS.

Paulson Plan Under Review

Remember the original Paulson plan before it morphed into plan B, then plan C? The original plan was going to waste $700 billion in taxpayer money buying "Top Rated" mortgage garbage at whatever price Paulson wanted to pay.

We were told that taxpayers would make a profit on this. Of course anyone in their right mind knew that was nonsense but it did not stop every lout on CNBC from touting the fine benefits of the plan.

Now most of the first $350 of the $700 bailout has been spent and we see what those "Top Rated" securities are worth: 18 to 30 cents on the dollar.

Supposedly the original Paulson plan was needed because otherwise the stock market would crash. Well it crashed anyway, along with the global economy. So Paulson went with plan B (a hodgepodge of disjointed ideas) to fully embracing plan C, recapitalizing banks so they would have more money to lend.

But a funny thing happened to plan C. Instead of buying mortgage backed securities, or lending, taxpayers are funding bank dividends and bank mergers. With that, the New York Times floated the ridiculous idea that bank mergers were Paulson's plan all along.

The idea that Paulson and Bernanke are doing anything other than grasping at straws in a tornado is silly. I said so in NY Times Lending Conspiracy Madness.

New York Times Theory

• Paulson asked for taxpayer bailout money explicitly to get banks to merge.
• To cover up his tracks, Paulson changed his mind three times on how to spend that money.
• To guarantee the merger outcome, Paulson called all the big banks in a room, forced them to take loans at a rate that would ensure they would not want to lend it, but instead would want to use it in mergers.
• Prior to the above three points, the Fed embarked on a series of lending facilities cleverly disguised to make it undesirable for banks to lend to each other or for anything else, while purporting to do the opposite.

My Theory

The economic constraints and poor policy decisions by the Fed and Treasury make mergers a better alternative than lending money or sitting in cash.

Fed Becomes Lender Of Only Resort

Each of Bernanke's vast array of lending facilities is causing an unwanted side effect somewhere else. And by competing against the banks it wants to lend, the Fed is guaranteeing it will be the lender of only resort.

That is just one reason not to lend. Here are more:

• Rising unemployment
• Rising credit card defaults
• Rising foreclosures
• Rising bankruptcies
• Massive overcapacity
  
• The TAF, PDCF, TSLF, CPFF, MMIFF, ABCPMMMFLF

Banks are supposed to compete against those facilities? In a backdrop of rising unemployment, rising credit card defaults, rising bankruptcies, rising foreclosures, and massive overcapacity? When the Fed keeps driving interest rates lower and lower?

Also note that Congress is pressuring Fannie Mae and Freddie Mac to lend more, and at terms that are going to cause defaults to rise at Fannie and Freddie. Banks don't want to compete against Fannie and Freddie either.

And so non-agency mortgage bonds are collapsing. Agency mortgage bonds would be collapsing too if the Treasury had not guaranteed them.

Pigs at the Trough

And now insurance companies, homebuilders, auto manufactures, banks, brokerages, state governments, and everyone else is lining up like pigs at a tough asking for a handout.

One big irony in this mess is that some of the banks receiving taxpayer money do not even want it because the terms are too high. See Compelling Banks To Lend At Bazooka Point and Treasury Crams More Money Down Bank's Throats for more details on who was forced to take what money and on what terms.

So $350 billion has been wasted and it did not accomplish a thing. Now Congress wants to throw another $300 billion "stimulus" down the gutter. It will be a waste of another $300 billion if they do.

Money is being diverted from productive uses to non-productive one and the number of wasteful ideas grows by leaps and bounds. Every day someone sends me an idea to get the economy humming. The latest one yesterday was to give everyone a tax credit but only if they spent it before year end. The idea is so ridiculous that Congress will probably consider it.

No one bothers to figure out that aggregate spending will collapse once again as soon as the money is wasted or that such ridiculous proposals will divert money from productive uses or paying down debt to frivolous spending.

Frivolous spending was the problem, so promoting more frivolous spending to stimulate the economy cannot be the solution.

The sad story is no one in power has learned a damn thing from the Great Depression, and that includes many highly respected economic professors. In the final analysis, the more money Congress, Paulson, and Bernanke waste attempting to stimulate demand, the lower the stock market will fall.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List