With a shout-out to Jill, and a big “thank you” to Zach and Jody, I’ve been asked to opine on the latest round of Fed liquidation of Maiden Lane II. For those who wonder what the innocent-sounding Maiden Lane series might be, those are the taxpayer funded “financings” of the AIG mess and the Bear Stearns subsidized takeover.
I’ve been wondering, along with the rest of the market, what Goldman paid for the bonds. Jody Shenn at Bloomberg is on the case, and so far he’s only been able to determine that most of the bonds are still at Goldman. A day later, I’m happy to report that Jody is now up on Bloomberg with his article about it. Sometimes letting a blog post “age” overnight before publishing has its benefits.
The good news, if you want to call it that, is that the Fed figures this sale will complete paying off Maiden Lane II.
There is that open question: At what price?
A cynic would say that the taxpayers just got out with a minimal return and Goldman got to buy cheap bonds after the worst of the subprime storm was well and truly over. We warehoused the inventory, and then they got to pick what they wanted at a bargain price. Such a deal. So call me a cynic.
I’ve been more interested in how the liquidation game has been played. It seems that the major players take turns putting up “stalking horse bids” for chunks of the Fed’s portfolio, and then the Fed responds by holding an auction to which only those major players are invited. Possibly to maintain some appearance of propriety, the winner of the auction is usually some other player than the one that kicked off the process by making a bid.
When we throw in the news that a pair of CSFB derivative mortgage bond traders were so colossally stupid as to mismark their positions and talk about it in company e-mails and on recorded phone lines on the trading desk, we see that the question of price is quite easily manipulated.
That’s my main gripe with all the “hero” stories out there about the hedge funds that made a fortune off the meltdown, and my gripe with their mouthpieces in the press. During the height of the panic, some of those hedgies were short in size in the Credit Default Swap (CDS) market, especially in the visible published index called ABX.
Some of those reporters dutifully reported that investors were considering suing any auditor that used any prices other than the ABX to set portfolio values for banks or investment funds that held mortgage bonds. That was probably one of the main drivers for the unprecedented speed and viciousness of the US housing market’s decline. After all, a score of other economies around the world had objectively higher housing costs. But they didn’t have the same kind of apocalypse the US did. What those other markets didn’t have was the leveraged casino of the CDS and its ugly public face, the ABX index.
There are now academic studies that prove the prices were WAY too low for the ABX, but that happens in any market where there are only sellers, doesn’t it? Especially if the “natural” buyers were forbidden from taking a position.
I wrote about the crazy nature of the discrepancy in my book, Mortgage Market Mayhem. The hedgies were getting many times the leverage being offered in the cash market, and they took advantage of it by placing bets that were up to 100 times the size of that cash market. In essence, they set themselves up to multiply the losses in the mortgage market BBB bonds by orders of magnitude. When those losses were realized, the taxpayer paid at far higher prices than the market would have dictated. The AIG disaster was almost entirely synthetic bonds, and the full face amount payments the government made to those big banks were mostly passed through to the hedge funds that were the “heroes” of books like The Greatest Trade Ever. When Michael Lewis added to the public love fest for the vultures, I couldn’t help writing that muggers aren’t heroes.
Just because it’s in the paper or on the internet doesn’t make it true. In fact, you should probably be twice as suspect when your politics agree with your source, like all my politically conservative friends that swallowed the big lie that Fannie, Freddie and Barney Frank caused the meltdown.