Financial Engineering Bad Mortgages
The markets have been signaling "something" these days... Economic pundits are attributing the US stocks and dollar's new strength to the US taking the lead in pulling out of a global downturn that hit the Asian and European markets later than the US. And the bears still consider the new optimism sucker rallies, believing that the credit crisis' tipping point has already been reached and the dominoes are lined up to eventually knock over credit card companies, and subsequent relentless recession.
The most auspicious market signals are those that portend big money movement from private, even hidden players:
John P. Grayken made a fortune buying investments no one else seemed to want during the savings and loan debacle in the early 1990s. Now he is trying to repeat that feat by buying the detritus of today’s mortgage crisis.The fact is brand name financial institutions like Merrill are in the process of cleaning up their books, the faster the better. The markets treat these deals kindly, and the whole financial sector is boosted. Compare today's economic sentiment with one month ago when oil futures were cresting at $147/barrel, the weak dollar threatening a death spiral of inflation, and the pundits were speculating on a list of banks (and Freddie/Fannie) teetering on the edge of insolvency. Nowadays, only oil price rises (which have been rare days) and death threats about the state of financial institutions send the stock markets downward.On Monday night, Mr. Grayken’s private investment company, Lone Star Funds, agreed to pay $6.2 billion for most of the toxic, mortgage-linked investments held by Merrill Lynch.
The deal was classic Grayken: Lone Star, which has a long history of swooping down on troubled assets, paid 22 cents on the dollar for investments with a face value of nearly $31 billion. Mr. Grayken’s firm even got Merrill to finance 75 percent of the purchase price. If the investments turn out to be worthless, Merrill not Lone Star, will be on the hook for most of the losses.
As Wall Street sized up the sale on Tuesday, the verdict among analysts was nearly unanimous: Lone Star drove a hard bargain.
Yes, today has its load of bad news - foreclosures up, retail inflation swelling - but the markets have discounted Global Armageddon and are pricing up a future based on stabilization.
For the folks at Merrill Lynch and the investors with The Lone Star Funds those transactions should be transparent at least to the deal makers themselves. The investors behind all of that Merrill Lynch debt should of had all of the due diligence documentation that supported the value in that debt completely organized inside of a Virtual Deal Room (VDR) or Virtual Data Room and then they should of made absolutely sure that the debt they were selling was properly exposed to all the qualified buyers/investors so that they may not have needed to sell the debt for only 20 cents on the dollar and finance the other 80 percent of the purchase as well. Personally I think that there is even more corruption taking place as they supposedly "clean up their books" by selling this debt off too cheap, screwing their own investors and selling this stuff to their buddies at LONE STAR or whatever other companies.
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Great point, Merrill's executives need new jobs and a financial cushion.
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great article, pat. you touched upon exactly the point i agree with - global stabilization in the larger perspective. there are still so many opportunities for the hidden guys to capture.
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Nice post Pat. So well in fact I had to do a double take to see if you were a Mortgage Planner!
Keep up the good work!
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"On Monday night, Mr. Grayken’s private investment company, Lone Star Funds, agreed to pay $6.2 billion for most of the toxic, mortgage-linked investments held by Merrill Lynch."
IMHO, this is definitely welcomed news for the market. They sold this CDO for 22 cents on the dollar. Look for these homeowners to get their loans modified, short refi's, short sales accepted at light speed.
No more marked-to-fantasy, as it's marked-to-market and the market can start flowing again.
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Exactly! A good sign when the private sector is marking to market without Fed help (i.e. Bear Stearns). Here's more to come in Sunday's news: Lehman reportedly in talks to sell $40bn in real estate assets
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Another winner, Pat. It's my contention, and has been, that we'll be looking back next spring pointing to this small group of toxic cleanup projects as the beginning of the long awaited U-turn.
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