Troubled U.S. financial institutions stand a better chance of profitably selling their toxic accounts to the government than they do selling them to investors in the financial market. Additionally, Hedge and sovereign wealth funds will likely find a way of selling these accounts to the government.
The U.S. government may well be their only buyer, at least in the near future. Many private investors are either making bottom-dollar offers or are unable to obtain loans that would enable them to buy.
Bill Goss, CIO and founder of Pacific Investment Management Co., predicts that the U.S. government will pay around 65 cents on the dollar for mortgage securities. Considering how low some private investor offers have been (between 20-30 cents on the dollar), it would probably be wise for today’s troubled financial firms to take the deal.
Beck also makes the observation that the firms that qualify for the government bailout can boldly buy risky accounts on the cheap, and then sell them to Uncle Sam for a quick profit.
Or, as former hedge fund manager Andy Kessler says, “Any time there is a big pile of dough, guys on trading desks will figure out how to make money off of it.”
Truer words were never spoken.
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There’s no arguing the fact that these are tumultuous, and downright scary, economic times for Wall Street. The outright downfall or restructuring of venerable banking giants Lehman Brothers, Merrill Lynch, A.I.G. (soon perhaps to be followed by Washington Mutual and Morgan Stanley) has been such a shock that it’s easy to overlook one important detail: with chaos and transition comes opportunity.
What was true for Lone Star Funds back in July is just as true today. As the titans of Wall Street begin to panic, they begin selling off their distressed assets at fire-sale prices. To be sure, a portion of these assets will never regain their worth, but at bargain prices of around 22 cents or less on the dollar, the complete package will likely end up netting a considerable profit for those investors wealthy and patient enough to hold onto them until the financial crisis (most notably in the housing market) passes. In short, distressed asset investment is a long-term game, not a churn and burn, get rich quick process.
Currently, the U.S. Government is planning to invest over two trillion dollars(!) in distressed mortgage assets from some of the nation’s largest investment banks. True, the purpose of this act is to avoid what many fear could become the next great depression. What this situation indicates however is the desperation to sell, or to seek assistance, on the part of many Wall Street institutions that heretofore would have been loathe to do so.
]]>Freddie and Fannie finance roughly half of the U.S.’s mortgage debt, and have been central players in the real estate market’s recent credit woes.
One plan, co-designed by Treasure Secretary Henry Paulson, is for Freddie and Fannie to undergo a conservatorship, which essentially gives government overseers legal control over both companies. Not surprisingly, each respective CEO will be removed (wonder if they’ll still get their inevitable billion dollar golden parachute rewards?).
A recent report by the Mortgage Bankers Association finds over 4 million U.S. homeowners behind or in foreclosure on mortgage payments for 2008. This is largely the fallout from “optimistic” loans given out to homeowners who lack the ability to pay them off. These sort of shenanigans have cost Fannie and Freddie a combined total of $3.1 billion between just April and June!
As significant as this situation is, it’s not without precedent: eleven federally insured banks have failed this year, and the government recently arranged the takeover of investment bank Bear Stearns by JP Morgan Chase.
It will be interesting to see how the U.S. government manages all these distressed mortgage accounts.
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