Ok the inevitable is finally happening. Companies like Countrywide that originated and packaged horrible mortgages as investment grade securities are now getting a fresh wave of big indigestion. The managers and institutions who bought the junk (including the NY Federal Reserve and Freddie Mac) are now filing to 'punt the junk' back to them. The issuing docs all provided for this “put-back demand” if it was ever found that the originators breached representations and duties in originating the mortgages. Read the whole legalize letter that was sent yesterday to Countrywide and company from the claimants here.
“…the presence of two names on the list of complaining bond buyers was truly terrifying: the New York Fed and Freddie Mac.
Top Wall Street executives had assumed that the government agencies would not be on the other end of put-back demands, according to my sources. They believed that their put-back exposure would be limited to private market buyers of mortgage-backed securities. The far larger portfolios of securities owned or insured by the Fed or government-sponsored entities were assumed to be safe from put-back demands.
“The universe just got a whole lot bigger,” one executive said.
What he means is that the “universe” of potential liability is greatly expanded, if the Fed and the GSEs start demanding that banks repurchase the mortgages they included in residential home-loan securitizations.
“We thought the government wouldn't come after us on these things. It bought them to stabilize the financial sector and the housing market. Going after us would undo both those things,” one executive explained.
But with Freddie and the New York Fed, through its Maiden Lane operations, on the other end of the Bank of America put-back letter, the assumptions are changing. The losses from residential mortgage-backed securities (RMBS) repurchase obligations could grow to staggering levels…”
See: Why the Bank of America put-back demand has Wall Street freaking out.
The rats will now all fight each other to the death. Interesting to see how they settle this one.
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Many analysts seem to be shrugging this off, saying that they don't think it's going to be a big deal and judging by the market's reaction today, most investors feel the same way!
I've been following you for quite a while now and I agree with your opinions on how we are setting up for a great fall but it is very frustrating holding off participating in this market when it seems no matter how bad the news is, stocks keep trending higher!
I have the same comment as above. Danielle, can you please rationalize with me why someone would want to invest in the stock market. I am not necessarily a conservative person but it sure seems like gambling/speculating to me. Despite poor fundamentals, the markets shrugs off bad news (usually turning it into a positive and takes off). I have a hard time 'investing' hard earned money into something that is way beyond my understanding as the markets seem to be manipulated for lack of a better word by financial media and big financial institutions. What's a guy to do?
I have not said that you have to stay out of the rally if your rule set allows some of your capital to be in. That said, lasting success in secular bear markets can only be had with a trading method and not without a very tight set of pre-defined buy and sell rules. If you lack a proven system, nerves or interest in trading (most do), I suggest that you are better to stay out even though the rally may go on longer still. The point is that fresh lows ahead would be a normal part of this market climate over the next few years before we get to the start of the next secular bull. It is not easy to make money in a secular bear in stocks, and especially when interest rates have been forced down to 100 year lows at the same time. This is a very challenging time to be trying to “invest” in public markets. Best plan is to get rid of debt, and build up savings now so that you will be one of the few that are ready and able to buy later when tides finally turn and prices finally bottom. I know it seems impossible to believe that this crazy time too shall pass. But it will, and those that are ready for the next secular shift will be ideally positioned to take advantage. Those that are still holding and hoping through this phase will be too beaten up, broke and angry to seize the best opportunities that lie ahead. Sometimes if you are searching for a gem and all you find is trash you should just take a break, and wait for the gems to come to you. Patience is a virtue in this, no question.