Saturday, January 22, 2011

Mortgage-Bond Math Really Means Everyone is a Winner

Another letter, this one real. Perhaps the title should end with "Everyone (that was a loser) is a Winner."

Dear Mr. Weil,

I enjoy reading you regularly. The title "Mortgage-Bond Math Means Everyone is a Winner" would be apropos for a contrary look of the same topic. (Click here for the original article.)

First, Bank of America yesterday joined JP Morgan in revealing that they are expensing undisclosed amounts related to the putback and broader private mortgage securities demands into a "litigation reserve" account. This is what reminded me of your article published in mid December.

But perhaps more significantly, banks have sustained large write-downs on their counterparty exposure to the monolines. B of A mentioned in their call yesterday reducing exposure to monolines in their FICC unit, suggesting they are no exception. Given the credit leverage in the bond insurance business, such exposure could be very large. This means that a commutation settlement could result in both sides declaring accounting victory despite the mismatch you have pointed out. For the same reason, banks could pay out substantial sums but receive a net-benefit if the perception of MBIA's credit quality improves markedly as a result. Though this offends logic, such is the intersection of market and accrual accounting in this case.


Mark Tapley

P.S. I'm going to blog this here:

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The Morgan Stanley example of this math has been posted here.

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