So if you’re a bank, told to write down $5 billion worth of mortgages (your “share” of the total) and given discretion as to which ones you write down, on which loans do you “write down” the principal?
You write down those on which you hold a second, because it increases the value of the second in actual terms on a dollar-for-dollar basis!
Note that this does not change the balance sheet numbers, since you’re already claiming that these loans are good when they are not. But it does help to “rescue” your bad paper. This would be a circle-jerk and of no consequence if the funds for the write-downs were coming from the banks. But they’re not — they are instead largely coming from Treasury, that is you and I as a taxpayers, via HAMP and HARP.
And who’s going to take it in the ass?
The bad news is that the paper holders will take it in the back door again. Not so much by defaults, but rather by prepays into a world where the only replacement paper yields half of what they were getting before. Since the major holders in the US of this paper are pension funds and insurance companies, all we’re doing here when you analyze this on a macro-level balance-sheet basis is creating a detonation in pension funding a few years out. I’ve been talking about that too for a while, but once again nobody wants to hear it, and I’m sure in five or ten years when all these pension funds blow sky high we’ll be told once again “nobody could have seen it coming.”
The banks that service about half the nation’s mortgages on behalf of investors will be able to share losses on their junior loans with bondholders and get credit toward the cash they pledged to spend in the settlement, said an Obama administration official involved in drafting the $25 billion agreement. Second liens would typically be wiped out before senior-mortgage investors take a loss, said Laurie Goodman, managing director at Amherst Securities Group LP in New York.
It’s “a gift to the banks, at investors’ expense,” said Goodman, a member of the Fixed Income Analysts Society’s Hall of Fame. “A proportionate write-down of the first and second represents a reversal of normal lien priority.”
There it is.
Incidentally, if you didn’t parse the above completely, let me do it again — it is you who will get the short straw on this. Your insurance premiums will be going up and your pension funds will be going up too — up in smoke, that is.
Thank President Obama and that little weasel Geithner for this. This is entirely, 100%, without exception their personal responsibility.