"No one in the market knows what to believe any more"

Another day, another set of rules to play by in the mortgage bonds market:

Nov. 12 (Bloomberg) — Residential and commercial-mortgage backed bonds tumbled after Treasury Secretary Henry Paulson said the government no longer plans to buy devalued mortgage assets, credit-default swap indexes suggest.

All 24 of the ABX indexes tied to subprime mortgage bonds fell to new lows, according to Markit Group Ltd. One of them, known as ABX-HE-PENAAA 07-2 linked to AAA rated bonds created in the first half of 2007, dropped 8.4 percent to 41.83. The level suggests the bonds might fetch about 42 cents for each dollar of balances.

 

While losing the government as a possible buyer hurt prices, the lack of direction by the Treasury department is causing problems as well.

The government’s exit as a potential buyer added to confusion that’s deterring investors in the bonds.

“No one in the market knows what to believe any more,” David Castillo, a senior trader of structured-finance bonds at Further Lane Securities in San Francisco, said in an e-mail today. “Things change on a daily basis.”

While many, [including this blogger] feel the new plan is an improvement over the old one, Paulson’s flip-flop may not set well with everyone:

His remarks are an acknowledgement that the pitch he made to Congress for the bailout hasn’t delivered what was promised. Paulson sold the Troubled Asset Relief Program as a way to rid bank balance sheets of illiquid mortgage assets, and he may encounter resistance from Congress for the remaining $350 billion after using most of the first half to buy bank stakes.

Lawmakers will “put his feet to the fire,” said Kevin Petrasic, a former official at the Office of Thrift Supervision, now an attorney with the Paul, Hastings, Janofsky & Walker law firm in Washington. “I’m not sure how you get around dealing with what is clearly the congressional intent.”

This apparently doesn’t deter Paulson:

Paulson said he has no regrets for the revised plan. “I will never apologize for changing a strategy or an approach if the facts change,” he said.

The fact is, what changes the most is Paulson. There will never be stability in the financial markets as long as the Treasury and the government fail to demonstrate that it has a long-term strategic plan.  With the government playing financial "Whack-a-mole", skittish investors aren’t going to want to play.  No one wants to be the one that is hit on the head with a hammer.

 

 

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3 Comments for this entry

  1. John M. says:
    November 13, 2008 at 7:43 AM

    twist -

    BL’s since weighed in with another story (BNP is France’s largest bank):

    “Paulson’s TARP Reform Spells Return of Systemic Risk, BNP Says”, by Abigail Moses, Bloomberg, November 13, 2008.

    Treasury Secretary Henry Paulson’s decision to abandon the purchase of toxic mortgage-linked securities under the Troubled Asset Relief Program may trigger a return of systemic risk to credit markets, BNP Paribas SA said.

    “Substantial risk still remains within the U.S. financial system,” said Rajeev Shah, a London-based credit strategist at BNP Paribas.
    …

    “Uncertainty about existing troubled assets could lead to increasing systemic risk.” Residential and commercial-mortgage backed bonds tumbled after Paulson’s about-turn on the TARP program. All 24 of the ABX indexes of credit-default swaps tied to subprime mortgage bonds fell to new lows, according to Markit Group Ltd. One of them, known as ABX-HE-PENAAA 07-2 linked to AAA rated bonds created in the first half of 2007, dropped 8.4 percent to 41.83. The level suggests the bonds might fetch about 42 cents for each dollar of balances.

  2. freemonster says:
    November 13, 2008 at 7:52 AM

    The AAA rated bond down 58% sure sounds bad. The daily news about all the confusion sounds worse. Twist, I nominate you to replace the idiot Paulson immediately. If that doesn’t fly then we have to wait 9 weeks to see this guy go bye bye. Hopefully we can get an unbiased plan pushed through before we go completely broke as a nation. Scarier by the minute

  3. John M. says:
    November 13, 2008 at 8:51 AM

    freemonster -

    Maybe my joke about Alt-AAA Agency Debt wasn’t so funny after all.

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