The banks’ cunning MBS plan

By Felix Salmon
July 2, 2009

Heidi Moore has 1,200 words on bank bonuses in The Big Money. But it being a holiday weekend and all, I know you can’t be bothered to read the whole thing. So here’s the shorter version:

All those bonuses can’t be coming from banking. But it turns out that the banks have been buying up billions of dollars of subprime mortgages, driving up their price. If they carry on doing that a bit longer, the market price will go higher than the price the banks have on their books, and they can then mark their mortgage book to market and report lots of lovely profits. What could possibly go wrong?

5 comments

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I like the last lines in her blog post:

“Even this year’s alleged record bonuses will probably be paid in illiquid, long-term stock that banks can pull back any time they like. Fake bonuses, then, for fake profits.”

Maybe for bonuses they should start using those little colorful bills that come with the Monopoly board game.

Posted by Bryan X | Report as abusive

Mortgage back securities are already mark to market (the loans aren’t). MBS price overshot on the downside at the beginning of the year (like securities in every asset class). As such, it is only reasonable that there is bounce back for MBS (just like very asset class).

The relief of bank solvency question powered the financial stocks last quarter. MBS will probably power financial stocks this quarter. Hopefully, improving economy will power next quarter.

Posted by silly things | Report as abusive

only a fool could believe that subprime MBS will be the root cause for any earnings power by financials in Q2. MBS of the highest quality has been down-trodden, which makes that yield arb a little easier to believe. and as Pimco keeps saying, shake hands with the US govt & make them your trading partner (until they try to command your bonus pay-outs, of course)

Sub prime is a sinkhole, and fortunately another 2 years there’ll be dramatically less of it than at the peak in 2007 (moreso from default as opposed to voluntary refi)

Hmm…fire people, temporarily reduce VAR, profit levels stabilize as underwriting becomes profitable again, pay goes up. 100% Believable

Posted by Griff | Report as abusive

Am I the only one feeling very uneasy about the middle men (the banks) making more profit (again) than any other industry? I am not sure what to do about this — and I don’t even know if anything can be done, but this just strikes me as a sign of an inefficient economy. The investors lose or make little, the invested (companies) lose or make little but the middle men are back on top again. I have a really bad feeling about this.

Posted by kman | Report as abusive

“the market price will go higher than the price the banks have on their books”

Then they short them, dump them and make a fortune.

Posted by Tommy Vu | Report as abusive