Counterparties: Jumbo shrimp

By Peter Rudegeair
March 21, 2013

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Resurrecting asset classes that fell out of favor after the financial crisis is all the rage this week. First, there was the news that the synthetic CDO market has risen from the dead (kind of). Now, we learn that JP Morgan is selling a small new batch of mortgage-backed securities, the first such transaction from any of the biggest banks since the financial crisis.

Some characteristics of JP Morgan’s new offering are reminiscent of crisis-era securities and have drawn skepticism from credit raters and investors. Specifically, Fitch was concerned that the deal was “significantly diluted” by weak guarantees the bank made about the quality of the 752 underlying loans. This prompted David Reilly to warn that even though underwriting standards have tightened in recent years, the lesson of 2007 and 2008 remains: “investors shouldn’t quickly or easily give up their right to seek redress.”

Maybe that explains why the loss buffers on JP Morgan’s offering are greater than similar deals brought recently by smaller issuers. That feature, says Houman Shadab, is “probably ultimately more valuable to investors” than putback rights.

Moreover, as Matt Levine says, the loans underlying this bond are jumbo mortgages to high-quality buyers with an average loan-to-home-value ratio of just 65%. On top of that, all the loans were examined by an independent reviewer. That’s a far cry from the bubble-era no-doc loans with loan-to-value ratios in excess of 90% and sometimes even 100%.

Whether or not investors should jump back into the private-label RMBS market right now, it’s still far too tiny to be of much consequence to the overall health of the financial system. The market is still small: only $13 billion in non-agency mortgage debt was issued in 2012, or about 1% of the equivalent figure in 2005. At some point, the private sector is going to have to get back into the mortgage game. But for the time being, it’s a bit player. — Peter Rudegeair

On to today’s links:

Alpha
PIMCO’s new investment strategy: direct property purchases – Reuters

EU Mess
Cyprus is the “sum of all FUBAR” – Paul Krugman
“We have never seen this”: Notes from European officials’ crazy conference call on Cyprus – Reuters
Statement from the Eurogroup President on Cyprus – Eurogroup

The Fed
“You can thank Ben Bernanke that we are not in a global depression” – Stanley Fischer

Quote Of The Week 
Lululemon CEO: “The only way to test for the problem is to put the pants on and bend over” – WSJ
All the best worst Lululemon puns in one post – Business Insider

JPMorgan 
Jamie Dimon, inequality crusader? – Louisville Courier-Journal
JPMorgan’s management rating secretly downgraded by regulators – John Carney

Wonks 
We can mostly blame old people for our deficit problems, not higher healthcare costs – Ezra Klein
Income inequality in America is increasingly permanent – Ryan McCarthy
Why it’s time for balanced-budget stimulus – Robert Shiller

Niche Markets 
The rise of the Amish romance novel – LA Review of Books

Says Science 
Children are awful to each other – NPR

Whoops 
Stan Chart CEO corrects himself: we definitely committed “knowing and willful criminal conduct” – Reuters

Real Talk 
“Profit margins are probably the most mean-reverting series in finance” – Climateer Investing

TBTF 
Hilarious: An idea for a TBTF ETF – Barry Ritholtz

Bubbly 
A PE firm is investing in an “innovative” partially-popped popcorn company – Fort Mill Times

Oxpeckers
David Grann explains his excellent Twitter account – The Awl

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