Saturday, June 02, 2007

Buying and Selling "Toxic Waste" Mortgage Bonds

Well, well.

Somebody has to do it, right?

Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds.At a sales presentation of the bank's CDOs to 50 public pension fund managers in a Las Vegas hotel ballroom, Jean Fleischhacker, Bear Stearns senior managing director, tells fund managers they can get a 20 percent annual return from the bottom level of a CDO. . . .

You could get 20%. You could also wind up losing the entire investment. Calculated Risk comments:

Your pension fund managers are buying "high yield" bonds that put you in first loss position on a bunch of junk bonds, and they are doing so on the risk-management "advice" of the people who are making a commission from selling those bonds.

The California Public Employees' Retirement System, the nation's largest public pension fund, has invested $140 million in such unrated CDO portions, according to data Calpers provided in response to a public records request. Citigroup Inc., the largest U.S. bank, sold the tranches to Calpers.

The General Retirement System of Detroit holds three equity tranches it bought for $38.8 million. The Teachers Retirement System of Texas owns $62.8 million of them. The Missouri State Employees' Retirement System owns a $25 million equity tranche

More comments from Calculated Risk:

I'm still not sure everyone is getting the picture here, so let's try this: the subordinate tranche of a subprime ABS/MBS is a "pig." With or without lipstick. The equity tranche of a CDO made up of subordinate tranches of a subprime ABS/MBS, mixed up with some other junk you do not understand, is a pig of a pig, distilled essence of pig, ur-pig, Total Ultimate X-Treme Mega Pig. Buying a B tranche of a subprime ABS is playing with matches. Buying the equity tranche of a CDO is playing with a blowtorch in the parking lot of the Exxon station while wearing a St. Lucia wreath on your head.

(St. Lucia's wreath had a number of lit candles on it. Don't ask me why. Look it up.)

And the GOOD news? Sorry. Not in this post.


Random10 said...

Calculated Risk (CR to his readers) spent a lot of time in proverbial “sausage factory” and it fun reading his outrage at the amount of “rotten meat” in the recent manufacturing of CDO’s. Product must be moved, however, and the old truth of the confidence game is that the sucker must bring their own greed to the table. Any professional pension fund manager that purchases a promise of 20% return gets what they deserve. Besides, there is a certain irony to relish in tax raised funds being “redistributed” back to the private sector.

Anonymous said...

You make another point.

If those are "fixed-benefit" retirement funds, that means that losses will be made up by increasing taxation to cover the difference.