Agency MBS Hammered – PIMCO Begging For ANOTHER Bailout!

Posted on September 18th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

It seems like only yesterday Fannie and Freddie failed and they were taken over…actually it almost was.  Everyone cheered for days how helpful this would be for mortgage bonds and mortgage rates alike. Speculation abound that this was the needed ‘fix’ for the housing market. Of the largest voices was PIMCO.  Well, it may have lasted a couple of days but now things have fallen apart again much like I speculated may happen a few weeks back in my ‘Final Thoughts Before the Market Decides’, post.

Now PIMCO is back at it. A few weeks ago Paul McCulley and Bill Gross were heavy on the media circuit threatening Treasury to rescue Fannie and Freddie and their sub and senior debt or ‘ they and their investors’ would boycott buying any US debt.  After the bailout, they gloated for a week over how much money they made off the US tax payer.  Just two weeks later the tables have turned and they are getting creamed. 

Are Agency MBS holdings now being ‘marked by matrix’ or some other hypothetical means?

The reverting of Agency-Treasury spreads to pre-bailout levels exposes another dirty secret on The Street. There are so many sellers of agencies on the Street that dealers, no doubt under executive management direction have dropped bids and expanded bid offer spreads.

The media and quote services are showing unrealistic prices. A week ago we sold FHLB 2-year notes for an an account we manage at 99.925, the best bid we could find. Bloomberg quoted them at 100.54. How many funds and banks are marking their agencies at quote or matrix prices instead of transaction prices?

People are aware that hedge funds, banks and brokers unrealistically marked derivatives and other crappy paper. But most of the known universe is unaware that agency holdings might be unrealistically marked now because few people want to warehouse agencies these days.

Not only did PIMCO take a major hit due to Lehman and likely AIG but GSE spreads are back at wider levels than before the GSE bailout and mortgage rates are up.  Now, Paul McCulley is out there again this morning on CNBC begging Hank Paulson to ‘show his wallet’. He specifically said that Hank Paulson has to get out there and ‘buy GSE securities’. The following is the link to this mornings CNBC segment.

Agency Spreads Widen Dramatically – Seeking Alpha

Agency spreads have widened rather dramatically versus benchmark Treasury debt as fear grips even a market which, for all intents and purposes, carries the same risk as Treasury debt. The 2 year agency sector has widened 16 basis points versus benchmark Treasury paper. In the 5 year sector paper is wider by 10 basis points and in the 10 year sector bonds have cheapened by 8 basis points.The flight to quality trade which has engulfed the markets has also contributed to the widening spread basis in this sector.

Repo issues also impact demand as well as traders’ ability to carry agency paper. As I have noted earlier today, Treasury repo was anywhere from zero to fifty basis points today. Agency repo was around 2 ½ percent. If you fund your long at 2 ½ percent and reverse your short in at zero, you will soon be applying for a bridge loan from the Fed.

In general, balance sheet space is sparse and traders cannot hold positions. Six-month agencies appear very cheap. Discount notes trade around 2.60 percent. Six-month T bills trade around 1.05.

One trader also noted that the recent spike in volatility has made callable paper cheap. (When one buys a callable bond you are selling an option to the issuer. Consequently, expensive vol works to the advantage of the buyer of the bond.)

PIMCO was reckless and bet the farm early on distressed mortgage debt. Now, they have turned into a bunch of whiners spending all their free time using the media as a platform to threaten the regulators into making them whole at the tax payers expense.

We see this all of the time but nobody has been more vocal and sounds more desperate than PIMCO in recent weeks.  You saw what happened yesterday to the dollar/gold due to the US Gov’t printing more money. They want even more money now at our expense. Hey, its their job, I get it. But there has to be a point where throwing your brother under the bus to save your wallet becomes viewed as anti-American and not capitalistic.

The question if you are an equities trader is who owns the most GSE MBS debt on LIBOR floating repo credit? Ah, those M-REITS that have been relentlessly upgraded over the past week. – Best, Mr Mortgage

More Related Mr Mortgage Posts

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  • Fannie/Freddie – Massive Fraud Breakdown (32)
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  • Fannie/Freddie – The Game Has Changed. ENRON on Steriods (16)
    Posted on September 7, 2008 12:58 AM
  • Fannie/Freddie MBS: Have You Ever Seen One? Bill Gross Must Not Have. (18)
    Posted on September 6, 2008 5:12 PM
  • Fannie/Freddie…Now We Wait For Help or HELL (12)
  • 11 Responses to “Agency MBS Hammered – PIMCO Begging For ANOTHER Bailout!”

    1. When will we see your August foreclosure report, or did I miss it?

    2. I would not have picked Bill Gross as a whiner. I agree he has been manipulator extraordinaire the last few weeks. But perhaps there is more to this? Is PIMCO the next AIG? Are they signaling distress, or just trying to jerk more coin out of .gov?

      You mentioned they are under a triple threat: LEH, AIG and now MBSs. Maybe they are they big users of short term debt to juice their returns? I sold my PIMCO shares a few weeks ago. For while I felt really stupid, now I feel smart. Hold that thought.

    3. Your right, Bill Gross is only looking out for himself and not the country. Which I believe everybody on Wall St. is doing. .Gov should just step aside and let Wall St. go through what I like to call a cleansing phase. Every bail out so far has led to more severe crashes.

    4. Yo Dog, take a look at the Treasuries. The MBS paper is not out of line. It’s the financial economy that is falling apart as everyone rushes to cash and near cash secutities. The 3 month T pays nothing. Factor in inflation and ALL of these cash instruments are losing money. Says loads about investor expectations of the economy.

    5. Mark,
      You continue to provide the insight regarding the actions in the market. Without your thoughtfull explanations I would leave the headlines without an adquate appreciation of the impact and unintended consequences these financial moves are having.
      As Robin knows only too well (as your proxy recipient for my email spewings)many of us see eye to eye with you on the simple and basic underlying cause of this ever widening crisis.

      We all can agree that the global homeowner’s (includes me) bought more house than we/I could afford (for many,many reasons) and until we clear the market (forcibly or voluntarily) this debt/credit disease cannot be cured.

      Thank you again for the great service you provide us all.
      bscgovman

    6. OT – Here we go again, with the RTC….we’re going up, up and up. Once again, bottom is in again. Buy buy buy!

      If it still fail to convince the market. The next thing Heli-Ben and Hanky will do is suspend the freaking market. This time I believe they’ll call it the capital preservation.

    7. I’m back after a furlow b/c I don’t believe in negativity which is too prevalent on this site. Negativity never got anyone anything in life.

      But.. I just can’t resist after the results of today.

      The Republicans just gave the election to Obama! They have shown themselves to only be interested in covering their own financial asses at the expense of this country! Our national debt will skyrocket IF this bank bailout is approved!

      It’s so obvious. Instead of letting market forces punish those greedy AHs they are going to bail them out!!!! This is a travesty!!!!

      We need a revolution!!! And Obama is going to sweep the election. Just watch. McCain better divorce himself from this nonsense big time right know if he knows what’s good for him. I won’t vote for him if he doesn’t. I’ll stay home.

    8. Ambac and MBIA back in the news with the word downgrade attached… well this can’t be good. I have wondered where these two gems were hiding. Now I know… the old duck and cover. Well I hate to be the one to tell them, but with AIG backed and WaMu gone the news days will be slow. We all know what happens when the Wolf needs to keep eating… anything will do for the next meal!!!

      Enter the insurers! Ambac & MBIA your turn has officially arrived! I know, I know, you were rightfully mentioned, these days long ago, as a potential problem, but now you are one. Well at least the mob is looking at you with big eyes and an empty belly right now. Do you have what it takes to make a meal?

      I can assure you of this people, whoever is hanging by a thread will now be exposed. If for no other reason than to toss the bright lights of off themselves and onto anyone else. You best be strong or the Wolf will be eating you up quickly in these times. Kill or be killed is the new wall street mantra, and if you don’t beleive me then just ask some traders or better yet spend one day on the floor and you will see…

    9. Thank you for providing me with an education in common sense finance. I run my own finances a little differently than I did a couple of years ago, because you pointed out about all these problems coming. Got rid of most of my debt and working hard on the rest.

      Enjoy reading your posts on the net, even though some of it is still way over my head.

      I always get the answers I need from your conclusions though…………………..lol

      Enjoyed your youtube stuff as well……..

      Thanks.

    10. NO PROBLEMO. Everybody is being bailed out, except the taxpayer and the house owner. So long suckers ! This country is crap. It’s incredible. World reserve currency and this countr is like a south-american banana republic. No more shorts on banks. What’s next ? No bearish blogs on banks ? FREE MONEY. (but just for banksters).

    11. Looks like PIMCO gets what they ask for.
      Reuters: http://www.reuters.com/article/bondsNews/idUSN195214120080919
      FED: http://www.federalreserve.gov/newsevents/press/monetary/20080919a.htm

      MBS prices spiked this afternoon in a matter of minutes. I can only assume the Treasury and/or the Fed are to thank.

      I’m looking forward to your analysis…

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