Get me some of that subprime action!

One part of Baruch’s latest post concerned what after today may now properly be called “Mortgage Crisis II — The Evil Spawn”. I’m not referring to the foreclosure issue, that’s totally separate. I mean the bit where the banks knew that they were selling on dodgy mortgages — where they had done the due diligence and forgot to tell anyone they were selling them crap. We got the first case today. Pimco, the NY Fed, and others are suing BofA, and want them to take back $47bn of dodgy mortages they sold on. At par! It’s called a “Putback”, apparently.

Anyway, as you may remember from the post, Baruch made a joke! He wrote, concerning, as it may come to be known, Putbackgate (actually, Felixgate would be much better):

Certainly you would think a civil case would be worth a shot, and if proven, I can only imagine the settlements. I hope they remember to ask to have the checks made out in Yuan.

Baruch also wrote, and then deleted “I got to get me some of that sub prime paper” — on the ground that it wasn’t that funny. Honestly, I really did.

Incredibly, doing precisely that is the new real life trade on Wall Street! This crappy old mortgage paper trading at 40c on the dollar has suddenly found a new lease of life. Once you own 25% of a securitised issue you can, apparently, get to look at the books and find out just what it was the securitising banks didn’t tell you. You can get your own Clayton to look at the loans. And if you find a discrepancy, you hit the jackpot! Double your money. I dont think these loans are going to stay at 40c for long.

Pimco, according to the WSJ, had 63% of its main bond fund in government paper in July this year. Now it’s just 33%. They’ve been buying, among other things, mortgages, now 28% of the fund. Clever Baruch, with his little joke. But much cleverer is Pimco, methinks, for taking its sense of humour seriously, and thinking of a way of making money from it.



2 thoughts on “Get me some of that subprime action!”

  1. Too delicious. And I as a Pimco investor do hope to profit from this mess. In it’s own perverse way, the big stinking, broken-down mortgage engine could provide the retribution we all seek. Putbacks, the great avengers.

    Before you know it, Mozilo may even be forced to give up his tan.

  2. When the foreclosure debacle first erupted this trade looked ridiculous (who would now be so dumb as to make payments on their underwater mortgage?), but it’s starting to make sense. Reits which own this paper are rallying.

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