Bear Stearns mortgages not a disaster, fund manager says
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Bear Stearns rides to the stock market’s rescue?
It did, in a sense, today.
Share prices rebounded at midday on a report that the government’s portfolio of junk mortgage assets acquired from defunct brokerage Bear Stearns in March isn’t the black hole that many had feared.
From Reuters:
A $30-billion Bear Stearns mortgage portfolio backed by the U.S. government is generating cash flow as expected, and could end up being worth more than its market value implies, the portfolio’s manager BlackRock Inc. said on Tuesday. Speaking at the Reuters Global Finance Summit, BlackRock President Robert Kapito said that ‘the cash flows are coming in very close to what we had anticipated from the very beginning.’
The upshot: Investors may be too bearish about the true value of many mortgage-backed bonds. The collapse in prices of those securities this year has been a major drag on financial companies’ balance sheets, triggering huge write-offs and forcing the companies to raise fresh capital.
If the Bear Stearns mortgage assets are producing decent levels of cash flow, BlackRock’s experience with the portfolio may raise new questions about mark-to-market accounting rules that have forced banks to value mortgage assets at market prices -- even when nearly everyone agrees the market is too pessimistic.
More from Reuters:
‘That’s become a very big issue in the market place, is that you have securities where the cash flow is coming in very close to predicted values, but the current mark to market, because of the illiquidity ... has been a big pressure on companies’ capital,’ Kapito said. As of the end of September, the market value of the Bear Stearns portfolio was $26.8 billion, compared with its original face value of $30 billion, according to a government report on October 23. ‘I would say that the cash flows on these securities predict a higher value than what is currently marked to market,’ Kapito said. When asked if the predicted value could be between the portfolio’s current market value and its face value, Kapito said, ‘somewhere in between there, yes.’
Then again, it may just be too early to know the real value of the Bear portfolio, with the economy sliding and mortgage defaults likely to keep rising.
In any case, Kapito’s relative optimism was enough today to keep the financial-sector index of the Standard & Poor’s 500 from closing at a new low. The index fell as low as 175.27, then rebounded after Kapito’s comments hit the wires. It finished at 179.83 -- still down 2.4% for the day, but just above the recent 12-year closing low of 179.22 reached on Oct. 27.
As I noted in this earlier post, Wall Street has worried that a plunge by the financials through their October lows could lead to another leg down for the stock market overall.