US housing market moves in mysterious ways


This week we were surprised by two stories on the US housing market and more specifically on one of its less appealing features : home foreclosures. A first story line focused on the amount of legal mistakes made by banks during foreclosure processing. This became known as the robo-signing scandal, or the practice of a bank employee signing thousands of documents without verifying the information thoroughly. Some reports last year revealed that 1 bank employee managed to perform the Herculaneum task of signing off almost 10,000 foreclosure documents in less than 1 month time !! When this news leaked, 4 major banks – JPM, BofA, Ally Financial and Wells Fargo – called a halt to foreclosure actions in 23 states. Then came a coalition of 40 attorneys general plan, a sort of class action against the banks’ procedures. Last Thursday, we had the historic foreclosure settlement of 25 bio USD which potentially can grow to 40 bio USD. First press reactions are in the trend of “too little to late”. For a more extensive review, I would like to refer to

But there was another story which received less attention and it nevertheless deserves some scrutinizing. It involves Joe-Six-Pack’s tax payers money and the core of democracy : The FED’s secret deals with some specific Wall Street firms on re-selling mortgage backed securities which it received after several bail-out operations. It involves the unwinding of the Maiden Lane vehicles on the FED balance sheet. These 3 vehicles came to life as follows :

Maiden Lane 1 : 30 bio USD of mortgage assets JPM found too risky to hold when they took over Bear Sterns.

Maiden Lane 2 : 19,5 bio USD of mortgage assets coming from AIG which was bailed out 11/08

Maiden Lane 3 : 24 bio USD credit line to cover Credit Default Swap obligations by AIG on toxic Collateralized debt obligations

The NY FED always stated that it was its intention to re-sell these products in the market once conditions stabilized and became more market friendly. And in fact it managed so far to unwind several bio of assets. But the way it achieved this raises some eyebrows. Last year for instance, the FED invited more than 40 brokers to take part in a series of auctions. In the end, the FED only selected Goldman (surprise, surprise) , Credit Suisse and Barclay’s to bid on the full amount of bonds. The same thing happened this year with also a limited number of selected brokers bidding in the end (Goldman, BofA and Citi).

Now it might seem strange but we had learned that in order to receive a good price, some competition amongst bidders might serve you well. But it becomes even more strange when the following is revealed :

1) The NY FED did never announce its auctions in public unless after the facts. They said that the broker dealers were selected on previous strong bids.

2) Wall Street firms and their clients who wished to bid on the assets during an auction, were explicitly required to sign non-disclosure agreements, forbidding them from discussing the offerings in public.

Some have argued that this more secret way of doing business was actually beneficial in terms of not disturbing the secondary market of the assets. And in addition, that the transactions would be done quickly without any problems. And to compare this with an example more familiar to us : State Street in 2010 and Dexia in August 2011 also sold mortgage bonds, respectively for 11 and 8,8 bio USD. Dexia had publicly announced its intention to sell, State Street (third largest custody bank) didn’t.


This article was written by Econopolis

on 10 February, 2012