February 21, 2012


Why Toxic Debt Looks a Lot Less Toxic (Jody Shenn and Saijel Kishan, 2/16/12, Business Week)

Some of the same investors who made big profits betting against mortgage bonds before the 2007 housing bust have started snapping up the toxic assets. Hedge fund manager Kyle Bass, who made $500 million when subprime debt cratered, is raising a fund to buy them. He's joining John Paulson, who made $15 billion in 2007 thanks to the housing bust. Goldman Sachs Group has bought the bonds this year. Remarkably, so has American International Group (AIG) --the insurer that had to be rescued by the U.S. government in 2008 after its wagers on risky mortgages went bad. [...]

Typical prices for a type of mortgage bond tied to option adjustable-rate mortgages (ARMs) rose to 55¢ on the dollar in the second week of February from 49¢ in November, according to Barclays Capital (BCS). The securities are bouncing back "almost like a coiled spring," says Clayton DeGiacinto, chief investment officer of hedge fund Axonic Capital. Option ARMs allowed borrowers to pay less than the monthly interest due with the shortfall added to the balance and were among the toxic debt that the Financial Crisis Inquiry Commission said helped fuel the housing boom and subsequent bust. About 45 percent of the option ARM loans that are in bonds are delinquent, according to JPMorgan Chase (JPM) data.

Posted by at February 21, 2012 6:59 PM

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