Wednesday, September 30, 2009

Idiocranomics: Re-REMIC's...More of the Same, Did We Learn Nothing

When I read this Wall Street Journal article I about fell out of my chair. I honestly thought it was a parody, something you'd see on The Onion, its not.

In essence a Re-REMIC is a repackaged pool of loans....or a re-repackaged pool of loans! Banks and Insurance companies are upset that they can't sell the junk on their balance sheet and they are ticked that they have to actually hold capital against lousy assets, so they came up with a scheme to package junk assets with seemingly "good" assets, pay a ratings company to turn the entire package into a AAA rated security so that they can hold the same assets on their balance sheets......but with less capital. Does any of this sound familiar to you? Anyone?

"There is $350 billion to $400 billion in market value of securities with no natural buyer due to their rating," Barclays said in a June report. "The re-remic market provides a way out of this gridlock by creating new AAA securities, which are likely to be viewed as attractively priced."

It is quotes like the above that make me want to both laugh and cry because they are so incredibly stupid. So the bank holds assets that there is "no natural buyer" because they are poorly rated....this is total and complete baloney - every asset has a buyer at the right price. Secondly, if you put lipstick on a pig, you still have a pig - but the Wall Street magic combined with a small payoff to one of those trusted rating agencies turns the pig into something, a Stallion if you will. This is the same financial alchemy that was at the heart of the financial crisis.

A year later and we've learned nothing.

Scott Dauenhauer CFP, MSFP, AIF