America’s Biggest Banks Are Rehabilitating The Mortgage Bonds That Crashed The Economy In 2008

Tuesday, September 17, 2019
By Paul Martin

by Tyler Durden
Tue, 09/17/2019

10 years after a blowup in the private-label MBS market nearly brought down the global banking system, the biggest, most systemically important banks (who were ultimately forced to accept a government bailout and a round of consolidation during the fallout) have apparently decided that enough time has passed, and that now would be a good time to revive it, as they close deals on billions in newly issued mortgage-backed bonds, WSJ reports.

After many of their investors got stuck holding – as Jeremy Irons’ character in “Margin Call” so eloquently put it – “the biggest bucket of odorous excrement in the history of…capitalism,” the private label MBS virtually disappeared in the wake of the crisis. Over the years, smaller banks that weren’t burdened by all of the regulatory hangups of their SIFI peers have tried to revive the business, but to no avail.

But while private label MBS still only represents a tiny share of the overall market, issuance is picking up this year.

The timing is certainly interesting. Earlier this month, President Trump proposed privatizing Fannie Mae and Freddie Mac (it’s not too difficult to imagine some of these banks buying up chunks of the GSEs’ business). And even if the government can’t put together a plan to privatize the mortgage-origination giants, the White House will at least shrink them, creating more room in the market for private label.

With trillions of dollars of global bonds yielding less than zero, and the 10-year Treasury struggling to retake the 2% level, investors remain “starved” for yield. Since there’s no implicit government guarantee on private label bonds, investors will likely demand a higher yield than the MBS being packaged by Fannie and Freddie.

The Rest…HERE

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