10/30/2010

Obama administration Cooks the Books on Toxic Mortgages

The title on this CNBC report tells it all. Even worse, there is no transparency. Americans don't even know the investments the government has made.

Late Friday afternoon, a Bloomberg headline trumpeted the success of The Public-Private Investment Program thusly: "Treasury Gets 36% Return Buying Toxic Mortgages." . . .
In paragraph eight, however, the article does eventually turn to the contrarian opinion of University of Louisiana at Lafayette finance professor Dr. Linus Wilson — who cites a far lower return figure: 5.6%.
I spoke to Dr. Wilson earlier today in an attempt to reconcile that discrepancy.
Dr. Wilson began by explaining the derivation of the 36% figure: "If you take a simple average of the eight fund returns, you get a 36% annualized return. That's what Bloomberg did."
But, according to Wilson, there are other factors which must be accounted for in calculating the actual rate of return.
"Two thirds of the taxpayer's investment is in debt: Taxpayers are receiving a meager 1% return on two thirds of their investment — only the one third that is in equity is doing well." . . .
Says Wilson: "The problem the taxpayers have with all the assets is that these things are not being audited. We need to have these returns audited by independent bodies."
Also, there's the issue of how Treasury is annualizing their return figures.
Wilson told me, "The way treasury is handling their annualizing is, I believe, boosting their rate of return by a factor of two. There is nothing wrong with annualizing returns — but you can't eat annualized returns — you can only eat the returns you get. If you look at the 36%, you're not going to be able to say you have 36% more equity — because you don't."
"These are eight to ten year investments," Wilson went on to say. "If it turns out that the underlying mortgage bonds are doing really well right now, it doesn't mean that they are necessarily going to do well in 8 to 10 years." . . . .
"We have no disclosure with what they've bought. They're just not disclosing their holdings," Wilson says.
Why wouldn't Treasury disclose the actual securities they hold in their portfolio?
According to Wilson, it's likely that, "they're worried that people are going to copy their trades. The fear is that if investors know what particular bonds these funds are targeting, other people would try to get into similar bonds before them."
In short, Wilson sums up his suspicions rather succinctly: "It appears" he says, "They are trying to overstate how much taxpayers are making." . . .

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1 Comments:

Blogger Sasha Peterson said...

The housing market has not been normal for over a decade. Even today there is this assumption that since the market has purged the bulk of subprime and option ARM loans that lending standards are now good.

2/04/2011 5:13 AM  

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