The world's largest hedge fund manager, Bridgewater Associates, apparently won't participate in the Treasury's much-ballyhooed public-private investment program designed to clear "legacy" securities and loans off of troubled banks' balance sheets. The $71 billion money-management firm reversed course Thursday, after earlier indicating it had planned to participate, according to a report in the New York Post.

Bridgewater founder Ray Dalio blasted the program — at least the securities side of the program — as both a conflict of interest and one that offers very little leverage.

In terms of a conflict of interests, Dalio zeroed in on Treasury's plan to hire five asset managers to run the program. "The managers are clearly in a conflict-of-interest position because they have both the government and the investors to please and because they will get their fees regardless of how these investments turn out," Dalio is quoted by the Post as writing in his letter.

"We would not want to have our clients commit to invest, or even ask them to trust us being in this conflicted position."

Investors had initially cheered the program when it was first announced, believing the government was offering the private sector access to cheap leverage that had largely evaporated during the ongoing credit crisis. Dalio, however, said that upon further inspection of the government's plan, actual leverage being offered is closer to 1-to-1, the Post reported.

Dalio suggested the whole loan aspect of the PPIP would be more attractive to investors, possibly, offering leverage of as high as 12-to-1; but said Bridgewater had little interest in acquiring "illiquid loans."

And, of course, investors specializing in whole loan acquisitions have had their own concerns, as well, as HousingWire reported previously on Mar. 24. See earlier story.

It's unclear if other firms intend to follow Dalio and Bridgewater's lead, but the move is clearly an ominous one for a Treasury that is counting on private investors to make the most of remaining TARP funding.

Write to Paul Jackson at paul.jackson@housingwire.com.

The Federal Reserve Bank of New York said late Thursday it had purchased another $68.5 billion in agency mortgage-backed securities this week from government-sponsored entities Freddie Mac (FRE: 0.00 N/A), Fannie Mae (FNM: 0.00 N/A) and Ginnie Mae. For the week ending April 1, the Fed purchased, net of $35.6 billion in coupon sales, $32.91 billion in agency MBS, virtually unchanged from last week's $33.2 billion in net purchases.

The Fed bought $15.4 billion from Freddie’s books, $51.5 billion from Fannie and $1.6 billion off Ginnie’s books this week. Thirty-year 5.5 percent coupons were the most popular item purchased at $25.6 billion from all agencies, followed by 30-year 4s at $21.6 billion. Meanwhile, the Fed also sold $24.8 billion of 30-year 5.5 percent coupons. Thirty-year 6s came in second in terms of sales, at $6.2 billion, while $3.5 billion in 30-year 4s and $1 billion in 30-year 5s were sold as well.

For the first week, the Fed listed "settlement month" data for both purchases and sales, indicating when its balance sheet will be affected by the final settlement of the transactions.

See a detailed table of the current week’s purchases and sales.

The Fed’s assets slipped $2.3 billion the same week ending April 1 after steadily increasing in recent weeks, according to a balance sheet summary released Thursday. The data show the Fed’s consolidated balance sheet shrank slightly to a value of $2.049 trillion for the week, but is still up $1.173 trillion from the year-ago week ended April 2, 2008.

Write to Diana Golobay at diana.golobay@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

An historic $3.6 trillion budget passed Congressional votes late Thursday, signaling a major victory for President Barack Obama's sweeping plans to build up a receding economy, primarily with government spending programs.

Although Democrats trimmed Obama's spending initiatives, both versions of the fiscal year 2010 budget allow for the original vision of expanded health care coverage, expanded funding for college loans and a so-called "cap and trade" system that would aim to reduce emissions and pollutants that are said to contribute to global warming. Missing, however, is a controversial $250 billion reserve for future bank bailouts.

The budget for FY10 — which begins in October — passed the house largely along party lines, with 233 Democrats voting in favor; 20 House Democrats joined the 176 House Republicans voting against the legislation, for a final passage of 233 to 196. One Senate independent party member joined the 54 Senate Democrats that voted in favor of the budget. Only two Senate Democrats joined the 41 Senate Republicans that voted against it. The legislation passed the Senate in a final 55-43 vote.

A substantial focus of amendments passed in the Senate version lay on increased transparency and oversight of the Federal Reserve "concerning the use of emergency economic assistance," continued funding for international affairs and protection efforts against "potential spillover violence from Mexico." The Senate's version even includes an amendment from Jeanne Shaheen, D-N.H., that aims "to establish a reserve fund for monitoring of FHA-insured lending," which has come under scrutiny recently for an increased delinquency rate among Federal Housing Administration-insured loans.

Both versions of the budget leave out the $250 reserve for additional TARP spending that Obama had requested. The absence of the reserve would not prevent Obama, the Treasury Department or the Fed from requesting extra funds for future bank bailout initiatives.

Write to Diana Golobay at diana.golobay@housingwire.com.

A disclosure from Federal Housing Financy Agency director James Lockhart over bonuses set to be paid at twin mortgage finance giants Fannie Mae (FNM: 0.00 N/A) and Freddie Mac (FRE: 0.00 N/A) may be set to become the next center of investor ire over a widening government bailout, with the Wall Street Journal reporting Friday morning that the GSEs will pay $210 million in retention bonuses to employees.

The letter has not been publicly released or released to other media, but the office of Senator Charles Grassley (R-IA) leaked a copy to the Journal on Thursday evening. An emailed request to see the letter, made to Grassley's office Friday morning, had not been immediately responded to when this story was published.

Under the GSE bonus plan described in the letter, any individual executive's bonus cannot exceed $1.5 million during the 18 months ending in early 2010, the Journal reported; $51 million of the $210 million in the bonus pool was paid out in late 2008 and the rest is set to be paid later this year and early next year. It's worth nothing that this is not solely an executive bonus plan at either GSE: in Freddie's case, the program involves 80 percent of the GSE's headcount; at Fannie, 61 percent of employees.

A few weeks ago, House Financial Services Committee chairman Barney Frank (D-MA) sent a letter to Lockhart, asking him to cancel planned bonuses to executives at both GSEs. See earlier story.

“I remain very skeptical that retaining and rewarding people who made the mistakes that contributed to the unsatisfactory performance is a good idea,” he wrote in the letter. “Further, in this troubled economy, and in this job market, it is difficult to imagine that the companies would not be able to find competent and talented replacements for anyone who chooses to leave.”

Lokchart has staunchly defended the bonus program, however, as a needed tool to retain top employees. “We started to design a retention plan with a compensation consultant even before the conservatorship because it was critical to retain their most important asset –- their employees — who are being asked to play a vital role in the nation’s economic recovery,” he has said in the past.

Write to Paul Jackson at paul.jackson@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

The housing crisis is now a jobs crisis that's reaching pretty far back into the history books for an equal. The U.S. Labor Department said Friday morning that nonfarm payroll payrolls plunged 663,000 in March, driving the unemployment rate rose from from 8.1 to 8.5 percent; the only good news, relatively speaking, is that the number of jobs lost was relatively within Wall Street's expectations.

But that doesn't make the number of jobs lost small. As the Wall Street Journal noted in its coverage of the jobs numbers, the number of jobs lost in the current 'great recession' has now topped 5 million since December 2007, with more than 3.3 million of those job losses coming in the past 5 months.

January's job loss total was revised to 741,000, as well, the third highest monthly job loss total in U.S. history — only monthly job losses seen in the 1940s due to a historic coal and steel strike and and the end of World War II were greater.

For mortgage servicers, the number to pay attention to is a bit broader, and includes marginally attached and involuntary part-time workers: that number pegs the total of unemployed and underemployed at 15.6 percent in March, up sharply from 14.8 percent in February. Mortgage lenders and servicers care deeply about the broader employment figures because workers moving into part-time employment involuntarily are as much of a credit risk for default as an employee being laid off.

The number of workers who want full-time work but can only find part-time jobs rose by 423,000 to 9 million in March, as well.

Which means that those economic talking heads pegging a double-digit unemployment rate by the end of this year appear ever-more likely to be correct; and depending on the measure, we may already be there.

Commentary by Howard Gold at MarketWatch asks a very pertinent question as the U.S. economy continues to right-size: where will we find new jobs?

"I'm more convinced this is not just a deep cyclical recession but a fundamental 'reset,' to use a popular word these days," he wrote Thursday. "U.S. consumers simply can't resume the debt-induced spending binge that powered the global economy for most of this decade. And the rest of the world, especially China, isn't ready to take up the slack."

Write to Paul Jackson at paul.jackson@housingwire.com.

If you read the headlines (and most people don’t bother to go much farther beyond the headline than the lead paragraph –- to our collective disgrace), you already think FASB eased the rules for measuring fair value on Thursday. You might believe that it has at last caved in to pressure from banks and Congress, and decided to allow “preparers” and their auditors to use judgment when valuing illiquid assets.

Not so. They are reiterating for the third time that “fair value is the price that would be received to sell the asset in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date.”

And for the second time it is “highlighting and expanding on the relevant principles in FAS 157 that should be considered in estimating fair value when there has been a significant decrease in market activity for the asset.”

The first time, of course, was when they issued FAS 157. The second is the SEC/FASB staff clarifications on fair value accounting issued September 30, 2008. This is the third statement, second clarification and expansion.

Despite press reports on the Board meeting, the March 16 exposure guidance was toughened to reflect comment letters. In particular, staff recommended removing the “presumption that all transactions [in an inactive market] are distressed unless proven otherwise.” The handout and Board discussion acknowledged this proposed language confused people and might serve as a pretext to exclude relevant transaction information or preclude the use of pricing services or brokers in fair value measurement. The requirement to use all factors and information still stands.

Press reports on of FASB’s vote are also somewhat overreaching. The discussion centered on questions the staff had about possible changes to the proposed guidance and the kinds of language that might be added. In other words, precise sections of the next draft of the guidance were not read and voted on. Instead staff –- who do the writing of these things –- were given more guidance on what should be in the final guidance. I might be alone in this, but I’m hedging a bit on what was decided until I see FASB’s summary of decisions taken at the meeting (usually posted the evening of the meeting) and read the final FSP when it is issued, not before the end of next week.

Moreover, the discussion on Thursday clearly indicated that more tweaks and adjustments could occur as Board and staff continue to digest comment letters and each others’ opinions. And the door is not closed on comments, especially because normal due-process was foreshortened by the political pressure brought to bear on this traditionally independent standard setter.

Whatever the fine points of expansion and clarification provided in the final FSP might be, one can hope the third time is a charm and that there will be no further protest that FASB doesn’t allow preparers and auditors to use “significant professional judgment” in arriving at a fair value in a market where there has been a significant reduction in trading activity.

Inactive markets not the real issue

I didn’t come here to praise FASB, however, but to bury the notion that the devalued and disgraced RMBS securities on banks balance sheets are illiquid. Nor should the observable market prices be described as “fire sale” or “distressed sales.”

Not that there have not been fire sales. There were some very large and visible fire sales last year as the biggest “sinners” in structured products (a blanket term that includes fairly vanilla non-agency RMBS and CMBS as well as CDO, CDO’s backed by CDS, CDS and so on) shed assets on their way to bankruptcy or acquisition (Merrill’s infamous 22-cents-on-the-dollar sale will come instantly to mind for many).

That those fire sales took place has provided a smoke screen, as it were, for banks and their enablers in Congress, free-enterprise, free-market “think tanks” and industry groups, and the media, to claim these markets are inactive.

The other mythos this crew hides behind is the notion that these riskier-than-first-thought assets are too complex to easily value (please notice that I am not going to say “troubled,” “toxic” or, no not never, “legacy” with regard to this batch of soiled laundry).

First, there is plenty of pricing information on triple-A private RMBS and CMBS. They may not trade where banks holding lots of this paper at a loss wish they traded, but they do trade. Let’s get something clear, too — they NEVER traded with the kind of depth or frequency that Treasury, agency debt or Ginnie, Fannie and Freddie MBS do. Each bond is unique enough that it has to be manually evaluated — anything from a simple cash flow calculator that uses market conventions for prepayments and defaults – or elaborate option pricing models that take into account hundreds of different interest rate, credit performance and prepayment scenarios. The cash flow calculators are ubiquitous — the sophisticated tools are available at a market price.

They trade less frequently because significant sources of demand have been eliminated. Except for the big trading books at the big banks, banks have eliminated themselves as potential buyers on the re-trade. They also cannot sell held-to-maturity triple-As unless they are downgraded, they can’t realize much in the way of losses on available-for-sale triple-As. Ditto for insurance companies, though the rising tide may let them wriggle out of some clunkers.

What’s left is the subset of investors who are marked-to-market. Ergo they have experienced their losses. This would include money managers of various kinds of funds (mutual to pension) using what we call “real money” and leveraged investors — the hedge funds and private equity managers. This segment of the market can and does trade this paper. It has been slow, but their activity has been significant enough for trading desks on both sides of the trade to track market levels, make offers and attempt to buy paper from known holders.

Most pertinently, sources on trading desks tell me they make “on the market” bids to banks for their paper and banks won’t sell. These same sources will explain that hedge funds are still the buyer on the margin, and prices have adjusted to reflect the hedge funds’ required yield –- typically 25 percent.

However, hedge funds used to achieve that yield by leveraging securities that traded at much higher prices, back when triple-A was assumed to mean risk-free (not a waiting game or playing chicken with a falling housing market). Now hedge funds’ traditional sources of leverage are gone. Security pricing has adjusted to reflect this loss of leverage.

To summarize: there are lots of tools for assessing the cash flow value, even for adjusting for credit, prepayment and interest rate risk. So market pricing would incorporate those factors, transactions will incorporate a “market view” of those risks. Those prices are further adjusted to satisfy the risk appetites of hedge funds that no longer can easily leverage to their required returns. There is necessarily a liquidity premium as well, but it is not sized on the assumption that only a fire sale will entice a buyer. It is sized given the fact that the securities must be manually examined and the field of buyers has shrunk.

The PPIP/TALF-expansion announced last week caused spreads to tighten and speculative buyers to build positions. It also triggered research from every major bond house left standing that (1) provided current market levels for the affected sectors –- either generically or for specific bond examples –- and (2) modeled expectations of price improvements when TALF and PPIP reintroduce leverage for secondary RMBS (originally rated triple-A) and triple-A CMBS.

For one thing, an illiquid market would not be graced with so much professional research. Nor would an illiquid market adapt so rapidly to the hope of new buyers (rather than the fact). In fact, if PPIP/TALF do nothing else, they should at last stop institutions that made bad investments (and, in the case of SIV, ABCP assets come home to roost, bad funding decisions) from hiding behind claims the assets are too complex to value and anyway their market prices don’t capture their true long term worth.

Editor’s note: Linda Lowell is a 20-year-plus veteran of MBS and ABS research at a handful of Wall Street firms. She is currently principal of OffStreet Research LLC.

Imagine paying full premium for an insurance contract, and receiving only 60 percent on any claim you make — that's the unsavory situation now being faced by both Fannie Mae (FNM: 0.00 N/A) and Freddie Mac (FRE: 0.00 N/A), as well as a bevy of private-market lenders, on their mortgage insurance contracts with troubled mortgage insurer Triad Guaranty Inc. (TGIC: 0.00 N/A).

The insurer, which put itself into run-off and ceased writing new mortgage insurance policies in the middle of last year, said late Wednesday that it had received a corrective order from its regulator, the Illinois Director of Insurance, limiting its payout on claims to 60 percent. The remaining 40 percent of a claim will essentially take the form of an IOU, or a deferred payment obligation (DPO), meaning the lender/investor will not immediately be able recover the full amount of its claim.

Which means one thing: get ready for loss severities to go up, as servicers recover less on a growing number of bad loans. Especially so if other mortgage insurers are eventually forced to follow Triad's lead, as some analysts say they expect.

For the GSEs, the pain of the change at Triad is likely to be immediately felt. More than half of Triad's roughly $17 billion risk-in-force is written on mortgages held or otherwise guaranteed by Fannie and Freddie; Bank of America Corp. (BAC: 7.29 -0.14%) and Wells Fargo & Co. (WFC: 29.60 +1.89%) are the insurer's largest private market customers, Triad CEO Ken Jones told reporters on a call Thursday morning.

In a frequently asked questions document, Triad noted that policyholders will still be required to pay the full premium, since "Triad is recognizing its entire claim obligation at the time of the claim through the cash payment and DPO, with the intent of paying the DPO amount in the future." But when that future is seems pretty uncertain, to say the least: the future payment on the DPO can only occur when the insurer's regulator sees the insurer achieve specified minimum surplus balances and risk-to-capital ratios. It's unclear how a company that is not bringing in new revenue via new policies can be expected to bolster its level of capital.

"Continuing volatility in the housing and mortgage markets, as well as the overall economy, make it very difficult to forecast Triad’s future financial position with certainty," the company said Wednesday evening. Auditors slapped the insurer with a 'going concern' warning for its 2008 financials earlier in the year, as well.

"This is regulated highway robbery," said one senior banking executive, who said he expected the move and expects to see more. "Banks and others depending on MI to mitigate some losses now have to at least ask themselves 'what is the likelihood my insurer decides or is forced to cut my claims coverage?'" It's a question that auditors may also ask, he said, in terms of estimating a bank's exposure to bad loans.

In February, Moody's Investors Service downgraded all mortgage insurers over concerns with capital adequacy amid a worsening U.S. housing market.

Write to Paul Jackson at paul.jackson@housingwire.com.