Thoughts on Maiden Lane II

I hate working in an information vacuum.? Look, I lack the advanced analytics of major Wall Street firms.? A Bloomberg terminal is powerful, but not as good as the major investment banks, or third party specialists.

My friend jck gave me constructive criticism regarding my post on Maiden Lane III.? I am still waiting for the 2009 audit report for Maiden Lane III.? It should be published soon.? The 2008 report said that there were no gains or losses.

jck said that I should look at the decrease in book value in liabilities over time — that would measure the success of Maiden Lane III over time.? But any payment on the liabilities should stem from a diminution of the assets.? Even though the assets are held at fair value, and the liabilities at book value, this would still remain true.? Thus the gap between assets at fair value and liabilities at book value have significance.? So here it is for Maiden Lane III:

Maiden Lane 3

With ML III there was an investment of $5 billion of equity, there is still a loss against that yet, though not much.

But there is a similar graph for Maiden Lane II:

Maiden Lane 2

There is a rhythm to this because assets are revalued in the first month of the quarter, whereas liabilities are fixed, at least subject to paydowns and draws.? I would not be surprised to see a further improvement in the gap by the end of April, even as credit metrics continue to decline.

The Maiden Lane II Portfolio

Aside from two privately placed interest only securities, the rest of Maiden Lane II could be modeled.? Here are the credit metrics:

Rating Principal $K Percentage
AAA 1,719,167

5.0%

AA 2,173,090

6.3%

A 2,166,569

6.3%

BBB 1,211,229

3.5%

BB 2,648,188

7.7%

B 4,955,596

14.4%

CCC 16,362,857

47.6%

CC 2,456,082

7.1%

C 687,387

2.0%

Total 34,380,166

The average credit rating is B-, with a downward tendency.? 56.7% of the portfolio is rated CCC and below, and 71.2% of the portfolio is rated B and below.? But what types of collateral are in the portfolio?

Alt-A 4,289,185

12.4%

HELOC 1,012,497

2.9%

Home Equity 8,644,853

25.0%

Subprime RMBS 13,581,921

39.3%

Fixed WL 500,599

1.4%

Floating WL 6,519,656

18.9%

Total 34,548,712

All of it is housing related.? None of it is agency quality.

What sort of origination vintages does the portfolio have?

Issue Year Principal $K Percentage
2000 503 0.0%
2001 1,657 0.0%
2002 690 0.0%
2003 112,273 0.3%
2004 747,871 2.2%
2005 5,630,124 16.3%
2006 17,635,093 51.0%
2007 10,251,954 29.7%
2009 168,547 0.5%
Total 34,548,712

The average vintage is mid-2006, which is lousy for any debt portfolio on residential real estate in the US.? I would expect bad performance from a portfolio with these characteristics.

Compared to ML III, ML II has better collateral, but worse vintage years.? Both are messes.? I am not saying that the Fed will necessarily lose money on either one, but I question the valuations on the assets.? If Blackrock is doing the valuations, maybe I should be quiet — who has more knowledge than they do?

All the same, I still question the ability of two Fed vehicles to extract liquidity out of illiquidity, and on favorable terms.

2 thoughts on “Thoughts on Maiden Lane II

  1. “Information vacuum” is the right way to put it.
    As long as we don’t know exactly how the loan is being repaid either positive carry, sales, pay-downs, etc… it’s hard to take a view.

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