Yesterday I wrote about fraud in the mortgage market.
Today I will write about a single deal – the Bear Stearns 2007-1 closed end second deal insured by Ambac.
This deal is a stinker. Ambac has provisioned for an 82 percent cumulative loss rate on this deal. I have looked at the raw securitisation data and I don’t think it will be quite that bad – but it is awful.
For this to happen 85 plus percent of the loans in the deal need to default.
That doesn’t happen to normal loans. Even in the worst of crises diversified and honestly assembled pools of loans don’t default at that rate.
It only happens when there is mass fraud involved.
Bear Stearns assembled those loans fraudulently or knew the loans were fraudulent when assembled.
But it is worse. They warranted the loans would be OK.
You will find the serving agreement here. I am not a total masochist so I haven’t read all of it… however the document contains the usual clause requiring Bear Stearns to buy back and replace loans that breached the mortgage loan purchase agreement…
Jamie Dimon didn’t create this problem. Them lying scoundrels at Bear Stearns did. They misrepresented the loans – not Jamie Dimon.
But Jamie bought this problem and it is now his.
Jamie – it is time to pay up. Hope you have provisioned for it.
PS. Not to be too hard on Mr Dimon I have spent some time looking at securitisation created by JPM. They perform better than average at least in the areas I have looked.
Post script: I have just listed to Ambac's conference call. I said in this post that my estimate for loss on this deal is somewhat less than Ambac's estimate. In the quarter Ambac reversed some of their reserve and the reserves look much closer to my estimate. So Jamie doesn't have to pay quite as much. But he is going to have to pay...