In a terse post-bell 8-K filing, Thornburg Mortgage (TMA) said it failed to meet a $28 million margin call from JPMorgan Chase (JPM), triggering a series of "material" cross-defaults on various lending agreements.
JPM's lending agreements with Thornburg total about $320 million, a small fraction of the $11.5 billion in reverse repurchase ("repo") agreements that TMA had as of December 31, 2007. Nonetheless, JPMorgan refused to budge, notifying Thornburg that it planned to exercise its rights under the loan agreement (i.e. seize the underlying collateral) due to the default. Shares of TMA obviously tanked on the news.
But why jump at the chance to seize residential-mortgage backed collateral instead of working something out with Thornburg? Because JPM (and everyone else) knows that Thornburg's paper is of excellent credit quality, its just temporarily an illiquid investment. When mortgage investors use repo agreements to finance their assets, they do so on a "haircut" basis -- they have to overcollateralize the repo agreement by a certain percentage. Therefore, if JPM seizes the collateral and holds it long enough for the credit markets to thaw, they stand to realize an immediate built-in gain because the AAA paper is likely worth more than par, yet JPM "acquired" it at a fire-sale price.
Contrast the JPM-Thornburg situation with the Wachovia-NovaStar Financial situation. NovaStar has been out of compliance with its Wachovia lendings for months, yet Wachovia continued to waive the default. Unlike Thornburg, NovaStar's paper is subprime and unlikely to recover in value enough to make Wachovia whole. Wachovia does better by taking its chances that the NovaStar mortgages will perform to an extent that NovaStar can repay its obligation. If Wachovia declared NovaStar in default and seized the collateral, WB would be locking in a significant loss.
However the Thornburg situation ultimately resolves itself, the greedy grab by JPMorgan underlines the risk of dealing with ruthless Wall Street investment banks.
JPM's lending agreements with Thornburg total about $320 million, a small fraction of the $11.5 billion in reverse repurchase ("repo") agreements that TMA had as of December 31, 2007. Nonetheless, JPMorgan refused to budge, notifying Thornburg that it planned to exercise its rights under the loan agreement (i.e. seize the underlying collateral) due to the default. Shares of TMA obviously tanked on the news.
But why jump at the chance to seize residential-mortgage backed collateral instead of working something out with Thornburg? Because JPM (and everyone else) knows that Thornburg's paper is of excellent credit quality, its just temporarily an illiquid investment. When mortgage investors use repo agreements to finance their assets, they do so on a "haircut" basis -- they have to overcollateralize the repo agreement by a certain percentage. Therefore, if JPM seizes the collateral and holds it long enough for the credit markets to thaw, they stand to realize an immediate built-in gain because the AAA paper is likely worth more than par, yet JPM "acquired" it at a fire-sale price.
Contrast the JPM-Thornburg situation with the Wachovia-NovaStar Financial situation. NovaStar has been out of compliance with its Wachovia lendings for months, yet Wachovia continued to waive the default. Unlike Thornburg, NovaStar's paper is subprime and unlikely to recover in value enough to make Wachovia whole. Wachovia does better by taking its chances that the NovaStar mortgages will perform to an extent that NovaStar can repay its obligation. If Wachovia declared NovaStar in default and seized the collateral, WB would be locking in a significant loss.
However the Thornburg situation ultimately resolves itself, the greedy grab by JPMorgan underlines the risk of dealing with ruthless Wall Street investment banks.
3 comments:
every thing is clearly written on the wall when peloton funds sold their AAA paper with 30% discount.
I am surprised none paid serious attention to the sounding siren until this monday ( Peloton news was on Feb 28 (last Thursday).
can't tma raise some fast money from big insitutional shareholders to protect their investment being that this is not a issue of quality but lqiquidity and greed right now?
Are you asking if institutions would loan $$ to TMA? Buying stock would certainly not help TMA unless they go through the process of issuing new shares and would take a while . . .
Post a Comment