How is the government going to buy mortgage-backed securities?
What it boils down to is that there are no set of transparent (regulated) ways to price mortgage-backed securities. You’ll read quarterly statements of different companies to find out that each one prices its mortgage-backed securities in its own adjusted manner.
Hence, you get different Wall Street firms that have similar pool of securities which are accounted for in a completely different manner. This inconsistency in pricing securities leads to problems, and even disasters as we have witnessed.
It also leads to a disagreement on what the fair value of the security is. Therefore, Lehman could have one opinion (and maybe mark down all their securities), and Goldman Sachs could have another opinion ( and maybe not mark down any of their securities).
The government’s current plan is to have a type of reverse auction which means that they’ll buy the cheapest securities offered. Analysts have said that this is efficient when the assets are homogeneous. However, mortgage-backed securities are complex because they differ in the probability of mortgage repayment and other characteristics. And with no standard model to price them, things get complicated.
This means that the government will have to find a way to assess the securities and price them. However, what happens if that price is lower than what the company values them ? It would either mean more write-downs or no transaction. Let’s see what happens.
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