Wednesday, May 21, 2008

BlackRock Buys MBS from UBS with UBS's Money?

I'm kind of surprised I didn't hear about this anywhere else yet.

So let me see if I understand. BlackRock buys $22B of MBS from UBS, and gets a 32% price reduction on the purchase. However, UBS loans BlackRock 75% of the purchase price, or $11.25B, specifically for this transaction. Thus, actual out of pocket cost to BlackRock is $3.75B, or 17% of the face value of the securities.

Now, the loan to BlackRock is supposed to be collateralized, but there's no mention of what the collateral is in this article.

Somehow, I can't help but wonder who got screwed here. Given the roles that both firms have taken on since the credit crunch started, I'm inclined to believe the one getting the shaft is UBS. I'd have to do a bit more analysis to conclusively say that, however. It is a strange structure, and I imagine that BlackRock sniffed around the portfolio and just wasn't coming on board for any more than the $3.75B. Nice work if you can get it. I wonder just how much BlackRock expects the portfolio to perform over the years. Clearly, they expect it to be decent, but that was based on the right purchase price. An 83% haircut sounds like a decent price to me!

I think the word "wow" just sums it up. Wow, that UBS could fumble so badly. Wow, that BlackRock is able to be so successfully mercenary. (That should be expected given Larry Fink's background and how well they seem to be capitalized going into this whole credit crisis, I guess.) There's just a lot of "wow" all around here. What does this mean for securities substantially similar to the ones in the portfolio BlackRock just bought (with little of their own money)? What about lower tranches, especially given the Moody's news. Where are market clearing prices going to be set now on these types of securities? Wow!

Anyway, I'm off to bed. Hope to see more about this deal in the next day or so. Until next time...

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