Markets

Nov 25: Chris Flanagan says government only buyer of MBS

November 25 2008: Chris Flanagan, managing director at JP Morgan and head of the bank's asset-backed research, says 65 to 75 per cent of the investor base for asset-backed securities is gone and will not return for a "very, very long time". The government is trying to fill the gap, and the Federal Reserve is looking to use the capital markets, use securitised products, to provide financing to the consumer through its $200bn Term asset-backed securities loan facility (Talf). The asset-backed markets are still very risky and volatile. Securities that are linked to assets that are largely government guaranteed or supported, such as student loan or credit-card deals, may be worth buying. Credit card asset-backed securities basically have indirect sponsorship from the government through banks. Mr Flanagan says it is an "open question" whether investors should buy mortgage-backed securities. Banks with hundreds of billions of dollars of mortgage-backed securities on their books are basically stuck with them unless the government takes them over. Mr Flanagan says it is very difficult to rule out the possibility of further declines in the values of mortgage-backed securities, and another round of losses related and another vicious cycle where their reduced value requires banks to take write-downs and require fresh capital, the situation that led to Citigroup's recent crisis.