The Mother of All CDOs!

Wow. It turns out that REITs can go up in price too. And Mr Market actually compelled the government itself into purchase mode with a new plan to buy mortgages. Do you think Mortgage REITs may be a good place to be, with the federal government now swinging the bat on the bids? If you don’t know the answer, go buy some money market funds, because the goverment is now guaranteeing those too. Not only will the shorts be covering, but there will now be actual real buyers will be coming into the REIT market. Did you see the volume in Mortgage REITs on Thursday afternoon? That was very liquid liquidity. This morning, Northstar is truly shooting to the moon, and the volume on the NYSE in just the first few minutes of trading was almost equivalent to one entire day.

In the irony of ironies, it looks like the government plan contemplates using some of the same structured finance techniques that were blamed for causing the blowout in the first place. The U.S. Treasury apparently plans to issue debt that will ultimately be used to buy and hold mortgage assets. I think we should old a contest for what the government will call this giant collateralized debt obligation. Perhaps the “Salvation Mortgage Tust”? I personally prefer “Hank’s House of High Yields”. The government also plans to hold the mortgages to maturity. This will alleviate further selling pressure and reduce supply on the open market. Mark to market marks should now start to reflect a substantially different environment.

Not only that, the SEC announced a ban on shorting 799 financials. More important than the actual ban may be the order requiring that institutional money managers report their new short sales of certain publicly traded securities. Talk about naked shorting.

The order also implies that the government will go even further if necessary, stating that the Commission “may consider additional steps as necessary to protect the integrity and quality of the securities markets and strengthen investor confidence”.

These measures will absolutely take much of the pressure off struggling mortgage assets, and allow investors to price them in accordance with their true instrinsic value, both good and bad. We still don’t know what the government’s bid will be, but for those of you that have been suffering through the REIT roller coaster for over a year, I think you can say goodbye to your white knuckles. For those of you that are still speechless, you only need to answer one question: what’s better than a government-guaranteed 20% yield?

Hang on to your hats, it really is going to be a wild ride!