They are doing it to make money.

See:

http://www.zacks.com/stock/news/18599/C,+BAC+Pushing+Prices+Up%3F

How does it work.
These securities are marked down because there is no market for them. If they can create a market for them, the other mortgage backed securities owned by themselves and other banks will be worth more because there will be a market for them.

They have very little risk because they are using OPM to buy them. (Other Peoples Money). They are buying them with your tax dollars. Since they are buying them on the open market, they will have a defined market value and will not have to be marked down further. Thus they are gaming the system.

How do they make money?

Never lose site of the fact that the ONLY thing BAC and City care about is making money. They are buying these securities because they think they can make money on them.

Speculation is that they used YOUR money to buy these securities at about 30 cents on the dollar. This will have the following results.

Right now, only 12% of the mortgages are in default. If that doubles to 24% they will still have $76.00 worth of performing mortgages for each $30.00 they spend. Of the 24% we estimate may default, all are secured with single family homes that will ultimately be sold for around fifty cents on the dollar. recouping 12 of that 24 cent loss. Thus the total return ( after working through the foreclosures) will be around $76 + $12 = $88 for each $30 spent.

There is another strategy that is even better than the above but this answer is already too long.
Source(s):
29 years Bank and S&L Experience.

Asker's Rating:

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