JPMorgan To Issue CMBS Backed By... Defaulted Loans

Tyler Durden's picture

No, this is serious news. Dow Jones reports:

JP. Morgan Chase & Co. (JPM) next year plans to issue the first U.S. commercial mortgage-backed securities supported by defaulted loans since the 1990s as it revives a practice that regulators used to extricate the nation from the savings-and-loan crisis.


The investment bank has approached rating agencies with two pools of distressed loans that it acquired from European banks and other financial institutions, according to people familiar with the matter.


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Mad Max's picture

I'll be REALLY, REALLY curious what their prospectus says about the enforceability of the mortgages going along with those loans.

Gief Gold Plox's picture

I am not at all ashamed in admitting that I don't have a clue about how this is supposed to work. Could anyone please explain this rationally? Oh wait,... nevermind.

Sabibaby's picture

It's a lot like a person backing their bad credit by not paying their bills. You bundle up the unpaid bills in a UBS (unpaid bill security) and then sell it back to creditors, like in never never land...

Steaming_Wookie_Doo's picture

Oh my God, I'm really a millionaire! If only I could collateralize myself to CALPERS, since they almost assuredly would be buying the dreck from JPMorgan.

Git_Naked's picture

It's pretty straightforward actually. Surprised to see that ZH "cannot compute."

Hard1's picture

Considering that France, a country with a defaulted banking system, is AAA, a CMBS backed by defaulted loans should clearly be AAA as well.


Hey, even the EFSF is AAA, a pile of troubled european sovereigns backed by themselves and France.

flacon's picture

Null Pointer Exception on mortgage.getPayment()

iinthesky's picture

Kernel Panic

gmrpeabody's picture

Will we be able to get these CMBS through Groupon?

jeff montanye's picture

far better to buy a mortgage backed security where you know going in the loans are bad.  it's the finding out after purchase that's the real disappointment.

knukles's picture

No Mystery At All Folks.

JPM exchanges a pool of Zero Coupon Perpetuals backed by nothing (no cash flows, no perfected titles, no possibility of recovery--- in the extreme case) with Zero Coupon Perpetuals issued by the Federal Reserve (liability, pays no interest which never matures) both of which were created on a computer by enrty of key strokes, neither of which are available in hard copy, tactile form.

What's the problem?

iinthesky's picture

No problem.. they will just sell it to the Bernak

topcallingtroll's picture

A small tranch could get rated AAA.


When someone buys up a bunch of bad debts they know roughly the minimum percentage they will collect. Structure half of that as Senior with absolute priority, then the tranches become more equity-like as further pieces are sliced off.

Lets say worst case is five cents on the dollar of a group of bad debts totalling 100 million. Best case is 50 cents on the dollar but you estimate only a ten percent chance of that level of recovery. If the "risk free" portion (half of the minimum of five million you are virtually guaranteed to collect) is being offered at three percent over ten years, then what would the next portion yield if it included 2.5 million that has a hundred percent chance of recovery and an additional 7.5 million in bad debt, with an 80 percent chance of recovery?

At what price and yield would you pay for that ten million of bad debt junior to that senior tranch, but with priority over any other tranches down the line?

Now u understand financial engineering!

Rich_Lather's picture

JPM may know something you don't. What are our Congress critters up to now?

Mugatu's picture

The concept is easily understood, but the big fly in the ointment is that this is like buying a very old used car.  Who usually has the best idea of the true value of the used car - the seller that's who!  He knows if he is selling a dud for a good price because he drove the piece of shit for 100,000 miles.  The buyer gets screwed most of the time.

Same thing here.  This time, the guy selling you the used shit box is JPM.  

epwpixieq-1's picture

No problem on high level languages but go to the low ones and you get a core dump! Surprise, Surprise :)

Stack Trace's picture

// small C# method to express the situation more clearly!

// Remember to check the ref value after calling this function. Always returns True and an undesirable result will be loaded into billToTaxPayer

public bool IsTaxPayerFucked(List<Mortgage> mortgages, ref int64 billToTaxPayer)


bool isTaxPayerFucked = true;

int theBillToTaxPayers = 0;



foreach(Mortgage mortgage in mortgages)


if(mortgage.getPayment() == null)


theBillToTaxPayers += mortgage.Balance + JPM.Fees;




theBillTotaxPayers = int64.MaxValue;

throw new AccountingCorruptedException();






catch(Exception ex)


isTaxPayerFucked = true;




isTaxPayerFucked = true;


return isTaxPayerFucked;


TheFourthStooge-ing's picture

perl -e 'print "Taxpayer is fucking fucked, bigtime!\n"'


SRVDisciple's picture

This is just a variant of the old Basic Computer Language statement "10 GOTO 10" except they added a few steps:

10 GOTO 20

20 GOTO 30

30 GOTO 40

40 GOTO 10

See, I'm productively writing more lines of code and my computer is just humming along.

Carlyle Groupie's picture

WTF! Hey can you dudes debug my code. I cannot compile!

for( i=0; i<= tyler_posts_a_technical_reference; i++)

eatthebanksters's picture

They are trying to figure out what their shit is worth....they are sitting on so much of it that they are trying to find an exit strategy which gives them the highest return...foreclosing and selling the properties are not an option, they can't distort the value of a building to look like its worth more than it is like they can with a synthetic can be sure that they will be the fuckors in the end and that the poor sod's who buy this shit will be the fuckees.

TheFourthStooge-ing's picture

They are trying to figure out how to get people to pay them for leaving a burning bag of dog shit at the front door, ringing the doorbell, and running away.


BorisTheBlade's picture

Their task is more complex: present dog shit as AAA structured financial instrument backed by a pile of burning dog shit that yields flowers and sell it to the willing buyers. It takes a lot of MBAs and CFAs on both sell and buy side to make this structure work and create appearance of something noble and useful happening.

chet's picture

"Could anyone please explain this rationally?"

Sure they can!  Oh wait, "rationally"?  No.  No they can't.

NumberNone's picture

Sure...let me explain.  10 years ago I took a shower with Jerry Sandusky.  He told me all we were doing is 'horsing around'.  He just invited me again to another 'horsing around' party.   Why wouldn't I want to go back again? 

Same thing.  JP Morgan is Jerry Sandusky and they can't understand why everyone wouldn't line up for another good ass-raping/horsing around session (allegedly). 

Captain Kink's picture

I assumed that it meant that they pursue the settlement of these bad debts.  Pay 50 cents on the dollar, recover 70 cents--damn! just made 40%.  it's like a colection agent buying your debts of $1000 for $500 who then calls you and settles with you for $700.

iinthesky's picture

Actually its more like a collection agent buys your fake debt of 1000 bernak bux for about 10 dollars and tries to collect 1200$ for the interest, you know... Collection attorneys are bottom of the barrel scum who prey on ignorant people and business is good today.

topcallingtroll's picture

Somebody has to be the vulture and eat up the putrid mess. It is the cycle of life and finance.

Vultures or at least organisms that eat dead organisms are necessary.

palmereldritch's picture

“Hey everyone, look at me, I’m a cowboy! Howdy, Howdy, Howdy!”


epwpixieq-1's picture

And after that, whoever bought it for $700 will sell it for $300 (braineless investor) to the same money transfer people/sharks again. And they will sell it again for $500 and will make 66.66(6)% this time and so on and so on. Anyone see something wrong with this logic ???????? If you do you have an idea what is going on and you know what to do, if not continue playing according to the system rules, for this is the only thing left in your heads.

ArkansasAngie's picture

The problem is that because the loans have not been handled properly the loans aren't actually secured. I sure as heck wouldn't give'm anything more than pennies on the dollar. Seriously ... 6% ... maybe 8%.

What you bet there is a hold harmless clause in there regarding mortgage origination and servicing irregularities.

And to think our government thinks these are the guys we should be paying billions to.

What a crock of odoriferous material.


trav7777's picture

yeah, recover, they will actually have to foreclose and then SELL...aka, let the market clear


It's pretty easy........shit backed by shit leveraged up with shit. 

midtowng's picture

I'm curious who would buy the stuff? And why?

AccreditedEYE's picture

This has "Retail Mutual Fund" written all over it...  

hedgeless_horseman's picture



...right next to government pensions. 

Paging all CALPERS portfolio managers...please come to a JPM all-you-can-eat dog-and-pony luncheon.

" achieve the highest possible return at an acceptable level of risk."

That is a BINGO!!!