NEW YORK - While the rest of the marketplace sees mortgage-backed securities as radioactive, Ben S. Bernanke doesn't - at least when taxpayers' money is at stake.
That isn't an April Fool's joke. The chairman of the Federal Reserve thinks the Fed's $29 billion loan to facilitate the fire-sale of Bear Stearns isn't at risk because the collateral backing it has a high credit rating.
He also said at a congressional hearing that the Fed's financial adviser is "reasonably confident" the central bank will get its money back on those mortgage-assets - and may even profit.
Maybe it's time for him to call up some bank executives who've lost their jobs by counting on the same premise. The housing and credit crisis is proof that things which look safe may not be.
Bernanke's first comments on the central bank's mid-March move to save Bear Stearns from collapse came Wednesday and Thursday during back-to-back congressional hearings - first the Joint Economic Committee, and then the Senate Banking Committee.
Bear Stearns was crippled when market rumors began to swirl about the size of its exposure to mortgage-related securities, and whether it had ample reserves to cover potential losses. That led clients and investors to demand their money back, causing a run on the bank.
Bernanke, citing "chaotic unwinding of positions," said the Fed had to step in to avert a Bear Stearns bankruptcy because the failure of the nation's fifth largest investment bank could have threatened the financial system. To stop that from happening, the Fed agreed to provide special financing that facilitated JPMorgan Chase & Co.'s buyout of Bear Stearns.
It's now known that the collateral on that $29 billion loan consists primarily of mortgage-backed securities - assets considered garbage on Wall Street now due to the continued slump in the housing and mortgage markets. Those securities are difficult to sell and almost impossible to value.
Yet Bernanke doesn't seem fazed by that. His spin is that the quality of the collateral is "investment grade, entirely current and performing."
Josh Rosner, managing director of research firm Graham Fisher & Co., calls it a "fallacy" for the Fed to find any comfort in high credit ratings. Rating agencies have been criticized for keeping high ratings on risky assets - including subprime loans - until the market was crashing.
Also, what's considered investment-grade - which has a rating of triple-B or higher - shouldn't be considered risk free. It can quickly turn to junk.
For instance, many triple-A mortgage pools are comprised of Alt-A mortgages, which include loans to individuals with better credit than subprime borrowers but who still aren't considered prime.
Fitch Ratings and Moody's Investor Service have both announced reviews of the Alt-A segment of residential mortgage-backed securities market in recent months due to the deterioration in the US housing market.
Rosner also notes that many financial company executives tried to hide behind what he calls "our exposure is highly rated myth," before they had to eventually take massive write-downs on the assets. Citigroup Inc.'s Chuck Prince and Stan O'Neal at Merrill Lynch lost their jobs as a result.
"The problem (with the financial crisis) began because lenders made loans to borrowers without considering their ability to repay. Now the Fed is doing the same," Rosner said.
Another flash point in Bernanke's testimony came when he acknowledged that Bear Stearns did the valuation of the collateral in the transaction. Imagine that: A desperate home seller gets to do the real-estate appraisal for the buyer.
The Fed's financial adviser on the transaction, Blackrock Inc., has vetted the Bear Stearns' valuation. Bernanke acknowledged, however, that if Blackrock had found the collateral to be worth a lot less, the Fed couldn't ask for more.
The Senate Banking Committee asked Thursday for the Fed to supply more detail on those assets and the parameters that went into negotiating the deal.
And despite Bernanke's comments during his testimony about the continued severity of the housing and mortgage crisis, he still said that Blackrock was "reasonably confident that we will be able to recover the full amount if we dispose of these assets on a measured basis, rather than sell them all at once."
Then came the kicker: Bernanke said the Fed may even make money on the deal.
Investment manager and blogger Jeffrey Miller said if the housing market turns up and the mortgage defaults slow then those profits could come. But clearly the Fed is making a bet that most of us couldn't stomach.
"From an investment perspective, this is not anything anyone would choose to do," said Miller, who writes the blog "A Dash of Insight" that looks at current market events.
"But there is a benefit to society" that came through this bailout.
Federal Reserve Bank of New York, which led the transaction, has said it will report a quarterly valuation of the portfolio. Then taxpayers will get to see if Bernanke's upbeat assessment holds true.