After his disastrous bet on Treasurys in early 2011, Mr. Gross began snatching up mortgage bonds.
The Fed has pumped trillions of dollars into the markets by buying up mortgage bonds and U.S. Treasuries.
Unlike some other bonds, mortgage bonds are still not required to publish data electronically, leaving investors in the dark.
Finally, the value of subprime and Alt-A mortgage bonds has soared in secondary markets this year, assuaging investor anger.
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Meanwhile, the values of commercial-mortgage bonds issued during the boom years have risen.
On the conference call, Mr. Paulson calmly explained the trade with Goldman, which involved a "short" bet on mortgage bonds.
So far this year through March 30, mortgage bonds have rallied 0.57%, while Treasurys have handed investors a 1.29% loss.
The company also says mortgage-backed funds are up 3.74% and relative value funds (which would also hold mortgage bonds) are up 6.53%.
Basically, MERS directed defaulting mortgages to the appropriate tranches of mortgage bonds.
The central bank said it plans to extend its program of buying government-backed mortgage bonds, which should have the effect of reducing mortgage rates.
Lawrence Caplan, a senior vice president at Sanders Morris Harris, a Houston asset management company, says he doesn't buy mortgage bonds for his clients.
The investment bank, in fact, also still existed, albeit with billion of dollars in mortgage bonds that had gone bad as the subprime crisis worsened.
Just 1% of the mortgage bonds securitized so far this year and rated by Moody's Investor Service have been downgraded or put on watch, for example.
Unlike traditional bond funds, which have produced low returns in recent years, DoubleLine has benefited from buying mortgage bonds at a time when most investors were scared of them.
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Bond rater Moody's lost 3.8% on Thursday after Berkshire Hathaway Chairman Warren Buffett cut his stake in the firm, which got burned giving high ratings to junky mortgage bonds.
Another scenario: The economy worsens, property owners miss debt payments, mortgage REITs are hit by defaults in their whole-loan portfolios, falling prices for junky commercial mortgage bonds and margin calls.
Home lenders, thinking they would always be able to sell the loans they made to Wall Street firms for bundling together into mortgage bonds, extended credit to just about anybody.
Admittedly, America's AIG got into serious trouble after expanding into the business of insuring mortgage bonds, but Swiss Re was the only other company to dabble in this dangerous niche.
The Fed's heavy buying last year drove yields on mortgage bonds to within 0.65 percentage point of comparable Treasury bonds, much lower than the traditional spread of 1.15 percentage points.
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As a result, commercial mortgage bonds, including these shaky malls, have lagged behind a recent rally and retail loans in new deals are getting greater scrutiny from investors and rating firms.
The government-controlled agency alleges in its lawsuit that banks colluded to the manipulate the Libor rate causing it to lose money on products such as mortgage bonds and swaps tied to the rate.
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Many would prefer the government to pursue Mr Miles's requests to loosen rules that restrict banks from hedging the risks of fixed mortgages and block the creation of a market for mortgage bonds.
After combing through MBIA's books, Warburg Pincus' partners concluded that marking to market the mortgage bonds it insures produces some scary numbers but doesn't threaten a firm that plans to hold the liabilities to maturity.
Defaults by subprime mortgage borrowers earlier this year took a toll on mortgage lenders and the banks that provide the backup financing for them, as well as the hedge funds that invested in the subprime mortgage bonds.
That whole fly-by-night lending boom, slicing and dicing mortgage bonds, derivatives and CDOs, and all the other shadiness of the 2000s mortgage market was a Wall Street creation, and that is what drove all those risky mortgages.
Once again, the reason he was able to make so much money on his bet against mortgages was because the broadly held view in a very deep market was that the only direction for mortgage bonds was up.
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Instead, it appears they were slapping bogus ratings on poor-quality, high-risk mortgage bonds just to ensure they got their fees, ignoring the fact that real people were counting on them to give an independent view of the safety of the investments.
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Unease has been growing since last year, when the sharp drop in interest rates, and the consequent rush to refinance mortgages taken out at higher rates, left Fannie Mae with a mismatch between its debt obligations and its revenues from mortgage bonds.
Bank of America will defend itself saying disclosures over mortgage bonds issued by Countrywide were sufficient for big investors like AIG, but the problem is Bank of America has become a prime target for large institutions seeking to limit the damage of the credit crisis.
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