Bear's $30 billion mortgages may fare well

NEW YORK Tue Nov 11, 2008 5:24pm EST

BlackRock President Robert Kapito speaks at the Reuters Finance Summit in New York November 11, 2008. REUTERS/Brendan McDermid

BlackRock President Robert Kapito speaks at the Reuters Finance Summit in New York November 11, 2008.

Credit: Reuters/Brendan McDermid

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NEW YORK (Reuters) - A $30 billion Bear Stearns mortgage portfolio backed by the U.S. government is generating cash flow as expected, and could end up being worth more than its market value implies, the portfolio's manager BlackRock said on Tuesday.

Speaking at the Reuters Global Finance Summit, BlackRock President Robert Kapito said that "the cash flows are coming in very close to what we had anticipated from the very beginning."

If this portfolio performs better than expected, it may indicate that investors were wrong to lose faith in Bear Stearns in March.

New questions may also arise regarding mark-to-market accounting, which requires banks to record some assets on their books at their market value. The wider use of this accounting method, which can trigger big losses and capital hits for banks when asset values decline, has grown controversial.

"That's become a very big issue in the market place, is that you have securities where the cash flow is coming in very close to predicted values, but the current mark to market, because of the illiquidity ... has been a big pressure on companies' capital," Kapito said.

Some regulators agree with Kapito. At a conference in San Francisco on Monday, Office of Thrift Supervision Director John Reich said, "When there are no markets for securities, it makes absolutely no sense to see institutions have to write the securities down to an unreasonable level reflecting a period of time when markets have seized."

But some supporters of mark-to-market accounting believe that it provides clear information about the value of a bank's assets, and that attracting more capital to the banking system will require more transparency.

News that the Bear Stearns portfolio might be worth more than its market value implies lifted U.S. shares off their session lows in the middle of the day.

"All those financials have toxic assets marked at fairly draconian prices and if cash flows were better from the Bear portfolio, that is a positive for the market," said Bobby Harrington, head of block trading at UBS in Stamford, Connecticut. "It implies that maybe things are not as bad as the market is telling us."

SOMEWHERE IN BETWEEN

As of the end of September, the market value of the Bear Stearns portfolio was $26.8 billion, compared with its original face value of $30 billion, according to a government report on October 23.

"I would say that the cash flows on these securities predict a higher value than what is currently marked to market," Kapito said.

When asked if the predicted value could be between the portfolio's current market value and its face value, Kapito said, "somewhere in between there, yes."

The Bear Stearns mortgage portfolio's risk ended up mainly in taxpayers' hands in June after JPMorgan Chase & Co (JPM.N) agreed in March to buy the faltering investment bank only if the government guaranteed some of Bear's assets.

(For summit blog: summitnotebook.reuters.com/)

(Additional reporting by Kristina Cooke; Editing by Phil Berlowitz)