Money Talks Louder Than Happy Talk

Good indications here. From Bloomberg.

April 25 (Bloomberg) -- Citigroup Inc. and Merrill Lynch & Co. led $43.3 billion of U.S. corporate bond sales, the busiest week on record, as financial companies sold debt at the highest yields since May 2001.

Sales compare with $31.2 billion last week and an average this year of $18 billion, according to data compiled by Bloomberg. Citigroup, the biggest U.S. bank by assets, sold $6 billion of hybrid bonds in the company's largest public debt offering, while New York-based securities firm Merrill Lynch raised $9.55 billion by issuing debt and preferred securities.

Bond offerings soared as investors grew more optimistic financial companies can recover from $309 billion of writedowns and credit losses tied to the collapse of subprime-mortgage securities. Banks and securities firms sold 88 percent of investment-grade debt this week, Bloomberg data show. High-yield bond sales swelled to the most since November.

``Investors are feeling better about banks being proactive about raising capital,'' said Mike Difley, who helps oversee $21 billion in fixed-income assets as a portfolio manager at American Century Investment Management in Kansas City. ``They're trying to get their house in order.''

The extra yield investors demand to own investment-grade debt fell 9 basis points this week to 268 basis points, the lowest since March 5, according to Merrill Lynch index data. Yet yields rose to 6.13 percent, the highest since August. A basis point is 0.01 percentage point...

for some peoples, times are really good

LONDON (Reuters) - While the global credit crunch has forced many consumers to rein in spending, one Beijing-based billionaire has splashed out a record $500,000 on 27 bottles of red wine, London-based Antique Wine Company said on Saturday.

The anonymous Chinese entrepreneur bought a mix of vintages of Romanee Conti, a Burgundy wine and considered to be among the world's most exclusive with only 450 cases produced each year.

The client bought 12 bottles of Romanee Conti 1978, two bottles of the 1961, 1966, 1996 and 2003 and single bottles of the 1981, 1990, 1992, 1995, 1999, 2001 and 2002.

PALM BEACH — In another sign of just how hot the mansion market is, the oceanfront estate built by billionaire businessman and philanthropist Sidney Kimmel has sold for $81.5 million, a record for the island.

John L. Thornton, 54, a former Goldman Sachs partner and chairman of the Brookings Institution, is the buyer, people familiar with the transaction said.

wamu gets mad loot

smells like we may be getting close to a bottom - the smart money is coming in and starting to put values on this stuff.

Washington Mutual's Kerry Killinger called in a few friends from the past to help salvage the largest U.S. thrift, and possibly his job.

The Seattle company, battered by the credit crisis, said Tuesday it will have a greater than expected $1.1 billion first-quarter loss, after taking a $3.5 billion provision for loan losses and $1.4 billion in charge-offs for bad loans. It is closing its stand-alone home lending offices and its business of lending to mortgage brokers. It reduced its dividend to 1 cent a quarter, from 15 cents, which will save $490 million annually.

Killinger, 58, and the company's CEO since 1990, is battling a coalition of unions that are demanding the ouster of two board members and asking tough questions about whether WaMu (nyse: WM - news - people ) took the right steps early enough to protect shareholders from a downturn in the mortgage markets.

He's also battling an image problem, with critics accusing him of poor strategic vision in the face of a credit meltdown. Shares of WaMu have tumbled 70% in the last year and were down another 9% on Tuesday.

Like many other financial companies, the bank's been looking to raise new capital, but at least it hasn't had to resort to overseas investment funds or general stock sales. On Tuesday, it announced plans to sell $7 billion worth of securities to Texas Pacific Group and other "long-time" institutional investors, an amount that was more than expected. The price at $8.75 is a 33% discount to WaMu's closing price Monday.

David Bonderman, founder of Texas Pacific Group, will rejoin the board of WaMu, where he was a director until 2002. He's bringing a friend with him, Larry Kellner, chief executive of Continental Airlines (nyse: CAL - news - people ), who knows a thing or two about turning around a struggling company. Because Texas Pacific Group was allowed only one board seat, Kellner's role will be to participate as an "observer."

A Good Sign for the Real Estate Market

A bottom needs to be found, and this should help. From Bloomberg

Blackstone Raises Record $10.9 Billion Property Fund (Update1)

By Hui-yong Yu and Jason Kelly

April 1 (Bloomberg) -- Blackstone Group LP, manager of the world's biggest leveraged buyout fund, raised a record $10.9 billion to invest in property as the U.S. housing slump pushes global real-estate prices lower.

The fund, the New York-based firm's ninth property pool, brings to $25.7 billion the capital it has raised to buy real estate since 1992, New York-based Blackstone said in a statement today. The company is raising a separate fund of more than $1 billion for Western Europe.

``There should be attractive investment opportunities for this capital, given the market dislocation that exists today,'' Jonathan Gray, senior managing director and co-head of Blackstone's real-estate group, said in the statement.

Blackstone is expanding real estate investing as the market for corporate buyouts remains all but frozen. Its real-estate funds have delivered an average annual return of 31 percent after fees since 1992, higher than private equity or hedge funds, the firm said in government filings prepared for its initial public offering last year.

The firm, led by Stephen Schwarzman, last year completed the biggest-ever buyouts in the real estate and hotel industries. It acquired Sam Zell's Equity Office Properties Trust for $39 billion including debt in February 2007 and quickly resold more than $28 billion of the buildings to pay down debt. Blackstone bought Hilton Hotels Corp. for $26 billion with assumed debt last October...

Good News

Ambac Has $15 Billion in Claims-Paying Resources, Callen Says

By Romaine Bostick

March 14 (Bloomberg) -- Ambac Financial Group Inc., the world's second-largest bond insurer, said it has more than $15 billion in claims paying resources and will be able to retain its AAA ratings and meet its immediate objectives.

``Ambac never considered a `bailout,''' Chairman and Chief Executive Officer Michael A. Callen said in a letter to policyholders released today. ``Many parties offered us capital alternatives, but, as I have said publicly, their terms were at an unacceptably high price.''

More scary news on banks (business week)

Investors breathed a sigh of relief on Mar. 11 when the Federal Reserve offered to lend troubled banks as much as $200 billion in Treasuries. Still, the Fed's lifeline won't fix the root of the housing market's problems—falling prices and rising defaults. So it is unlikely to save mortgage lenders from the next wave of losses, those buried deep in the minutiae of balance sheets.

A closer look at the books of big lenders reveals several weak spots that haven't yet shown up in the financial results. At many banks, bad loans are piling up faster than the amount of money they're setting aside to cover them. Meanwhile, housing lenders booked income on vulnerable exotic loans and mortgage securities before they collected the money—paper gains that may be reversed through writedowns. Plus the values of some troubled loans, which have been trimmed modestly so far and shown up in previous losses, could still be overstated......

Moishe: Let's make an offer

From Bloomberg.

March 4 (Bloomberg) -- Nothing has done more to disturb financial markets in recent months than the huge writedowns in the value of bank assets related to subprime mortgages. Some of them may have gone too far.

Federal Reserve Chairman Ben S. Bernanke said in congressional testimony on Feb. 28 that accounting rules may be forcing banks to put artificially low values on little-traded assets when they mark them to market.

The inability to value such assets on the basis of actual trades, Bernanke said, is ``one of the major problems that we have in the current environment. I don't know how to fix it. I don't know what to do about it.''

Writedowns in the tens of billions of dollars have forced some large institutions, including Citigroup Inc., to raise new capital to offset losses and perhaps made them less willing to extend credit, hurting economic activity.

Some analysts, such as Richard Bove of Punk Ziegel & Co., say the tools banks are using to value their assets ``don't reflect the real world.''

``This mark-to-market accounting forces banks to mark their portfolios against indexes that aren't representative of what's going on in the markets at all,'' Bove said in a Feb. 28 interview.

One index banks use ``shows something like an 8 percent potential loss in commercial real estate in the United States,'' he said. ``Do you know what the actual loss is right now? One quarter of 1 percent.''

`Fallacious Indexes'

In other words, banks are marking their securities against an index that suggests the losses will be 32 times worse than the actual loss experience, Bove said.

``We're marking against fallacious indexes,'' he said, ``and that's creating more problems than necessary.''

A key issue is that with many investors shunning risk, an asset that in the future might have substantial value may have few if any buyers now.

Funny, but True

I know this is ruining Moishe's chances of appearing on Kudlow and Co., but c'mon! From The Big Picture.

The Modern Kudlow To Standard English Translation Guide
Kudlowism : Modern Translation
“The Greatest Story Never Told”:
Early stages of a normal economic expansion.
"Goldilocks Economy":
Latter stages of expansion; cracks
in the façade are beginning to show.
“A possibility of Recession exists”:
The recession has already begun.
“A Mild Recession”: We are in a broad and deep recession.
“We are in a serious recession”: Stock up on canned food, bottled water and handgun ammo.
“I don’t see how this can get any worse”: BUY!

Grain of Salt

From Bloomberg.

Feb. 11 (Bloomberg) -- Barton Biggs, co-founder of hedge fund Traxis Partners LLC, said he's ``gradually increasing'' his holdings of U.S. equities because he doesn't expect a recession and shares are ``very, very cheap.''

Biggs, the former global investment strategist for Morgan Stanley, said in a Bloomberg Television interview that the market is ``at or very close to an important bottom'' and may be led higher by banks and brokerages when a rally occurs. Some financial companies may advance 20 percent to 25 percent over periods of two to three weeks, said Biggs, who helps manage $1.5 billion in Greenwich, Connecticut.

The Standard & Poor's 500 Index fell 6.1 percent in January, its biggest monthly decline since September 2002 and its worst start to a year since 1990. During the month the index fell as much as 16 percent from its Oct. 9 record.

Financial companies in the index fell almost 21 percent in 2007, the worst performance among 10 industry groups and their biggest drop since 1990. They trade for 14.8 times profits, compared with an average price-earnings ratio of 15.5 this decade, according to data compiled by Bloomberg.

The S&P 500 trades for 18.1 times earnings, 31 percent below its monthly average this decade, according to data compiled by Bloomberg.

Biggs correctly forecast U.S. equities would rebound from declines in March and August last year. On March 16, following a 5 percent decline by the S&P 500 from its Feb. 20 peak, he said stocks were approaching a bottom and predicted a gain of as much as 15 percent for the index in 2007.

The S&P 500 rose as much as 12 percent from that level before retreating to end the year with a 3.5 percent gain.

On Aug. 16, after a 9 percent decline by the index, Biggs said it was bottoming and predicted a rebound. The benchmark rose almost 11 percent over the next seven weeks.

Good piece on whether or not Obama would be good for the economy (business week)

On Sunday, Feb. 10, after he found out he'd won that day's Democratic Presidential primary in Maine, but before his appearance on CBS's 60 Minutes, Senator Barack Obama (D-Ill.) sat down at the keyboard of his computer to write an e-mail. Not to a media consultant or a delegate counter, but to banker Robert Wolf, CEO of UBS Americas (UBS). The two men exchanged notes about the Senate-passed economic stimulus package and that weekend's G-7 economic summit, Wolf says.

A banker as Obama's pen pal? Hard to believe, given the senator's liberal image. But in between rallies and airplane flights on the campaign trail, Obama has also taken time to consult on the economy with billionaire Warren Buffett, whose support of rolling back the Bush tax cuts Obama often cites in his stump speeches. Obama has also been in touch with former Federal Reserve Chairman Paul Volcker, who endorsed the freshman senator in January. "When I sat down with him, I found him to be unbelievably refreshing and smart and thoughtful," says Wolf, who first met Obama at the offices of financier George Soros. The UBS chief has gone on to raise more than $1 million for the Obama campaign.

The rest of Corporate America may not be persuaded as easily. After all, Obama is hardly a shoo-in for the C-suite set: He's got a scant three-year record on the national stage, and he wants to roll back the Bush tax cuts that benefit many of the people running big American companies. Plus, the U.S. Chamber of Commerce gives him the lowest rating of any of the three major contenders for the Presidency, behind Senator Hillary Clinton (D-N.Y.) and Senator John McCain (R-Ariz.). But Obama's sweep of the "Potomac Primary" in Maryland, Virginia, and the District of Columbia makes him a very real contender for the Democratic Presidential nomination...

Quote of the Day

Brought to my attention by The Big Picture. Click here for other subprime related posts that Morty and Moishe Recommend...

"I wouldn't quite call it a credit crunch. Money is available, and it's really quite cheap because of the lowering of rates that has taken place.”
...he said what had taken place was "a re-pricing of risk," leading to an "unavailability of what I might call 'dumb money', of which there was plenty around a year ago."

-Warren Buffett

More Background on the Microsoft/ Yahoo Deal

From the great financial blog, The Big Picture. Click here for other deal related content on Morty and Moishe Recommend...

Was a Private Equity Bid for Yahoo Thwarted by Microsoft ?
Monday, February 11, 2008 | 06:00 AM
in Corporate Management | M&A | Valuation | Web/Tech

Last week, before the Microsoft (MSFT) deal was rejected by Yahoo's Board, some interesting chatter was bouncing around NYC.

The latest rumor to make the rounds was that Yahoo (YHOO) was just about to announce a negotiated transaction for the sale of the company to an East Coast private equity firm. Then Microsoft stepped in the way. We first heard this story sometime between Mister Softee's $31/share, $44 billion hostile bid, and this weekend's rejection of that offer by Yahoo as an insufficient valuation for all of Yahoo's properties.

The rumors of this now pre-empted private bid include the following:

-to be announced as early as February 5th;
-negotiated price was in the $23-25 range;
-some Yahoo! properties to be spun out to shareholders;
...
While this remains unconfirmed by anyone willing to make an on-the-record statement, it is well sourced enough that I suspect there is sat least some degree of truth to it.
...

More Gangster News, For Fans of The Wire

From the Philadelphia Inquirer. Click here for more gangster tales that Morty and Moishe recommend...

Kingpin: 'I broke the code'
On the stand four days, Camden drug lord Raymond Morales ratted on major players. He did good business, he said. His regret: Testifying.

By Troy Graham
Inquirer Staff Writer
In the last 15 years, perhaps no one has contributed more to the misery of drugs and violence on Camden's streets than Raymond Morales.

A former cocaine wholesale and retail kingpin, Morales secretly pleaded guilty in federal court in 2005 and helped investigators dismantle his organization and target his old customers.

For four days, Morales recently sat on the witness stand for the first time, testifying against three men with whom he did business, and giving a remarkably frank and chilling description of his long reign at the top of the drug world.
...
Morales' business ties to some of Camden's most notorious crime figures stretch back to the early 1990s, when he said he used the menacing Sons of Malcolm X street gang as muscle. Gang members eagerly provided their help so they could have more access to his wholesale cocaine, he said.

The Sons controlled vast swaths of the North Camden drug trade for more than a decade and were best known for the 1992 "test night" shootings, in which gang members had to show their loyalty by killing random civilians. A former member, convicted as a juvenile in one of the test night shootings, is scheduled to testify this week.

Years later, a competitor tried to contract a hit on Morales with Leonard "Pooh" Paulk. Paulk, described as another of the city's largest wholesalers, warned Morales instead.

Paulk is the stepfather of Camden basketball legend Dajuan Wagner, who played three years for the NBA's Cleveland Cavaliers. Paulk was given a life sentence on drug conspiracy charges in federal court in 2005.

Morales's testimony also was remarkable for the way he described his business, dealing with many of the same issues as legitimate executives and applying many of the same economic theories.

For one, he offered a money-back guarantee on the quality of his drugs. And he griped from the stand about expenses cutting into his profit - though his expenses included paying bail bondsmen and lawyers and the toll of stick-up artists.

The wild card, of course, was the violence. Morales once had a drug dealer killed for representing his own, inferior cocaine as having come from Morales' supply.

"Nothing's normal in the drug trade," he said. "Every day's different."

Morales was wildly successful. Investigators said his business grew so large and was able to buy so much cocaine at once, that he drove out his competitors - a strategy not unlike Wal-Mart's.

At his height, Morales said, he was moving 70 kilos a month from his connection with a group of "Arizona Mexicans."
...
His drug-corner "manager," Dennis Rodriguez, testified in this same trial that they pioneered the sale of $5 bags of crack rather than the corner standard $10 bags. Addicts, he said, often showed up with $8 or $9 and haggled.

The $5 bags were a sensation.

"We were selling more coke than ever. Customers were coming out of everywhere," Rodriguez testified. "We were number one."
...

Who Doesn't Love a Good Old Fashioned Lawsuit?

From the NY Times. Let's everybody sue everybody else.

...
Wall Street banks that sold mortgage investments around the world face legal complaints from as far away as Australia and Norway. Lehman Brothers, the Wall Street bank with the biggest mortgage business, is being sued by towns in Australia that say a division of the firm improperly sold them risky mortgage-linked investments. Lehman has denied the charges and has said the unit, formerly known as Grange Securities, acted properly.

Closer to home, members of a New Jersey family have sued Lehman for $4.14 billion, saying the firm steered them into complex securities that have become difficult to sell, Bloomberg News reported Friday. Lehman denied the accusations.

In the United States, Lehman is suing at least six mortgage lenders and brokers like Fremont Investment and Loan and the Fieldstone Investment Corporation, claiming they sold Lehman dubious loans. Lehman claims that borrowers’ incomes were overstated, appraisals were inflated and the homes were in poor condition. In most cases, the lenders are fighting the allegations and Lehman’s demand that they buy back defaulted or otherwise problematic loans.
...

More People Morty Does Not Stay Up at Night Worrying About...

Follow up to Moishe's post. From the NY Times.

LAS VEGAS — It was Monday night on the Strip, and John Devaney was giving a party for himself and fellow connoisseurs of risk who have seen their hot hands go cold.
In a gilded ballroom at the Venetian, the revelers sipped cabernet, dined on surf and turf and crowed as the Blue Man Group put on a private show.

The partygoers had traveled to Sin City this week — Mr. Devaney by chartered jet — for an event that before the current credit squeeze might have been called the Predators’ Ball of this era.

This time, with mortgage securities replacing the junk bonds of the 1980s, the gathering felt more like group therapy.

The occasion was, officially, the 5th annual conference of the American Securitization Forum, a celebration of the financial wizardry that supposedly turns risky mortgages and other loans into gilt-edged securities but, as Mr. Devaney belatedly discovered, does not always make them safe. Mr. Devaney, a 37-year-old money manager, lost big on bond investments last year. This week, in Las Vegas fashion, he said he was doubling down.

The four-day event at the Venetian drew more than 6,500 financial professionals from across the country. Many came in search of ways to ride out — or better yet, to profit from — the mortgage mess their industry helped to create.
...

Dude to America: Shut Up, Already, You Big Baby

From the Financial Times.

Stop behaving as whiner of first resort

By Ricardo Hausmann

Published: January 30 2008 19:36 | Last updated: January 30 2008 19:36

The same voices that supported tough macroeconomic policies to deal with the excesses of spending and borrowing in east Asia, Russia and Latin America are today pushing for a significant relaxation in the US to deal with the so-called subprime crisis. Interest rates should be slashed quickly and $150bn put into taxpayers’ pockets by April at the latest, they say. The Fed cut by another half-point on Wednesday.

The goal seems to be to avoid a 2008 recession at all costs. As Larry Summers, former Treasury secretary, put it, failure to act would make Main Street pay for the sins of Wall Street.

It is easy to lose sight of the overall picture. Main Street consumers have overspent and over-borrowed and are unable to meet their obligations. The fact that households may have so behaved because they were enticed by “teaser loans” does not change the facts; it only assigns blame. Consumption has been above sustainable levels and needs to adjust down, whatever view one has about the responsibility of adults over their financial decisions.
...
The US should face its need for adjustment with courage and reason, not fear. It should stop behaving as the whiner of first resort, ready to waste all its dry powder on a short-sighted attempt to prevent a 2008 recession. Many poorer countries with weaker markets and institutions have survived and benefited from an adjustment that involves a year of negative growth. Faster bank recapitalisation, fiscal investment stimulus and international co-ordination should be first on the ­policy agenda.

The writer is the director of Harvard University’s Center for International Development

Moishe: This is not a Good Cocktail Party Conversation Piece with Kudlow

Food stamps offer best stimulus - study
Moody's study suggests extending unemployment benefits, increasing food stamps fastest ways to stimulate economy.
WASHINGTON (CNN) -- As Congress and the White House consider a $150 billion stimulus package that includes tax rebates and tax incentives for business, a report released Tuesday suggests that other methods would do a better job of infusing money into the flagging economy and doing it fast.

The industry research firm Moody's Economy.com tracked the potential impact of each stimulus dollar, looking at tax rebates, tax incentives for business, food stamps and expanding unemployment benefits.

The report found that "some provide a lot of bang for the buck to the economy. Others ... don't," said economist Mark Zandi.

In findings echoed by other economists and studies, he said the study shows the fastest way to infuse money into the economy is through expanding the food-stamp program. For every dollar spent on that program $1.73 is generated throughout the economy, he said.

"If someone who is literally living paycheck to paycheck gets an extra dollar, it's very likely that they will spend that dollar immediately on whatever they need - groceries, to pay the telephone bill, to pay the electric bill," he said.

Link via the great site Wall Street Jackass

Oh Snap! Is Kudlow Busting on Greenspan?

This is not so optimistic, is it, Moishe? Click the link to Kudlow's site for a informative chart that illustrates his point.

Stop & Go Fed
Has the Fed spent too much time tinkering with interest rates? Was Ben Bernanke handed a bucketful of bad molasses from Alan Greenspan?
...
For four years, between 1995-1999, there was basically no change at all in monetary policy. Nothing. Then, all of a sudden, the Fed started raising the fed funds rate in 2000. So, loose in 1999, followed by tightening in 2000.

Then, the Fed put the pedal to the metal in ’01, ’02, ’03, ’04. That was their big GO period.

As we know, in ’05, ’06, and early ’07, the central bank hit the brakes. It had officially entered the STOP camp.

Lately, it’s been one big GO.

Remember, all this Fed tinkering occurred in less than ten years. Stop. Go. Stop. Go. Monetary whiplash.

I prefer monetary stability. And I just can’t help but wonder whether the current Fed chair wasn't dealt a really crummy hand from the Greenspan Fed. It's not Bernanke's fault. All the previous monetary tinkering landed him on the Greenspan shovel brigade. He's cleaning up.

Bottom line: All this Fed fine-tuning can’t be great for the economy.

The Transition to Green Technology Will Rival, or Surpass, the Tech Boom

Why don't our better policitians (Obama) talk about how going green will be a net economical boost? As always, click the link above for the whole article.

SAN FRANCISCO — The sun is starting to grow jobs.

While interest in alternative energy is climbing across the United States, solar power especially is rising in California, the product of billions of dollars in investment and mountains of enthusiasm.

In recent months, the industry has added several thousand jobs in the production of solar energy cells and installation of solar panels on roofs. A spate of investment has also aimed at making solar power more efficient and less costly than natural gas and coal.

ok Clayton Holdings,you are a better informant then Pussy on Sopranos

From the Wall Street Journal:

The New York attorney general's office, pursuing an investigation into whether Wall Street firms improperly packaged and sold mortgage securities, is latching onto a powerful regulatory tool: the 1921 Martin Act.

The state law, considered one of the most potent legal tools in the nation, spells out a broad definition of securities fraud without requiring that prosecutors prove intent to defraud. As a result, the act has become an influential hammer in recent years for New York state prosecutors in cracking down on securities manipulation, improper allocation of initial public offerings of stock and misleading stock research on Wall Street....

The development comes as the attorney general's office has gained the cooperation of Clayton Holdings Inc., a company that provides due diligence on pools of mortgages for Wall Street firms. At issue is whether the Wall Street firms failed to disclose adequately the warnings they received from Clayton and other due-diligence providers about "exceptions," or mortgages that didn't meet minimum lending standards.

Such disclosures could have prompted credit-ratings firms to judge certain mortgage-backed securities as riskier investments, making them more difficult to sell, these people said. The attorney general is examining, among other things, whether some Wall Street firms concealed information about the exceptions from the credit-rating concerns, these people said, in a bid to bolster ratings of mortgage securities and make them more attractive to buyers, such as pension funds, which often required AAA, or investment grade, ratings on potential investments in securities containing risky mortgages.

The attorney general's office has issued Martin Act subpoenas, which don't spell out whether matters are civil or criminal in nature, according to people familiar with the matter. So far, the recipients include financial firms Bear Stearns Cos., Deutsche Bank AG, Morgan Stanley, Merrill Lynch & Co., and Lehman Brothers Holdings Inc., possibly among others. Representatives of Bear, Deutsche, Morgan, and Lehman declined to comment on the investigation. A Merrill spokesman said, "We cooperate with regulators when they ask us to," but declined to elaborate....

With data provided by Clayton, Mr. Cuomo's office is seeking to gather more information on how Wall Street firms purchased home loans that had been singled out as "exception loans" -- that is, loans that didn't meet the originator's lending standards. Data from Clayton, for instance, indicates that in 2005 and 2006, years in which the mortgage-securitization business was going full throttle, some investment banks acting as underwriters were purchasing large numbers of loans that had been flagged as having exceptions, these people said.

In 2006, according to the data, as much as 30% of the pool of exception loans was purchased by some securities firms, these people said. One likely reason: Flawed loans could be purchased more cheaply than standard loans could be, lowering a firm's costs as it sought to compile enough mortgages for a new security.