Prime Housing Market and BAC

There's some serious hating going on with Bank of America:

• Zero Hedge covers Value Investor Club's review
• Bill Black on BAC move of Derivatives to BofA FDIC backed holding company
• Yves Smith on same

The first article discusses the possibility of a Bank of America default. The second and third articles are about a move of risky Merrill Lynch assets into the Bank of America holding company which contains Bank depositors money and is protected with FDIC. These two authors propose that bank deposits are being used as collateral for the derivatives.

Should B of A customers be worried? What about Merrill Lynch customers? What if your bank clears through BofA (e.g. First Republic Bank), should you be worried about that?

What does this have to do with housing? I'm not sure unless the CDS book that Merrill held includes a whole bunch of subprime, alt-prime and prime MBS?

On another note, after reading quite a bit in the blogosphere (and not sure if I'm just looking for bad news), but I've come to the, perhaps, cynical view that the Fed is holding interest rates low to protect large banks; that is, to keep them from failing. Why? Because banks get to keep assets on their books without marking to market. If interest rates go up, housing prices will fall (it's the natural way of things). Banks aren't in the business of managing real estate, they hold the property as collateral, but want to be rid of it as soon as possible. It seems they are trying very hard to not recognize bad loans by (1) holding back on foreclosures and (2) not marking to market. Also, (3) lobbying government to hold rates low to keep prices high is not a bad move.

Back that up you say? OK:

Here's an article on lurking foreclosures (#1).

Here's an article that explores different options in the Mark to Market debate (#2).

It's pretty easy to find conspiracy theories that defend point #3.

On yet another note, here are two great articles on why right now (2011) is a bad time to buy an expensive house and how to determine if the house you're buying is too expensive (via prevailing rent rates): (a) terrible idea and (b) don't be suckered.

Finally, Zero Hedge believes Bill Gross front runs the Fed using contacts he has on the Fed. Here's an article proposing that he's buying up MBS because the Fed is about to start a program to do that (and he's trying to arbitrage that trade).

I've noticed that the PrimeX indexes have taken a breather from their downward plunge. Deutsche Bank put out a report on the PrimeX suggesting a BUY. Here are the last two paragraphs from that report:

Based on October 14’s closing PrimeX prices, we estimate that the market implied HPDs forARM.1, ARM.2, FRM.1 and FRM.2 are 16%, 19%, 27% and 30%, respectively. Those HPDscenarios are worse than most of the projections by market participants. Therefore, PrimeXindices are oversold at their current levels, according to our work.

Despite all the weak fundamentals and technicals, we believe that the PrimeX indices areoversold at current levels. The market-implied HPD in our analysis suggests that a massivedecline from current price level is not sustainable given the indication that future home pricedeclines have been mostly priced in. Furthermore, the high running coupons of the PrimeX indices are significantly more expensive to carry for shorting the PrimeX.

I'm not moved by this logic. The claim is that PrimeX is a buy because those default rates seem unlikely and shorts are too expensive (coupon). The coupon is only expensive if you don't believe there will be defaults.