tag:blogger.com,1999:blog-30213905.post7347906658184783742..comments2023-12-23T03:16:36.014-05:00Comments on Robert Hansen's Blog: A Mortgage Backed MysteryRobert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-30213905.post-28404226280312704022008-10-04T11:02:00.000-05:002008-10-04T11:02:00.000-05:00I essentially agree with this. They were arbitrag...I essentially agree with this. They were arbitraging the agencies and related prices. But I don't think the arbitrage should have existed, that is what I am saying. That is the Modigliani Miller idea: you should not be able to arbritrage equity and debt prices to increase the value of the firm. Of course, at times such mispricing will exist. Why did this one persist for so long?Robert G. Hansenhttps://www.blogger.com/profile/08922339441309144396noreply@blogger.comtag:blogger.com,1999:blog-30213905.post-41520828452379089912008-10-04T07:50:00.000-05:002008-10-04T07:50:00.000-05:00Bob,The cost of financing the tranches securities ...Bob,<BR/><BR/>The cost of financing the tranches securities was lowerthan the cost of financing the original asset because the rating agencies were willing to give higher ratings to some part of the tranches such that on a blended basis the cost of financing was lower.<BR/><BR/>This is no different than issuing debt with lower cost to buy any asset. The cash flow of assets does not change but the cash flow to equity holder does. Of course the riskto the equity holder does increase but as banker you have arbitraged (if you sold everything) the situation and created cash and value to yourself. It is essentially arbitraging the rating agencies rules and related cost of financing.<BR/><BR/>AKAnonymousnoreply@blogger.com