AgriBank Strategy on Verge of Vindication

AgriBank's insistence on retaining its mortgage-bond investments through the worst of the credit crisis may finally be paying off.

Buyside players expect that when the St. Paul, Minn., lender issues its 2010 annual report at the end of this month, writedowns on its mortgage-bond holding will be much smaller than before maybe $55 million of fresh markdowns last year, compared to $221.6 million in 2009 and $345.8 million in 2008. At this rate, those investments could even start recovering some value by the end of this year.

That would mark a vindication of sorts for AgriBank's strategy of sitting on its mortgage-bond portfolio even as its value plummeted amid the credit-market meltdown. While most other institutional investors unloaded their structured-product holdings, often at extreme discounts, AgriBank wagered that eventually credit conditions would improve, and its positions would regain much of their lost value.

AgriBank's holdings of non-agency mortgage bonds are split into two portfolios, one containing paper backed by jumbo and alternative-A mortgages, and the other involving subprime mortgages and home-equity loans. The prime and alt-A securities had a value of $333.9 million at the end of the third quarter, while the other component was valued at $220.5 million.

In its annual report, AgriBank is expected to write down the non-agency portfolio by another $25 million, versus an unrealized loss of $129.4 million for 2009. The bank is seen writing down the other portfolio by about $30 million, compared to $92.6 million in 2009.

The slower decline is tied to an ongoing rise in mortgage-bond prices on the secondary market. Most triple-A-rated securities backed by jumbo and alt-A mortgages are now trading well above 90 cents on the dollar and in some cases have regained par value.

AgriBank is the largest of five wholesale lenders that operate under the U.S. Farm Credit System. As such, its investment activities are limited to triple-A paper, though a number of the bonds it bought were downgraded during the financial crisis. At one point, AgriBank had to seek a waiver from its chief regulator, the U.S. Farm Credit Administration, to retain 59 batches of bonds whose grades were no longer triple-A.

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