T2 Buys ‘Most Toxic Mortgages Ever Written’

Dec 9 2008 | 2:01am ET

New York-based T2 Partners is betting that the housing crisis will continue through next year, shifting a portion of its assets into mortgage-backed securities for the first time. The hedge fund’s founder, Whitney Tilson, announced the firm’s plans at a Reuters summit in New York yesterday.

“For the first time in our 10-year history we are buying distressed debt, and we are selling equities to do it,” Tilson said. He said some of the one-time triple-A-rated bonds offer “enormous” returns on capital, with the most senior securities paying interest, allowing the firm to get cash back “very, very rapidly.”

“It would be hard to find a more tainted asset, and of course therein lies opportunity for people who can do the work on it and who don’t care what the rating is,” Tilson said, adding that the securities his firm is buying are “pools of the most toxic mortgages ever written.”

“The characteristics of these would really make your jaw hit the floor.”

T2 has moved between 10% and 25% of its assets into mortgage-backed securities, Tilson said. On some of the bonds, T2 is writing of some 98% of the loans that they include.

Tilson said the $100 million fund expects to make between 30% and 70% on its mortgage-backed investments.


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