Friday, August 31, 2007

Government is bailing out homeowners - Mortgage Aid Plan

--Just help subprime homeowners --it rejects a bailout for speculator --Bush will let the Fed Housing Assocation guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favorable rates --He will also change the tax code to aid refinancing

Thursday, August 30, 2007

Bernanke vs Greenspan

--difference in the way they perceive psychology and dual role --GS: risk taking is critical to ecnomy. BN: technical factor vs fundamental factor --dual role: BN tries to make a distance between maintaining financial stability and economy stability, liquidiy issue is not economy issue. GS: interwined functions

Bernanke put - moral hazard

--it will encourage investors to act mroe recklessly because they think Fed will protect them --investors' attitudes towards risks is intrinsic to the economy's health.

SIV (structured investment vehicles) vs conduits

--conduits have bank-supported credit lines to carry them through if they can not roll over their commercial paper while SIV receive only limited support.

Hedge Funds Do About 30% Of Bond Trading -- quote from WSJ

Hedge Funds Do About 30% Of Bond Trading, Study Says By CRAIG KARMIN August 30, 2007; Page C3 There was a time when debt was considered a boring investment, held primarily by institutions seeking predictable returns or a steady stream of interest payments. A recent study by the consulting firm Greenwich Associates shows how much that's changed. Hedge funds have quickly become a dominant player in the world of debt. In some corners of the market -- often among the most complex areas -- they are the biggest force by far. Hedge funds are responsible for nearly 30% of all U.S. fixed-income trading, according to the survey. DOMINATORS • The News: A study shows how important that hedge funds have become in debt trading -- they do nearly 30% of U.S. bond volume. • Doubled Up: The amount of trading doubled in just a year, the study by Greenwich Associates showed. • Impact on Investors: This isn't your father's debt. Hedge funds often focus on short-term goals, not the long-term holdings that other investors may prefer. That level, which reflected activity over a 12-month period through April, was double the amount of trading hedge funds accounted for the previous year. Greenwich found hedge-fund trading comprises 55% of U.S. activity in derivatives with investment-grade ratings, and also 55% of the trading volume for emerging-market bonds. The rapid rise in hedge-fund trading underscores the changing nature of the debt markets. Unlike many mutual funds that look for stable returns or pensions and insurers that want steady, long-term holdings, hedge funds frequently seek short-term gains through numerous trades they can amplify with borrowed money. "We've seen over the past 10 years a proliferation of products created to meet the needs of hedge funds," says Tim Sangston, a managing director at Greenwich Associates. "More and more of the growth in bond trading is coming from these kind of professional traders and investors." In some corners of the U.S. debt market, hedge funds practically are the market. For instance, hedge funds generated more than 80% of the trading for derivatives with high-yield ratings, and more than 85% of volume in distressed debt, Greenwich found. Hedge funds also accounted for a good portion of the trading in mortgage-backed securities, asset-backed securities, collateralized debt obligations and other parts of the debt market that have suffered recently as worries over subprime loans have spread. Analysts say these debt instruments were developed primarily for sophisticated investors like hedge funds, which sometimes use these products to protect themselves. But the debt securities have also been peddled to pension funds and other institutions that may not completely understand them. The survey involved responses from 1,333 institutions in North America, including mutual funds, insurance companies, pension funds, banks, brokerage firms' proprietary trading desks and federal agencies, Greenwich said. These investors were polled about their trading in 15 kinds of debt instruments. Overall, debt-market trading volume among the participants increased by 10% in the period, to $25 trillion, from the previous year.

Wednesday, August 29, 2007

Three gorge dam draws criticism

--China's the Three Gorges Dam drew fierce criticism during its construction for uprooting more than a million people and manhandling the Yangtze River basin. --the project has new problems: landslides, water pollution

Tuesday, August 28, 2007

State Street Double Whammy

--The Boston Globe reported that the State Street Limited Duration bond Fund lost about 37 percent of its value during the first three weeks of August. --These conduits – packages of retail and commercial loans financed by short-term debt raised in the commercial paper market – have become of increasing concern to investors amid fears that banks will have to fund the debt from their own balance sheets if these vehicles are unable to sell on their maturing paper. --Times of London woke everyone up early this morning with a report that State Street has $22 billion of exposure to asset-backed commercial paper conduits --STT is just liquidity and credit enhancement providers to these conduits, but it takes the risk when underlying asset performance deteriorates or as conduits draw upon the backup facilities from us.

Monday, August 27, 2007

Bond insurance companies

--MBIA: US largest insurer, 5.1 bil direct investment in RMBS. 0.8% of its total portfolio, only serve AAA ogligations --Assured Guaranty, 6.7 bil, 4.7% exposure. --Amac, 9.3 bil, 1.7% exposure

Saturday, August 25, 2007

how does non-bank broker dealers borrow money from Fed indirectly?

--Citigroup, with the Federal Reserve’s assistance, appears to have found a way to use the easier access to the discount window to inject cash more directly into illiquid mortgage markets. --Since the Fed eased conditions for borrowing from its discount window Friday in an effort to restore liquidity to credit markets, banks, securities dealers and others have searched for ways to exploit it. One constraint is that only banks have access to the discount window but most of the liquidity in credit markets is supplied by securities dealers. Many banks like Citigroup own securities dealers but section 23A of the Federal Reserve Act imposes limits on loans between the bank and dealer units to protect the taxpayer-backed bank deposit insurance fund. --The Fed, in a letter sent to Citigroup Monday, exempted it from the limit on how much its bank unit, Citibank N.A., can lend to its affiliated broker-dealer, Citigroup Global Markets. In the letter, the Fed said it would permit Citibank to lend up to $25 billion to “market participants in need of short term liquidity to finance their holdings of certain mortgage loans and related assets,” and it could channel the transactions through Citigroup Global Markets in the form of offsetting repurchase agreements, which are short-term loans secured by financial assets. --The amount a bank can lend to an affiliate is normally capped relative to its capital. The Fed said it was using its authority to exempt Citigroup from that cap “in the public interest.” The exemption, it said, would last as long as the Fed’s modified discount window program. --The letter makes no mention of whether Citigroup would actually use discount window loans with its new flexibility, or how much it might borrow to do so. On Wednesday Citi, J.P. Morgan Chase & Co., Bank of America Corp. and Wachovia Corp. each said they had borrowed $500 million from the discount window. A spokeswoman for Citigroup declined to comment on the bank’s request for the exemption and its approval. Both J.P. Morgan and Bank of America have received similar exemptions, people familiar with the matter said. --Last week, Citi, J.P. Morgan Chase & Co. and Bank of America had explored ways of using Fed loans to together inject $75 billion into the asset-backed commercial paper, mortgage securities markets, and other instruments The Wall Street Journal reported Monday. --Citi will channel these transactions through allifiated broker-dealer unit, which uses the forms of reverse repos or securities finance transactions(SFT) to lend money to other unaffliated broker-dealers.

Fed broadens the collateral for discount window

--In another step aimed at unfreezing the commercial paper market, the Federal Reserve Bank of New York clarified its discount window rules with the effect of enabling banks to pledge a broader range of commercial paper as collateral. --The clarification, he said, means if an issuer is unable to sell an entire portion of its paper, the bank providing the backstop can finance the unsold portion with a discount window loan, backed by the assets underlying the paper.

what is greate investors

--like sailors: they have the courage to set forth, they know where they want to go, they have a strong gyroscope to keep them on course.

Condo market is in trouble

--The condo market, while tied to the housing market overall, behaves differently under stress. While a single-family home builder generally constructs units as orders come in, a condo developer builds all at once and hopes for the best, adding risk. So while the speculative overhang of newly constructed single-family homes may have peaked in many markets across the country, the full force of the condo glut is starting to hit now. --Typically, condo developers are required to pay off construction loans shortly after construction is completed. But with sales stalled, more developers are defaulting, creating headaches for banks and real-estate funds that financed the projects. --The percentage of bank construction loans overall that are in default has risen to 2.3% in the second quarter of 2007 from 1.0% at the end of 2005 . --One of the biggest condo lenders, Chicago's Corus Bankshares, has seen its $3.7 billion portfolio of condo loans deteriorate. --Underlying the defaults was a loosening of lending standards. In the past, wary of the high risks posed by condo sales, lenders such as commercial banks would give money to condo projects with the understanding that if the condos didn't sell, the developer could rent them and still repay the loan. That would limit the amount banks would lend, because the cash from renting units is slow and steady and can cover a smaller amount of debt than the amount generated by selling all units within a year of completion, as most condo projects aim to do. But in the latest boom, a host of nonbank lenders began throwing cash at condo projects, allowing developers to pay prices for land and buildings such that they could pay back the loans only if the units sold at high prices. --

Friday, August 24, 2007

edu: Why the private equity bubble is bursting

--the bursting of the bubble will inflict broad damage. The cascade of private equity deals will slow to a trickle. Overpaid firms will deliver poor returns --the suffering won't be confined to the professionals or the wealthy. Ordinary investors investing in high-yield mutual funds will feel the pain. --begin:the combination of low interest rate, depressed stock prices, and rising corproate profits created ideal conditions for private equity firms to flourish. --middle: like many mania, the lure of easy riches drew new players, and the pace of dealmaking picked up. --As the good time rolled, the buyout binge took on a life of its own...Buyout targest realized they did not need to accept the first bid that came along, no matter how rich it was...push prices to new heights, reulting more debt. --the other half of the buyout equation are crazy lenders craving for higher yields. Banks drank the Kool Aid too, using convant lite to give green lights to deals --the cheap money pumped the bellows, and the pace of dealmaking accerlated in 2006. --All of a sudden, the music stopped. The trouble began with rising defaults in subprime market. While that market is unrelated to the buyout firms, the problems there served as a wake-up call. Debt investors began facing up to the risks they were taking. --Today the entire money-machine machinery that powered the boom has seized up as lenders awaken to the danger in these deals and insist on being paid for it. Banks will tak a bath on those transactions.

Barclays Capital Exec resigns as investments slip

--Edward Cahill, head of CDO, resigned --SIV-lite: borrow CP to fund buying long-term higher yield instruements --problem: CP cost high and they can not sell CDOs

BAC $2 bil stake on CFC

--20,000 shares of CFC's non-voting preferred stock, convertible to about 111 mil (18% statke) shares. Yileld at 7.25%. it is expensive source of capital. Damn good deal for BAC. --home mortage business lurches from boom to bust every few years, requiring lenders to boost staffing quickly for good times and lay off people amid tough periods --CFC's advantage: technology

July Durable Goods 2007

--3.7% durable goods ex transporation vs 0.6% est and -1.2% last month. --Capital Spending still looks strong, overal domestic and global economy remain healthy

Thursday, August 23, 2007

gambler's fallacy

--if five tosses of a fiar coin all turn out to be heads, whiat is the probability tha the sixth toss will be tails? 1/2 --the law of large numbers does not apply to small samples.

Home Depot Supply deal: succeed?

--This will be a test of wills between Wall Street and private-equity firms. In recent years, the buyout shops have used their clout to extract sweeter financing terms from the banks. These terms also made it harder for the banks to back out of their financing commitments, no matter how much market conditions deteriorated. Until recently, the banks were happy to oblige, given the lucrative fees that flowed from the buyout groups. --Pinched by the current credit crisis, the banks are toughening their stance against the private-equity firms. With a backlog of some $300 billion of U.S. private-equity deals still to be funded, the banks are now facing significant writedowns on their balance sheets. That's why they are weighing how to extract themselves from as many buyout transactions as possible. --Home Depot was Thursday night close to accepting about $1.2 billion less for the sale of its wholesale distribution business to three private-equity firms, people familiar with the matter said. ($10.2 bil deal - 1.2)

Discount window seems work

--Loans made from the Federal Reserve's little-used discount window shot up after the Fed eased borrowing conditions and invited banks to borrow last Friday, though a sizable chunk was soon repaid, new data from the Fed show. --As of Wednesday, the only discount loans still outstanding appear to be those announced with fanfare by the nation's four largest banks that day, according to weekly discount-window data released yesterday. --The data suggest that the Fed has had some initial success in getting banks to assist in calming credit conditions, but whether that will continue is an open question. Officials have played down expectations for borrowing, arguing that just the availability of the discount window should be a confidence booster, whether or not it is utilized. --The Fed said in its weekly report that as of Wednesday, there was $2.001 billion in loans outstanding under the Fed's primary credit program. It doesn't identify the borrowers, but the country's four largest banks -- Citigroup Inc., J.P. Morgan Chase & Co., Bank of America Corp. and Wachovia Corp. -- each said Wednesday they had borrowed $500 million that day. That means only an additional $1 million of loans to other banks was outstanding that day. Wednesday's total was the largest since April 12, 2006, when $3.6 billion worth of loans were made through the discount window, the Fed said.

Bill Gross urged Government to bail out economy

--Bill Gross urged presiden, not Fed, to bail out economy -- Bill Gross, manager of the world'sbiggest bond fund at Pacific Investment Management Co., urged theBush administration, rather than the Federal Reserve, to bail outU.S. homeowners to avoid ``destructive housing deflation.'' ``Fiscal, not monetary policy should be the preferredremedy,'' said Gross, who manages the $103 billion Pimco TotalReturn Fund. ``This rescue, which admittedly might bail outspeculators who deserve much worse, would support millions ofhard working Americans whose recent hours have become ones offrantic desperation.'' --Why is it possible to rescue corrupt S&L buccaneers in theearly 1990s and provide guidance to levered Wall Streetinvestment bankers during the 1998 LTCM crisis, yet throw 2 million homeowners to the wolves in 2007?'' Gross wrote. ``If we can bail out Chrysler, why can't we support the American homeowners?' --provideadditional avenues for people to get cheaper, reasonable, safercredit'' without relying on subprime loans --Even cuts of 200-300 basis points by the Fed would not avert a built-in upward adjustment of adjustable-rate-mortgage interest rates,'' Gross said. ``Nor would it guarantee that theprivate mortgage market, flush with fears of depreciatingcollateral, would follow the Fed down in terms of 15-30 yearmortgage yields and relaxed lending standards.'' -- Almost half of all collateralized debt obligations sold inthe U.S. in 2006 contained subprime debt, according to a Marchreport by Moody's Investors Service. CDOs are packages of bondsand loans.

Wednesday, August 22, 2007

edu: capital (securities) market

The capital market (securities market) is the market for securities, where companies and the government can raise long-term funds. The capital market includes the stock market and the bond market. Financial regulators, such as the U.S. Securities and Exchange Commission, oversee the capital markets in their respective countries to ensure that investors are protected against fraud. The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded.

Monday, August 20, 2007

how is CFC different from other mortgage originator

--CFC is a savings and loan holdin company tha includes a thrift unit, Countrywide Bank FSB, and mortgage bank unit, Countrywide Home Loans. That gives it more ways to borrow money than would be available to a mortgage bank alone. The thrift units takes deposits can borrow from the Fed Reserve and Fed Home Loan Bank and has short-term financing agreements with private banks. --Mortgage banks, which borrow short-term in credit markets, lend to home buyers, then sell the loans to WS banks or keep them as investments. They arn't bnaks and do not take deposits. --CFC said it would shfit nearly all of its home-mortgage lending from its mortgage bank into its thrift unit. --CFC is regulated by the Office of Thrift Supervision. FDIC will protect the interests of its depositors. Fed and Fed Home Loan can make added emergency loans to CFC.

Past may offer clues to market's fate

similarity with 87 and 98 crsis --quants model and leverages (margin) contributed to huge markets swings differences --valuations (87 20 PE vs now 16) --the real excess this time has been in lendigng markets (more Structure products, MBS, Junk bonds) Reassuring differences --bosth crsis were severe but brief --Fed jumped in to stanch the bleeding

GE plastics LBO

--debt sale has a fairly standard structure. It does not include some of the liberal terms - such as the ability to make interest payments with new bonds rather than cash - that were a hallmark of buyout-related debt this year. --provide a template for next generation of LBOs

Sunday, August 19, 2007

edu: repos

--largest short-term money market in the world, having a turnover of more than $1 tri a day. --a haircut is demanded by collateral buyer who provided money --most common approach in FOMC trading - open market operations --low transaction cost for a dealer who used it to finance its inventory and trading positions.

edu: financing structure of LBO

--50% to 70% of an LBO funding takes the form of senior debt: a reovlving lien of credit and senior term loan. --15% to 30% is in the form of subordinated financing --15% to 20% equity

housing market is driving by "Psychological Boom"

--how does it become an fundamental issue: investors are stretching to buy a house when they assume the price will go up. When they realize they have negative home equity they will default. --how is housing market impacting overall economy: more than half of economy is related to housing market, mortgage, banks, constructions. Now the issue in housing maket is no longer subprime issue, it is impacting even Jumo mortgage. The result is that whole housing market tanker and economy will enter into recession.

bespoken CDO

--synthetic single-trache CDO --high level of customization: reference selection vs risk selection --diversification: 100 -120 credits

Commercial Paper

--short term unsecured private money market instruement --majority (more than 70%) of issuers are financial companies --small secondary market because it is highly customized term --term less than 270 days are exampt from SEC registration

Saturday, August 18, 2007

China in danger --The most dangerous thing being produced in China is neither lead paint-laden toy cars nor magnet-spewing Polly Pocket dolls and Batman action figures. Rather, it is a booming capitalist culture that, far too often, places value over values. --This reality was brought home again this week, as Mattel (MAT) announced its second big recall of Chinese-made merchandise in a fortnight. The news, coming on the heels of Chinese food, drugs, and other items being recalled or fingered as potentially hazardous, resulted in a renewed round of pleas in Washington for heightened vigilance by the Consumer Product Safety Commission. Watchdogs, meanwhile, advocated independent, third-party testing of toys being imported into the U.S. --All of this is reasonable. But it won't get at the real issue: the need to instill in China's burgeoning population of factory owners and managers the fundamental idea that the only way to sustain a business—indeed, the only way to sustain Chinese capitalism—is to make sure that they cultivate a sense of social responsibility. --becoming rich and being ethical are somehow mutually exclusive. --First, Do No Harm --Inspirational Reading: he creation of such a pool of managerial talent

Friday, August 17, 2007

Chain of action: impact of credit crunch

--For months, Fed officials believed the financial market's problems were generally limited to borrowers of subprime mortgages -- those issued to more-risky homebuyers and firms -- and investors who held those mortgages. But the credit crunch has spread as hedge funds, banks and others from around the world reported unexpected exposure to defaulting subprime loans. The breadth, suddenness and opacity of this exposure have rattled investors and triggered a broadbased reluctance to lend to any but the most creditworthy borrower. --That skittishness spread first to the market for loans to heavily indebted companies, such as those undergoing a leveraged buyout. Next it hit "jumbo" size mortgage borrowers, and then some issuers of asset-backed commercial paper -- short-term corporate IOUs backed by other assets such as subprime mortgages, which are often sold to money-market funds.

Discount window

--The discount window was originally established as a way for the Fed to lend to banks having difficulty raising funds elsewhere, but the mechanism is little used as it generally carries a stigma. Officials are hoping their latest moves will encourage more borrowing, injecting more liquidity into the system. --Officials knew one of the biggest risks facing their new strategy was that banks wouldn't borrow at the discount window. In attempt to prevent that, officials went on the offensive. --The discount window can be particularly helpful to the nation's smaller institutions, which have less access to financing mechanisms than their larger brethren and are likely reining in their lending due to concerns about deteriorating credit markets. --Even so, the discount window's reach in the current crisis is limited by the fact that only banks can use it, and they aren't the ones facing the greatest strains. Fed officials categorically rejected suggestions by some analysts that they were acting on signs of distress among banks, saying banks are in good shape. Rather, the strains are being felt by nonbanks such as unregulated mortgage lenders, issuers of commercial paper, hedge funds, and the market for securitized loans such as mortgage-backed securities and collateralized debt obligations. --In theory banks could use the discount window to make relatively low-risk loans, such as jumbo mortgages -- as those over $417,000 are known -- or purchases of commercial paper, and be assured a profit for 30 days. Moreover, he noted that many investment dealers and finance companies have bank subsidiaries or affiliates that they may be able to use to access the discount window. For example, both Merrill Lynch and Morgan Stanley own industrial loan companies, and Countrywide owns a thrift, all of which have access to the discount window.

edu: fed rate discount rate

--The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured. --Under the primary credit program, loans are extended for a very short term (usually overnight) to depository institutions in generally sound financial condition. Depository institutions that are not eligible for primary credit may apply for secondary credit to meet short-term liquidity needs or to resolve severe financial difficulties. Seasonal credit is extended to relatively small depository institutions that have recurring intra-year fluctuations in funding needs, such as banks in agricultural or seasonal resort communities. --The discount rate charged for primary credit (the primary credit rate) is set above the usual level of short-term market interest rates. (Because primary credit is the Federal Reserve's main discount window program, the Federal Reserve at times uses the term "discount rate" to mean the primary credit rate.) The discount rate on secondary credit is above the rate on primary credit. The discount rate for seasonal credit is an average of selected market rates. Discount rates are established by each Reserve Bank's board of directors, subject to the review and determination of the Board of Governors of the Federal Reserve System. The discount rates for the three lending programs are the same across all Reserve Banks except on days around a change in the rate.

Thursday, August 16, 2007

What is Jumbo Mortgage

-- They set a limit on the maximum dollar value of any mortgage they will purchase from an individual lender. As of 2006, the limit is $417,000, or $625,500 in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. Other large investors, such as insurance companies and banks, step in to fill the need, with maximum mortgage amounts going to the $1 million or $2 million range. --Jumbo mortgage loans are a higher risk for lenders. This is because if a jumbo mortgage loan defaults, it is harder to sell a luxury residence quickly for full price.

Wednesday, August 15, 2007

China policy challenge

--sustain growth without triggering inflation China government is engaging in a delicate balanching act - attempting to cool overheated sectors while increasing investment in other sectors with national priorities --Currency: see stable currency as a key element in their overall effort to promote a stable financial environment. Higher Yuan will slow growth and encourage speculation --A revaluation of the RMB would enable other emerging economies in teh region to raise the value of their currencies. The collective outcome could be a revaluation of regional currencies against the dollar and Euro. --It is mistake to view China as competitive just because of its cheap labor. Increasingly it will be skilled labor and high quality engineers an scientists. --Energy: Russia would build a pipeline to a port in Russian Far East, to ship to China and Japan. --Credit market has turned positive: bank lending to households and corporations picked up. Cause of Asia crisis --balance of payments and banking system: current deficit and pegged currency policy caused currency to devalue.

large issues of Asset Backed CP in Canada

--Conventree is the largest non-bank issuer --Bank of Montreal and Canada Imperial Bank

Tuesday, August 14, 2007

the rise and fall of the dollar

--dollar's rise from the Spring 95 through the fall of 98 was driven by a class rise in U.S/foreign real interest-rate differentials that made dollar assets more attractive to international investors. Those inflows came in faster thant the rate at which the U.S trade and current account balances were deteriorating. Overall balances of payments(net private foreign purchases minus current account) was highly dollar positive ove the 1995-1998. --from 1999 to 2000, trade balances continued to widen and REAL interest rate differential(US MINUS GERMAN) was low. What drove the dollar higher? This reassessment was sudden and dramatic, following closely on the heels of a sudden and dramatic upgrade in market expectations regarding the U.S. economy's long-run growth prospects. ---NEW ECONOMY - HIGHER LONG-TERM GROWTH PROSPECTS - productivity was raised because of new economy --the IT driven - new economy fueled the equity market and attracted oversea capital flows at a a pace far exceeding the pace at which the U.S. trade deficit was dteriorating. ---balance of payment indicators

stock lending issues

--The stock-lending market was once a backwater of Wall Street, but has grown into a $10 billion industry, fueled by the increased use of short-selling. For years, this market had been under the radar, which authorities believe created holes in compliance and an opportunity for fraud. --Problems have occurred when stock borrowers pay finders to help locate shares when such services aren't needed, people familiar with the situation said. That can in some cases result in finders' siphoning off investor fees that should go to the brokerage house. Ultimately, the practice could make borrowing more expensive.

edu: how hedge funds avoid taxs

--Hedge funds, which control liquid pools of capital with little regulatory oversight, are a growing presence in the lending business.. Thedge funds increasingly take part in lending syndicates with traditional banks, often indrectly, aqnd also make riect loans, frequntly to riskier or smaller companies that may have difficulty obtaining traditional financing. --they use off-short affiliates and transactions designed to take advantage of a murky area in the tax law that differentiates between lending and inveting activities. --trick: passive foreign investor can avoid taxes on the profits. --the structures used by hedge funds to avoid U.S. taxes on lending activities take a variety of forms. One common structure: under American tax law, a foreign company with employees in the U.S. that makes loans in the U.S. generally owes federal corproate income taxes on the profits. But the law also says that if a foreign company is merely a passive investor or trader - as opposed to being actively engaged in a "trade or business" - it doesn't own any taxes on that income. --after making a loan, many domestic hedge funds wait between 30 and 90 days - a so called seasoning period - then sell the loan to an off-shore sister fund. Offshor fund isn's involved in the actual business of making loan. --extent: Hedge funds bought up $69.8 billion, or 23% of noninvestment grade syndicagted loans in the first half of 2007, up from 11% in 2005. --often, offhore hedge funds purchase slices of the loands shortly after the syndication deal is completed, generally waiting 48 hours before taking over responsibility for their slice of the loan. By waiting that time period, the funds argue that they aren't actually lenders, but merely foreign investors or traders purchasing loans in the secondary market and thus not taxable. --it could draw all of the offshor funds' income into the U.S. tax it is vague.

factors contributed the turmoil in the past few weeks

--fallout from soaring defaults on riskier home-mortgage loans --"downtick" rule effective in July made it easier for investors to bet on stock-price declines. why the uptick rule is revoked --obsolete. futres can bet on price decline too --SEC see little impact on volatility

why Bank of England did not pump in money

--A large fraction of U.K. banks' balance sheets are in euros or dollars, not pounds sterlings. --liquidity is provided to a large extent by the Fed and ECB.

Monday, August 13, 2007

asset-light debt --The holding company (subsidary) note was part of a broader phenomenon known as asset-light debt, in which collateral levels are far below the usual standard of 30% or more of a company's enterprise value. Collateral could be around 10% or even nothing at all. Such asset-light deals were a bit of a fad in finance. --Here's the usual process in such deals: The new corporate entity is created with the sole purpose of owning stock in the original, operating company. The holding company can issue debt, even though it doesn't generate any revenue or profits. It can typically pay off debt in one of two ways. The operating company can give the holding company a cash dividend, which can be used to pay back interest and principal on the holding company's debt. If the operating company elects not to make the cash payment, the holding company doesn't have to worry about going into default, though. It simply adds its regular interest payments to the amount of principal that's due. The idea is that the holding company's debt can be repaid all at once in a few years when private equity investors sell the operating company or take it public.

edu: bridge loan

--In theory, a bridge loan is similar to a home buyer who takes out a short-term loan to cover the down payment, which he plans to repay as soon as he sells his current home. But what if the current home can't be resold? The lender can try to resell the loan, but as current market conditions suggest, that isn't always possible. Banks now face a similar quandary. They lent private equity firms hundreds of millions of dollars to use as equity in the buyouts. The bridge loans (equity bridges ) were supposed to be repaid as soon as the buyout firms found other investors who wanted an equity stake in the leveraged buyouts. But as market conditions have tightened, private equity firms have found it difficult to find investors to take some of the bridge loans from the banks. The banks can keep trying to sell the loans, a tough bet in the current market. Or they can keep them on their books—and possibly have to write down their value. --So why would a banker agree to such a deal? As a favor to big private equity firms, which have been among the banks' most lucrative customers, generating a record 22% of investment banking revenue over the past year, according to researcher Dealogic. --Dimon said equity bridges are particularly risky, even compared to highly leveraged loans. That's because equity bridges are made with little or nothing in the way of seniority or collateral, which is a crucial issue for bankers and investors in bank debt --Banks typically sell, or syndicate, their loans to other banks and investors. Hung loans and equity bridges that can't be sold to secondary investors make it hard to spread the risk. "It's a matter of concentration. Banks are supposed to be in the business of diversifying risk --

China inflation

--4th largest economy --consumer price jumped 5.6% --food-driven, food account for one third of consumer price index --out of control, government is behind the curve or temporary and contained? --


--European's largest bank --CEO ousted, UBS Dillon Read collapsed, need a couple of quarters to get out of the woods --trail WS firms, such as Credit Suisses which avoided subprime losses --40% revenue from investment banking --The charges will once again bring this untidy affair tothe forefront,'' Wheeler said. The cost ``pales into insignificance compared to the impact on sentiment and the management distraction this episode has cost UBS,'' he said. --

Sunday, August 12, 2007

reading on productivity - Baumol's Disease comes in Between the mid-1970s and mid-1990s, annual productivity growth in the U.S. nonfarm business sector averaged about 1.5%. In the past decade, it has averaged about 2.6%. For a couple of years in the early 2000s it was near 4%, and Mr. Baumol's idea looked destined to join others in economics that looked good in theory but wrong in practice. Yet last week's downward revisions of U.S. productivity growth for the past three years suggest that the trend is closer to 2%, and shows that productivity growth has slowed for four straight years. At the same time, employment in traditionally less-productive sectors such as health care and leisure is growing rapidly, while employment in higher-productivity business services is growing more slowly; in manufacturing and retail trade, it is flat or shrinking. Therein may lie clues into whether the recent dip in productivity growth is a major turn or a temporary lull. That's where Baumol's disease comes in. In the 1960s, Mr. Baumol, now at New York University, and William G. Bowen, an economist who later became president of Princeton University, argued that because productivity growth in labor-intensive service industries lags behind that in manufacturing, productivity growth in service-oriented economies tends to sag. Still, the Fed economists and their co-authors estimated that from 2000 to 2004, multifactor productivity growth averaged just 0.2% a year in personal and cultural services (which include health care, social assistance, recreation and food services, among others), compared with almost 2% for finance and business, 2.6% for distribution and 5.4% for high tech. Sectors where productivity is high and average labor cost low "are those things that can be automated and mass-produced," Mr. Baumol, now in his mid-80s and still teaching, said in an interview. "And things where labor-saving is below average are things that need personal care -- these are health care, education, police protection, live stage performance... and restaurants." U.S. job growth has been concentrated in those latter sectors. More than half of the 1.6 million jobs added in the private sector in the past year have been in food services, health care and social services. Food services alone account for more than 20% of all new jobs this year, including government.

Fannie Mae cap

--Cap is $727 billion in May 2006 --its securitization business is more than $600 billion in the first half of 2007

behind mortgage mess

--Rates have also increased over the past few months on jumbo mortgages, which exceed the $417,000 limit for loans offered by government-backed mortgage houses Freddie Mac and Fannie Mae. That could squeeze middle-class families in cities like San Francisco, New York, and Washington, D.C., where middle-class home prices have risen above $500,000. --Alt-A loans accounted for about 13% of home loans last year and subprime loans accounted for about 20%, according to Inside Mortgage Finance. Jumbo loans account for about 16% of the market. Facts • Certain "no-doc" subprime loans didn't require the lender to verify the borrower's income. In extreme cases, lenders offered what was dubbed a "ninja loan" that required no income, no job, and no assets. • Mortgages date back to the Middle Ages. In French, "mortgage" means "dead pledge," implying that the property was "dead," or forfeited, if a loan wasn't repaid and that the pledge was "dead" once the loan was repaid. • One sign that risk has returned to financial markets: the CBOE Volatility Index, or VIX, alternatively known as the "fear gauge," reached its highest level in four years. • Homeownership rates rose to a high of 69.2% in 2004, from an average of 65% through the 1990s, according to government statistics. • As a share of all mortgage originations, subprime loans nearly doubled to 19% in 2004 from 9% in 2003, according to Inside Mortgage Finance.

reasons for fed fund rate spike

--Demand: issuers that rely on short term commercial paper for funding, such as funds, could not roll the paper over. So they turned to back up credit lines in banks, resulting in high demand for loans --Supply: amid the turmoil, banks desire to keep execess reserve for uncertainty so they are relunctant to lend them out.

How Does the Fed Inject Money into the Economy? A Primer

--All banks in the U.S. are required by law to set aside a portion of their demand deposits (such as checking deposits) as reserves. These reserves can be either currency in the vault, or reserves on deposit at the Federal Reserve. Banks can use reserves at the Fed to settle transactions with each other. Numerous factors affect the level of reserves: funds disbursed for new loans, funds coming in from loan repayments, clearing of checks with other banks, tax payments to the federal government, federal disbursements such as for social security. On any given day, some banks will have more reserves than they need, and others less. Those with an excess lend to those with a shortfall in the federal funds market. The Fed manipulates the federal funds rate by manipulating the supply of these reserves. Its principal means of doing this is via open market operations. To put downward pressure on interest rates, the Fed would buy securities in the open market from a designated dealer (primary dealer). The Fed pays for the securities by crediting the account of the dealer’s bank at the Fed. The bank now has more reserves than it needs, and so it lends them out, pushing down the federal funds rate. This operation results in an expansion of the Fed’s balance sheet and thus the money supply. However, the Fed is not principally targeting the money supply but the short-term interest rate, which ripples out to all borrowers and lenders. To raise interest rates, the Fed sells securities to dealers. The Fed has two principal types of open market operation. A permanent operation is conducted to adjust the Fed’s balance sheet to what it believes is the normal, long-term need for currency and reserves. To do so, it either buys (or, more rarely, sells) Treasury securities and adds them to its portfolio. A temporary operation is response to short-term fluctuations in the supply and demand for reserves. To supply additional reserves, the Fed conducts a “repo” or repurchase operation. It offers to supply a fixed quantity of funds to primary dealers for 1 to 15 days in return for collateral consisting of either Treasurys, bonds issued by Fannie Mae or Freddie Mac (called agency bonds), or federally or agency-guaranteed mortgage backed securities, those issued by Fannie Mae, Freddie Mac or Ginnie Mae. At the end of repurchase agreement, the dealers repay the money with interest and the Fed returns the securities. The opposite operation is called a reverse repo. Last Friday’s repo was unusual in that the Fed encouraged dealers to submit only MBS as collateral, the only time it has done so since at least 2000, according to Fed records. The New York Fed said it did so for “operational simplicity.” (In the days after Sept. 11, 2001, it conducted similar “single-tranche” repo operations, in which it ended up accepting only Treasurys as collateral). It may have done so to make it easier for dealers to finance their MBS inventories. Why might such a temporary operation be necessary? The federal funds rate could rise above the Fed’s target for several reasons: either unexpected high demand for reserves, or restricted supply. The precise reason for last week’s rise in short-term rates remains unclear. It may be that European banks, some of whom have U.S. units that participate in the fed funds market, faced an unexpected jump in loan demand, perhaps from issuers of commercial paper who could not roll the paper over and thus turned to back up lines of credit at banks. It may be that some banks holding excess reserves were reluctant to lend them out, anticipating a need for them for their own purposes or uncertain as to the safety of the counterparties to whom they might otherwise lend.

business phrase (update 4)

--leverage finance's cash engine has ground to a halt --worldwide sellof accerlated and concerns spread beyond financial companies and homebuilders --the cost of financing has skyrocketed, imperiling the raft of corporate buyouts that has fueled the bull market. --stock markets across Asia were pulled down sharply July 27 by the previous day's rout on WS that saw DJ and S&P500 fall 2.3% and register their biggest declines since late Feb. --WS woes hit hard. --China toughens stance on food safety --the bear event is a watershed event --Speculation has run rampant in recent years in real estate, private equity, merging market and levreage loans. Subprime is the first category to collapse. --Joe wrote a 23-year stretch that ended in 1958. For me, this lap on the track is sweet and bitter. Sweet because I relish a quest to become FORBES' longest-running columnist. Bitter because I've always believed that Joe was the best FORBES columnist. --As businesses of all sizes expand overseas, Asset backed lenders are following along... --the credit market is in disarray, and that disarray has given the stock market a worthy case of the jitters. --It is not a full rout. So far, there are no corporate defaults making the headlines. --there is an overhang of $225 billoin in debt from PE deals that need to be refinanced. --it would dent the sotck market by 5%. --do these perks (interest bearing account...ATM rebates) outweigh the hassle of switching (from banks to retail brokers) --If invetors get spooked, then the ability of lenders to fund loans may be hampered. --If a few of high quality deals get good prices, that may unclog the pipline. --assets around the world move in one lockstep. --this(credit market downturn) was their (mututal funds with long-short strategies) opportunity to prove their mettle, they came up short. --The common thread tying those companies together: they either have low or negative free-cash flow and in some cases those flows are unpredictable. --He takes ove the reins as sole president to help guide Bear. --No timetable has been set for the final report. --With the development late in the housing boom of subprime mortgages where borrowers needed to provide little or no documentation, and no money down, the market entered uncharted territory. --investors tend to look askance at such put selling because the losses can be catastrophic. --lenders stay tight with their money --second heaviest one-day plunge --They believe U.S growth would settle back to a more modest pace. --They(numbers in 1998) paled in comparison to the number of references tha were to coming in the new economy frenzy of the next two years. --the number soared seven-fold in 2000. --U.S firms in particular were at the forefront of those changes on a global scale. --this raise an important question: how much of the dollar's rise over this period was an equilibrium phenomenon. --The year 2001 marked a watershed for the dollar. --bank profits are heading south --run on the bank --keep a cool head when everyone else panick --issuers of commercial paper could not roll the paper over --people yank money out of their fund. --Investors have all but stopped buying debt... --Some experts believe that some of them could pose a significant risk of default if the economy slows or veers into recession --what would make the investor stomach such an arrangement --when capital flowed freely and corporate debt demand far outstripped supply. That led investors to push the envelope when it came to risk --as the markets gyrated... --the firm's reputation as one of WS savvist players has taken some knocks... --it is too early to give the all-clear signal --this move helped breathe life into a group of major quants hit sepcaically last week --a hawkish inflation fighter unafraid to swim against the moneytary-policy tide. --a lot of funds get slammed.. --selling can feed on itself, prompting nervous investors to sell more, which adds to volatility. --the information technology(IT) revolution of the late twentieth/early twenty first century has followed a similar script. --U.S. trade deficit was deteriorating --turmoil in the credit markets is spreading tremor to one of the most conservative kinds of investments. --restore nomalcy to the markets --the downside risk to growth has increased appreciably --Markets reacted euphorically to the Fed intervention --With the blow up at Amaranth and other hedge funds in thew news, do clients call in more? --CFC hit the tape this morning with news that it has decided to fully draw on the an $11.5 billion backup credit facility amid continued severe strain in the secondary non-agency market. --Open Market Desk (OMD) excutes outright purchases and sales or through repos(temporary transactions). --But fears of a full-blown credit crunch, which last week reached a crescendo, have put the brakes on activity in teh commercial-paper market. --The bond market has seized up(suddenly stop moving), stocks are in turmoil, private-equity funds are sidelined and hedge fund managers and lenders are hosting fire sales. --Given the headlines about shelved leverage buyout deals --economically resilient industries like health care --banks are the best proxy to the (China) economy --if five tosses of a fair coin all turn out to be heads, whiat is the probability tha the sixth toss will be tails? Gambler's fallacy. --Months ago, Mr. Gross positioned for anticipated Fed Reserve rate cuts.... --stocks got rattled last month aftrer credit markets seized up... --After a three year stretch in which risk-taking was rewarded handsomely, markets were rocked this summer by ripples from the imploding subprime-mortgage business. --Banks will take a batch on those transactions, holding on its own inventory/holding the bag --the problems in subprime-market served as a wake-up to debt holders. --Banks drank Kool Aid too --easy money pumped the bellows. --the lure of easy riches drew new players --The bursting of the bubble will inflict broad damage. The cascade of PE deals will slow to a trickle. --emotion determines tolerance for risk --In essence, the Fed is following advice that British journalist Walter Bagehot offered in his 1873 book, "Lombard Street," a copy of which Mr. Bernanke kept on a shelf when he was Princeton professor. In times of "internal discredit" -- when uncertainty leads private players to pull back -- the prescription to the central bank is: Lend freely. -- it will borrow $100 million today as a gesture --The latest chapter in the credit crisis of 2007, rooted in the deterioration of the market for U.S. subprime mortgages and securities linked to them, represents a new test of the savvy of central banks from Frankfurt to London to Washington to Tokyo. --Mortgage lenders are dropping like flies. --Take a deep breath instead. No question, the mortgage market is in for a rough ride. --Further tightening of the credit conditions will increase the risk that current weakness in housing market will be deeper or more prolonged then expected. --Fed Reserve stands ready to take additional actions as needed to provide liquidity and prmote the orderly functioning of markets. --The collapse of the housing boom in the first half of the decade is taking its toll on broader economy. --Benanke counter perceptions that Fed has been quick to cut rates and cushion investors. --He does not give in to their pleas for immediate help. --So it's not out of line to worry that the credit crunch could crimp ongoing business or inflict outsize losses --Barclays Capital had a record first half --Most emerging countries need structural reform to unlock their potential -- --On the heels of a bumpy summer marked by dramatic losses at several high-profile firms, hedge funds and their investors are adjusting to a new environment featuring a reduced appretite for risk taking. --Clients forgive managers who lose on the downside, but if they miss the upside, they are really toast. --banks have a moutain of low-grade debt to sell in the next few months. Investors have a long list of stocks and bonds to pick...yet the setting is fraughts with uncertainty. If the market is going to be back on its feet...Are any more bombs ticking on the balance sheets of hedge funds or banks. --Still, anxiety abounds. --funds that close their books in October sell stocks in September for tax-loss purposes --an expectation of declines has become self-reinforcing -- --It is one of the nine companies that have succumbed to (been plagued by) the subprime crisis...the loss of the business will lop $16 million from the is just a temporary blip... --At the time, the subprime meltdown had yet to take hold... --large outsourcers remain unscathed --sales were not as dismay as in July --the disjointed movement in Libor and other short-term interest rates underscores the turmoil that persists in money markets...the two rates are now parting ways. --Many European banks have been stung by exposure to U.S subprime mortgages --Banks, especially in Europe, have heavy commitments tied to struggling commercial-paper markets. --a host of credit derivatives are also pegged to the Libor --the two BSC funds hit the rocks in June --SS's recent clobbering looks overdone --funding problems leave other banks such as Germany IKB on the brink --Though recent distress in financial markets has "deepened" the housing slump, the overall economy has seen little impact so far --consumer spending saw "modest to moderate increases" --But with less extra cash in the system to ease banks' nerves (inflation concern), the anxiety about liquidity has resurfaced --the bank of England took its first step toward easing strains in U.K. money markets. --the quandary facing centrals banks (low short-term rates vs high long-term rates) --Fed should take some comfort from this. -- --Citigroup raked in $89.6 billion in revenue last year --Some high-profile hedge funds have registered big losses amid recent market turmoil --TPG-Axon has scored gains of 22% so far this year --you can only find out if these models are any good when they are stress-tested --the 126k gains in payroll was nearly halved --inflation targeting is not at odds with reacting quickly to market turbulences --SEC has opened a probe of the company --the company asked the court to rule that a delay in filing quartely report consitute a default on its 1.3 bi of senior notes --investment bubbles and high animal spirits do not materialize out of thin air. They need extremely favorable economic fundamentals together with free and easy, cheap credit, and they need it for at least two or three years. --There is no end in sight to the inconsistency of leadership --she( Abby daughter of Fiedlity owner) has many doubters --With McColgan gone, Lawson's job is now half left. --Many of the problems were their own doing --overall markets managed to finish the month in the black (positive return) --That (deleverage) force them to pare their holdings. Because so many growing hedge funds embraced similar stocks in recent months, when they turned to sell it put extra pressure on holders of these shares. --remarkes from Bernanke seems to lean toward a quarter percentage point cut. --it might not enough to forestall the inevitable: that the consumer is going to roll over. --foster a housing bubble --We wanted to shut down the possibility of corrosive deflation," he writes. "We were willing to chance that by cutting rates we might foster a bubble --I do not see any positive market-moving event --a basket of stocks can be cumbersome at times, particulary on the short side. --the problem (leverage) is by no means solved, but things are moving in the right direction. --(Qatar acquire 1/3 LSE) so doing, they are testing Western politicians and intitutions that often espouse free-market principles but are wary of foreign governments owning iconic assets. --Goldman's decision to partner with Mr. Fang raised some eyebrows at the time. The WS bank's sophisticated culture and emphasis on subsuming individual egos to the firm's collective good seemed an odd mix with the headstrong Mr. Fang, who helped se up Goldman rival Mogan Stanley's own joint-venture Chinese investment bank in the 1990s. --Fed would rather err on the side of fanning inflation --economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. The (rate cut) action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time --readings on core inflation has improved modestly this year --development in the financial markets since the committee's last regular meeting has increased the uncertainty surrounding in economic outlook. --The cut of discount rate, too, greases the wheels of the economy --Anchor a strategy with either an index portfolio or an enhanced index portfolio... --the reason of the smooth tone ( of CDX rollover) is because markets are on tenderhooks to how the current credit squeeze will develop - not because there are contradictory signals about the market to the degree the recent bout of the market turmoil will affect the economy --Odds are stacked in favor of further (yield curve) steepening --Bear is expected to flounder, weighed down by its hedge-fund fiasco and the weak bond market --Bush Administration eased its position (on Fannie and Freddie) in light of credit crisis...its position continue to bend.. --Conditions have improved broadly, but it is still a bifurcated market --these concerns haven't entirely ebbed --A flurry of new offerings continued to rain down on the investment grade corporate bond market --the loss in mortgage market sapped investors' appetite for risk --Alan Greenspan' memoir arrives with remarkable timing for two reasons. One is that at a time like this, with financial markets in a upheaval, we yearn for guidance from the oracle who presided over 18 years of relative peace and prosperity in the U.S. economy. the second is that a wave of revisionist thinking holds that the reign of Greespan may not have been so great after all, that bears some responsibility for the twin bubbles of dot-com mania and the recently deflated housing boom. --financial market turmoil will tip the economy into recession --inflatoin can perk up --wind down the business --CDS offers some glimpse into the oqapue corporate bond market, foreshadowing the market turbmoil --The world's largest economy is heading into tailspin --it seemed in later sep the housing market was in free fall, with both sales and prices plunging --crimp the consumer spending --stall economic growth --shrinking CP market/ the chill in the CP market --siphon consuemrs' wallets --Threat to financial stability increased largely because of uncertainty over how credit problems are transmitted globally and how deeply the credit crunch will bite around the world --In good times, the complexity of the financial system helps spread risk among institutions and countries -- lessening the possibility that any one sector will be battered. --In bad times, this complexity makes it hard to figure out where problems will materialize --housing market has taken a second leg down --companies may decide to rein in spending after the meltdown in subprime lending sent financial markets reeling in August, dimming growth prospects --how far can J.P. Morgan Chase and BOA push their own agenda without being snared in litigation. --Doubts have been swirling around the deal for months, but the drama came to a head yesterday as UBS AG infomed a group of bankers that he wasn't prepared to pay the price --We got in under the wire ( just in time) --As a token of our gratitude --I have cleared the schedule with Hui --The Federal Reserve's dramatic rate cut Sept. 18 helped buoy confidence, they are willing to step in to maintain the functioning of financial market --The high-yield market, in contrast, has struggled to regain its stride after its summer standstill. --distribution prevailed in the past might not hold in the future --as stockpiles climbed and sales fell, home price.... --Sum of the individual units is larger than the organization as a whole --Citi pre-annoued Q3 2007 earnings where it expects to fall short by 60% from prior year --Citi described its weak trading performance as an "aberration" and point to "more normalized" levels in September. --Citi's mark-down of 1.4 bil relative to total commitment of $57 bil equates to about -2% of haircut. --Interest rate moves usually take 12-18 months to walk their way through the economy --Ever since the pipeline for junk bonds clogged up in late June....relative deficit of supply relative to demand ---I am weak in pair and dispersion trade and I enjoyed this seminar because I learned a lot in this regard ---please keep me apprised if there is an appropraite role available. ---pleased keep me apprised of the situation --There is not as much of the edginess of concern with the short-term funding markets. There is still room for an accident going forward --memories of scorching hot days flashed through my mind. --The Journal's findings reveal that the subprime aftermath is hurting a far broader array of Americans than many realize, cutting across differences in income, race and geography. --The collapse of BSC funds conjures memories of LTCM...both cases ignited worldwide credit crunch and prompted intervention by central bankers...LTCM failed because its complex strategies went haywire. --As borrow-and-buy gamit grew less profitable, BSC hedge fund sought out esoteric bonds and lightedly traded securities that offered high yields. --I am an intellectually curious man... --he was a priviledged young man without much substance...leave the less priviledged at a disadvantage --joined the company as a junior and marched up the hierachy --Complex investments are roiling WS. --typically, when results aren't going to be up to snuff, a company will issue an earnings warning ahead of time. --CFC, which swung to the 1st quarterly loss in two decades, spent recent months ensnared in the credit crunch. --GIPS advertising guidlines do not exempt firms from adhering to all the required provisions of the standards --Citi remains bogged down in bureauracy. --the proliferation of LBOs and the accompanying credit-quality downgrades have vaulted covenants into the spotlight. --the DQRP displays and tallies late-payment and foreclosure data for the subprime and so-called Alt-A loans. --the booming global growth may have trouble pulling U.S. markets out of swoon --make sure our effort will not in vain --Wall Street always rides a wave until it crashes --As fees roll in, one firm after another abandons themselves to the lure of easy money, then hands back, in a sudden, unforeseen spasm, a big chunk of the profits it booked in good times. --everyone rationalizes that it's safe because they are making so much money.. --the blow to shareholder wealth is staggering... --Merrill turn the bond over to its sales forced to peddle to hedge funds. --Hillary hits a rough patch --But what if I'm the nominee? I'll be ripped apart by the Republicans. And what if I'm the president? My hands will be tied..helps illuminate why she has hit a dangerously bumpy stretch as January's first nominating votes near..Sen. Clinton actually is running two campaigns at once -- courting left-leaning Democrats to get the nomination, but mindful even now of maintaining a sufficiently centrist course to withstand Republican attacks and win election next November...Stoking the conflict are Republicans, who report their first uptick in donations to party headquarters in many months, thanks to a recent stream of "stop-Hillary" fund-raising emails. --Some of the skills needed to pull this off haven't come naturally to Sen. Clinton. --The disparity between those two views of the economy -- one growing bleaker, the other remaining sanguine -- stood out starkly last week. --High energy prices, a slumping housing market and tightening credit conditions conspired to keep consumers hunting for deep discounts. --As colleage-application season enters the most stressfull final strech, parents want to know wehther their children's school are delivering goods - sending them to top universities --In a sign of shifting global economic food chain, students from abroad are taking up a growing number of spots. --the process can be performed at an infrequent internval --allocate assets within the framework of meeting liabilities --back out the implied market risk equivalibrium and correlations across assets --critique a plan in light of these issues --the UBS annoucement of a fresh $10 billion subprime-related writedown brings the industry tally to around $75 billion --Its (capital infusion for MBIA) real value is a vote of confidence --not all losses fall on banks --The term "emerging markets" conjures up images of corrupt governments, civil unrest and financial crises for many U.S. investors. --Sagittarius isn't in liquidation, but conflict already is brewing. --Wall Street is abound with complaints that the central bank didn't do enough to rein in risky lending practices during the run-up to the housing bubble, and that it isn't doing enough now to help clean up the mess. --"It's the Fed this, the Fed that," says Tony Richards, managing principal at money manager Stairway Partners. "It's getting a little obnoxious." --Some of the criticism is understandable. By the end of 2004 there was plenty of evidence that speculation had run amok in many housing markets. Media reports were regularly referring to a bubble when the housing market crested in the summer of 2005. The Fed seemed slow on the uptake. --Banks and investors are dealing with a growing problem: Some firms on the other side of trades in the beleaguered credit markets might not be able to make good on their commitments. --World crude prices have long tracked the thirst for oil in the U.S., which consumes about a quarter of the world's oil output. But recent months have shown how decoupled the oil market is becoming from the economic ups and downs of the world's largest energy consumer. --The year 2008 didn't set out to be a volatile or unusual year, but as it draws to to a close, many investors are nursing serious wounds. --right on the top of the list are TIPS...there are some notable standouts, and figuring high on the list were bets on weakening dollar, as well as betsw on overseas bonds, particularyly in emerging markets, and especially in local currencies. --as ever when markets are in a state of flux, there has been an overreaction, with many bonds being punished despite no real signs of any deterioration in credit quality or pick-up in the default rates. --1 million people are expected to crowed Las Vegas strip for the countdown to midnight --Beijing trumpeted its 2008 Olympic --security is tight around the world --at the stroke of midnight

--demand for mortgage-related debt is so anemic --intensity of the plunge in Treasury yields is reminiscent of the drop seen in 2001. --Bernanke has thus far been unable to reinstill a sense of confidence --His faith in modern forecasting models notwithstanding, he failed to foresee that the sudden rise in homeowner defaults, which triggered the crisis, would have such far-reaching effects. --the investment is like a vote of confidence in the dowtrodden's reinsurers' prospect. Shareholders get Buffet's endorsement.

Saturday, August 11, 2007

thoughts of Fed's action to money injection

--It used market operations to ensure liqudity because fed fund rate(overnight borrowing cost among banks ) and Repos (no-bank borrowing rate) are way too high(Fed Fund Rate 6% in openning market > 5.25% target rate) --Fed will promise to open Discount Window to ensure liquidity --If both means are not enough, it might cut interest rate depending on economic indicators --It will cut interest rate under the combination of liquidity crunch, low equipment investment from companies and higher unemployment. Results --Fed Fund Rate dropped 1% Questions exist: --too optimistic:Fed jumped in just two days after FOMC statements in which it sets an optimistic tone... --amount of funds provided is much lower than that of ECB --indicators for business equipment investment Gross Private Domestic Nonresidential Equipment Investment (GPDIPRC% Index)

shares of mortgage lender

--CFC from 15.2 to 17% --No. Wells Fargo, from 13.3% to 10%

analysis: CFC liquidity and loan quality

--In a Securities and Exchange Commission filing, the Calabasas, California-based company said it was at midyear using $93.3 billion of its $283.6 billion of short-term liquidity, leaving $190.3 billion untapped. It listed $3.8 billion of long-term debt maturing within six months. --Countrywide said liquidity included $46.2 billion of "highly reliable" short-term financing, including commercial paper that companies often use to fund day-to-day operations. --Countrywide holds $27.8 billion of option ARMs on its books, and their quality is deteriorating. ( see the 'risk management section') Payments were 30 days or more overdue on 5.7% of them as of June 30, compared with 1.6% a year earlier

mortgage finance

--Several dozen mortgage lenders have closed down in the past six months, including two major ones, New Century Financial Corp. and American Home Mortgage Investment Corp --CFC CDS 315 bps, Cash Spred 315 --it takes more market share --unlike rivals and those lenders, Countrywide owns a sizable deposit-taking bank and have insurance business

Friday, August 10, 2007

edu: banks

--Depository institutions ( commercial banks and thrifts) are required to maintain reserves --reserves are deposited in Fed reserve bank and called Federal funds --no interest is earned on fed funds --one way to bring reserves to the required level is to enter into a repo with a nonbank customer. An alternative is for the bank to borrow federal funds from a bank with excess reserves.(fed fund market) the equilibrum interest rate is decide by supply and demand, is called fed fund rate. --fed fund rate and repo rate are tied together because both are a menas for a bank to borrow.

repo rate vs fed fund rate

--a dealer firm usually use repo to finance its inventory and covering short position(reverse repo). --the repo rate will be lower than fed fund rate because repo involves collaterized borrowing --Fed inject money into financial systems to on short-term interest rates (fund rate equal to targe rate) - system or customer repo

Fed pumpe $19 bil to buy MBS

--The Federal Reserve added $35 billionin temporary funds to the banking system through the purchase ofsecurities including mortgage-backed debt to meet demand for cashamid a rout in bonds backed by home loans to riskier borrowers. --The New York Fed's actions lowered the Federal funds rate to 5.25 percent, matching the bank's benchmark overnight rate,according to ICAP Plc. The rate began trading today at 6 percent,the highest open since January 2001. Treasuries fell after theadditions, stocks rebounded and the dollar rose against the yen. --The Fed typically only accepts so-called agency mortgage-backed securities, such as those guaranteed by government-chartered Fannie Mae or Freddie Mac, rather than non-agency home-loan bonds from other financial institutions. Issuance and trading of non-agency bonds, including securities backed bysubprime mortgages, has ground to a near-halt the past month. --Fed funds, the U.S. overnight interbank lending rate, closedat 4 15/16 percent yesterday, after trading between 4 3/4 percentand 5 3/4 percent, and averaging 5.38 percent, according to ICAPPlc, the world's largest inter-dealer broker. --In repos, the Fed buys U.S. Treasury, mortgage-backed andso-called agency debt from its 21 primary dealers for a setperiod, temporarily raising the amount of money available in thebanking system. At maturity, the securities are returned to thedealers, and the cash to the Fed. --The Fed's benchmark was 6 percent the last time fed fundsopened at today's level. On average, the Fed has added about $9billion in temporary funds daily this year through yesterday. --In the week after the Sept. 11, 2001, terror attacks, theFed added a daily average of $75.3 billion in reserves throughrepos. The record was $81.25 billion on Sept. 14, 2001. --Fed Fund Effective rate

Thursday, August 9, 2007

what is 13F form

Institutional investment managers who exercise investment discretion over $100 million or more in Section 13(f) securities must report their holdings on Form 13F with the SEC. In general, an institutional investment manager is: (1) an entity that invests in, or buys and sells, securities for its own account; or (2) a person or an entity that exercises investment discretion over the account of any other person or entity. Institutional investment managers can include investment advisers, banks, insurance companies, broker-dealers, pension funds, and corporations. Section 13(f) securities generally include equity securities that trade on an exchange or are quoted on the Nasdaq National Market, some equity options and warrants, shares of closed-end investment companies, and some convertible debt securities. The shares of open-end investment companies (i.e., mutual funds) are not Section 13(f) securities.

market went down due to BNP Paribus

--three hedge funds with a combined vlaue of $2.17 bil --played in home loans with shaky credit --market-neutral strategies are not working for some hedge funds (long+ short) --quant funds were hit hard too --

the downpour of issuance drenches IG corp bond market

--The high yield market also dipped a toe back into the new issuance pool. Vector $150 mil senior secured. --There is no green light that appeared, but things just felt better.

a history of market scares

--Q3 2001 - Q2 2--2 Enron/Worldcom Blow ups --Q2 2005 GM/Ford Dongraded to Junk --Q3 2007 Sub-prime/Leveraged Loan Scares

ECB pump money $132 bil

--The European Central Bank, in annprecedented response to a sudden demand for cash from banksoiled by the subprime mortgage collapse in the U.S., loaned4.8 billion euros ($130.2 billion) to assuage a credit crunch. The overnight rates banks charge each other to lend inollars jumped to the highest in six years. The so-called dollar London interbank offered rate rose to 5.86 percent today from .35 percent and in euros gained to 4.31 percent from 4.11ercent. --The ECB's response to the fastest increase in the dollarank rate since June 2004 signals that lenders are reducing theupply of money as losses triggered by the U.S. mortgage slumppread worldwide.

Wednesday, August 8, 2007

AIG Q2 2007: commentry on subprime exposure

triple exposure to subprme --3.6% of 814.4 bil in cash and investd assets in residential MBS linked to subprime loans and 0.6% in CDO backed by subprime. 86% AAA rated, 11% AA: check Invested Asset section. Totally 11% exposure to RMBS. Only 1% of total exposure to RMBS rated BBB and below. But until Q2 2007, no sburpime backed RMBS have been downgraded --United Guaranty Corp unit insures mortgage payments: Mortgage Guaranty increased 21% to 272 mil. -American Finance unit caters to home buyers, mainly in subprime sector. - loose lending standards -- consumer finance segment in Finance business reduce d60% in Q2

Asset-Backed CP show some stress

--three issuers took advantage of the Home Mortgage Investment, Luminent Mortgage Capital are in distress because of their mortgagte investments. So they are extending loan maturities to address liquidity problems. --CP offers maturities on average of about 30 days. A cheap alternative to bank loans. Rates in this market have risen following the credit market's turmoil. --AB CP accounts for more than half of the $2.2 trillion of CP outstanding at the end of July. AP CP is used by companies such as mortgae lenders and auto makers. A mortgage lende typically secures an AB CP line with a pool of home loans that it holds. --Moody's Investors Service is reviewing for a possible downgrade its top-notch rating for American Home's exptendible CP program of about $1.54 bil. the mortgage lender extended about $150 million of AB CP taht was due to mature monday. The extended paper reaches final maturity 120 days after the date of the extension. --Commercial paper is bought by money market funds, mutual funds that invest in short-term debt securities and hold moneyfor everything from individual savings to the coffers of Standard& Poor's 500 companies. The cash from money market accounts is lent to entities such as those owned by American Home and Luminent to buy mortgages, bonds, credit card and trade receivables as well as car loans. Extendible notes allow the issuer to delay repayment for as long as 397 days, the maximum U.S. money market funds may hold. --extendible AB CP yields rose from 5.75% to 5.95%, unextendible AB CP 5.25%, Corporate CP 5.3%

Bernanke Auguest

--leave benchmark interest rte at 5.25%, he rebuffed calls for a more balanced assetment --U.S conomy expaned at a 3.4% annual pace in Q2, fastest in more than a year, yet it is because Q1 GDP revised lower --Prices increases have slowed for 4 straight months under Fed's preferred gauge (core PCE). Cor PCED price index rose 1.9% in June.

S&P500 Q2 2007 profit status

--Profits at the 434 S&P 500 companies that reported second-quarter results as of yesterday climbed 11.1 percent on average,more than triple analysts' estimates at the end of March,according to Bloomberg data.

Tuesday, August 7, 2007

S&P crisis in early 1980s compared to current subprime crisis --the rapid unraveling of US subprime market reminded us of the adage that history repeats its self: many of the sad excesses of today's subprime markets are but an echo of costly savings and loans crisis in early 1980s. --securitization seperate originator of mortgage loans from final outcome, relaxing their responsiblity to scrutinize the quality --Two further financial market innovations have played important roles. The first was the increased use of collateralised debt obligations, which allowed AAA ratings to be obtained for the larger part of subprime mortgage loan pools, thereby substantially expanding the participation in this market to pension funds and insurance companies. The second was the introduction of financial market instruments such as adjustable rate mortgage loans or negative amortisation loans. These instruments, which were introduced with the encouragement of the Federal Reserve, allowed very much less creditworthy borrowers to qualify for mortgage financing for the first time. --&L meltdown of the 1980s also had its origins in financial market innovation and poor regulation --the balance sheets of savings and loans - the US equivalent of building societies - came under severe pressure from higher interest rates. Congress then substantially loosened S&L lending standards and allowed them to diversify into riskier and very much more profitable commercial real estate lending. --At the same time, federally backed deposit insurance at these institutions was raised from $40,000 to $100,000. Not only did this trigger a rush of money into the S&Ls, it also further encouraged the S&Ls to increase risk taking. --Compounding the S&L crisis was the considerable loosening of regulatory standards. In particular, the S&Ls were given the option of choosing whether they were to be state or federally regulated. Predictably, this encouraged many states, which stood to earn large fees from registering S&Ls, to enter a race to the bottom by offering ever more lax supervisory regimes. --A cautionary lesson to be learnt from the S&L crisis is how official estimates of its scale were repeatedly ratcheted up and how in the end it was the taxpayer who got stuck with the bill. Initially, the cost was put at some $50bn. However, when the dust settled, it turned out that the federal bail-out of the S&Ls cost the taxpayer some $150bn.

drivers of easy money ***

--the origins of the boom and this unfolding reversal predates last year's mistakes. --they trace to changes in the banking systems provoked by the collapse of the savings-and-loan industry in the 1980s, the reaction of governments to the Asian financial crisis of the late 1990s, and the Fed reserve's reponse to the 2000-01 bursting of the tech-stock bubble. --Like S&P crsis and because of S&P crisis, financial innovations and lax regulation lead to boom --global saing glut is another factor: Asian recession in 1998 lead to depressed currencies, resulting in huge reserve in central banks. They put much of the cash into U.S Treasurys. --together with overeas saving, low interest rate, cut by Greenspan after tech-burst in 2001, fueled home prices and leverage buyouts.

UK banks leverage on Asia Growth

--HSBC, biggest U.K bank, Q1 profit rose 25% mainly from China --Standard Charterd PLC get most revenue from China, No. 2 next to HSBC Inc. Singapore state-owned company - Temasek- has 15% of stake in the company.

Monday, August 6, 2007

dilemma of business economics

--should we endeavor to continue to refine our techniques of deriving maximum information from an existing body of data --or should we find ways to augment our data library to gain better insight into how our economy is functioning. -both

factors lead easy money

--financial innovations: securitization --LTCM made asia central banks to build up reserve and invest in safe places like U.S Treasury --Tech bust made U.S central bank to cut interest rate to 1% --easy money are funneled into banks which finally goes to housing market because its high return and to lendings to hege funds --now it is a revulsion...

American Home Morgage filed for bankruptcy

--Second biggest residential mortgage lender, specialized in Alt-A mortgages --It originated almost $60 billion in morgages last year, and issued $16.7 in Q1 of 2007

Sunday, August 5, 2007

a broader worry of credit marke slump

--economy has become increasingly dependent on financial markets to meet lending needs, with lenders slicing and dicing everything from short-term corproate loans to auto loans into securities sold to investors. If investors get spooked (by the fallout), the ability of lenders to fund loans may be hampered.

Home myths meet reality

--representative home builders : Dr. Horton, Beazer, Hovananian Enterprieses Inc., Lennar Corp, WCI(luxury home bulders), KB home, Centrex Corp --several factors dry up their profits machine fallacy: builders would turn into "cash machines" in the event of a housing slowdown becaues they would pare constuction and land buying. In reality, they have to keep building large housing developments so they are unable to stockpile as much cash as expected. --b.incentives are crippling these companies' profits. --most builders except KB Home has few cash cushion and negative cash flows --Some might buy lands outright, which tripped up builders uring the previous slump. --only biggest builder achieve diversity --bank will tighten its stance on credit line, further deterioate the housing market condition

Retailer brokers Bank Perks to lure cash accounts

--Put checking and brokerage under one roof. Top brokers, Fidelity Investments, Charles Schwab Corp, and E*Trade Fiuanncial Corp, launch interest-bearing accounts, offers checking, debit cards, and rebates on ATM fees. --Offer interests 3.5%, 4.25%, 3.25% respectively. --ATM fee reimbursetment alone might outweight the downside of paying fees to use another bank's ATM or mailing in deposits. --competition from banks: BAC and Wells Fargo now offer free online trades for those who meet minimum balance requirements.

Saturday, August 4, 2007

Mortgage: lien status

--the lien satus dictates the loan's seniority in the event of the forced liquidation --mortgage loans ar eoriginated using first-lien --borroers often 2-lien as a means of liquefying the value of a home for the purpose of expenditures(medicall bills or college)investments(home improvement) --second lien may also use together with first lien to maintain hte first-lien loan-to-value(LTV) ratio below a certain level, 80%

Home Equity Loan

--A home equity loan is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful for families to help finance major home repairs, medical bills or college education. A home equity loan creates a lien against the borrower's house. Home equity loans are most commonly second position liens (second trust deed), although they can be held in first or, less commonly, third position. Most home equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types, closed end and open end. --Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the United States, it is sometimes possible to deduct home equity loan interest on one's personal income taxes.

why mortgage matters and some quo card

--mortgages matters because they represent about four-fifths of U.S. consumers' 12.8 trillion in total debt. About one in six subprime variable mortgagte were delinquent. --delinquencies are also up among fixed-rate subprime mortgages: 10% --prime borroers: 3.7% ARM up from 2.3% last year, remains 2.2%. from Mortgage Bankers Association --Credit Cards: delinquency rate hovers around 4% ove the past four years. Fed data --Auto Loans: delinquency rate 1.68% 12-year low --Home equity loans: 2.15% Q1, lower than 2004. ABA (American Bank Assocaition). But CFC reported 4.6% of its prime home-equity loans in Q2, up fro m1.8% a year earlier. A early hint for Q2.

Friday, August 3, 2007

fallout of subprime slide continues to spread

--Insurers took a hit too. AXA SA money-management unit($650 bil), European, offered to cash out investors as the fund size shrank 40% last month due to exposure to U.S. subprime market. --Most mututal funds sheltered from the storm as they invest predominantly in high-grade agency MBS. Few execptions like Fidelity Mortgage securities fund even it only has an stake of 2.5% exposed to subprime MBS. --CDOs Managers are feeling the pressure too. Credit-Based Asset Servicing&Securitization LLC dubbed C-BASS warned it was being squeezed by unprecedented margin calleds from its lenders. Among big managers who have seen their CDOs put on notice for possible downgrade by Moody's Corp: GSC Partners and AGA Capital Holdings Inc. Some managers avoid riskier debt, such as second-lien mortgages in its CDOs.

BSC upgrades its credit profile

--Wall Street firms are especially vulnerable to crises of confidence, because they depend on lenders to finance their day-to-day securities trading and other operations. --BSC is reducing its reliance on short term liabilities, such as CP from 21 bil in Jan to 15 bil, so that it wont't risk of being shut off from the loans required to fund trading operations. --company has unused committed secured bank lines that are "of over $11.2 billion, $4 billion of which is available to be drawn on an unsecured basis." --The firm is in a delicate position: It needs to demonstrate to the market that it has a strong, liquid balance sheet without suggesting it is seriously weakened or taking desperate measures to strengthen its balance sheet. --They called it the worst fixed-income markets in 20 years, grouping it with 1987 and the bursting of the Internet bubble --Everybody's waiting for the second, third and twentieth shoe to drop,"

commentary on July employment number (quoted from W. cunninghma)

* July nonfarm job growth was +92K vs. expected +127K, with modest downward revison to previous two months, but top-line not as weak as appears. * More important private (non-govt) sector job growth of 120K on trend with year-to-date average, with moderate upward revision to June from +92K to +107K. * Strength in Financial, Business Services, Health & Education, and Leisure, with better-than-expected -2K for Manufacturing. * Continued weakness in Retail, as well as Information, a proxy for technology and Temporary Help, which is viewed as a leading indicator of job demand. * Government job growth reversed strong June gain, which was revised down. * Earnings and hours consistent with moderate tone of report. * Tick up in unemployment rate to 4.6% was actually close to moving to 4.7% on a rounding basis, while household employment continues to be only modest and median duration of unemployment moved up sharply to 8.9 weeks from 8.2 weeks. * YOY% growth in Total Nonfarm and Private Nonfarm job growth at 1.37% and 1.40%, respectively, continue slowing trend of past year for a metric that