Benazir Bhutto's profile -- from Washington Post

--a life spent in Pakistani has accustomed her to chaos and disarray. She thrives on it. --a Greek Tragedy - the zenith of political power and nadirs of violent death --her husband is allegedly to be involved in schemes to skim money from national coffers. --character assasination kill your reputation http://www.washingtonpost.com/wp-srv/discussion/Bhutto.pdf

overreaction

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.

bank loans and its funds

--pay attention to the funds' fine prints: a number of bank-loan funds permit daily trades, some allows investors to withdraw money only once a quarter --banks loans are generally made to borrowers with below-investment-grade credit ratings.

issues of rating methods for structure products

--use past performance to guarantee future successes: flow of empirically derived model --a fundamental moedling falow to apply observations from one asset class to a new, different one (subprime). Too new to have historical data available --dependence upon assumptions: arange of independent variables: recovery rates....zero for structure products

four factors to gauge the credit market condition in the first month of 2008

Spread of LBIOR over Fund Rate --One important indicator will be the difference between key central-bank interest rates and the rates that banks charge each other to borrow money. The bigger the spread, the more reluctant banks are to lend to one another. --In August and November, the difference between the rates bank charge each other for loans and the expected interest rates charged by central banks widened to more than a full percentage point. Such spreads are typically less than a fifth of a percentage point. The November spike eclipsed surges seen during the 1998 financial crisis and in the run-up to Y2K, according to Morgan Stanley. Fed --The second factor is what the central banks do. Early next month, the ECB will have to decide whether to roll over the short-term loans it made this month or withdraw the stopgap funding. If the ECB siphons that cash from markets when funding pressures may be rebuilding, credit markets could seize up again. --The Fed isn't putting as much money to work in markets as the ECB, but its new auctions may help bolster bank confidence if banks show that they don't have trouble repaying the loans, says Ed McKelvey, senior economist at Goldman Sachs. "What the Fed is hoping is that if banks start to trust one another again, you can unlock the money and that can have a beneficial effect," he adds. Commericla Paper --The third factor is the commercial-paper market. In January, about $300 billion of commercial paper backed by assets such as mortgages will come due, according to Federal Reserve data. Yet the market for this kind of debt, typically issued by conduits and structured investment vehicles, is quickly shrinking. For the week that ended Wednesday, outstanding asset-backed commercial paper, measured on a seasonally adjusted basis, fell to $748 billion, compared with $824 billion at the end of November. The amount outstanding peaked at nearly $1.2 trillion in August. Earnings --Finally, there is earnings season. Banks start reporting annual results in mid-January. These figures will be important because they are signed off on by auditors, who have taken a tough stand when it comes to marking down securities linked to mortgage debt.

yard sale on bank assets

--In a sign that they see tough times ahead, U.S. and European banks are considering sales of everything from branches to entire units. Possible sellers include Citigroup Inc., which may unload or shut several midsize units, and United Kingdom banking giant HSBC Holdings PLC, which could exit all or parts of its $13 billion auto-finance business, say people familiar with the situation. --Talk of the potential moves comes days after Merrill Lynch & Co. announced that it would sell most of its commercial-lending business to General Electric Co. for $1.3 billion. Morgan Stanley pocketed more than $250 million last month by selling a slice of its MSCI Inc. investment-analysis unit in a public offering. --For one, asset sales generate immediate cash at a time when banks are likely to face persistent difficulties borrowing money. --Other sources of money, such as the market for short-term IOUs known as commercial paper, remain frozen or prohibitively expensive. --Also, the sales allow banks to replenish their capital levels -- a measure of their ability to absorb sudden losses -- without resorting to such draconian steps as slashing dividend payments to shareholders. --In recent weeks, several of the world's largest banks -- including Citigroup, Merrill Lynch, UBS AG and Morgan Stanley -- have sold multibillion-dollar stakes to Asian and Middle Eastern investors to boost their capital amid heavy losses on mortgage investments. But as banks increasingly take responsibility for assets that had been held in off-balance sheet funds such as structured investment vehicles, or SIVs, their capital needs have grown. --In a report this month, Goldman Sachs estimated that $475 billion of "extra" assets had been moved to bank balance sheets since the credit crunch picked up speed earlier this year. --Citigroup has been struggling to boost a capital ratio that stood at 7.3% as of the end of September, below the bank's internal target of 7.5%. Last month, the bank turned to the Abu Dhabi Investment Authority for a $7.5 billion capital injection. It has also agreed to take direct responsibility for $49 billion in SIV assets. The bank has stopped purchasing its own shares, and has warned of as much as $11 billion in fourth-quarter losses. Analysts expect it could be more: Goldman analyst William Tanona, for example, now estimates the write-down will rise to $18.7 billion in the fourth quarter. --HSBC doesn't face the same capital pressures as Citigroup. But Mr. McDonagh has shut or discontinued several U.S. businesses, including Decision One Mortgage, which operated as a middleman in the subprime-lending industry. And as Chairman Stephen Green and CEO Michael Geoghegan focus more on growth in emerging markets, more U.S. businesses could face the cut, particularly those that benefit little from being part of a bigger bank, says Alastair Ryan, a bank analyst at UBS.

prime brokerage

--prime-brokerage units of the major banks, which make big money by lending to hedge funds, as well as helping the funds manage their cash and short stocks by borrowing and selling shares as a bet on falling prices. --Prime brokers like Morgan Stanley, which has one of the largest businesses catering to hedge funds, have made repurchase agreements so expensive that some funds are going to rival firms to borrow money, according to people familiar with the matter --Hedge funds often borrow money through a "repo" operation, a financing arrangement in which a hedge fund sells securities to banks in exchange for cash, while entering into an agreement to buy them back at a later date when they pay the money back. The interest rate that funds pay for this borrowed money has shot up in recent months. --The biggest players catering to hedge funds in recent years have been brokers such as Morgan Stanley, Goldman Sachs and Bear Stearns. These firms don't take deposits as a retail bank does, so they have less cash on hand. Large banks such as Citigroup Inc., UBS AG and Credit Suisse Group have large low-cost deposit bases, and some say they may be able to take some market share from the investment banks.

banks Discount LBO debt up to 10% to clear backlog

--Citigroup Inc., Goldman Sachs GroupInc., Morgan Stanley and JPMorgan Chase & Co. are offering discounts of as much as 10 cents on the dollar to clear a $231billion backlog of high-yield bonds and loans. -- While lenders reduced the overhang by 32 percent since July, they are struggling to unload debt from this year's record $438 billion of leveraged buyouts after losses from securities linked to subprime mortgages reduced demand for higher-yielding assets, according to data compiled by Bloomberg. They sold some bonds ata discount of 10 percent to face value and loans at 5 percentbelow par, according to London-based Barclays Plc. --LBOs declined to $101.9 billion in the second half from$336.4 billion in the first six months as the subprime marketcollapsed. --Banks have $161.9 billion of loans and $69.6 billion ofbonds left to distribute, according to JPMorgan data.

IT sector will be down

--financial sector is the largest corproate consumer, nearly one quarter of technology spending --So far, the fallout in the tech sector has been a drip, drip, drip, rather than a flood. On Oct. 16, IBM announced its largest customer group, big banks and brokerage firms, was pulling back on buying the large software programs and mainframe machines used for massive, complicated calculations. Cisco, EMC all reported similar issues.

some major themes of 2008

--sovereign wealth fund rush will continue --business internationlization: International companies weather the storm better than US. business. --financial companies will continue to be troubled, feeling the brunt of credit squeeze. Bill Gross believe US is in recession and bankers are no long trying to predict an upturn

subprime losses of various banks

Firm Writedown Credit Loss Total Citigroup $13.2 $2.6 $15.8 UBS 14.4 14.4 HSBC 0.9 9.8 10.7 Morgan Stanley 9.4 9.4 Merrill Lynch 7.9 7.9 Bank of America 4.8 1.3 6.1 Washington Mutual 4.2 4.2 Wachovia 2.4 1.5 3.9 Deutsche Bank 3.1 3.1 Canadian Imperial (CIBC) 3 3 Barclays 2.7 2.7 Bear Stearns 2.6 2.6 Royal Bank of Scotland 2.5 2.5 Lehman Brothers 1.5 1.5 Mizuho Financial Group 1.5 1.5 Wells Fargo 1.4 1.4 JPMorgan Chase 0.3 1 1.3 Credit Suisse 1 1 National City 0.9 0.9 Nomura Holdings 0.9 0.9 Japanese banks 0.8 0.4 1.2(excluding Mizuho, Nomura) Canadian banks 1.2 1.2 ____ _____ _____ TOTALS* $74 $23.2 $97.2 credit loss: reserve

downturn tarnishes Wells Fargo's conservation reputation

--Mr. Cannon calculates that Wells had nearly 17% of its loan portfolio in home-equity loans at the end of the third quarter, compared with about 9% overall for the 10 biggest banks. He also sees risk in the bank's big servicing business, as more borrowers default on their payments. --Wells traditionally reduced the risk inherent in home-equity loans by making them only to customers who already had a Wells Fargo first mortgage. --But, as more aggressive rivals cut into Wells's markets over the past several years, Wells adopted a riskier approach of making home-equity loans through brokers whose customers didn't have any prior relationship with the bank. --That turned out to be a mistake, Mr. Kovacevich admits. The loans have gone bad at a much higher rate than similar loans made to Wells's own clients. --Wells's business is concentrated in Western states where a high proportion of mortgages overall were interest-only or option ARMs, says James Ellman, president of San Francisco hedge fund Seacliff Capital, which invests in financial stocks but currently holds no position in Wells Fargo. In Arizona, California and Nevada in 2005, for example, such loans made up at least half of subprime loan originations that were securitized, according to a report from the Federal Deposit Insurance Corp. --Last month, Wells said it would pool $11.9 billion of its riskiest home-equity loans for liquidation, and take a $1.4 billion special provision in the fourth quarter to cover expected losses. But the bank still has $71.5 billion in home-equity loans on its books. Wells says nearly all were originated by the bank's own retail team, but about $22 billion are in a second-lien position behind a non-Wells Fargo mortgage -- typically, a higher risk type of loan.

what amplify credit crisis

--easy credit --structured products, CDO: a.the loss protection works only if thes securities in the CDOs are uncorrelated. But it does not work for mortgages b.seperation of underwriting and onwership c.cross-selling: CDOS of CDOs creates futher leverage d.mezzanine CDOs get high rating, sometimes 75% of a portfolio is rated AAA. --derivatives : it allows banks to create an unlimited number of CDOs linked to the sme MBS. UBS investment research estimate that CDOS sold CDS on around three times the actual face value of BBB-rated subprime bonds --by Mid-December, $153.5 bil in CDOs slices had been downgraded, according to Deutsche Bank. Beause banks owned the lion's share of the mezzanine CDOs, they bore the brunt of the losses.

Profit Outlook Darkens for Big Banks

--bank business model: Make loans that are then sold off to investors while arranging corporate financing through off-balance-sheet vehicles that keep banks' capital costs down. --Now, banks are holding on to more of the loans they make, as they did years ago. And the off-balance-sheet lending business is crippled. --Less securitization means lower fee income; more loans on the balance sheets mean higher capital charges; bigger balance sheets mean less capacity to make new loans. --Through 2006, the three big banks' (Citi, BAC, JPM) average annual profits had grown at a roughly 20% clip during the past three years, according to data provider Capital IQ. That is likely to slow significantly, analysts say. Through 2009, the three banks' combined earnings are expected to be just 5.5% higher than they were at the end of 2006, according to some analyst forecasts. --Investors also will have to contend with another unsettling phenomenon -- bank profits that may swing wildly from quarter to quarter. That is because banks are using market values for more of the assets they hold on their books, meaning their prices fluctuate like those of stocks. --There also may be a silver lining: Banks may end up in better shape if weaned from an over-reliance on securitization, said Gerard Cassidy, an RBC Capital Markets analyst. --Meantime, changes being wrought to the banking business model are quickly becoming apparent. Citigroup has seen the amount of loans and leases it holds in inventory -- and doesn't plan to sell to investors -- increase to about $697 billion at the end of September, up about 9% over six months, according to data from IRA. --Banks are likely to make up for those lost fees by increasing the interest rates they charge on loans, Mr. Poulos added. But that will diminish companies' ability to take on debt, which could hurt the wider economy.

Credit Downturn Hits the Malls

--One victim is Centro Properties Group, the fifth-largest owner of shopping centers in the U.S. The Australian real-estate company saw its share price fall by 90% in two days last week as it struggled to refinance short-term debt it took on to fund its $6.2 billion acquisition of New Plan Excel, one of the biggest owners of strip malls in the U.S. --Centro had planned to pay off the short-term loans by selling long-term debt via the commercial mortgage-backed securities market, but the lack of buyers forced it to get a two-month extension from its creditors. Commercial mortgage-backed securities, or CMBS, are pools of loans that are sliced up and sold to investors as bonds. --Residential mortgages are packaged and resold much the same way, but so far the CMBS market hasn't had any significant problem with defaults. --The predicament facing Centro, Mr. Macklowe and numerous others underscores the state of the once-unflappable commercial real-estate market. For the past few months, the sector has been in a state of near-paralysis, as financing has nearly dried up. The number of major properties sold is down by half, and many worry that the market will continue to deteriorate as property sales remain slow, prices continue to drop and deals keep falling apart. --The CMBS market was the engine that drove the commercial real-estate boom. Over the past few years, the issuance of CMBS allowed banks to get rid of the risk on their books, lend with cheaper rates and looser terms and that made it easy for private-equity firms to do huge real-estate deals. --Between 2002 and 2007, CMBS issuance rose to an estimated $225 billion from $52 billion, according to Commercial Mortgage Alert, a trade publication that compiles its own statistics. --Real-estate investors aren't the only ones feeling the pain. Many big banks issued short-term loans to buyers and planned to sell them off later, much the way they do with loans made to private-equity buyout shops. But the banks have gotten stuck with an estimated $65 billion in fixed- and floating-rate loans on their books, according to J.P. Morgan. Some of the largest issuers have been Lehman Brothers Holdings Inc., Credit Suisse Group and Wachovia Corp. --Lehman has said that about half of the $79 billion in mortgage debt it was holding at year-end is CMBS-related. Wachovia and Credit Suisse declined to comment. --Prices, however, haven't appeared to fall, though much like residential real estate, there is often a period where buyers stop buying but sellers refuse to lower prices. --There is "cognitive dissonance" between buyers and sellers, says Dennis Russo, a real-estate attorney for Herrick Feinstein. "There's a period of time in which the seller cannot psychologically move his price down. They haven't accepted what's happening in the market." --According to Real Capital Analytics, sales of significant office properties plummeted to $7 billion in November, a 55% drop compared with November 2006. So few deals are getting done that many market experts say they don't know how to put a value on many buildings right now -- but almost everyone is in agreement that the valuations are dropping. --Often, deals aren't done because financing either isn't available or is so expensive that buyers are insisting on price reductions that sellers won't accept. --The commercial real-estate market was still soaring in early 2007, long past the peak of the residential real estate market. But a combination of frenzied deal making, high prices and credit worries combined to sink the sector. --First, private-equity firm Blackstone Group LP made its record-breaking $23 billion purchase of Sam Zell's Equity Office Property Trust, the nation's biggest owner of office buildings. Then it turned around and sold off many of the properties at even higher prices. The frenzied deal-making surrounding the EOP portfolio came to symbolize frothy valuations, which triggered a backlash in the lending markets. --In April, Moody's Investors Service said lenders' underwriting standards had become too lax during the run up in prices. The warning scared investors and prompted bankers to raise interest rates and required borrowers to put in more of their own money into deals. http://online.wsj.com/article/SB119862576458749597.html?mod=hps_us_whats_news

two bubbles: housing and financial bubbles

--Housing peaked in 2005. In June 2006, sales of existing single-family homes were 9% below their year-earlier level, sales of new homes were down 15% and framing lumber prices were down 19%. The Dow Jones Wilshire index of home-building shares had fallen 41% from its July 2005 peak. --Issurance of CDOs in 2006 hit $187 billion in 2006, according to Dealogic. That was up 72% from 2005. --Lenders wrote $600 billion in subprime mortgages last year, down a little from 2005's $625 billion, according to Inside Mortgage Finance. But they also wrote $400 billion "Alt-A" mortgages -- a category between prime and subprime loans -- up from $380 billion in 2005. --When housing retreated, underwriting standards needed to fall just to keep the whole thing going. Federal Reserve surveys show lending standards for mortgages slipped through the third quarter of 2006.

a roadmap of risk in 2008

recession risk --38% of chance of recession in 2008 --Fed might not be in a great position to contend with a recession. Inflation is perking up. International Bubble --According to the Investment Company Institute, between the beginning of 2006 and October 2007, non-U.S. stock mutual funds showed a net inflow of nearly $273 billion. U.S. funds have showed a net outflow of $9.77 billion in that time. --0vervalued China and Indian market, five year $0% annualized return --high P/E: China 46.6, Indian 26.4 Agflation --droughts have caused a surge in prices of corn and wheat. Exacerbated by the demand of ethanol as a fuel. http://online.wsj.com/article/SB119845373794447709.html?mod=todays_us_money_and_investing

'Blank Checks' Generate New Interest

--The black sheep of the IPO world quietly took over a large part of the market in 2007, with so-called blank-check debuts generating nearly a quarter of all new stocks that listed in the U.S --There were 66 initial public offerings of blank checks -- also known as special-purpose acquisition companies, or SPACs -- priced this year in deals that raised a total of $12 billion. That is 23% of the total number of U.S. IPOs and 18% of the money raised, according to data from Dealogic. In 2006, blank-check IPOs raised $3.4 billion, accounting for 7% of the total money raised in IPOs and 16% of the number of new issues, a percentage-point increase equaled only by the growth in technology IPOs. --Once seen as deals of questionable quality, blank checks are essentially empty shells that generally give themselves 18 months to two years to acquire an operating company with the proceeds from an IPO. --The performance of these stocks is attention-worthy. The Morgan Joseph Acquisition Company Index, launched in 2006 to measure the performance of all blank-check companies that went public since 2003 up to the point that they complete an acquisition, was up 28.25% for the year as of Friday. --The increasing popularity of the structure marks a stark change in the deal-making environment. Blank-check companies are like private-equity firms in their mission to acquire operating companies. But private equity, a rival for acquisitions, has been stung in the past few months by strains in the corporate debt market, which they rely on heavily for financing. Blank checks, by contrast, turn to public stock markets for cash and issuance has kept going strong. Some investors like them because the structure offers a quicker route to cashing out of their investments than does private equity. --Wall Street has noticed. SPACs used to be underwritten primarily by smaller investment banks like Morgan Joseph & Co. and Ladenburg Thalmann, but big Wall Street firms and some big names in the world of deal making are joining in. Names such as Citigroup Inc., UBS AG, Deutsche Bank AG, Credit Suisse Group, Lehman Brothers Holdings Inc. and Merrill Lynch & Co. increasingly are showing up on prospectuses alongside the typical blank-check underwriters. Players such as Nelson Peltz and Ronald Perelman also are involved. --Citigroup bankers say one reason they began to underwrite such deals was investor demand for private-equity type investments with shorter timelines than actual private-equity funds. The investment bank became more involved after underwriting Boulder Specialty Brands Inc., which went public in 2005 and this May acquired Smart Balance Inc., a food marketer best known for its trans-fat-free margarine. --"The main advantages are liquidity and transparency," says William D. Fertig, chief investment officer of Context Capital. "If investors put money in a private-equity fund, they might get it back in four to five years. They have no say over what the fund buys. In a [blank-check company], investors get to call the shots." If shareholders don't like the proposed acquisition, they can get their money back, less fees, and walk away, even if the majority votes for a deal, he adds.

why deleveraging is painful

--the process of deleveraging is coupled with the sluggishness of the economy --margin calls forced many funds to liquidity their assets and liquidity issue exacerbate the issue by further creating price pressure to the assets.

2008 outlook of hedge funds

There are several things which worry us as 2007 ends. --First, as further losses are taken by funds and other counterparties on subprime assets and derivatives, the possibility of a loss to the sponsoring broker or bank becomes increasingly likely. Again, remember that the relationship between a hedge fund and a dealer, and a SIV and a dealer, are not that different. In both cases, the dealer really owns the assets and the risk. --Second, we remind one and all that among the tricks of the hedge fund trade in recent years was to write credit default protection on everything from corporate default swaps to subprime CDOs. As long as their was no apparent risk, the premium income seemed as free money, just like banks thought that lending was a zero cost activity. But hedge funds are not insurance companies and have neither permanent capital nor reserves, preferring instead to treat premiums on selling derivative put options as regular income. --Third, the failure to perform on a derivative obligation by a hedge fund that causes a loss to a bank could seriously damage what remains of market confidence. Part of the "markdown" process which must occur is valuing the derivative guarantees made on subprime assets or corporate debt when spreads were tight vs. where the spreads are trading today. --Now that defaults on subprime collateral as well as corporate names are starting to rise, hedge funds with commitments to offset these defaults are in a trap. Widened spreads make it uneconomic to sell the obligation to offset defaults, but as calls to perform come in from counterparties, these same funds must begin to consume profits and then that tiny bit of client capital that is available. --Whereas 2007 was the year of imploding structured assets, 2008 could be the year of hedge funds decimated by losses on cash positions as well as unfunded credit default insurance obligations. Then you can "turn out the lights."

Bill Gross's comments about economy

Will lower interest rate create another bubble? --Yes. According to Austrian thesis, in which it's necessary for recessions to occur for asset prices to be liquidated in order to start anew. And I think there’s a semblance of logic and common sense to that. --It’s just that we’ve gotten to the point and backed ourselves into a corner so many times that the pain may be too much to bear for, not only the American economy, but the global economy, because of the interconnection. And what do you think is the biggest problem facing America today? --enormous future liabilities that haven’t even been addressed. We have immediate problems in terms of the housing market, but our future liabilities in terms of healthcare, in terms of social security, in terms of the retirement of the boomers and the aging of the boomers and the ultimate ill health I guess of the boomers - and that’s what happens as people get older - that those liabilities are enormous and they number in the tens of trillions of dollars that haven’t been addressed and ultimately have to be. --They’ll be addressed, in my opinion, with cheaper money, a declining currency and higher interest rates as we go forward. But that’s, perhaps, for another day, not for 2008.

China raise interest rate again

--China raise interest rate for the sixth time this year, a move intended to ease inflation concern --The central bank raised one-year benchmark deposit rates by 27 basis points to 4.14 per cent, and one-year lending rates by 18 basis points to 7.47 per cent. --Fuelled by soaring prices for pork, Chinese consumer inflation hit 6.9% in November and looks likely to persist longer than officials had hoped. --In a sign that previous efforts to promote pig-rearing are proving insufficient, the government this week promised to double its subsidy to farmers for each fertile sow to Rmb100 next year and to give Rmb2.5bn to support large-scale standardised pig production.

how snafus can upend a mortgage

snafus: minor paperwrok slipups can be enought to get a recession --under a recission, while a homeowner still owes the principal, the lender won't be able to foreclose. Plus, all loan-related fees and interest that were paid are substrated from the principal. --After a recission, the borrower must pay off th eloan, typically with a new mortgage, or sell the house. Other times, lenders will modify the terms of a mortgage instead of doing recission. --It is available only to people who refinanced their original mortage on their primary residences. --Many seemingly small foul ups can qualify. If the APR, or annual percentage rate, is off by a fraction of a percent between the preliminary and final loan docuemtns, the loan may be rescindable. Same goes if the total in fees is off by more than $100.

Street's Finger Points at Fed, But Perhaps It's Misdirected

--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. --

the debacle of two Bear Stearns hedge funds - CDO

--At the center of it all was the new breed of CDO pioneered by Cioffi and his team to tap into the $2 trillion universe of money-market accounts in which individuals and corporations stash their spare cash. Cioffi's CDOs, initially branded "Klio Funding," were entities that sold commercial paper and other short-term debt to buy higher-yielding, longer-term securities. The Klios were a win-win proposition for money-market funds. They paid a higher interest rate than the usual short-term debt. And investors didn't need to worry about the risky assets the Klios owned because Citigroup had agreed to refund their initial stake plus interest, through what's known as a "liquidity put," if the market soured. Cioffi engineered three such deals in 2004 and 2005, raising $10 billion in all. --What did Citigroup get for guaranteeing the Klios? For one thing, fees. The Klios were also a ready buyer of Citi's own stash of mortgage-backed securities and other debt. Citi probably never imagined it would have to make good on those guarantees because the underlying assets had the highest credit ratings. --Cioffi used the money from each deal to purchase billions in mortgage-backed securities and pieces of other CDOs for his three Klios. He bought many of the assets directly from the two Bear hedge funds he managed. The move also supplied the hedge funds with cash. --In hindsight, CDOs and SIVs served as a foundation for a pyramid-like structure that Yale University economist Robert J. Shiller says occasionally arises from bull markets. As new investors arrive to the party, they bid up prices, boosting returns for those who got in earlier. The big gains attract more investors, and the cycle continues—as long as the players don't try to take out their money en masse. --The mortgage-market system played out much the same way. The new type of CDO lured a different tier of investors: money-market funds. The flood of fresh money made it even cheaper and easier for buyers to get mortgages. That, in turn, drove up home prices, holding off defaults and foreclosures. The process enriched the people who bought earlier in the boom and triggered more speculation. --Now investigators are trying to determine whether Cioffi and his team crossed legal lines. The Klios provided the Bear hedge funds with a ready, in-house trading partner. Their financial reports, which were reviewed by BusinessWeek, show many months in which the Cioffi-managed Klios traded only with the Cioffi-managed Bear funds. For example, in April, 2006, one Klio CDO bought $114 million worth of securities from one of the Bear funds. Such trades, says Steven B. Caruso, an attorney who represents several Bear hedge fund investors, may be "indicative of an incestuous, self-serving relationship that appears to have been designed to establish a false marketplace." --Amid the market turmoil earlier this spring, Cioffi hoped the Klios would work their magic once again. In April, as losses at the funds began mounting, Cioffi set up another CDO, High Grade Structured Credit CDO 2007-1, which issued short-term paper and offered investors a money-back guarantee from Bank of America. Cioffi had raised nearly $4 billion by late May, making it the biggest CDO of the year, according to Thomson Financial (TOC). --By autumn the practice of using CDOs to raise cash was dead. Money-market funds had stopped buying the short-term debt, and the credit markets were frozen. That forced Citigroup and Bank of America to make good on their guarantees to investors in Cioffi's CDOs, triggering big losses at the two banks. --The global markets are dealing with the consequences: The tab from the mortgage mess could run up to $500 billion, and central bankers are struggling to stave off recession. As investigators sort through the wreckage, the records of Bear Stearns' doomed hedge funds are turning out to be some of the most revealing in an era of financial folly.

Bear Stearns Q4 2007

Overall --Rev: -$854 million, or $6.90 a share(est -$1.82), versus net income of $563 million, or $4 a share in Q4 2006. --1st quarterly loss in 84 years (Morgan Stanley 1st quarterly loss since publice in 1986) --$1.9 bil writedown in mortgage related assets (forecast $1.2 bil) --negative revenue of $379 million as write-downs surpassed revenue. Net revenue a year ago was for $2.4 billion --company's executive committee won't receive bonuses this year. Detail Capital Markets(Fixed-income and equities trading and investment banking) --posted negative revenue of $956 million because of the write-downs. Year-earlier revenue was $1.91 billion. FI --Fixed Income net revenues were a loss of $1.5 billion, down from net revenues of $1.1 billion in the fourth quarter of 2006. Equity Trading --Bear Stearns, the fifth-largest securities firm, saidfourth-quarter revenue from equity sales and trading dropped 11 percent to $384 million. Investment-banking --fees fell 44 percentto $205 million. Clearing, which includes providing brokerageservices for hedge funds, advanced 2 percent to $276 million. Wealth-management --revenue rose 10% to $272 million as the number of accounts and client activity increased.

Fed Auction Draws Strong Interest

--The Federal Reserve's auction of loans, designed to ease strains in credit markets, drew strong interest from banks in its first round. --The Fed yesterday awarded $20 billion in 28-day loans at a rate of 4.65%, after 93 banks submitted about $61.6 billion of bids in the auction, which occurred Monday. The bidders' identities weren't disclosed. --The auction is the first of four that were announced last week by the Fed. The next one is today, and the next two will be early next year. They are part of an effort, coordinated with central banks around the world, to address liquidity concerns. --The rate is just below the 4.75% rate on funds from the Fed's discount window. --Banks were invited by the Fed to submit bids of at least $10 million, with a maximum of $2 billion per institution, at a rate of at least 4.17%. The final rate granted to all banks -- the stop-out rate of 4.65% -- is the highest bid needed to cover the total offer amount. --Market watchers said the final rate was a good middle ground between a lack of interest and desperate borrowing. --"If it were above the discount rate, it might have been because there was a lot of truly distressed borrowing," said Ray Stone of Stone & McCarthy Research Associates. "Coming in below the discount rate suggests these markets are not completely frozen and that this should help." --Time is the only real healer here, giving the markets enough time for price discovery, giving the markets time to identify and quantify all the subprime losses and time for financial institutions to rebuild their capital where necessary," said Lou Crandall, chief economist at Wrightson Associates, a Wall Street research firm.

morgan stanley Q4 2007

Overall --NI -3.59 billion, or -$3.61 a share --revenue reflects $9.4 Billion of Mortgage Related Writedowns (3.7 in Oct, 5.7 in Nov, 7.8 related to subprime) --Firm Further Bolsters Its Strong Capital Position With a Long-Term Investment of Approximately $5 Billion from China Investment Corporation --Morgan Stanley valuation of subprime position as of November 30 takes into consideration a variety of inputs including observable trades, the continued deterioration in market conditions, the decline in the ABX Indices, other market developments, including mortgage remittances and updated cumulative loss data. --Of 9.4 writedown, $7.8 billion represents writedowns of the Firm’s U.S. subprime trading positions (including the $3.7 billion writedown of subprime assets announced on November 7, based on valuations as of October 31). --In addition, the Firm’s $9.4 billion in mortgage related writedowns also includes $1.2 billion of writedowns related to European Non-Conforming Loans, CMBS, ALT-A, and Non-Performing and Other Loans. --The Firm’s remaining direct net U.S. subprime exposure is $1.8 billion at November 30, down from $10.4 billion at August 31 (writien down 7.8 subprime). The value of these positions remains subject to mark-to-market volatility. An updated schedule defining and detailing the Firm’s direct U.S. subprime net exposure is included in the financial supplement. Breakdown FI and trading --Fixed income sales and trading recorded a net loss of $7.9 billion,

foreign capital will shore up US financial companies balance sheet

--Numerous financial-services firms have been raising capital to deal with the ongoing credit crunch. In recent weeks, Abu Dhabi's sovereign-wealth fund invested $7.5 billion in Citigroup Inc. and an investment arm of Singapore's government has put $9.72 billion into UBS AG. --China Investment Corp. will be acquiring up to a 9.9% stake in Morgan Stanley through buying equity units that covert into common stock. CIC, which has some $200 billion in asset, bought a $3 billion stake in Blackstone Group as part of the U.S. private-equity firm's June initial public offering.

estimated CDO and subprime market loss

-- Merrill Lynch & Co., Citigroup Inc.and other banks that underwrote collateralized debt obligationslinked to U.S. mortgages may end up reporting $77 billion oflosses on their holdings, half of which they have alreadyrecognized, according to JPMorgan Chase & Co. --Losses marketwide on the so-called structured finance CDOs will reach about $260 billion, New York-based JPMorgan analystsled by Christopher Flanagan said in a report yesterday. Structuredfinance CDOs repackage asset-backed debt such as subprime-mortgagebonds and other CDOs into new securities with varying risks. --Bond insurers, which have ``taken few reserves,'' own CDOsthat have had $29 billion in losses, JPMorgan estimated. --Losses on all subprime mortgage assets may reach $300 billion to $400 billion worldwide, Deutsche Bank analysts said Nov. 12. Credit losses on subprime, Alt-A and second mortgages made in thepast three years will rise to $394 billion, excluding the effect of CDOs and credit-default swaps linked to the loans, UBS said. --Collateralized loan obligations, which repackage buyout loans and other high-yield company debt, may have lost $45 billion of value, the report said. The losses aren't ``credit-driven,'' thereport said.

Moody's put more CDOs under downgrade review

--More than $174 billion ofcollateralized debt obligations tied to U.S. mortgages were underreview for downgrades by Moody's Investors Service at the startof this month, according to the ratings company, suggesting the subprime crisis may deepen. --Moody's downgraded $50.9 billion of CDOs made up ofstructured-finance securities in November, or about 9.4 percentof the total, the New York-based company said in a statementtoday. Standard & Poor's, which today lowered ratings on $6.7billion of the debt, has so far downgraded or placed under review$57 billion of the debt. --Losses on the mortgage-bond CDO classes that are the leastexposed to defaults among their underlying securities may total $77 billion for banks and brokerages such as Citigroup Inc., Merrill Lynch & Co., and UBS AG and $29 billion for bond insurerssuch as MBIA Inc. and Ambac Financial Group Inc., according to aJPMorgan Chase & Co. report last month. The estimate representsactual credit losses after foreclosures on homeowners, notchanges in the values of the CDOs.

Goldman Saches Q4 2007

overall --NI: $3.22 bil, $7.01/s vs 6.6 est, +2% --Rev: 10.7 bil, +14% Credit Metrics FICC --rev: 3.3 bil, +6% --800 mil gain from Cogentrix Energy LLC, the Goldman subsidiary that sold 80 percent of itsstake in 14 power plants during the quarter. --Finance chief Viniar said the firm's so-called unfunded commitments to provide leveraged loans on takeovers fell to $27billion at the end of the fourth quarter from $42 billion at the end of the previous period. --During the three months ended Nov. 30, Goldman sold or canceled $16 billion of the loan commitments, funded $9 billionof the commitments and made $10 billion of new commitments, Viniar said on a conference call with journalists today. Equity --Equity trading revenue climbed 22 percent to $2.59 billion. Investment Banking --Investment-banking revenue rose 47 percent to $1.97 billion. --Financial advisory revenue, derived mainly fromcounseling clients on mergers and acquisitions, climbed 98percent to $1.24 billion. --Goldman, the No. 1 adviser in worldwide announced mergersand acquisitions for the seventh consecutive year, arranged$417.9 billion of takeovers completed during the fourth quarter,more than double a year earlier, according to data compiled byBloomberg. --The firm, which ranks second this year behind Zurich-basedUBS in managing global equity offerings, arranged $18 billion ofequity sales during the quarter, up from $16.7 billion a yearearlier, Bloomberg data show. Asset Managment --Revenue from asset management increased 25 percent to $1.17billon. The firm is starting three new hedge funds, expandingits so-called alternative investment offerings. Goldman's Global Alpha hedge fund may lose about $6 billion this year, or 60 percent of its assets, because of trades that went awry and client withdrawals, two investors who declined to be identified Market Comments: --Goldman is increasingly buying and selling companies orstakes in companies in addition to earning fees from advisingclients and arranging transactions. The firm booked $900million, before taxes, in the third quarter from the sale of awind-farm company and reaped $700 million in the second quarterof 2006 by selling a New Jersey power plant, Katzke said. --

corporate default are poised to rise

-- U.S. corporate defaults probably willquadruple next year after the number of companies that lost theirinvestment-grade credit ratings rose at the fastest pace since2003. --Moody's Investors Service predicts companies will default on 4.7 percent of their bonds in 2008 as the economy slows, up from 1 percent this year. Jones Apparel Group Inc., the Bristol,Pennsylvania-based maker of Nine West shoes, mortgage lenderResidential Capital LLC and 31 other companies with a combined$52 billion of debt were downgraded to junk by Moody's this year. --Downgrades are accelerating across America. Moody's reducedratings on 389 corporate issues this quarter, compared with 150upgrades, according to data compiled by Bloomberg. The gap was the biggest since the first quarter of 2003. --Another 447 borrowers in the U.S. are at risk of havingtheir ratings reduced, according to an S&P statement today.Companies in the automotive industry lead the tally of those indanger of having their credit rankings lowered, S&P said. -- Companies that lost their investment-grade rankings, knownas fallen angels, included Natick, Massachusetts-based BostonScientific Corp., the second-largest maker of heart devices, BeloCorp., the Dallas-based owner of the Dallas Morning News and 20television stations, and Nuveen Investments Inc. of Chicago,which manages closed-end mutual funds. --The last time so many companies were cut to junk was afterWorldCom Inc. in Jackson, Mississippi, and AdelphiaCommunications Corp., then based in Coudersport, Pennsylvania,filed for bankruptcy in 2002. --The Merrill Lynch high-yield bond index has a par amount of$689 billion. The high-yield market totaled $882 billion in thethird quarter, according to a Moody's estimate based on bonds

money market update as 12 18 2007

--The ECB loaned a record 348.6 billion euros ($501.5billion) for two weeks at 4.21 percent today, almost 170 billion euros more than it estimated was needed. Banks also borrowed about 2.4 billion euros at 5 percent yesterday, the most sinceSept. 26, the ECB said. --Central banks in the U.S., U.K., Canada, Switzerland andthe euro region are responding to more than $70 billion offinancial institution losses on securities linked to U.S.subprime mortgages. The Fed held the first of four cash auction syesterday, offering $20 billion in one-month loans. The resultswill be announced tomorrow. --The amount banks charge each other for two-week loans ineuros dropped 49 basis points to 4.45 percent, the EuropeanBanking Federation said. The rate had climbed 83 basis points inthe past two weeks. --The reduction in the lending rate is the first sign central banks' efforts to revive interbank lending are succeeding. The TED spread fell to 1.8 percentage points today, from a four-month high of 2.21 percentage points a week ago.

what levers do administration remains to address housing mess and credit crunch

--Citigroup's bail out of its SIVs portrayed the failure of agency sponsored program of Master Enhanced Liquidity Conduit. --Alternatively, Do nothing. Otherwise, it will delay the point investors believe prices have touched bottom. --Freeze on ARM. How to identifiy those who are deserving saving? --Expand Freedie and Fannie's roles. They can contributed limitedly since expectations of more more red ink forced them to raise capital. If they can report their books timely in Feb, Office of Federal Housing Enterprise Oversight, or Ofheo, might lower their capital ratio, scaling back 30% capital required --Federal Housing Administration which insures home mortgages against the risk of default. The legislation, supported by the White House, would raise limits on the size of mortgages the FHA can insure. The current limit of $362,790 would rise to $417,000. --

what is driving inflation

--energy price --labor cost --cheap dollar

European banks' saga

--in Aug, some European banks hoped ECB could address credit crunch via US-Euro currency swaps because few participants were willing to swap US. --Now, the coordinated effort will implement the swap in a longer time frame than banks asked for. --The saga suggested that a.ECB was behind the curve in this credit tale b.centeral banks are more creative in their approach: collective action is necessary in an integrated financial system and crises can flit around the world at lightening speed. --not only can investors flit across natiional borders at growing ease, but financial institutions can straddle currency regions and markets to an extraordinary degree.

daily mkt review 12 14 2007

--stocks retreated due to the concern of higher expected core inflation(annual 2.6%), shedding more than 1% --it dashed the hope of further aggressive rate cuts

Goldman Saches wring money on mortgage market meltdown

--Goldman's bet that securities backed by risky home loans would fall in value generated nearly $4 billion of profits during the year ended Nov. 30 --Goldman's trading home run was blasted from an obscure corner of the firm's mortgage department -- the structured-products trading group, which now numbers about 16 traders. Two of them pushed the company to wager that the subprime market was heading for falls. --Goldman's success at wringing profits out of the subprime fiasco, however, raises questions about how the firm balances its responsibilities to its shareholders and to its clients. --Financial firms have good reason to keep a tight leash on proprietary traders. --Last December, David Viniar, Goldman's chief financial officer, gave the group a big push, suggesting that it adopt a more-bearish posture on the subprime market, according to people familiar with his instructions. Mr. Swenson and his traders began shorting certain slices of the ABX, or betting against them, by buying credit-default swaps. At that time, new subprime mortgages still were being pumped out at a rapid clip, and gloom hadn't yet descended on the market. As a result, the swaps were relatively cheap. --Thanks to the wager that the ABX index would fall, Goldman's mortgage department earned several hundred million dollars during the first quarter, say people familiar with the matter. But the traders had unwound that bet in the weeks that followed. That left Goldman unhedged against further carnage, a worrisome situation for the second quarter. --Although it had become more expensive to wager against the ABX index, Messrs. Swenson and Birnbaum got a green light to once again ratchet up the firm's bet that securities backed by subprime mortgages would fall further. In July, the riskiest portion of the index plunged

Citigroup bail out its SIVs

--Citigroup Inc. will take over seventroubled investment funds and assume $58 billion of debt to avoidforced asset sales that would further erode confidence in capitalmarkets. Moody's Investors Service lowered the bank's creditratings. --Citigroup didn't give details of how it will finance the assets other than to say it will provide a ``support facility''that will be in place early next year. Junior-ranking SIVcreditors will still bear the risk of first losses on the assets, the statement said. Citigroup's ``credit exposure under its facility is substantially limited,'' the statement said. -- Citic Ka Wah Bank Ltd., a unit of China's biggest state-owned investment company, is among the lower-ranking investors inCitigroup's Beta Finance Corp. and Five Finance Corp. SIVs. --Citigroup Tier 1 ratio will drop by 0.16percentage point from 7.32 percent as of Sept. 30

daily mkt review Dec 12 2007

--market staged a late day recovery followed a release of strng retail sales that coincides with the biggest jump in wholesale price in 34 years --the Commerce Department said November retail sales increased by 1.2%, double economists' estimate for a 0.6% advance. The surprisingly strong gain suggests the economy might not be as weak as feared. --a large portion of sales are driven by higher energy prices --The producer price index for finished goods jumped 3.2% in November, the Labor Department said Thursday, the biggest one-month rise since August 1973. --The core PPI, which excludes food and energy, was up 0.4%, matching the biggest increase in one year. --The figures doubled Wall Street expectations of a 1.7% rise in the headline index and 0.2% rise in the core, according to a Dow Jones Newswires survey. --U.S. business inventories slowed to a crawl in October, suggesting companies might have cut back on stockpiling and created a restraint on the economy in the final months of 2007. --Inventories increased by 0.1% to a seasonally adjusted $1.431 trillion, after rising in September an unrevised 0.4%, the Commerce Department said Thursday. Wall Street was looking for stockpiles to move 0.3% higher during October.

Leh Q4 2007

overall --NI 886 mil, EPS 1.72, fell 12%, higher than est 1.44 --Rev 4.2 bil, -3% YoY and +2% MoM, bouyed by equity trading and merger advisory fees --Net mortgage related writedowns $830 mil Credit Market Capital Market --Fixed Income Capital Markets, net revenues of $860 million, a decrease of 60% from $2.1 billion in the fourth quarter of fiscal 2006, due to the very challenging markets experienced during the period. --Net FI writeoff 830 mil --Equity trading 1.9%, +100% Investment Banking --831 mil, -3% Asset Management --832, +30% Others --no unhedged CDOs are owned --Level 3 assets jumped 57% to 34.7 bil in Q3 --6.3 bil subprime exposure at Q3 comments --risk-mitigation tactics is at work

Fed reserve statement of Term Auction Facility program

Actions taken by the Federal Reserve include the establishment of a temporary Term Auction Facility (approved by the Board of Governors of the Federal Reserve System) and the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank (approved by the Federal Open Market Committee). Under the Term Auction Facility (TAF) program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window. All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program will be eligible to participate in TAF auctions. All advances must be fully collateralized. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.

Fed launch a new srategy to thaw credit market

--In a biggest coordinated effort of international finance forces since Sept 11, 2001, Fed joined four other central banks in a plan aimed at coaxing banks to lend more money at a time when fear seized up the credit market --Fed will lend to $80 bil through four aution-off time windows in the next couple of months. To ease bank's concern, the lending rate will below the discount rate and a wide array of collateral will be accepted. --ECB and British, Swiss, and Canadian central banks simultanneously annouced the new or expanded operations to supply their banks with more cash. Japanese and Swedes chimed in the rhetoric support. Fed also agreed to provide U.S dollars to ECB and the Swiss central banks since a lot of them used U.S dollars to finance their portfiolios related to US mortgages. --The action was aimed to resolving the worrying dilemma, that the benchmark lending rates is still high after it agressively cut interest rates. The Fed has tried to solve two major issues since Auguest. One has been to cut rates enough to spur economic growth without fueling inflation. The other was to ease credit crunch that has muffled the ecnomic benefits of those rate cuts. So far the medcine was not working and rates offered to consumer and each other was stubbornly high. --Market responded to the action positively. S&P index was up nearly 1.5% after the plan was annouced and 3-M US LIBOR rate dropped from 5.06% to 4.88%. --the new strategy resembles other facilities such as open market operations which applies only to 22 bond dealers and collateral limits only to treasury and certain high quality mortages, and discount window which carries stigma for borrowers.

credit market condition as of 12 06 2007

--credit markets have tightened sharply. Since Oct. 31, the yields on securities backed by auto loans has jumped to 6.3% from 5.4%, while yields on securities backed by home-equity loans have jumped to 7.7% from 6.6%, according to J.P. Morgan Chase & Co. --Rates on "jumbo" mortgages -- those larger than $417,000 -- are around 6.9%, up from 6.6%. --The London interbank offered rate, the rate banks charge each other for three-month loans in the offshore market -- is a whopping full percentage point above the expected federal- funds rate; it is typically less than a tenth of a point higher.

daily mkt review Dec 11 2007

--Federal Reserve cut interest rates (to 4.25%) for the third time since August, and left the door open to further cuts. --Fed cut Fed Fund rate (overnight lending rate) by 25 bps. It also lowered discout rate by 25 bps to 4.75%. --But the cut, at the low end of WS hopes, disppointed investors. S&P sank 2.5%. --Some technical factor is in play too. Investors, who bet on the rate cut, pulled money out of the market right after the news were released. --Insteasd of signaling the balance between economic growth and inflation like in the last annoucemtn, Fed says it will continue to assess the effects of financial and other developments on economic prospects and will act as needed.

Washington Mutual cut jobs and dividends

--of the top five mortgage lenders, WaMu's portfolio has the most exposure to risky loans, with 29% of its 2006 loans in the high-cost category, mostly subprime, and 15% backed by homes other than the owner's primary residence. --might be an attractive takeover target for J.P. Morgan

UBS join the same league as Merrill Lynch and MS

--the UBS annoucment of a fresh $10 billion subprime-related writedown brings the industry tally to around $75 billion. --The lasest move brings UBS into the same league as ML, MS, Cit

Freddie try to limit damage

--Freddie Mac announced that it will reduce the number of overdue loans it purchases from investors in mortgage securities guaranteed by the company. --Its policy has generally been to buy problem loans from the investors shortly after they become 120 days overdue. Now, it will do that only in cases when the loans have been modified to ease terms for borrowers; a foreclosure sale occurs; the mortgage is overdue for 24 months; or th ecost of guarantee pyaments to investors exceeds the cost to Freddie of holding the loan on its own books

another big casualty - UBS

--UBS will take $10 billion write-down and sell a chunk of itself (11.5 bil) to the government investment arm of Singapore and an unnamed Middle Eastern investor --CDO (super senior exposure) at the end of Q3 is around 20 bil --UBS, which had already taken a $4.4 billion third-quarter write-down --UBS joins a growing list of Western banks, including Bear Stearns Cos., Barclays PLC, and HSBC Holdings PLC, that have received capital injections from Asia and the Middle East this year --Zurich-based UBS, formed from the 1998 merger of SBC Corp. and Union Bank of Switzerland, has struggled with its identity in recent years. It pushed aggressively into investment banking, but at times its investment bankers chafed at the Swiss bankers' historically conservative culture. It reached a boiling point earlier this year when several high-level investment bankers left. --UBS's holdings tied to subprime mortgages eroded its core "tier 1" capital to about 10.6% at the end of September, and came close to falling below a UBS internal target of keeping capital in double-digit figures. Traditionally, the bank has tried to maintain a high level of capital relative to peers because some of its core wealth-management clients tend to be sensitive about its financial health, the bank said. The capital-raising measures announced yesterday will raise the bank's tier 1 capital to 12%, the company said in a statement.

a new wave of partnership with China

--Credit Suisse Group has reached to form an investment-banking joint venture with China Founder. --If approved, the joint venture would be among the first to take advantage of a long-promised opening. The China Securities Regulatory Commission has promised to lift its moratorium on approving new joint ventures with foreign securities firms this year. --Credit Suisse won roles on the world's largest stock deals including the $21.9 billion initial public offering of stock in Industrial & Commercial Bank of China Ltd., and the $9.2 billion IPO of China Construction Bank Corp --with domestic firms handling almost all offerings for Class A shares, as they are known, the urgency for Wall Street investment banks to get access to the market has been growing. --Since the 1990s, Morgan Stanley has owned about 34% of China International Capital Corp., which dominates underwriting in China. --In 2004, the Chinese government also permitted Goldman Sachs Group Inc. to establish a venture in China, and a year later UBS AG agreed to buy into a local brokerage. But in late 2005, Chinese securities regulators stopped accepting new applications for foreign joint ventures, and moved to restructure the domestic industry. --Even as foreigners have been kept out of China, Chinese firms have started to court partners in markets overseas, including on Wall Street. In October, China's largest brokerage, Citic Securities Co., announced a reciprocal investment plan with Bear Stearns Cos.

consumers are pulling back

--Consumers spend more on housing, health care, education, travel, restaurants and other services -- $4.6 trillion last year -- than they do on food, gasoline, clothing, electronics, cars and other goods -- $3.6 trillion. Spending on services such as education and housing tends to be less sensitive to economic swings. But discretionary spending, such as elective medical procedures or airline tickets, is susceptible to cyclical pressures. --Besides rising mortgages delinquencies and home foreclosures, delinquencies in the auto-loan market are ticking up to the highest level in several years, and lenders are tightening terms. Student loans are weakening too. --Friday, Federal Reserve data suggested credit-card spending has slowed. Consumer credit increased at an annual rate of 2.3% in October, faster than September's 1.6%. But that was less than half the pace of earlier in the year, and the acceleration in the growth of credit-card debt offset a second month of declines in the category that includes auto loans. Credit-card issuers have been pulling back, with approval rates across the industry dropping to 33% from 41% a year ago, --The labor market has held up, a good sign since most Americans' incomes come from their jobs. But even here there are some signs of weakening. Initial claims for unemployment benefits are running at a four-week moving average of 340,000, the highest since October 2005. Fed policymakers' latest forecast shows the jobless rate rising to between 4.8% and 4.9% next year, and the outlook has darkened since those projections were made in late October.

tight credit stirs cental banks

--Bank of England cut its interest rate by 25 bps to 5.5% --ECB kept its rate on hold because the global resilient economy is and will be supporting euro-zone exports while corporate profits and employment number still look strong. But euro zone inflation is high, around 3%. --Bank of Canada, Indonesia' central bank lower rate by 25 bps implications --banks are reluclant to lend, straining the credit supply and whole economy

employment numbers in Nov. 2007

--non-farm payroll numbers rose by 94k, est 80k --Oct number was revised upward from 166k to 170k, Sept number was revised downward sharply from 96k to 44k -- transport and retail trade increased a lot MoM, not sustainable --though payroll number is better than expected, macro picture is weakening and the new drag is financial sector --25 bps rate cut is expected.

double whammy caused by the deleverage

--What's with all the gloom about the U.S. economy? The problem is that we have two problems. One is that the economy is slouching toward recession or, at best, slow growth. It's the consequence of falling house prices, higher energy prices, flagging consumers and shrinking profits. The other is that the market for credit, the lifeblood of a modern economy, isn't functioning well. That problem is amplifying the pain caused by the first. Rising delinquencies for credit cards and home-equity and auto loans are bound to make banks, credit-card issuers and other lenders wary. --Leverage is defined as the factor by which a lever multiplies a force. In economics and finance, leverage allows the bold to borrow to make bets that can pay off handsomely when times are good. But leverage magnifies losses when things go bad. So borrowing binges are followed by periods of deleveraging in which lenders and investors borrow less and take fewer risks. Economists dub the recent decades in which recessions were scarce and inflation calm the Great Moderation. That seems to be giving way to the Grand Deleveraging.

mortgage mkt update as of 11 05 2007

The housing sector took center stage Wednesday. According to a report on the Wall Street Journal website, the Bush administration is expected to announce Thursday an agreement with the mortgage industry to freeze interest rates for certain subprime mortgages for five years. In addition, the plan includes a provision to fast track some borrowers toward refinanced loans and allow state and local governments to use more tax-exempt bond programs to fund refinancings. The plan comes amid concerns about rising home-foreclosure rates.

credit market remains under stress as 0

--Moody's Investors Service on Tuesday downgraded a batch of asset-backed securities issued by Bear Stearns Cos --Also Tuesday, Fitch Ratings downgraded certain notes within Sedna Finance, one of the structured investment vehicles that Citigroup Inc. manages. Sedna, which has more than $10 billion in assets, has no direct exposure to subprime mortgages or to collateralized debt obligations with asset-backed securities underlying them. Sedna's second priority senior notes were downgraded to 'CCC' on Rating Watch Negative from 'A,' reflecting Fitch's view that the probability the notes will incur a loss has significantly risen in recent weeks.

serivice numbers in Nov 2007

--U.S. service industries expanded inNovember at a slower pace as an index of new orders dropped,raising the risk the deepening housing recession will stall theeconomy. --The Institute for Supply Management's index of non-manufacturing businesses, which make up almost 90 percent of theeconomy, fell more than forecast to 54.1, the lowest level sinceMarch, from 55.8 the prior month, the Tempe, Arizona-based ISMsaid. Readings above 50 signal growth.

Blackrock's proposal for resolving Florida state-run fund crisis

--isolate distressed securities --charge against large redemption ($2 million or 15% holding asset) --borrow from banks (BAC) that would extend lines of credit to investors, using interest income from the portfolio to offset interest payment for loans

transparency of mortgage market

--Unlike the corporate bond market, which gained pricetransparency in 2002 when the SEC required dealers to reporttheir trades on a computer system called Trace, the asset-backeddebt market has no centralized network for disclosing prices. --Dealers saw their fees for corporate bond deals cut in halfthe year after Trace was introduced, according to a study lastyear published in the Journal of Financial Economics. --Day trader Richard Field in Needham, Massachusetts, says hispatent for tracking medical invoices can be adapted for mortgageinterest payments, helping banks better value securities derivedfrom home loans and other receivables. From its headquarters inNew York, accounting firm Deloitte & Touche LLP says it'sdeveloping computer models that will do the same.

liqudity put of CDO

--When the credit crunch intensified in the summer, demand for CDOs dried up. Consequently, banks that arranged CDOs got stuck with subprime assets they had intended to eventually place in CDO entities. In addition, as underwriters of the deals, some were also left with large amounts of CDO bonds they could no longer sell. In both cases, the CDO assets and debt were already on a bank's balance sheet. --But in some cases, banks were suddenly forced to take large amounts of fresh CDO debt onto their balance sheet. --Here's how. Some CDO trusts funded themselves by repeatedly selling short-term debt into the markets. When the debt became due after, say, three months, it was supposed to be re-sold to investors, or in market jargon, it would be "rolled over." --In the summer, with the credit crisis deepening, investors had no desire to keep buying any short-term debt issued by CDO trusts. But some banks, in trying to make their CDO deals more attractive to investors, had committed to buy that short-term debt if it couldn't be rolled over. Citigroup called that commitment a 'liquidity put,' when explaining why it ended up taking $25 billion of CDO debt onto its books.

economy as of 12 03 2007

--A weak dollar makes exports of U.S.-made cars, airplanes and mining machines more competitive. And manufacturing of oil and gas machinery is still booming. But for most other sectors, the housing slump, credit woes, and high energy prices are taking a toll

Overstretched state funds go south

--As the mortgage investment crisis has rippled through Wall Street, high-paid hedge funds and deep-pocketed banks seemed most prone to taking on too much risk in exchange for a little extra return. Now it's clear that even some money-market funds -- supposed to be bastions of low expectations and safety -- missed on this trade-off. --Florida's Local Government Pool, a state-run fund that manages money for local governments seeking a stable place to park extra cash, boasted market-beating returns. In 2006, it yielded about 5.4% while the average money-market fund yielded 4.8%. --As the credit crunch unfolded, the plan's managers took on even more risk by cutting their U.S. Treasury securities holdings to zero from an already tiny 3%. The fund held $27 billion at the end of September. That dropped to $15 billion after the local governments that parked money there took a hard look at the holdings and pulled out. The rush for the exits prompted the state to freeze redemptions. --Florida isn't alone. Money-market funds run by Wachovia-unit Evergreen Investments and Bank of America's Columbia funds bolstered returns with SIV debt and other opaque securities. Their corporate parents are stepping in to back them up. Florida is in a tougher spot -- municipalities need cash to pay employees. A plan to tap a state pension fund as a stopgap has been shot down.

who will be impacted by SIV downgrdes?

-- Moody's Investors Service is preparing the biggest credit rating cuts since subprime mortgagescontaminated the bond market, foreshadowing losses forinvestments that pay Florida teachers and money market funds. Moody's may lower ratings on $105 billion of debt sold bystructured investment vehicles after the average net asset valuesof SIVs sponsored by firms including New York-based Citigroup Inc.declined to 55 percent from 71 percent a month ago, Moody's saidin a statement Nov. 30. The assets were valued at 102 percent inJune. --Montana, Conneticut, Florida state funds will be impacted by the downgrades. Florida State Run funds have withdrawn half of $27 bil funds invested in SIVs..

E*trade deal implications

--Citadel bought the entire ABS portfolio from E*Trade, including CDO. Citadel paid an average of about 27 cents on the dollar for these assets. --In addition to our asset-backed CDO and second lien portfolio, ETRADE hold approximately $2.6 billion in amortized cost in other asset-backed securities, mainly securities backed by prime residential first-lien mortgages. net exposure to AB CDO and second-lien ast of Sept 2007 was approximately $450 mil (20%) --In a report released in October (10/18) by E*Trade that gave details on its holdings, the firm said that nearly 60% of the assets in its $3 billion portfolio were rated double-A or higher. Of these securities, $1.35 billion were residential-mortgage securities given to borrowers with good credit histories. (84% A or better) --Those aren't the kind of assets that usually sell at 27 cents on the dollar. "We were surprised at the large discount given the quality of the assets," Goldman Sachs analyst William Tanona said in a report. --The portion of the ABX index tracking double-A-rated subprime bonds that is used by many investors as a proxy for determining the value of similar mortgage securities recently traded at 45 cents on the dollar, according to data from Markit Group. That is up about six cents, or about 15%, from a week ago. But the Citadel average of 27 cents is at a more than 30% discount to even that lower price.

How Investors might ride out the market malaisa

--Is stock market taking a turn toward recovery or repeating the history? --Stocks surged last week on a bet of interest rate cut. This wasn't the first time. After credit worries hurt stocks in July and August, stocks rallied on the rate-cut hope in Sept, only to plung again when the credit worries resurfaced. --if you think it is time to start bottom fishing, be prepared to ride it to deeper bottoms. --cheap does not equal value: look ofr distressed stocks with values, such as financial companies with no exposure to subprime --watch lawmakers for opps and bottoms. Regulators often show up late in the game, a potential guidepost to bottoms. Sarbanes-Oxley was passed just a few months before Nasq bottomo in Oct 2002. http://online.wsj.com/article/SB119663796725711104.html?mod=hps_us_whats_news

economy in the near future

--housing situation will be a cloud hanging over --but other sectors, especially net exports, will mitigate the impact --the whole ecnomy will go through a weak patch in the next couple of quarters, growing at rate of 1% in that neigborhood --we can escape a recession, corporate balance sheets are strong, Fed will cut rates, exports is growing