Tuesday, November 27, 2007
-better news from banking sector helped Wall Street recover its poise on Tuedays although the grim consumer confidence and housing data provided a stark reminder of potential headwinds to come --News of 7.5 bil new capital injection into Citigroup and upbeat trading statement from Barclays, and UK bank, offered some respite from the gloom that have engulfed the financial sector recently --Barclays said its Q4 pre-tax earnings will be in line with analysts forecasts and 2007 profit will match 2006 profit although asset writedowns end a four-year growth streak.
--in the amount of $7.5 billion, ADIA will buy securities in Citigroup, which will offer an annual yield of 11%. --The bonds will eventually be converted into shares between March 2010 to September 2011, at a price of between $31.83 and $37.24 each. --Abu Dhabi's move is the latest example of the financial muscle of the oil-rich Gulf states, which have benefited enormously from booming energy prices and are now looking for new homes for their wealth.
For a fee, monoline insurers lend their high credit ratings to less creditworthy borrowers to help them gain access to investor capital at cheaper levels. If the issuer defaults, the insurer agrees to make the interest payments over the lifetime of the bond and to repay the debt at maturity. Based on preliminary reviews, both Moody’s and Fitch said CIFG was highly likely to fall below their capital adequacy requirements due to relatively high exposure to CDOs backed by mortgages. Fitch affirmed CIFG’s AAA ranking after the French banks took control, while Moody’s said the rescue “greatly reduces the risk” that CIFG’s capital will fall below the amount needed for the top rating. The CIFG bail-out may help to set the tone for other bond insurers as they seek to avert a downgrade, but unlike CIFG, most monolines do not have a big banking parent to fund a bail-out. Downgrades of the bond insurers could have serious consequences for investors who own the $2,400bn of bonds the insurers guarantee, which will in turn suffer downgrades and further drops in market value. The consequences could be particularly acute in the case of ACA, because, unlike other insurers, ACA has to post collateral against its derivatives trades if it gets downgraded. This is in part because ACA, rated A, is one of the only bond insurers that operates with a rating below AAA. S&P began reviewing ACA’s rating for downgrade this month after the company posted a $1.04bn third-quarter loss.
Monday, November 26, 2007
--In a sign of the building pressure, United Kingdom banking giant HSBC Holdings PLC yesterday became the first bank to bail out specialized funds known as structured investment vehicles. HSBC plans to gradually shut down two bank-sponsored SIVs and take $45 billion in mortgage-backed securities and other assets owned by the funds onto its own balance sheet. --two SIVs, called Cullinan Finance Ltd. and Asscher Finance Ltd. Janus Capital Group Inc. --Cullinan Finance Ltd., which has $37 billion in assets, is the second-largest SIV after Sigma Finance Corp., an SIV operated by a nonbank firm in London called Gordian Knot Ltd. Asscher has $8 billion in assets. --HSBC's move was viewed as a plus for firms such as these because it would help prevent a fire sale. "While this does not eliminate default risk to Federated and Janus, it does reduce or eliminate" the risk that the assets would be dumped into a market with few, if any buyers, said J.P. Morgan analyst Kenneth Worthington in a research note yesterday. --In a statement, HSBC said its move to rescue the two funds will "prevent funding constraints in the structured investment vehicle sector from forcing a liquidation of high-quality assets." --Ratings agency Standard & Poor's said yesterday that its long-term AA-minus rating on HSBC is unaffected. The bank, S&P said, "has sufficient resources to absorb these additional obligations." --HSBC's Tier 1 capital ratio, a measure of a bank's regulatory capital strength, ranked high among its peers at 9.3% as of June 30. In a worst-case scenario -- the company essentially would have to fund the entire new structure -- that ratio would fall to about 9%.
--high yield is appealing --as the maket boomed, greed set in. By 2006, investment banks are willing to bend over backward if it helped win the business of arranging a deal. e.g banks used cheaper short-term commerical paper instead of long-term debt to fund the highest portion of CDO. This saved more money to be paid to equity investors. Some banks even step in if lenders suddenly snubbed the short-term debt - liquidity put. this has landed Citigroup with $25 billion, and bank of America with $15 bil of exposure to commercial paper backing CDOs. --another mechanism is "auction-rate note program" --those two mechanisms helped spread the CDO spain throughout the financial system.
--home loan bank system's debt outstanding rose to $1.134 trillion as of Sept. 30, up 21% from nine months earlier. Although operating independtly, 12 regional home loan banks are jointly liable for one another's debts. --top four borrowers are Citigroup(104.5 bil, up 28%), Washington Mutual (52.5 bil, up 19% , Countrwide(51.1 bil, up 81%), Wachovia... --the home loan banks are cooperative, owned by 8000 members, mainly commericial banks, thrifts, and credit unions. Thye main business of the home loan banks is making secured loans known as "advances" to their members --home lona bank does limit any member's total advances to 50% of that member's assets. Countrywide's saving bank had assets of 106 bil at the end of Octomber, which suggest that its advances are near the ceiling.
--The disparity between those two views of the economy -- one growing bleaker, the other remaining sanguine -- stood out starkly last week. --By itself, the housing slump seems unlikely to choke off U.S. economic growth. Home construction accounts for less than 5% of the nation's gross domestic product. But if banks curb their lending in response to billions of dollars of mortgage-related write-offs, or if consumers cut their spending as home values fall and gasoline prices rise, it could knock the economy out of its delicate balance. --The outlook for the global economy depends largely on whether the rest of the world -- particularly Europe and Asia -- can pick up the slack. But Europe's outlook is growing cloudy. Interest rates are rising in the markets European banks use to borrow money. And the banks have grown wary of lending to each other because of anxiety about potential losses on investments tied to the U.S. mortgage market. Sanguine view --Economists, however, take heart from the U.S. economy's proven ability to withstand shocks, financial and otherwise, something Mr. Bernanke noted earlier this month.
Saturday, November 24, 2007
--According to Bank of America, $362 bil worth of adjustable-rate subprime mortgages will reset their rates higher. Besides the $362 billion of subprime ARMs that are scheduled to reset during 2008, $152 billion of other loans with adjustable rates are set to reset, according to Banc of America Securities. The other resetting loans include "jumbo" mortgages of more than $417,000 and Alt-A loans, a category between prime and subprime. --While many accounts portray resetting rates as the big factor behind the surge in home-loan defaults and foreclosures this year, that isn't quite the case. Many of the subprime mortgages that have driven up the default rate went bad in their first year or so, well before their interest rate had a chance to go higher. Some of these mortgages went to speculators who planned to flip their houses, others to borrowers who had stretched too far to make their payments, and still others had some element of fraud. --The reset peak will likely add to political pressure to help borrowers who can't afford to pay the higher interest rates. The housing slowdown is emerging as an issue in both the presidential and congressional races for 2008, and the Bush administration is pushing lenders to loosen terms and keep people from losing their homes. --Larry Litton Jr., chief executive of Litton Loan Servicing, says resetting of adjustable-rate mortgages, or ARMs, has recently emerged as a bigger driver of defaults. "The initial wave was largely driven by a higher frequency of fraudulent loans...and loose underwriting," says Mr. Litton, whose company services 340,000 loans nationwide. "A much larger percentage of the defaults we're seeing right now are the result of ARM resets.". More than half of the subprime delinquencies and foreclosures this year involved loans that hadn't yet reset, and thus were due to factors such as weak underwriting and falling home prices, according to Rod Dubitsky, an analyst with Credit Suisse. --Treasury Secretary Henry Paulson and the chairman of the Federal Deposit Insurance Corp., Sheila Bair, have been pressing lenders to modify terms in a sweeping way, rather than going through a time-consuming case-by-case evaluation that could end up pushing many people into foreclosure. --The political efforts are aimed at keeping the U.S. economy out of a housing-triggered recession. The Mortgage Bankers Association estimates that 1.35 million homes will enter the foreclosure process this year and another 1.44 million in 2008, up from 705,000 in 2005. The projected supply of foreclosed homes is equal to about 45% of existing home sales and could add four months to the supply of existing homes, says Dale Westhoff, a senior managing director at Bear Stearns. Foreclosed homes typically sell at a discount of 20% to 25% compared to the sale of an owner-occupied home, analysts say. --Federal Reserve Chairman Ben Bernanke told Congress earlier this month, "A sharp increase in foreclosed properties for sale could...weaken the already struggling housing market and thus, potentially, the broader economy." The big concern is a vicious cycle in which foreclosures push down home prices, making it more difficult for borrowers to refinance and causing more defaults and foreclosures.
Wednesday, November 21, 2007
--Moodys is cautious about the retailors' outcoming performance. Many of them will have promotional top-line sales because customers have been pinched by housing and sotck market --Retailors overbought their inventory. They bought their inventory months ago coinciding with the markt recovery. They were optimistic about economy and tended to overbuy. --The negtive outlook reflects the aftermaths of LBOS deals in the past few years. Many retailors are burdened with interest expense due to LBOs and have to cover them by the year end.
-- Derivative Fitch, a unit of Fitch Ratings Inc., on Wednesday downgraded the credit ratings of $29.8 billion of collateralized debt obligations, taking the total volume of its rating cuts on these investments to $67 billion. --Earlier this month, Fitch downgraded the credit ratings of $37.2 billion of CDOs, with more than $14 billion of transactions falling from the highest-rated AAA perch to speculative-grade, or junk, status. The severity of the downgrades serves as a warning to investors that even securities carrying the highest rating aren't shielded from the subprime debacle.
--they raise $2.7 trill to purchase and guarantee home mortgages --Freddie Mac posted 2.03 bil wider than expected loss, Fannie 1.4 bil --FM's loss reflects a provision for credit losses of 1.2 bil and 3.2 bil writedown --FM cut dividend by 50% to 25 c --core capital 34.6 bil, 600 mil more than the required captial. --they own or guarantee a combined $4.8 tril of U.S. home-mortgage-loans, mor than 4.3 tril a year ago --among U.S. mortgage securities offfered to invesetors, the portion guaranteed by Fannie and Freddie has rebounded to 72% from 41% in 2005 --Loans guaranteed by Fannie or Freddie are put into "pools" of mortgages that provide the backing for mortgage securities. When borrowers fall behind on payments on some of those loans, the companies have to buy those loans and reimburse the holders of the securities. Fannie and Freddie then must recognize a loss on any drop in the market value of the loan below the amount they paid for it. --Freddie Mac's regulatory core capital was estimated at $34.6 billion at September 30, 2007, which represented an estimated $8.5 billion in excess of the regulatory minimum capital requirement, and an estimated $0.6 billion in excess of the 30 percent mandatory target capital surplus directed by the Office of Federal Housing Enterprise Oversight (OFHEO).
Tuesday, November 20, 2007
--though last month's fed decision is a close call, more officials view the potential risk led by housing market might outweigh the inflation risk --inflation will be stable and under control. Weak dollar is a bigger worry, but will benefit exports --GDP 2007, 1.8%-2.5%, Q4 1.5%; it revised downward the GDP in 2008 from 2.5%-2.75% to 1.8%-2.5% --inflation PCE: 1.6%-1.9% in 2010
--WJ respected names are being battered by upheaval in the credit markets and economy at large --Cerbrus want ed to renegotiate the $4 bil buyout deal of United Rentals, higher bid than rivals --the ordeal might be a turnabout for Cerbrus. --Cerbrus is a $5.5 bil fund --51% stake of GMAC using $14 bil, which is dragged down by the loss in ResCap, a mortgage unit --Another Morgage firm controlled by Cerbrus, Ageis Mortgage Corp, is underwater. It was ranked 13th among subprime-morgage lenders in U.S.
Monday, November 19, 2007
Nov. 19 (Bloomberg) -- Swiss Reinsurance Co., the world'sbiggest reinsurer, lost 1.2 billion Swiss francs ($1.07 billion)on derivatives in October after the U.S. subprime mortgage crashroiled debt markets. -- The investment portfolios involved consist mostly ofmortgage-backed securities, and include some subprime and asset-backed holdings in the form of collateralized debt obligations,or securities made by bundling together bonds, Swiss Re said. -- Swiss Re cut its estimates of the value of the CDOs to zeroand the subprime securities to 62 percent of their originalvalue, bringing the market value of the portfolio to 3.6 billionfrancs, the company said. Quinn said the majority of the holdings
--For the first time since 2001, yields on Treasuriesmaturing from three months to 10 years are below the federalfunds rate. Five of the past six times that has happened, theeconomy entered a recession, data compiled by Bloomberg show. --Most analysts don't expect a recession. After annual growthof 3.9 percent from July to September, the economy will cool toa 1.5 percent pace this quarter and expand 2 percent in thefirst three months of 2008, according to the median estimate of72 economists surveyed by Bloomberg from Nov. 1 to Nov. 8. TheFed will cut its target to 4.25 percent next quarter and leaveit there through 2008, a separate survey shows.
Sunday, November 18, 2007
--In recent weeks, regulators in China have quietly ordered commercial banks to freeze lending through the end of this year, according to bankers in several cities. These bankers say that to comply, they are canceling loans and credit lines with businesses and individuals. --The order on loans may have a particularly disruptive effect on foreign banks with incorporated subsidiaries in China. Foreign bankers occupy only a corner of China's financial system and they say they are eager to remain on good terms with regulators. Foreign banks in the key Shanghai market -- including Britain's HSBC Holdings PLC, New York-based Citigroup Inc., Standard Chartered PLC of the U.K. and Hong Kong's Bank of East Asia Ltd. -- controlled 6.2% of industry deposits at the end of September and more than 16% of loans outstanding, according to official figures. --Since foreign banks have fewer deposits than their more entrenched Chinese counterparts and regulators are already pushing them to keep loans outstanding at 75% of deposits, they have very little financial flexibility. Their earnings could also take a hit if they need to get compliant with rules by borrowing in local money markets or selling loans. --The latest lending directive is a reminder of April 2004, when the China Banking Regulatory Commission said it offered "guidance" to banks they slow new loan approvals. It quickly backed off when economists howled that the government should treat banks like commercial enterprises, and instead, authorities lifted interest rates for the first time in nine years.
--some argued taht raters' work has public value and would be "chilled" if they are financially liable for their errors --other asserted that ratings firms deserve same First Amendment protections given to journalists. --yet is it not for CDO raters a.rating firms rated traditional corporate bonds whether they are paid or not, CDO raters are usually paid b.tradtional debt is accessible to public while CDO are sold privately to qualified investors.
Saturday, November 17, 2007
--43 bil exp is from returned ABS CDOs, off balance sheet in Q2. It is returned because of "liquidity put", termed when the securities were sold --trading account in Citibank N.A Q3 is 183 bil vs Q2 126 bil, Q1 105 bil, Q4 06 106 --based on the above data we can conclude that the clients returned these "assets" to Citi and booked under trading account.
in Q3 --short position: 101 bil a.level 1: 89 bil b.level 2: 11 bil c.level 3: 0.9 bil --derivative: 85 bil a.credit derivative notional amt 3.5 tril Q3 vs 2.9 tril in Q2 b.credit derivative receivable Markt in Market 52 bil vs payable 49 bil, net 3 bil (+26 bil vs -27 bil, neg in Q2) --trading securities: 496 bil --ABS CDOs: 42 bil GS short position Q3 --196 bil cash instruements: L1: 98,637, L2: 11,509, L3: 1,265 credit instruements: L1: 253, L2: 90,816, L3: 16,878
Friday, November 16, 2007
--IT rose from a small player in mortgage CDOs in 2002 with just 3.4 billion in underwritings to the leader from 2004 through 2006, posting $44 bil --It acquired First Franklin, one of the nation's largest originators of subprime mortages in December of 2006 for 1.3 billion. --In the first half of 2007, it underwrote $28 bil of mortage CDOs --Greed is important factor: not satisfied with underiting fees, it used its own captial to bet on the Super-senior tranches AAA, a lot of them are junk bonds now. High yield of CDO put ML in blind
--a client - known as collateral manager such as PIMCO - approaches ML to provide financing for a CDO that will hold 1 bil worth of bonds backed by subprime mortgages --Merrill Lynch makes 1 bil available to them, taking a fee of 1.5% to 2%. Collateral manager uses the balance to purchase bonds backed by pools of subprime mortgages, known as mortgage ABS. --At the same time, ML's structure finance team goes to work creating a variety of bonds taht will be backed the interest and principal the CDO collects on the asset-backed securities it owns. The bonds are also known as CDOs --ML's sales force will peddle to hedge funds, pension funds, and other investors.
two things stand out --shocking: a pack of talented people made billions of loss --predictable: wall Street always rides a wave until it crashes How big could losses be. --Mayo and CIBC project taht write-downs could total $50 billion or more by the end of the year. LT 70 to 100 billion
--Merrill's 6.4 percent notes due in 2017 () pay a spread of 2.24percentage points, almost double the premium of 1.21 percentagepoints a month earlier, according to Bloomberg data and Trace --excess liquidity around 39 bil (Asset 1097 - 180 inlcuding mortgage, liability 1058 - 180 long term laiblity maturing after 2008) --CDS
-- The slump in global credit marketswill force banks, brokerages and hedge funds to cut lending by $2 trillion, triggering the risk of a ``substantial recession'' in the U.S., according to Goldman Sachs Group Inc. --Losses related to record U.S. home foreclosures using a``back-of-the-envelope'' calculation may be as high as $400billion for financial companies, Jan Hatzius, chief economist at Goldman in New York wrote in a report dated yesterday. The effects may be amplified tenfold as companies that borrowed tofinance their investments scale back lending, the report said. --``The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized,'' Hatziuswrote. ``It is easy to see how such a shock could produce asubstantial recession'' or ``a long period of very sluggishgrowth,'' he wrote. --forecat reduction in lending is equivalent to 7% of total U.S household, corporate and government debt. --WS banks have written down more than $50 bil on seucrities related to U.S. subprime mortgages
• The News: A federal appeals court ruled new fuel-economy standards for light trucks are too lax, a setback for the auto industry and the White House. • The Industry Impact: The ruling, which the government may appeal, puts in doubt tougher fuel-economy rules that were nevertheless acceptable to car makers. • The Political Impact: The decision comes as the Bush administration faces rising political pressure from higher gasoline prices as well as from global-warming concerns.
Thursday, November 15, 2007
--Bear Stearns Cos.' credit rating wascut by Standard & Poor's after the securities firm said it wouldwrite down the value of subprime assets by $1.2 billion, leadingto its first quarterly loss since becoming a public company. --Standard & Poor's lowered Bear Stearns's long-term debtrating to A from A+ and kept the short-term rating at A-1, therating company said in a statement today. A is the sixth-highest investment grade on a scale of 10, while A-1 is the second best for short-term debt out of four investment-grade ratings. --writedown scale is small, but not small relative to its firm size --monoline business, heavy reliance on mortgage-based revenue comments: --the company might not suffer a loss due to its hedging
Wednesday, November 14, 2007
--Collateralized debt obligations willcost banks $253 billion in writedowns, according to the marketvalue of the lenders, Bank of America Corp. analysts said. --The writedowns account for 87 percent of the $292 billion of CDOs created by firms such as Citigroup Inc., UBS AG and MerrillLynch & Co. The securities package debt including mortgage-backedsecurities and use the income to pay investors. --The world's biggest banks and securities firms havedisclosed about $45 billion in writedowns and loan losses becauseof the turmoil in the subprime mortgage market. Total losses fromthe falling value of securities linked to home loans may reach asmuch as $400 billion worldwide, Deutsche Bank AG analysts said
Europe's biggest bank by market value writedown --The bank posted $925 million in third-quarter writedowns oncredit-related trades including securities backed by U.S.subprime mortgages. The bank also has $2 billion in subprimeresidential mortgages still to be securitized it said. reserve --HSBC set aside $3.4 billion in the quarter tocover U.S. defaults, $1.4 billion more than it forecast in July. revenue seg --NA account for 17% pretax profit, bad load represent 60% --29% profit fom Europe, 48% from Asia HSBC Finance Corp --HSBC Finance Corp., the bank's Prospect Heights, Illinois-based subprime consumer banking unit, said third-quarter baddebts more than doubled to $3.2 billion from $1.38 billion. The unit posted a third-quarter loss of $1.3 billion, morethan double the $492 million loss estimated by London-based analysts. market comments: --est $4 bil writedown for the second half of 2007
--short position in subprime securities a. Q3 2007, short positions (fina sold, not purchased yet, liab) 196 bil, compared to level 3 asset 72 bil. 177 bil Q2. 19 bil diff. b.Q3 07, cash adjustment in fina sold, not purchase yet is +39 bil vs 20.8 bil in Q2 07. 19 bil diff. --> it can be inferred that that the company sell short around 19 bil worth of securities in Q3 alone. vs peers LEH: --liability: fin sold, not purchaesd, liab in Q3 is 140.8 bil, vs 168 bil in Q2. --cash flow: fin sold, not purchaesd, in Q3 is 14.5 bil vs 42 bil in Q2 --> Lehman almost took not security shorting positions in Q3. MS --liability: Q3 176 bil vs Q2 166 bil -> 10 bil in Q3 --low exposure to CDOs a.retaiend interest in CDOs 1.773 bil at Q2 b.consolidated VIE assets in CDOs 37 bil, max loss 17 bil including 2.4 bil in retained interest c.nonconsolidated VIE assets in CDOs 32 bil at Q2, max loss is 14 bil including 1.7 bil in retained interest
Goldman Sachs, --no write down, --CDO exp Bank of America --$3 bill writedown --11.7 bil exp Lehman Brothers Holdings --700 mil Citigroup --11 bil writedown -- 43 bil exp at Q3, Merrill Lynch --7.9 bil --15 bil exp Morgan Stanley --3.7 bil writdown Bearn Stearns --1.2 bil writdown, est 3.2 bil in Q4 by Creditsights -- UBS --4.4 bil writedown Wachovia --1 bil writedown Credit Suisse --$948 million JPM --339 mil
Tuesday, November 13, 2007
--before the summer credit crunch, Countrywide raised money through issuing short-term commericial papers --with the spigot largely closed, Countrywide also is leaning on the Federal Home Loan Bank system for credit. --at the same time, Countrywide is relying on FDIC by promoting certificates of deposits with above-market rates.
mortgage market in the near future will be dominated by Fanni, Fred, FHA --private enterprise's role is narrowing in many instances to the job of arranging loans, providing the initial funding until the loans can be sold, and handling the monthly paper work --it means the end of era of easy approvals on mortgages. --lenders are more leaning on 12 regional Federal Home Loan Banks, which are cooperative chartered by Congress but owned by commerical banks and other financial institutions. TheHome Loan Banks' loans to financial institutions are referrred as "advances" --the portion guaranteed by Fiannie and Freddie has rebounded to around 72% in Oct from 41% in 2006 --irony in Fanni/Fredi: flip-flop their cap because government thought their dominance would disrupt the financial system --Federal Housing Administration (FHA) is expected to gain more than 10% of mortgage securitization market from 2% last year. --Total U.S. residential mortgage debt outstanding swelled to 10.3 tril at the end of 2006 --mortgage lending is volutible business. the cleanup of the saving-and-loan (S&L) mess of the late 1980s, when more than 1000 thrift institutions collapse, cost U.S taxpayres an estimated $124 bil. roles lenders (say Countrywide) first borrows money from FHLB or FDIC, originated mortgage loans, and sold them to agencies, such as Fanni, Freddi, and FHA who securitized and sold them into secondary market. Where, Fanni, Freddi, FHA also are mortgage insureres, charging compenstation fees for taking the risk.
Monday, November 12, 2007
-- Losses from the falling value of subprime mortgage assets may reach $300 billion to $400 billion worldwide, Deutsche Bank AG analysts said. --Wall Street's largest banks and brokers will be forced to write down as much as $130 billion because of the slump in subprime-related debt, according to a report today by New York- based credit analyst Mike Mayo,. The rest of the losses will come from smaller banks and investors in mortgage-related securities. --Subprime borrowers are likely to default on 30 percent to 40 percent of debt, Mayo wrote. Losses on loans to people with poor credit histories may be as much as half the sum lent, Mayo wrote. The forecasts on total writedowns are based on ``seat-of-the- pants'' estimates using losses announced by the biggest securities firms, he said. --Banks and brokers may have to write off $60 billion to $70 billion this year, Mayo wrote. The estimate is based on known charges of $43 billion and expected additional losses of $25 billion. The report didn't include writedowns at Frankfurt-based Deutsche Bank, which were 2.16 billion euros ($3.15 billion) in the third quarter. --About $1.2 trillion of the $10 trillion of outstanding U.S. home loans are considered to be subprime, Mayo said in the note. --Loss rates on about $200 billion of securities based on derivatives linked to subprime debt will run to as high as 80 percent, Mayo wrote. --Commercial banks, government-chartered firms Fannie Mae and Freddie Mac, and mortgage and bond insurers will be affected the most by mortgage losses, which will be about $50 billion in 2008, Lehman Brothers analysts wrote on Nov. 5. --``While this is large relative to historical losses on mortgage portfolios, it is about half the size of losses on corporate portfolios during 2002,'' when long-distance telephone company Worldcom Inc. went bankrupt, Lehman analysts wrote.
--Capital notes are long-term junior securities issued by SIVs which pay the highest return but absorb the first losses. However, the decision by the agency to put on review the ratings of capital notes issued by some of the biggest bank-run SIVs is even more significant. These include three run by Citigroup, the largest player in the sector, two run by HSBC and one by MBIA, the US bond insurer. --Also on review are notes from SIVs run by HSH Nordbank, Standard Chartered, Rabobank, SocGen, Bank of Montreal and Banque AIG. --While only the capital notes for most of these vehicles are on review at present, Mr Kerlogue said senior SIV debt ratings remained vulnerable to declining market values of assets and the inability to refinance maturing notes.
“Downside risks stem from a concern about the losses associated with US-based structured products turning out to be larger [than expected], which ends up constraining banks in their lending capacity, then things could get sticky. It’s a possibility,” IMF said.
Saturday, November 10, 2007
--Countrywide Financial Corp. warned in a securities filing that further cuts in its credit ratings to junk-bond levels could "severely" limit its ability to raise money in public debt markets and cause it to lose bank deposits. --In a quarterly filing with the Securities and Exchange Commission late Friday, the Calabasas, Calif., home-mortgage lender said that a cut in its ratings to levels below investment-grade could prevent it from placing funds from custodial accounts at its savings bank subsidiary, Countrywide Bank. Ratings below investment grade also might cause Countrywide Bank to lose commercial deposits and limit the trading activities of the company's broker-dealer unit, Countrywide said.
Friday, November 9, 2007
--US dollar CDO volume currently outstanding is 1.14 trillion --Cash CDO $1 trillion, Synthetic CDO $1.6 tril --issuers include S&P, SIFMA,Intex --2006 vintage, SIFMA structure finance CDO is 312 bil --not just ABS CDO bought subprimes --based only underlying collaterals, CDOs can be broadly divided into SF CDO (ABS CDO, RMBS CDOs ) vs Corporate CDOs (CLO, CBO)
--The State Street-managed CDO, Carina CDO Ltd., is the first to begin unwinding after a slump in the creditworthiness of its underlying asset-backed securities, Standard & Poor's said yesterday. The company's shares fell as much as 6.7 percentafter the ratings firm slashed the CDO's most-senior class from AAA to BB, two levels below investment grade. --``There's no material financial impact,'' Carolyn Cichon, a spokeswoman for Boston-based State Street, said in a telephone interview today. ``We're just the manager.'' The company oversees about $6 billion in CDO assets. -- The Carina CDO is primarily backed by residential mortgagesecurities, other CDOs and derivative versions of each, Moody'sInvestors Service said last month. Asset-backed debt CDOs suchas Carina mainly contain assets tied to subprime mortgages,whose values have dropped amid rising defaults by U.S.homeowners. About $1 trillion of such CDOs are outstanding,according to New York-based Moody's.
JPM acknowledges in its 10-Q that as of Sept. 30, it held $40.6 billion in leveraged loans and “unfunded commitments,” adding that “these positions are difficult to hedge effectively and further markdowns could result if market conditions worsen for this asset class.”
--Morgan Stanley bought Saxon in December to become subprime underwriting leader and used bearish subprime bet, swaps, to hedge risk --MS need to pay interest on those contracts. to offset the bearish subprime bet and help generate interest income to pay the cost of the swaps, the firm amassed the CDOs position (super senior) that produced most of the loss in Oct.
Thursday, November 8, 2007
--Morgan Stanley became a lead palyer in underwriting subprime-mortgage securiteis after acquiring Saxon Capitla Inc. for $706 mil --it has taken a 3.7 bil hit in the first two months of Q4, from Sept to Oct --at of the end of Q3, Auguest 31, US sub-prime direct exposure on the balance sheet was 12.3 bil, where 11.4 was sub-prime mortage related, incluidng loans, totatl rate-of-return swaps, ABS from ABS bonds, namely sub-prime residuals, of ABS CDS, CDS. The remaining 900 mill was in the most senior tarnches of CDOs, which are collateralized by ABS, ABS CDOs. net exposure is 10.4 bil. --We define net exposure balances as a potential loss to the firm in a 100% loss default scenario, with zero recovery. Some positive amounts indicate the maximum loss in a default scenario on long positions, a negative amount indicate the maximum gain in a default scenario on short positions. --At the end of the third quarter, our net exposure was $10.4 billion, and we recorded approximately $100 million in profits against fixed-income revenues. Of this, $1.6 billion in profits were recorded on our US sub-prime exposures that netted against a $1.5 billion loss on our ABS CDO-related exposures. Of course, since the end of our third quarter in August, the fair value of these exposures has declined due to the sharp decrease in the BBB ABX price indices, dropping between 35 and 50% in September and October, combined with the negative news on sub-prime mortgage remittances. --The result in declines in valuation as of October 31, 2007, are as follows. Our total US sub-prime related direct exposures on the balance sheet were $9.3 billion, representing $6 billion in net exposure, a reduction from the $10.4 billion we mentioned earlier. The total decline in revenues for the two months ended October 31, 2007, was $3.7 billion, of which $2.9 billion is against the total ABS CDO-related exposures. This write-off assumes a cumulative loss of 11 to 19%, with 50% severity and implies a 40 to 50% default rate of 2005 and 2006 vintages. --super senior exposure 8.3 bil --net exposure decreases from 10.4 to 6 bil, 4.4 bil loss, plus heding 0.7 bil -> revenue loss 3.7 bil
--AMBAC Financial Group, MBIA are leading the pack who agree to cover interest and principal payemnt in the event of default. Others like ACA Capital, Security Capital Assurance, PMI group. --deterioation in the credit market will weigh on the earnings of bond insuers and rating agencies will downgrade them too, another domino effect of bond-rating downgrades --lured by larger profits and higher growth rates, some bond inurers expanded into aggresive business of writing insurance for bonds backed by subprime. --Most guaranteors insured only AAA CDO and above. --value of CDS will be reflected in insuers' earnings --Market: according to Fitch, guarantors have written insurance on more than 80 bil of CDOs --AMBAC insured 29 bil of CDOs backed by subprime mortgages, the most among U.S guarantors. Est loss 4.4 bil
--SIVs funds will liquidate assets, triggering domin effect in assets rating and price downward. --Moody said it downgraded or migh downgrade debt issued by 16 SIVs due to the deteriorating market value of the assets the SIV own. --SIV market is made up of 30 funds holding 300 bil in assets
Wednesday, November 7, 2007
1.Overall --adj NI $3.49 billion or $1.35 EPS (1.6 est), vs 1.53 last year, 29% decline -- 2.Segments operating income --general insurance: 2.4 bil vs 2.6 bil (-7%) due to 215 mil operating loss in the Mortgage Guaranty business --life insurance: 1.99 bil vs 2.44 bil (-19.1%) due to declining premium in-force in the group life/health business --financial service: 0.669 bil vs 1.179 bil (-43.3%) due to 359 mil writedown of AIGFP's super senior credit default swap portfolio (short CDS) --asset management .419 bil vs 0.211 bil (100%) due to spread-based investment 3.Credit Metrics Mortage Insurance -- Op Inc -215 mil, domestic exp 28.2 bil risk in-force, 60 day delinquency rate 3% (24 bil, 2% last year) (-81 mil Op Inc, 25.9 bil 2.5% Q2) (-10 mil OI, --> will continue to lose money --subprime RMBS holdings totaled 25.9 bil, 98.3% of which rated AAA or AA as of Sep 30 (28.6 bil Q2) --> red flag, AAA value declined after Sep 30 Credit loss (CDS) --359 mil writedown of AIGFP's super senior credit default swap portfolio (short CDS), exp 12-18 bil (est based on Unrealized gain on swaps, options and forward transactions) -> more loss --CDO investments holdings 234 mil 4. Market comments --loss of 149 mil in portfolio of MBS --2.45 bil after tax drop inthe value of investmenets in assets that are backed at least in part by subprime mortgages. --663 mil of AIG's RMBS securiteis have been downgradecd through Nov 7th and 893 mil was place on negative watch. (662 mil were subprime 2.4% of subprime holdings) my comments: --further loss in AIGFP's CDS portfolio in Q4 0.55 bil --morgage insurance will lose at least 220 mil in Q4 --AIGFP's CDS portfolio will lose at least 400 mil --est EPS 1.2 - 1.3 --short the bond
--1. Hey, China Takin' Cheapshot at Our Foldin' Money Overnight the dollar fell to a record low versus the euro and its weakest level1981 against the pound after Cheng Siwei, vice chairman of China's National People's Congress, China's legislature, told a conference in Beijing, "We will favor stronger currencies over weaker ones, and will readjust accordingly." --2. ECB Facing the Fed's Familiar Spot Between Rock, Hard Place The Euro at a record level against the dollar, oil near $100 a barrel, severe credit issues that remain unsolved and worries about inflation in the EuropeanUnion have thrown what was to be a run-of-the-mill interest rate policy meeting into sudden disarray. --3. Super-SIV Now Super Sieve The Financial Times this morning is reporting that a USTreasury-backed plan for a “superfund” to buy up distressed mortgagesecurities appears to have stalled. --4. COF is updating its view of 2008 charge-offs to a range of $4.9billion on the bottom and up to mid-$5 billion. Schnall added: "Fourth quarter delinquencies are unlikely to declinethe way we had assumed, and consequently, the $175 million of“extra” charge-offs we anticipated in the first quarter are likely to continue into the beginning of the second quarter and possibly longer."
--Tenders totaled $30,453,482,000 and the Treasury accepted$13,000,002,000 of the bids. Competitive bids awarded totaled $12,737,720,000. Non-competitive bids awarded -- including those sold directly to individual investors -- totaled $137,282,000. --Indirect bidders, a group that includes foreign central banks, bought 28.7 percent of the amount sold, compared with 22.5 percent in the prior auction. Primary dealers bought 70.9 percent, compared with 77 percent in the previous sale. Direct bidders purchased 0.4 percent. --For its own accounts, the Federal Reserve bid and wasawarded $6,673,924,000. For foreign central banks, the Fed bidand was awarded $125,000,000. --The notes will be dated Nov. 15 (now 11 06), settle Nov. 15 and mature Nov. 15, 2017. The CUSIP number on the notes will be 912828HH6.
--General Motors Corp. (NYSE: GM) today announced it will record a net non-cash charge of $39 billion for the third quarter of 2007 related to establishing a valuation allowance against its deferred tax assets (DTAs) in the U.S., Canada and Germany. --In accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, GM has evaluated its DTAs quarterly to determine if valuation allowances were required. As previously disclosed in GM's 2006 Form 10-K, GM had determined in prior periods that a valuation allowance was not necessary for its DTAs in the U.S., Canada or Germany based on several factors, including the degree to which the company's three-year historical cumulative losses were attributable to special items or charges, several of which were incurred as a result of actions to improve future profitability; the long duration of its deferred tax assets; and the expectation of continued strong earnings at GMAC Financial Services and improved earnings in GM North America. --SFAS No. 109 guidelines require that a valuation allowance should now be established due to more recent events and developments during the 2007 third quarter. A significant negative factor was the company's three-year historical cumulative loss in the third quarter of 2007 in the U.S., Canada and Germany on an adjusted basis. Another significant factor was the ongoing weakness at GMAC Financial Services related to its Residential Capital, LLC (ResCap) mortgage business, including substantial U.S. losses incurred in 2007. Finally, the company faces more challenging near-term automotive market conditions in the U.S. and Germany. --DTAs from 10-k 2006 As of December 31, 2006, we had approximately $34.8 billion in U.S. net deferred tax assets (DTAs). These DTAs include approximately $5.7 billion net operating loss carryovers that can be used to offset taxable income in future periods and reduce our income taxes payable in those future periods. In December 2006 we increased our U.S. DTAs by $10.2 billion as a result of recognizing the funded status of our benefit plans on our 2006 consolidated balance sheet pursuant to the adoption of SFAS No. 158. Many of these DTAs will expire if they are not utilized within certain time periods. At this time, we consider it more likely than not that we will have U.S. taxable income in the future that will allow us to realize these DTAs. However, it is possible that some or all of these DTAs could ultimately expire unused, especially if our North America restructuring initiatives are not successful. While the closing of the GMAC Transaction in November 2006 did not directly affect GM’s ability to realize our DTAs, a significant portion of GMAC’s U.S. pre-tax income will no longer be available to GM. Therefore, unless we are able to generate sufficient U.S. taxable income from our automotive operations, a substantial valuation allowance to reduce our U.S. DTAs may be required, which would materially increase our expenses in the period it is taken and materially adversely affect our results of operations and statement of financial condition.
Tuesday, November 6, 2007
--David Trone of Fox-Pitt characterized the basis for his Morgan Stanley estimate as "educated guesses" tied to the firm's disclosed levels of credit and real-estate exposure. He estimated the firm's exposure to CDOs is about $16 billion and that the write-downs are likely to total 25% of the firm's CDO exposures, or $4 billion. He said the firm could take an additional $2 billion hit on straight mortgages and other risks such as exposure to SIVs, or structured investment vehicles. --Another research firm, CreditSights, yesterday estimated potential fourth-quarter CDO hits at $9.4 billion for Merrill, $5.1 billion for Goldman, $3.9 billion for Lehman, $3.8 billion for Morgan Stanley and $3.2 billion for Bear Stearns.
Morgan Stanley, Lehman Brothers Holdings, Bear Stearns and Goldman Sachs Group all gave their last earnings report in mid-September based on the quarters that ended in August. Both Citigroup and Merrill reported for periods including September, when the debt market downturn worsened, as it has in October as well.
Credit Metrics CDO and CLO - realted losses --1.8 bil pretax net writedown (1 bil on asset-backed CDOS, 0.5 bil on super senior tranches of CDOs, 0.3 bil CLOs) --43 bil ABS CDO super senior exposure (25 bil CP, 18 bil super senior tranches of ABS CDOs - 19 bil high grade , 8 bil mezzanine , 0.2 squrared) Leveraged loans --1.352 bil net writedown (0.9 bil debt underwriting, 0.451 bil lending activities) --11.7 bil of sub-prime relaeted exposrues in lending and structuring business as of sep 30, 07, 13 bil Q2, 24 bil beginning of the year. --a. 2.7 bil CDO warehouse, unsold tranches of ABS CDOs 4.2 SIV --citigroup has no contractual obligation to provide liqudiity facilities or guarantees to any of the SIVS, do not own equity positions --SIVs has no diretexposrue to US subprime assets, $70 mil of indirect exposure to subprime assets through CDOs which are AAA rated and carry credit enhancements. --98% SIV's assets are fully funded through theend of 2007 --exposrues 83 bil at September --provides arm's length commercial terms totalling 10 bil of commited liquidity, 7.6 bil of which has been drawn as of Pct 31, 2007 comments --est 8 to 11 bil loss in Q4 related to CDO writedown --
Monday, November 5, 2007
--mortgage investors use 10 trea as a hedge --sales of mortgages dropped 20%, less demand for 10 trea --influence of mortage over treasuries increased as mortage mkt quardupled to 10.9 tril since 2001 --more than 6 tril of securities backed by morgage loans are outstanding, comparing to 4.5 tril treasuries market --100 bil of treasuries trade every day, hedging surged to as much as 45% of that amount when yields drop a quarter percentage point.
--Mortgage-bond investors typically buy Treasuries when ratesfall and consumers refinance home loans, giving investors backtheir money sooner than anticipated and forcing them to reinvestin new securities at lower rates. Treasuries, meanwhile, usuallyrise in value. --Purchases of government debt by mortgage bondholders tend to lower yields by about half a percentage point during a rally, according to research by Frankfurt-based Deutsche Bank AG.
the myth of credit crunch --revaluation of assets downwards is not a credit crunch --credit crunch occurs when banks tighten lending standards across all sectors --bank credit has surged in recent months, total bank credit has exploded at 12 % annual rate due to a shift in corporate financing from CP to bank loans the myth of weak dollar --weak dollar is good for U.S stocks, espcially for exporters --concern about inflation is unfounded. Over the past five years, the exchagne rate of dollar has fallen 30% against Euro. infatlion rates still fell the myth of large U.S budget deficit --U.S budget deficit is low and shrinking. total debt burden of US is declining too --budget deficit in 2004 3.5% of GDP, 2.6% in 2005, 1.9 in 2006, 1.2 Sep 2007, average of the last 40 years --total debt dropped from 36.9% in 2006 to 36.5% 2007 What it ALL means --near term action could be choppy --long term outlook is postive
--As of Sept 30th the fair value of sub-prime related direct exposures in securiteis and banking (S&B) business is $55 bil (11.7 bil related exposures in leindg and structuring business, 43 bil in most senior tranches , super senior tranches, of CDOs) --Since then fair value dropped $8 bil to $11 bil following the downgrades of subprime mortgages after Q3 sub-prime direct exposure (lending and structuri8ng exposures) --11.7 bil of subprime related exposures in lending and structuring business vs $13 bil in Q2, 24 bil at the beginningo of the year. a.1: 2.7 bil of CDO warehouse inventory and unsold tranches of ABS CDOs a.2: 4.2 bil of actively managed sub-prime loands purchased for resale or securitization a.3: 4.8 bil of financing transactions with custoemrs secured by sub-prime collateral CDO (ABS CDO super senior exposures) --43 bil of exposures in the most senior tranches (super senior tranches) of CDOs which are collaterized by ASB CDOs --a. 25 bil in commerical paper principally secured by super senior tranches of high grade ABS CDOs a.18 bil of super senior tranches of ABS CDOs a.1: 10 bil of high grade a.2: 8 bil mezzanine a.3: 0.2 bil of ABS CDO-squared transations --not subject to valuation base on observaable market transactions captial ratios target: Tier 1 7.5%, TCE/RWMA (tangible common equity/risk-weighted managed assets) 6.5% actual: Tier 1 7.3%, TCE/RWMA 5.9%
--J.P.Morgan bought Chicago-based Bank One Corp. for $58 bil in 2004, new CEO Mr. Dimon from Citi --Bank of America snapped up credit-card maverick MBNA Corp. in a $35 bil deal in 2005, transforming the Charloette bank into a consumer-banking behemoth and creating a new competition for Citi's massive card business --Citi on international front: a.85.6% stake in China;s Guangdone Develpment Bank for $3.1 bil b.Nikko Cordial Corp, 3rd larget borkerage in Japan
--SIV are bank-backed investment funds, which issue CP to invest in high yield securities --it could compound banks' subprime issue by forcing them to cover conduicts' maturing debt. --alternatively, conduits could sell assets to raise funds, which put downward pressue on assets price and downgrade pressure. --HBOS' conduit Grampian, one of the largest, with about $35 bil in paper outstanding --Citi, $80 bil
Friday, November 2, 2007
Double Taxation A corporation's profits are taxed twice. Companiesthemselves pay a tax of as much as 35 percent on income, andshareholders must pay a 15 percent tax on any dividends theyreceive. In contrast, limited liability companies and otherpartnership-like vehicles distribute all of their income toshareholders, who then pay a single tax of up to 35 percent.
--Mark Zandi estimate that of 2.45 tril in risky mortgaes currently outstanding - includign subprimes, mortgaes taht exceed Fannie Mae lending limists andother s -- as much as a quarter could suffer defaults in the months ahead. --Total losses could reach $225 bil --price drop will be 10% from Q4 2005 to Q4 2008. It will wipe out $2 tril in home values, less than $7 tril in stock wealth wiped out by the tech bust. --Moody, SP, Fitch has downgraded or put on watch $100 bil CDO in Oct --ABX BBB- is 17.5 cents, droped 50% from August --ABX AAA is 79, down from 95 a month ago --super senior tranches is not immmune too, Merr and UBS are examples --special funds (SIV) invested in the top-rated tranches of CDOs by issuing CP or MTN to raise funds. Now $300 SIVs are in truoble, especially Citigroup --Bond Insurance company (MBIA, Ambac, AIG financial guaranty unit, PMI, ACA Capital) aggressively write insurance on super-senior tranches of CDOs that were backed by subprime. Ambac, PMI shares dropped 19.7% and 11% respstively. --3m libor dropped to 4.865, no sign of credit crunch. banks are still willing to lend money comments --housing market will continue to drag down economy and drive Fed fund rate lower to at least 4%
--Mer dropped 9%, analysts from Deustche Bank said Merrill will write down another $10 bil --LCDX has dropped 2% to 98 cents since end of Oct --employment numbers for Oct is 166k, est 85k, last month 96k --In total, the October jobs report has extended the ongoing dichotomy between actual available data, which show a resilient U.S. economy outside the housing sector, and widespread expectations that the broader economy is doomed to experience a sizable hit from credit-market turmoil.
Thursday, November 1, 2007
Overall --home-loan unit is called ResCap --GM owned 49% stake, Cerberus Capital Management 51% --1.6 bill loss, 1.8 bill loss in ResCap --Goodwill impairment 455 mil at ResCap, 2006 695 mil --weakening credit and housing market increased reserve, writedown... Segment performance --Auto line performed well NI increased >60% from 320 to 519 mil, rev 237 to 403 mil --ResCap, poor, 1.8 bil loss and 455 mil goodwill impairment Credit Metrics ResCap - mortgage - Subprime/CDO --2.3 bil loss, 1.8 bil + 455 mil goodwill impairment --cost structure a.provision -884 mil, b.HFS(Hold For Sale) evaluation adjustment -670 mil, c.trading sec vluation loss -333 mil, d.goodwill -455 mil, e.REO impairment -145 mil, f.lot option/model home impairment -98 mil --existing exposure 30 bil irregardless of classifications (6.6 bil are dangerous nonprime, HEL, non-performing, 2bil are most dangerous) --detailed exposure at the end of Q3 a.HFS 15 bil (nonprime 20%, 3 bil) b.HFI 21.7 bil (nonprime 19%, 4 bil) c.Warehouse Lending Receivable 1.8 (nonprime 12%, 300 mil) d.loan servicing portfolio 427.4 bil (nonprime 10%, 42.7 bil) --- not a problem when interest rate is falling due to natural hedge of MRS (high origination fees and gain on sale offset the impairment of portfolios) the relationship does not work well when there are substantial repayment and refinancing credit quality of MLHFI --nonaccural loan/total MLHFL 14.1%, up --net charge off/total MLHFL 0.7%, up --loan loss allowance 2.85%, up --analysis: a.writedown of trading assets and HFS around 1 bil, exposure subprime HFS and lending receivable 3.3 round to 4 bil, ratio 25% writeoff, at least 1/18 (5% writeoff) b.500 mil more wrieoff Liquitidy --$1 bil equity injection from GMAC out of 6.2 bil --secured funding 20 bil from Citi, committed secured funding 4.6 bil Evaluation --BB+, 7y cash bond T+483 bps --5y CDS, 500 bps --ResCap 10y T+1000 bps comments --1.8 bil good at the end of 2006, only 445 writedown in Q3, another $400 mil in Q4 --expected NI: -1 bil (ResCap -1.5 bil loss after tax) --hardly breakeven until end of 2008 because of goodwill --ResCap is a mess