Thursday, January 31, 2008

Bernanke put and Sovereign Wealth Funds put

--A put option gives the right, but not the obligation, to sell a specified security at an agreed price within a specified time. In other words, puts limit their owners' potential losses. Wall Street's latest financial crisis has spawned two variations on these hedges, which work like the "get out of jail free" cards drawn by lucky Monopoly players. The new benefactors: the Bernanke put and the Sovereign Wealth Funds put. --The first of these is the heir to the "Greenspan put," which emerged when the former Federal Reserve Board chairman took a machete to interest rates in 1998 following the collapse of the investment firm Long-Term Capital Management. Alan Greenspan bailed investors out, at the cost of fueling booms in housing and credit bubbles.

Tender Option Bond Yields Widened

--At the center of these Muni problems is a little-known but widely held investment known as a "tender option bond." These securities, like some of the other instruments that have struggled, rely on the kind of financial engineering of Wall Street banks and hedge funds that investors are second-guessing. --Tender option bonds are an estimated $175 billion to $200 billion market, and had become a common holding in tax-exempt money-market funds in recent years. With a tender option bond, hedge funds, banks and others raise money through short-term borrowings to fund the purchase of long-term municipal bonds. --Fearful of losses, money-market investors aren't buying, leaving billions of dollars of these bonds piling up at banks and brokerage firms like Citigroup Inc. and Merrill Lynch & Co. --Some hedge funds have been suffering double-digit losses as investors bailed out of tender option bonds and other kinds of insured muni debt. --Lack of buyers has caused prices on some of these short-term bonds to fall, sending their yields as high as 8%. Normally these bonds yield less than short-term Treasury notes, which yield 2.5% --It has caused dislocations in the wider municipal-bond market. Yields on 30-year municipal bonds, at 4.30% as of Tuesday, were a bit higher than the yield on a 30-year Treasury. Muni yields are usually much lower than Treasurys because of the favorable tax status of munis. --Tender option bonds are similar in some ways to investments known as structured investment vehicles, or SIVs, issued by banks in recent years. The critical difference is that tender option bonds invest in relatively safe municipal debt, while SIVs, which have caused banks huge losses, invested in risky mortgage debt. In addition, a tender option bond holder can give the debt back to the dealer at full value, an option investors have been making ample use of lately, much to the dismay of the brokerage firms.

Wednesday, January 30, 2008

Global Liqudity is Supportive going into the New Year

--It can not rescue financial markes single-handedly this year. But this will provide cushion to the markts --Real Rates (20y Treasury ) hit low --Monetary Growth is Still High in EuroZone. M2/GPD is is above 88% --Bank Deposits and liabilitiies increasd ~1 Tril last half of year to ~10 Tril --EM Central Banks, nearly ~1 tril, will pile into existing ~2 tril pool. They need a place to invest, either Treasury or Euro mix Bank Deposits. --Healthy fiscal Balances in major liqudi AAA treasury issuers, fiscal deficit has shranked in the past three years.

Chinese Investors Get to Be on U.S Stocks

--As China's stock market slumps from its recent dizzying heights, investors in the world's most populous nation increasingly have the option to move money into shares traded overseas, including the U.S --In the latest move to give Chinese investors access to the U.S. market, the U.S. Securities and Exchange Commission is expected to sign a memorandum of understanding in the next several days with the China Banking Regulatory Commission that will allow banks in China to develop U.S.-stock mutual funds for their clients, according to a person familiar with the situation. --The move is noteworthy because while mutual-fund companies in China can already offer their clients access to the U.S. markets, banks cannot yet develop their own stock funds. --Already, brokerages, banks and fund companies in China are pitching to the country's investors a fast-expanding array of mutual funds and other products that invest in, or reflect values of, world-wide stock and bond markets. Dubbed QDII, for qualified domestic international investor, the program marks the first legal channel for China's investors to put money in foreign financial markets. --Until about mid-2006, tough capital controls made it almost impossible for individuals in China to convert yuan into U.S. dollars and other foreign currencies, much less invest in overseas stock and bond markets. Now, individuals can convert yuan worth as much as $50,000 a year, reflecting how Beijing is eager to offset continued inflows into China by sanctioning more outflows. --The pending U.S.-China agreement for banks moderately expands the existing channels for foreign investment. Under it, banks in China will be permitted to design their own U.S. stock funds -- instead of selling products on behalf of other firms like mutual-fund companies. Banks are important because their branches are the primary platform for distributing financial products in China. --One hitch is frustrating the QDII industry: Individual Chinese don't yet show much enthusiasm for global investing -- in the U.S. or anywhere else. Almost all of the products introduced so far have been undersubscribed, and many have declined in value.

Comcast CEO is under fire

--On the subjects that matter most to investors -- financial performance, strategy and corporate governance -- Comcast's scores are decidedly lackluster. --The stock has fallen 39% in the past year. While it has held its own over the past couple of years relative to competitors such as Time Warner Cable Inc., the future doesn't look especially bright. Revenue is expected to rise at an annual rate of 6.6% for the next five years, compared with 8.3% growth at Time Warner Cable --Comcast also has proved itself to be a poor acquirer. Since 1999, it has spent about $80 billion on acquisitions, including the $58 billion purchase of AT&T Broadband in 2001. Return only 5$ tis past year. That is less than the company's weighted-average cost of capital of 8%. It tried to buy Walt Disney Co. for $66 billion in 2004 in a deal that looked dilutive for Comcast's shareholders at the time. --Comcast's governance may leave the bitterest aftertaste. Comcast has a dual-class share system that gives Mr. Roberts a third of the voting power despite owning less than 1% of the total stock. While this is typical of many U.S. media concerns, Mr. Roberts' stake comes with an added provision that allows him to keep his voting power even if Comcast issues new stock.

Tuesday, January 29, 2008

Junk Bond Spreads are Widening - signaling the verge of recession

--Junk bonds are off to their worst start since 1990, falling1.8 percent and triggering $17 billion in losses this month,according to index data compiled by New York-based Merrill Lynch& Co. Yields relative to Treasuries are rising at the fastestpace in at least 11 years as prices drop. --The pain may only get worse. Speculative-grade borrowersmade up the majority of U.S. corporate debtors for the first timelast year, according to Standard & Poor's. The default rate will soar to more than 8 percent this year, the highest since EnronCorp.'s collapse rippled through the market in 2002, estimatesZurich-based UBS AG. Yields show retailers, homebuilders and mortgage companies are among companies at the greatest risk as banks rein in lending. --This month they've dropped an average 2 cents on the dollar.An additional 7 cents would create losses of about $50 billion,based on the $709 billion of debt in Merrill's high-yield index. --In a recession, the extra yield investors demand to own junkbonds instead of Treasuries would widen to an average of morethan 10 percentage points from about 7 percentage points, saidParks, who wouldn't disclose what he was buying or selling. Thespread was a record low of 2.41 percentage points in June. --The December 2001 failure of Houston-based energy traderEnron was the biggest bankruptcy to date. It sparked an 11.2 percent annualized default rate the following month, according toNew York-based Moody's. Spreads reached 11.2 percentage points inOctober 2002, the highest since at least 1996. --Losses of as much as $400 billion on securities linked tosubprime loans may curtail lending by $2 trillion in the nextcouple of years, Jan Hatzius, chief U.S. economist in New York atGoldman Sachs Group Inc., said in a Nov. 16 report. --Junk ratings were assigned to 51 percent of U.S. corporate borrowers, New York-based S&P said in November. They accounted for 28 percent in 1992. The amount of distressed debt -- bonds that yield more than 10 percentage points above Treasuries --has swelled to $59.3 billion, the most since 2003, Merrill data show. --There are 147 issuers with bonds trading at distressedlevels, including Minneapolis-based mortgage lender ResidentialCapital LLC, whose $16.6 billion of debt was cut to belowinvestment grade last year, and Bon-Ton Stores Inc., the York,Pennsylvania, retailer that had losses in six of the past sevenquarters. In November, there were about 60, Bloomberg data show. --At least three high-yield companies have filed forbankruptcy this month. Montreal-based Quebecor World Inc., thesecond-largest publicly traded printer in North America, andEagan, Minnesota-based Buffets Holdings Inc., the biggest U.S.operator of buffet-style restaurants, sought protection fromcreditors last week. Hollywood, Florida-based homebuilder TousaInc. filed for bankruptcy today.

Better Late Than Never - PIMCO feb

Better early than never," I always say. And since never is a long, long, time – being late is OK too, but early – yeah early – is a portfolio manager’s best maxim. In this case it has nothing to do with birds getting the worm or being the first runner out of the starting blocks, but more about being positioned when markets move into crisis mode. Risk assets in a highly levered, financed-based global economy can move so quickly to the downside that by the time you hear the birds chirping or see the starter’s gun smoking the race may be already half over. Admittedly, there’s a price to be paid for sitting out the frenetic last thrust of any bull market. In stocks, it comes in the form of being labeled old-fashioned or out of touch as Warren Buffett was in the craze or even in the first half of 2007. In bonds, it shows up as lost carry when yield spreads compress and high quality government bonds are shunned for derivative structures offering double-digit levered rewards. But when risk markets perceive a change in the wind – a turn in profits, a potential recession, and most importantly as was the case in mid-2007, an implosion in the pyramid scheme, chain letter driven structure of modern finance – then you’d better be already positioned. Exit doors lock automatically as illiquidity and the psychological frailties of the human mind prevent quick action in order to preserve capital. Economists, TV talking heads, (and yours truly) can be early or late to a party as well. I marvel at the seemingly countless number of "celebrity" experts espousing the continuation or even extension of wealthy tax cut, supply side, freer regulatory policies that have lost not only their potency but their constituency as we turn the corner into 2008. Describing these pundits as being "late" in recognizing the increasing threats that their laissez-faire ideology poses to the U.S. economy, would be more than generous. "Never" is more likely the reality. One economist, however, who while early is more than likely to guide future policy solutions is Paul Krugman, op-ed columnist for The New York Times. Long before he accepted his current assignment at the Times he was a world-respected economist at MIT, proposing revolutionary solutions for the Japanese recessionary malaise of the 1990s and writing a book in 1998 entitled The Return of Depression Economics. While his book’s title features the "D" word, the content proposed nothing of the sort, but simply referred to the fact that the crucial task of future policy would be to bolster demand as was the case in the FDR-driven 1930s as opposed to encourage supply which has been the case since the Reagan revolution. Although Krugman doesn’t comment, in my opinion, it’s not that Reagan was wrong – he was in fact brilliantly correct and timely in his supply-side revolution. That pendulum, however, appears to have swung too far in the direction of the private market. But Krugman (and yours truly) was a tad early in his forecast for reversal I think, because of the failure to recognize the potency and the inventiveness of modern finance. Until recently, U.S. and therefore global demand has been driven by the ability to lower interest rates and extend credit to an increasing majority of Americans. Mortgages, auto finance, and credit cards were offered on increasingly liberal terms and continually lower yield and risk spreads because of Wall Street ingenuity and – importantly – the naïve endorsement of their black magic by rating services willing to sell AAAs for a fee. If you’re offered a new home with nothing down and nothing to lose, you’d take it and many Americans did. If you’re offered a new car with 0% financing for 5 years, you’d buy it and many Americans still do. Demand, as Krugman would likely retrospectively recognize, was bolstered and supported by innovative, securitized finance which in turn was nurtured by lax regulation and a belief that things could not go wrong – and if they did – that policy makers, both monetarily and fiscally oriented, would make things right. The repair, if needed, was labeled the "Keynesian compact" and it made for a deal with the American public: it would be OK to have free markets because policymakers know enough to prevent another Great Depression. Demand could always be stimulated with a combination of easy money/budget deficits. Prosperity in effect, was guaranteed. Well "probably" guaranteed – but the historic growth rate of that prosperity may now be threatened. Because demand in the form of consumption has been artificially and fictitiously stimulated in recent years by financial engineering run amuck, there is a legitimate question as to whether its black hole imploding destructiveness can be totally countered with another dose of lower yields and deficit spending packages. The $150 billion "return to sender" deficit plan advanced by Bush and the Congress, for instance, amounts to just 1% of GDP and is labeled temporary. It will be of marginal benefit to long-term prosperity. To understand why, consider that the productivity of our economy ultimately depends on its ability to 1) innovate, and 2) save and invest, and that there is little of either in this stimulus package. Some have even suggested – and with my somewhat grudging concession – that this package will help the Chinese economy more than ours. Americans will use the rebates to buy Chinese imports offered at Wal-Mart and the $150 billion will then wind its way inevitably back to Asian coffers. The U.S. needs a Krugman "demand-based" fiscal package alright, but a $300-$500 billion permanent one, in addition to the proposed temporary package, because as mentioned in last month’s Outlook, as the system of modern day levered shadow finance slows to a crawl or even contracts at the edges, its ability to systemically fertilize economic growth must be called into question. But government writing checks for American consumers which then flow to foreign central banks is not the permanent solution; it only makes sense in the short-term as a life preserver. To provide a stable recovery path, government spending needs to fill the gap – not consumption. Public works programs, badly needed infrastructure repairs, as well as spending on research and development projects should form the heart of our path to recovery. Assistance for homeowners? That too – figure out a fiscal/regulatory way to stop the slide in housing prices and foreclosures but please – no traffic jams at the Wal-Mart checkout counter in 2009 and beyond. Approaches to monetary policy must change as well. 1% short rates were so effective 5 years ago that they not only bolstered demand but created a housing bubble of Frankensteinian proportions. Those days, however were influenced by the creation and implementation of adjustable-rate mortgages (ARMs) that were priced at the short end of the yield curve. Millions of ARMs were issued at 2% and 3% teaser rates, many with terms of up to 5 years before their inexorable adjustment upwards. Surfeits of houses were bought at artificial prices because of these generous terms and billions in home equity loans were taken out – both driving demand and the economy forward. But adjustable-rate mortgages are a dying relic. Originators will no longer offer them except on onerous terms. No more teasers or pleasers of that ilk; there are regulators to deal with, and lawyers on the prowl with class action lawsuits in their briefcases. And so the monetary attempt to halt housing’s – and therefore the economy’s – downward slide rests on the shoulders of the 30-year mortgage. If so, then Mr. Bernanke – we have a problem. First of all these 6-7% 30-year mortgages now require a significantly higher down payment than in prior years. 20% down? Say what? Where does a 30-year-old couple get that kind of money? Secondly, however, and just as important, what motivates a future homeowner to pay 6%+ interest for an asset that is going down in price? It was an easy decision to pay subprime yields of that and then some when housing prices were accelerating at double-digit annual percentages; the benefit was obvious. Now however, with prices in negative territory, the risk/reward is tilted towards the renter. My point is that Chairman Bernanke must recognize the reduced benefits and obvious dangers of a déjà vu trek to 1% short rates. Those yields produced 5% 30-year mortgage rates to the homeowner for a 2-3 month period in 2003 and they could do so again, but bubble creating, inflation inducing damage to the U.S. dollar would be the likely result now. Best to stop far short of 1% and at the same time encourage reforms in FHA government assisted programs that would permit subsidized mortgage rates with minimal down payments. An artificially low, 1% short-term interest rate was an elixir during the days of a burgeoning shadow banking system. It cannot be the solution now. In combination, a well constructed, more than temporary fiscal/monetary stimulus plan is what is required to rejuvenate a U.S. economy reeling from a low punch delivered by a private market economy gone too far. Its "Rosemary’s Baby" took the form of a shadow banking system based on leverage and the fateful conclusion that a finance-based economy alone can deliver prosperity. It cannot. As Keynes theorized and then Krugman affirmed, when private demand falters, it becomes the responsibility of government to fill the breech. Because it likely will not do so effectively until after a new Administration is elected in late 2008, the U.S. economy and its somewhat coupled global companion will sleep walk for some time and a resumption of prosperity as we knew it will be dependent on reforms of monetary and fiscal policy resembling the 1930s more than our past decade. Better late than never.

Monday, January 28, 2008

liquidity comparison between Countrywide and MBIA

Countrywide --24 bil revenue, 2.6 bil NI, 3.5 bil market cap, 200 bil asset --short of capital ~10 bil --source of funding: Deposits (5% CD appealing), FHLB (over the cap 50% of asset, ordinarily 15-20%) MBIA --2.6 bil revenue, 0.8 bil NI, 1.2 bil market cap, 40 bil asset --short of capital ~4 bil --sources: bond (11% + 3M LIBOR), convertible equity

Credibility Vacuum with Regulators

--Ben Bernanke's Fed has never had as much authority as Alan Greenspan's. It has seemed panicked by the markets. Meanwhile, Henry Paulson, the Treasury secretary, has seen his initiatives run into a swamp. For example, his "super-SIV" plan for helping banks unload their subprime exposures came to naught. --Across the Atlantic Ocean, things are no better. The credibility of British authorities has been damaged by their incapacity to resolve the Northern Rock fiasco rapidly. The European Central Bank had seemed above reproach, but the SocGen fraud has undermined the euro-zone authorities, too. Either the Banque de France didn't tell the ECB promptly or the ECB didn't tell the Fed. If they couldn't communicate effectively this time, what is the guarantee that they will or can do better next time? --The fact that it took five days for information about the fraud to pass from France to the Federal Reserve has exposed the lack of effective communication among global financial authorities.

some doubts about Contrywide Bonds

--some are having doubts that he will ride to their rescue. --The reason: The largest U.S. bank in stock-market value has given few details about what will happen to about $25 billion in Countrywide bonds as part of the deal. As a result, some bondholders are worried that Bank of America will structure the agreement so that it doesn't fully back the mortgage lender's debt obligations. If that happens, Countrywide's debt may not rise in value to levels more in line with Bank of America bonds. --Terms of the deal are crystal-clear for Countrywide shareholders. --Bondholders are concerned about deal consummation, too. They face the additional mystery of how that debt will be treated after the merger, announced Jan. 11. In a conference call that day, Mr. Lewis deflected questions about how Countrywide's debt obligations would fit into the post-deal capital structure. --When the Countrywide deal was announced, the cost of insuring against a default at Countrywide plunged. Since then, though, the cost has surged to about $425,000 annually for protection on $10 million of Countrywide bonds from $342,000 the day the merger was announced, according to data provider Markit. It is abnormal.

Sunday, January 27, 2008

what does slump mean to consumers

--If the economic slump is in the cards, and recent gyrations suggest for it, it is guaranteed to hit people where it hurts: in the wallets. The issues can be complex, with scary words "recession" being bandied about, no to mention the insurgent inflation. Housing: --the previous cycle, housing market has been part of the problem and also part of the solution. The falling housing price helped tip the economy over. The resulting lower interest rate rekindled growth. --It isn't going to happen this time. First, the current glut of homes will delay new-home construction. Second, housing prices, though they have fallen in many places, could still fall further because the dour mood engendered by a recession will keep a lid on the home-buying market. Finally, many would-be borrowers will be locked out of the mortgage market. --But mortgage rate will be lowered to approximately 5%. --Inflation will be a potential kink. Consumer Credit --Rates on credit cards, home-equity lines of credit and car loans are getting cheaper --Already, a one-year certificate of deposit yields less than 3.8%, according to, and will go lower as the Fed cuts rates more.

Money Managers Woos Sovereign Wealth Funds

--There is a new courtship ritual among U.S. money managers hungry for business: They are wooing the world's cash-rich foreign governments. --For money managers, this source of revenue has become important as inflows from defined-benefit pensions and certain mutual-fund markets have flattened industrywide --Altogether, government funds are home to about $2 trillion to $3 trillion world-wide, and are expected to top $12 trillion in a decade, according to British bank Standard Chartered PLC. --Merrill Lynch & Co. estimates a potential shift of $1.5 trillion to $3 trillion of assets into the global asset-management industry in coming years, generating $4 billion to $8 billion annually in extra fees. --While payment structures vary, outside managers have been known to earn as much as 0.4% of such institutional assets in fees. --Challenges are emerging for the firms scrambling for a share of this business. Many funds are favoring money managers who has local offices in their country. --Many funds also are doing more of their own screening for external managers rather than relying on outside data or advice from consultants, said Ric van Weelden of Janus Capital International. --China's fund has been disclosing criteria for choosing external money managers. The fund explains that applicants must have more than six years of investment experience in the asset class for which they apply, and must already have total assets under management of at least $5 billion, with no severe regulatory penalties in the past three years. --The window for opportunities like these, while open now, also could snap shut in coming years, because many government funds are ramping up their own in-house expertise.

Bruised Banks Passed Their Pain to Consumers

--Banks have been pummeled by bad loans and are jacking up fees such as fees charged for using ATM --Earlier this month, for example, J.P. Morgan Chase & Co. started charging customers of other banks $3 nearly every time they use one of the bank's 9,100 ATMs. Before that, the fee ranged from $1.50 to $2. --Also rising are penalties for having insufficient funds in an account, which can be caused by bouncing a check or using debt-card purchase that exceed the account balance. --Mr. Horowitz, the Citigroup analyst, estimates that insufficient-funds fees rake in $30 billion to $40 billion a year. That is equivalent to as much as 70% of the total fee income U.S. banks get from consumer businesses. --Even though banks are hungry for revenue, few are likely to abandon the widespread practice of free checking accounts -- at least for customers with healthy balances -- or low-cost online banking. That is because those products are fiercely competitive.

Saturday, January 26, 2008

powerful motivations behind stimulus package - an nuniversal agreement

--the speed with which Washington hashed out the package was most driven by the drumbeat of bad economic news --behind the scenes, it was greased by other powerful motivations. Democrats want to demonstrate that they are capable of results after one year of gridlock. Republicans want to show they are sensitive to economic woes. White house did not want recession added to its legacy. --Fed Chairman Ben endorsed the plan at a critical juncture, reflecting his concerns ove the economy and limits on Fed's ability to drive the economy.

Friday, January 25, 2008

Bush hammer out the stimulus package

--One important provision temporarily raises the dollar limit on mortgages that can be bought or guaranteed by government-sponsored mortgage giants Fannie Mae and Freddie Mac. The current limit of $417,000 would rise above $600,000 and perhaps as high as $730,000 in the most expensive areas, congressional leaders said. --The centerpiece of the package is $100 billion in tax credits for an estimated 117 million families this spring. Most individuals who pay income taxes would get $600; working couples would receive $1,200. Workers who make at least $3,000 but don't pay income taxes would get checks of $300 to $600. People in both groups would get $300 credits for each of their children. --Businesses would be able to deduct an additional 50% of the cost of certain investments in 2008. In addition, small businesses would be able to write off more expenses from their taxes: $250,000, up from $125,000. --The checks would be gradually phased out for wealthier taxpayers. Couples with income of more than $174,000 would get nothing, unless they have children.

bond insuers take center stage

--once little known insurance companies now are taking center stage because their weakness have domino effect, undercutting the value of the bonds they garantee. --cash infusions from outside investors won't be smooth --not all banks have the same amount at stake. Citi and ML has relative larger exposure to bond insurance wrapping. --all banks are tight in credit, they already stretched their balance sheet.

China insurers risk massive redemptions and liquidity difficulties

-- China's insurers, among the world'smost valuable after reaping record gains from a stock rally, risk ``massive'' redemptions and liquidity difficulties should markets slump, the industry regulator said. --``Once the capital market heads for a downturn, we will suffer very badly and face huge risk,'' Wu Dingfu, chairman ofthe China Insurance Regulatory Commission said in Beijing today.``There can be massive redemptions and insurers may faceliquidity difficulties.'' --China Life Insurance Co. and rivals earned a record 279.2billion yuan ($38.7 billion) from investment returns last year,more than the previous five years combined, the commission saidtoday. The gains underscore the industry's dependence on a stockmarket that has lost 14 percent from its Oct. 16 peak aftersurging more than sixfold in the previous two years. -- ``Insurers' share prices are extremely sensitive in theshort term to their equity investment results,'' ``Chinese insurance companies will face a double whammy as theyincreasingly eye stakes in foreign insurers, which have evenhigher exposure to equities.''

China supports oversea takeovers by banks

--China supports plans by the nation's largest banks including Industrial & Commercial Bank of ChinaLtd. to acquire overseas rivals whose shares have fallen amidthe U.S. mortgage market collapse, the industry regulator said. --In China, raw-material companies that export heavily, industries plagued with overcapacity, and those that are heavypolluters and consumers of energy will ``likely get intodifficulties or even recession'' this year or in 2009, Liu said.Tighter loan curbs will increase the risk of defaults and assetprices will probably decline, reducing the value of mortgages,he added. --

Banks may need 140 bill to cushion bond insurers

--Banks may need to raise as much as$143 billion to meet regulators' requirements should rating firms downgrade bond insurers, Barclays Capital analysts said. --Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Financial Group Inc. are cutone level from AAA, and six times more for downgrades by foursteps to A, Paul Fenner-Leitao wrote in a report publishedtoday. Banks own $820 billion of structured securitiesguaranteed by bond insurers, the report said.

Thursday, January 24, 2008

Bond insurers's impact is larger than Fed

--THIS has been a crisis of risk in unexpected places. Think of collateralised-debt obligations (CDOs), structured investment vehicles (SIVs), and now a £4.9 billion ($7.1 billion) loss due to fraud at Société Générale. One particular nastiness has been festering in an obscure industry which, until recently, enjoyed pristine credit ratings: the “monoline” bond insurers. Their plummeting fortunes helped to spark the stockmarket sell-off that prompted the Federal Reserve to act this week ahead of its scheduled meeting. --So perturbing was their plight that the prospect of a rescue caused a far bigger stockmarket rally than the Fed's biggest rate cut in a quarter of a century the day before. There may be no better example of how a dull province of finance, when snared by complex risks it barely understands, can become terrifyingly unboring. --Though themselves no giants, monolines have guaranteed a whopping $2.4 trillion of outstanding debt. The two largest, MBIA and Ambac, cut their teeth “wrapping” municipal bonds, in effect, renting their AAA rating to the securities for a fee. For a long time this business, though staid, was nicely profitable. --But, as competition grew, the monolines—with two honourable exceptions, FSA and Assured Guaranty—were seduced by the higher returns of structured finance, especially the stuff involving subprime mortgages (see table). As mortgage delinquencies rose, so did paper losses. Ambac and MBIA wrote assets down by a combined $8.5 billion in the past quarter. --The monolines' thin capital cushions, adequate when they wrote only safe municipal business, now look worryingly threadbare. Moody's and Standard & Poor's—the very rating agencies the monolines relied so heavily upon when piling into the mortgage business—are threatening downgrades unless they raise more equity. Ambac's failure to do so last week prompted Fitch, another rating agency, to cut its debt by two notches, to AA. --This has spooked investors for several reasons. First, heavily downgraded insurers would lose their raison d'être and thus face the prospect of selling up or going into “run-off”: closing to new business and gradually winding down. --Worse, from a systemic point of view, when a monoline is downgraded all of the paper it has insured must be downgraded too. Hence, after its move against Ambac, Fitch went on to cut no fewer than 137,500 bonds (including one issued by Arsenal football club). --This is more than academic: holders of downgraded bonds have to mark them down under “fair value” accounting rules. Some, such as pension funds, may hold only the highest-grade securities, raising the prospect of forced sales. And, with fewer top-notch insurers to turn to, bond issuers' costs would rise. The loss of the AAA badge would cost investors and borrowers up to $200 billion, reckons Bloomberg, a financial-information firm. --Banks that were active in asset-backed markets have multiple reasons to worry. Many not only used monolines to wrap their products but also bought protection from them through credit-default swaps (CDS). One insurer, ACA, has already had problems paying out, prompting Merrill Lynch to write down its exposure to the firm by $1.9 billion. Meredith Whitney of Oppenheimer has calculated that banks may have to write off $10.1 billion of the paper they insured with ACA. --Because the CDS market is barely regulated, it is impossible to know how much of this monoline “counterparty risk” banks are exposed to. In many ways, ACA was an outlier: with a rating that never rose above single-A, it targeted inferior bond issuers (whom its boss once described as “the cream of the crap”). But downgrades could leave others struggling to pay out on policies too. --Monolines have a tiny percentage of the CDS business, according to the Bank for International Settlements. But the market is so vast that this still amounts to $95 billion of protection, most of it sold to banks. If Merrill Lynch is a guide, fully half of Wall Street's subprime and CDO hedges were booked with monolines, says Brad Hintz of Sanford Bernstein. As the risk of MBIA and Ambac defaulting has grown, he adds, so has the cost of holding once valuable hedges with them. A lifeline for the monolines --No wonder, then, that a group of banks is giving ear to a request from New York' s insurance regulator, Eric Dinallo, who oversees some of the big monolines, to discuss a possible rescue. In preliminary talks held on January 23rd, Mr Dinallo reportedly asked the banks to stump up as much as $15 billion to help MBIA and Ambac preserve their ratings. --The regulator, who apparently has the blessing of federal officials, is talking to other potential investors too, said to include Wilbur Ross, a vulture investor, and Warren Buffett's Berkshire Hathaway, which recently set up its own bond insurer and has not ruled out buying part of a troubled rival. These veterans believe the business has a future, despite its woes. That is because they understand that, on the municipal side at least, the market has always demanded a much higher spread than the actual cost of risk, points out CBM Group's André Cappon. Clever guarantors can exploit this gap. --It remains unclear how any bail-out would be structured. One possibility is to create the equivalent of “bad banks”, ringfencing the monolines' tarnished CDO operations to allow their municipal businesses to continue unencumbered, or be sold. This would also assuage fears that mishaps in securitisation might bring down the public-finance markets, says Janet Tavakoli, a consultant. Another idea would be to create a so-called “excess-of-loss pool” that would allow the monolines to reinsure their nastiest tail risks. --Banks have reasons to pause before taking part. They have seen a Treasury-backed bail-out of SIVs wither for lack of interest, and they are not exactly flush with capital. But it may be a bet worth taking, however gingerly. Even if $15 billion were needed, that is thought to be a lot less than their (undisclosed) total exposure to the monolines. A painful contribution now looks preferable to another agonising round of write-downs later this year.

regulatory intervention process

Risk of intervention --One year ago, direct regulatory intervention in monoline sector was unthinkable. The intervention of ACA Capital Holdings by Maryland Insurance Administration has set precedent for the sector. It is multi stage process: rehabilitation and liquidation. --Widespread downgrades in the monoline sector has a far reaching impact on the financial markets: --the loss of AAA monoline business model culd potentially force banks to consider writing-downs on the value of their monoline wraps. --A sustained lack of credible monoline wraps for SF deals could dry up SF business, further jeopardizing the economic sectors such as housing and commercia real estate that grew so dependent on structured finance in recent years. --It could also create more turmoil in the $2 trill municipal bond marekt, a market which is cretical to fixed investment in the US and which is highly dependent on monoline wraps. --The markets have a vested interest in preventing the industry from imploding.

Citigroup and Morgan Stanley embrace Taxman's loophole

--The global investors who plugged the leaks in the balance sheets of Wall Street may have got good deals. One party that looks like a loser: the U.S. Treasury. --Both Citigroup Inc. and Morgan Stanley used a financing structure that satisfies bank regulators concerned about their capital while also convincing federal-tax authorities that the interest payments they make to investors are actually tax-deductible interest on debt. Citigroup, which used this method to raise $7.5 billion from the Abu Dhabi Investment Authority in November, likely will save about $500 million on its U.S. taxes over nearly three years. Morgan Stanley could save roughly $300 million in taxes over 2½ years, thanks to the way it structured its mid-December deal to raise $5.5 billion from China Investment Corp. --The banks aren't doing anything improper, but merely taking advantage of a controversial 2003 Internal Revenue Service ruling that blessed the tax benefits of such deals. In recent years, numerous companies have raised money using these so-called hybrid structures, with nicknames like "Feline Prides," "Peps," and "Upper DECS." Generally, interest payments on debt are tax-deductible for companies, but dividends on common and preferred stock are not. --The hybrid structure used by both Citigroup and Morgan Stanley allows them to get the best of both worlds. The money raised is counted by the Fed and the SEC as Tier 1 capital to a point, but a portion of the payments on the new funding are tax-deductible. Bond-ratings agencies, which also are concerned about the banks' capital ratios, similarly view the new financing as equity. --The financing arrangements used by the two banks are complex, but generally are similar. --Until then, Citigroup will pay Abu Dhabi more than 6% annually on the outstanding sum -- initially about $495 million a year. The IRS considers those payments to be interest on the debt issued to Abu Dhabi and therefore tax deductible. Citigroup is paying the Abu Dhabi fund a separate fee, which is not tax-deductible, for taking part in the transaction, which, when added to the interest, totals an 11% annual return. --Then comes the second part of the transaction. Before Abu Dhabi buys the Citigroup shares, the emirate will try to begin selling the Citigroup debt to another investor. Theoretically, even after Abu Dhabi purchases the shares, the Citigroup debt still exists.

rogue trader lost 7.2 bil for Societe Generale

-- Societe Generale SA said unauthorizedbets on stock index futures by an unidentified employee caused a4.9 billion-euro ($7.2 billion) trading loss, the largest inbanking history. --Societe Generale joins a list of at least five financialfirms since the start of the 1990s to suffer losses fromunauthorized trades, including Kidder Peabody, Barings, andAllied Irish Banks Plc.

Financial guranty industry bail-out

regulators and Wall Street view the industry as too critical to fail, hurdles likely remain in hammering out a deal. • Scenario 1: reinsurance. We believe that reinsurance would be the most palatable form of capital relief for the bond insurers as well as any investment bank providing the capital. Reinsurance would clearly weigh on earnings until the reinsurance capacity was no longer needed. However, current shareholders would benefit from no permanent dilution to book value (as would be the case with a straight equity raise). We also believe reinsurance would be favored by the investment banks, which are unlikely to want direct investment exposure to some of the more riskier assets insured, such as HELOCs/Closed-End Seconds, Subprime RMBS, or CDOs. Through reinsurance, the banks could target the credits that they feel most comfortable with while freeing up capital to the bond insurers at the same time. What would be left at the monolines, however, is a much riskier book of business. That riskier revenue stream could impair the companies' ability to win back confidence among bond issuers and investors. • Scenario 2: direct capital injection. While regulators may favor the more permanent nature of a straight equity raise for the bond insurers, we believe a direct capital infusion is not the most likely scenario. We would expect any Wall Street bank participating in a bailout could balk at a direct investment, which would increase their risk exposure to the bond insurers' at risk credits. Shareholders are likely to oppose a directed investment as well, as it would prove to be significantly dilutive to tangible equity. Agreement over pricing of an equity offering could also serve as a stumbling block. • Scenario 3: surplus notes. A surplus note offerings, similar to the one recently conducted by MBIA, would be a feasible solution as part of a larger capital plan. We believe it is unlikely that the bond insurers would favor capital relief entirely in the form of surplus notes, given the high cost of the debt that MBIA paid to get their deal off the ground. We note that MBIA's deal had an initial yield of 14% but has subsequently traded to a yield of over 20%. While the yield on a surplus note that was part of an orchestrated capital plan may be priced tighter than the MBIA deal, we believe the pricing disagreements between the insurers and the banks providing the capital would keep surplus notes as only a small portion of a larger solution.

Wednesday, January 23, 2008

bond insurance bail-out plan

-- New York State’s insurance regulator met with U.S. banks today to discuss raising new capital for bond insurers, or monoline insurance, as we expected yesterday; -- The stock market immediately rallies 2.5% this afternoon led by financials on this much-needed good news, and eventually reverts a straight 5-day decline since last Tuesday; -- It is interesting to draw parallels between this move with the bail-out effort led by the New York Fed in the turmoil of Long Term Capital Management crisis a decade ago: -- Both involved a coordinating government regulator: New York Fed in 1998 versus New York State Insurance Superintendent in 2008; -- Both invited relevant financial players: All the major wall-street firms in 1998 versus unnamed banks in 2008; -- Both crises were triggered by, unfortunately, fixed income market problems: Russian default in 1998 versus sub-prime defaults in 2008; -- The key firms at issue in both crises were once considered high-quality financial institutions: LTCM as the largest hedge fund in 1998 versus AAA-rated bond insurers in 2008;

Business spending will take a break

--Business investment in equipment and software -- which accounts for $1 in every $13 of spending in the U.S. economy -- could be the next leg of the economy to weaken, an unwelcome development at a time when housing and commercial real estate are sinking and consumer spending is slowing. --In the auto industry, the slowdown in business investment has been reflected in declining sales of heavy trucks, like 18-wheelers, and of light trucks, like sports-utility vehicles and pickup trucks. --In 2007, sales of medium and heavy trucks fell 23%, according to Ward's Automotive, a trade publication that tracks industry sales. Sales of pickup trucks, which are the bread-and-butter of the construction industry, declined 5.8% in 2007, according to Autodata Corp. --Technology is among the biggest business expenditures, and signs have been growing that tech spending growth will weaken this year. Forrester Research said it expects U.S. tech spending growth of 5.2% for 2008, down from 5.7% last year. Overall, as much as 18% of U.S. tech spending comes from financial companies, according to Forrester Research analyst Andy Bartels.

monolines lust for CDO undercut its success

--They serve as CDS and CDO insuers, beside insuring Muni bonds of 2.6 trillion market. --Credit-rating downgrades may prompt forced sales byinvestors that are restricted to holding the highest-gradebonds, as well as further losses at banks that have alreadywritten down more than $130 billion on failed investments. --``Forced selling triggered by a downgrade of the monolines would lead to a further deterioration of an already distressed market,'' Felsenheimer wrote. --in the CDO market, the tipping point came last year when the three major rating companies downgraded thousands of CDOs. Ratings on morethan 2,000 CDOs were cut in November alone, with Fitch loweringCDOs backed by subprime mortgages 9.6 levels on average,according to a Dec. 13 UBS AG research report. Rating cuts on CDOs and other securities backed by subprime mortgages and home equity loans led S&P to conclude bond insurers faced potential losses of $19 billion --The first to fall was ACA Capital Holdings Inc., whose ACAFinancial Guaranty Corp. unit guaranteed $26.6 billion of CDOsbacked by subprime mortgages, according to S&P. S&P slashed ACA Financial's rating to CCC, a low junk --By using swaps, ACA wasn't limited to guaranteeing onlysecurities with a lower credit rating than its own. It could compete with AAA-rated insurers to back top-rated CDOs whilehaving to maintain less capital than the triple-A companies. --top-rated insurers collected annual premiums for insuring CDOs with swaps that were 50 percent of the capital the ratingcompanies required them to maintain, S&P said in a July 2007 overview of the bond insurance industry. ACA was scooping uppremiums that were 130 percent of its required capital. --Annual premiums on CDOs averaged 50 percent of the capital that the rating companies required the insurers to set aside,according to S&P. That compared with an average risk-adjusted profit ratio of 8 percent for insuring other types of structured-finance securities. --Buffet is making inroads...

Mortgage insurers lifted, But Default Fears Persist

--Mortgage insurers, which promise to help repay home loans if borrowers can't, have a lot riding on a key question surrounding yesterday's sharp interest-rate cut: Will it be enough? --Those losses could be stanched if more borrowers are able to stay in their homes and keep making payments. Mortgage insurers could also benefit if the rate cut boosts the economy and holds down unemployment, which has traditionally been one of the driving factors in claims for the industry. --Investors cheered the Fed's move, lifting the stocks of two of the nation's largest mortgage insurers, MGIC Investment Corp. and PMI Group Inc., nearly 14%. Still, PMI shares are down 85% since June and MGIC's shares have fallen 75% since then. Unlike bond insurers, the mortgage insurers don't pose a risk to the overall financial system. --And if the mortgage market and the economy don't pick up, the possibility of ratings downgrades looms over the industry -- a threat that is likely to grow if the downturn is deep and protracted. --Freddie Mac and Fannie Mae both typically want borrowers to have mortgage insurance if the borrowers put down less than 20% of a home's purchase price. The policies guarantee repayment of the mortgage up to a certain level.

Bank of America Q4 2007

--It took a $5.4 billion hit in the last quarter of 2007 and has $12 billion of exposure left to subprime mortgage-related securities -- each roughly a third of Citigroup's equivalent numbers.

M&A and IPOs market looks gloomy in 2008

--Credit-market turmoil and recession worries have had many investment bankers predicting a steep decline in the volume of mergers and acquisitions in 2008 for months. Now, the steep drop in stock values has them worried about some of last year's deals as well. --Clear Channel Communications Inc., which agreed last year to be acquired by private-equity firms Thomas H. Lee Partners LP and Bain Capital Partners LLC, widened $1.41 to more than $7. The spread on Alliance Data Systems Corp., which Blackstone Group LP agreed to acquire for about $6 billion, rose $1.64 to more than $21. And on the biggest buyout ever, the $33 billion acquisition of Canadian telecom operator BCE Inc. by a Ontario Teachers' Pension Plan-led consortium, the spread widened to more than $8. --The malaise also could upend another pillar of the investment-banking business -- initial public offerings. As stock prices drop, issuers have less incentive to tap the markets and may prefer to wait on the sidelines until conditions improve. --Issuers will get a sense of the appetite for stock this week with the IPO of risk-management specialist RiskMetrics Group Inc., which could raise as much as $266 million. The backlog of traditional IPOs filed in the past six months totals 95 deals valued at $24.5 billion, according to Dealogic. --The market volatility also could spell trouble for IPOs outside of the U.S. Investors in China are worried about a plan by one of China's biggest financial firms, Ping An Insurance Co., to sell over $20 billion of additional shares and debt -- just one of the fund-raising plans investors say has chilled their buying interest.

stimulus plan options

short term --tax rebates for individuals --tax incentive for business --unemployment benefits long term --tax incentative for infrastructure investment or R&D, $40 bil. Such a package, Mr. Mishel said, could be crafted to ensure money reaches the economy this summer, especially if it is focused on school maintenance or already designed highway projects that are awaiting funding.

Tuesday, January 22, 2008

bond insurer AMBAC lose AAA

-- Ambac Financial Group Inc., the firstbond insurer to lose its AAA credit rating because of subprimemortgages, is considering ``strategic alternatives'' afterposting its biggest-ever loss. The shares jumped 29 percent onoptimism the company may be sold. --The second-largest bond insurer posted a fourth-quarter netloss of $3.26 billion, or $31.85 a share, after writing down thevalue of credit-derivatives tied to loans made to homeowners withpoor credit by $5.21 billion, according to a statement by thecompany today.

Bill Gross's views as 01 22 2008

1.Fed move - Fed is behold to market in response to stock and bond market. Stock and Housing market are two pegs that support ultimate consumer. But it is a sad testment that Fed cut interest rate eight days before the scheduled meeting. ECB and Bank of England did not follow along. 2.Inflation vs recession: Economy, Employment has higher priority than inflation. 3.1% again - no, in 2003, we had deflation. Currently, housing deflation is in the table, but Food and energy see inflation at a 3% clip. 2.Bank Capital looks attractive - at least 200 bps above Treasury, 10y. Banks 5.5% 3.BoA, profitability is more important than downgrades. With lower rates, BoA will have postive yield curve. Profitablity will come to this insitute. 4.Treasury & Bond market - T-rally is over. Banks Bonds relatively cheap and too big to fall. 6 M from now, Baa corporate will be appealing. 5.Currency, dollar becomes funding currency. Like emerging mkt currencies. Yield spread narrowing, Yen has been undervalued.

Fed cut 75 bps in an emergency move -- inter meeting cut

-- The Federal Reserve cut the benchmarkinterest rate by three quarters of a percentage point, its first emergency reduction since 2001, after stock markets tumbled from Hong Kong to London amid increasing signs of a U.S. recession. --The central bank cut the target overnight lending rate to 3.5 percent from 4.25 percent, the Federal Open Market Committeesaid in a statement in Washington. Policy makers weren't scheduled to gather until next week. It's the biggest single reduction since the Fed began using the rate as the principal tool of monetary policy around 1990. --The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets. -- Today's so-called inter-meeting rate cut is the first forthe federal funds rate since Sept. 17, 2001, when the Fed loweredborrowing costs in the aftermath of the terrorist attacks sixdays before. That was the third emergency reduction in a year which saw the last U.S. recession.

daily mkt review Jan 22, 2008

--Traders said the Federal Reserve's decision to cut its key interest-rate target by three-quarters of a percentage point, from 4.25% to 3.5%, before the opening gradually attracted buyers back to the market as Tuesday's session played out. The central bank hasn't made such a large move in more than two decades. --Widening fears of a U.S. recession led to sharp declines in overseas markets prior to Tuesday's opening bell in New York. The losses in Europe and Asia in turn prompted U.S. shares to rack up big losses early Tuesday. --Banks also rose despite poor earnings results from some key players. Bank of America reported a 95% profit fall, KeyCorp unveiled a 80% profit drop and Wachovia posted a 98% profit decline, as loan-loss provisions mounted and the banks wrote down the value of mortgage-related securities.

Wall Street winers vs losers

Citigroup and J.P. Morgan Chase

Morgan Stanley and Goldman Sachs

UBS and Deutsche Bank

Merrill Lynch and Lehman Brothers

--Citi, Morgan Stanley, UBS and Merrill have among them written off $65 billion so far because of the credit crisis. Meanwhile, J.P. Morgan Chase, Goldman, Deutsche and Lehman have racked up write-downs totaling around $9 billion. The average share-price performance of the first quartet was minus 36% last year. The latter group was down 5.3%.

--The losers were infected by what one could call Goldman envy. The winners were more immune to the malady.

--The snag is that a bank is unlikely to manage things well when it's expanding rapidly and doesn't have experience. It may put the wrong people in place, not institute the right controls and implement the wrong incentive schemes.

--So why were others relatively immune to Goldman envy? Well, Lehman had a big, lucrative mortgage-lending and structuring business, so it didn't need to engage in a breakneck game of catch-up. Deutsche arguably also had a more ingrained risk-taking culture. Meanwhile, J.P. Morgan had more market-savvy leadership in James Dimon than, say, Citi had in Charles Prince. --All this suggests two lessons. If you are a chimp, don't try to kid yourself that you're a gorilla. And, if you see a chimp pumping itself frantically with steroids, sell its stock.

Bank of China's subprime hit: up to $2 bil

--Analysts estimate that the state-owned lender Bank of China, traditionally the most international of the country's big banks, may have to write off a quarter of the nearly $8 billion it holds in securities backed by subprime mortgages. --Bank of China's total exposure to U.S. subprime investments is the largest among Asian financial institutions, and any sizable write-down could rattle already-anxious investors. Chinese stocks have fallen this year in part because of concerns that banks -- market heavyweights in China -- won't be able to sustain their strong earnings gains. --Losses are a sore point for China's big banks. In recent years they have quieted doomsayers from the 1990s who predicted that huge bad loans eventually would cripple the nation's economy. Bank of China, for instance, in 1999 recorded nonperforming loans of $71 billion -- or 39% of its total loans. --The bank's U.S.-mortgage exposure became clear in August, soon after the subprime crisis began, when the bank reported holdings of $9.65 billion in the area. But the bank also said it expected losses to be small, because it held only assets with high credit ratings. Then, in October, it said the value of its portfolio of such securities had fallen to $7.95 billion and it had set aside $322 million for losses in the third quarter.

Sunday, January 20, 2008

end of the Great Moderation, might be

United States has spent only 16 months of the last quarter-century in recession — a vast improvement over previous eras. The recent period has been called the Great Moderation; growth cycles have evened out, and inflation has abated in almost every country around the globe. But will it work now? The Fed faces not only the twin demons of recession and inflation but also the specter that further rate cuts would cause foreign investors — who own more than $2 trillion of U.S. debt — to bail out, sending U.S. interest rates soaring. That, combined with the steadily worsening housing slump, could make for a long and nasty recession. And it would mark the end to the Great Moderation.

FOMC meeting agenda

The Open Market Committee has eight regularly scheduled meetings a year. The week before the members gather, they are sent the “green book,” with the staff’s economic outlook, and also the “blue book,” with a menu of policy options. The other governors, whose offices are down the hallway from Bernanke’s, typically know which way the chairman will be leaning. But the bank presidents, who generally do not confer between meetings, often arrive in Washington with no firm idea of what Bernanke wants. The group assembles around a massive, 27-foot Honduran-mahogany table in the conference room, which adjoins the chairman’s office, and at 8:30 a.m. the room falls silent, a side door opens and Bernanke enters. After briefings from the staff, the members go around the table as if it were a Princeton seminar, each expounding on his or her view of the economy (transcripts of Bernanke meetings are running much longer than those under Greenspan). The bank presidents give an idea of conditions around the country, and the governors tend to coalesce around Bernanke’s view. In Greenspan’s era, the chairman led off by giving a lengthy disquisition of his outlook and policy recommendations. Every member had a chance to speak after him, but the pressure to agree with the maestro was daunting. In a profound switch, Bernanke now presents his views last.

Bernanke's views

--He championed ideas for improving communications between the Fed — whose previous chairman, Alan Greenspan, spoke in riddles — and the public, believing that clearer guidance about the Fed’s aims would help the economy run more smoothly. --To the extent that bank panics interfere with normal flows of credit, they may affect the performance of the real economy --The current crisis is a hangover from a half-decade of heady speculation in both housing and home mortgages and does not necessarily admit to a speedy fix. --Thus, in both of its main areas of responsibility — monetary and regulatory policy — Fed laxity has seemingly contributed to the current mess. Bernanke deflects such criticisms, partly because he maintains that the mortgage fiasco had many fathers and partly because he has a scholar’s disdain for perfect-hindsight-type judgments. --It was Martin who proclaimed that the chairman's job was to “take away the punch bowl just as the party gets going” --In the long term, neither the Fed nor anyone could spur an economy to grow faster than its “natural rate” — which is determined by all those other factors: productivity, population changes, technological advances, demand for exports and so forth. --Bernanke is also firmly opposed to the notion that central banks should raise rates to prick bubbles in the stock market or elsewhere. --Bernanke says he believes that the Fed’s actions to cool off stock-market speculation in 1929 contributed to the Depression and was a grievous error. --Bernanke has discovered that even standard communication with the public — not just off-the-cuff remarks — can be fraught with peril.

Saturday, January 19, 2008

Emerging markets feel drag of U.S. -- conventionsl wisdom of decoupling is off the mark?

--As the U.S. outlook has darkened in recent months, investors have started to question whether emerging markets can "decouple" from the U.S. economic train, and continue to grow as expected even as the U.S. slows. What's more, even if these economies prove resilient, the same may not be true of their stock markets, which instead of becoming less linked to the U.S., are actually becoming more connected. --Worries about the rising odds of a U.S. recession have been rippling across the globe and yesterday sent shares in Asia sharply lower, adding to recent losses. --Since the start of the year, benchmark indexes in Korea, Thailand, Turkey and Brazil all have fallen by 8% or more, and the Morgan Stanley Capital International Emerging Markets Index is down 7.9% in dollar terms. --While the developing economies remain healthy, their links with developed markets have grown since the last time the U.S. experienced a recession. In Asia, exports hit 55% of total economic output in 2005, according to the Asian Development Bank, compared with 45% of output in 2002. While intra-Asian trade has grown, about 60% of Asian exports are eventually consumed in the U.S., Europe and Japan. --Together they are sitting on an estimated $4.1 trillion in central bank reserves, making a repeat of past crises highly unlikely. Local consumers are playing a bigger role in spurring economic growth, which helps to counterbalance the dependence on exports. --Economic impact aside, emerging-economy stock markets have become more highly correlated to those in the developed world in recent years. That's because global investors have piled into these countries, deepening the connection to world-wide investment shifts. And when markets get more volatile, they all tend to move together, as they have this week.

Investors Run From Sprint

--Sprint Nextel Corp.'s shares plunged almost 25% as the wireless carrier reported worse-than-expected losses in cellphone subscribers and issued a gloomy outlook for 2008. --Sprint said it would streamline its operations to reflect slowing growth, beginning with 4,000 job cuts in the first half of the year, reductions in outside contractors and the closing of about 8% of its retail stores. The company, which recently hired telecom veteran Dan Hesse to succeed ousted Chief Executive Gary Forsee, expects the moves to save $700 million to $800 million on an annual basis. Sprint shares skidded $2.87 to $8.70 in 4 p.m. composite trading on the New York Stock Exchange. --net losses of 683,000 post-paid subscribers -- people who pay monthly bills and sign contracts -- and 202,000 pre-paid customers exceeded bearish Wall Street analysts' forecasts. --Many of Sprint's problems stem from its 2005 merger with Nextel Communications, which led to higher customer-service complaints and subscriber defections. The investment community will be looking to Mr. Hesse to provide more details on a turnaround plan during its Feb. 28 fourth-quarter earnings conference call. Besides addressing its core cellphone business, Mr. Hesse may provide hints of whether and how Sprint plans to follow through on its planned $5 billion capital investment in a new high-speed wireless network based on WiMax technology. --Beyond those issues is a more fundamental marketing problem. Sprint lacks a distinct identity. Verizon gets credit for a reliable and fast network, while AT&T has benefited hugely from its exclusive rollout of the Apple Inc. iPhone in the U.S. "Everyone knows [Sprint], but no one knows them for anything in particular," said Robert Passikoff, president of Brand Keys Inc., a consultancy that specializes in customer loyalty.

Bond insurers weather hit to ratings

--The two biggest insurers, MBIA Inc. and Ambac ($600 bil) Financial Group Inc., have long maintained triple-A financial-strength ratings, which they used to insure some $2.4 trillion of bonds. --The expected turmoil fueled rumors of government orchestrated bailouts funded by the big Wall Street banks and others who stand to lose billions of dollars if they lose the insurance on the battered securities they are holding. People familiar with the matter said regulators are watching the situation carefully, but don't see the need for immediate action. --One reason a bailout might not be necessary is the bond insurers aren't on the hook for big cash payments the moment bonds default. Instead, they make the bonds' regular interest payments until maturity, which could be decades away. During that time, the insurers should continue to get premium payments on the bonds. Also, a downgrade doesn't mean MBIA or Ambac will have to post additional collateral, so they are unlikely to face a cash crunch. --As of Sept. 30, Ambac had exposure to about $60 billion of collateralized-debt obligations, according to Ambac's Mr. Poillon. MBIA had CDO exposure of about $130 billion, of which about $30 billion was mortgage-related, said MBIA's Mr. Chaplin.

Bush, Democrats Spar on Stimulus

As President Bush laid out his vision for an economic stimulus that could reach $150 billion, Democrats in Congress and the administration diverged about how to spread around its benefits. --The White House wants tax cuts to help a wide range of individuals and businesses. --In addition to tax cuts, congressional Democrats say they also want spending targeted at specific groups such as the unemployed. --Administration officials said it would make room for roughly half a million jobs that otherwise wouldn't exist. In an interview, Treasury Secretary Henry Paulson said the president envisions certain business tax breaks that would be in place for no more than a year, to spur companies to make immediate investments. --But millions of lower-income workers pay no federal income tax because existing breaks wipe out their exposure. According to Jason Furman at the Brookings Institution, 57 million households would get no benefit. That includes about 30 million households with wage earnings. The rest are mostly retirees. There are about 149 million households in all, which means about 37% of the total would get no benefit. Conservatives question the fairness of giving rebates to people who paid no income tax. Republicans --Republicans want higher earners to be part of a tax rebate. Even some Democrats in the Senate are likely to want to push the $85,000 cap higher. The stimulus package currently under discussion mirrors the one introduced during the last downturn 2001: --In the summer of 2001, the government mailed a total of $38 billion in $300 and $600 one-time rebate checks to two-thirds of U.S. households. 2002: --a low allowed business to deduct 30% of investments upfront, for purchases from Sep 2001 to Sept 2004. The law was modified in 2003 to raise deduction to 50% for certain invesments bought after May 2003 to Jan 2005. --results are mixed. Many say the rebate checks, which were mailed only to U.S. taxpayers, successfully boosted spending. But certain business tax breaks from 2001 through 2004 had a more limited effect Now: --$800 for individuals and $1600 family --Both sides want to add tax incentives to encourage business to invest in equipment --Congress wants other elements to the package, including food stamps and unemployment.

Friday, January 18, 2008

U.K. Offers London as Base for China's $200 bl fund

-- U.K. Prime Minister Gordon Brownoffered London as an overseas base for China Investment Corp.,the nation's $200 billion sovereign wealth fund, aiming to encourage the world's fastest-growing major economy to invest in Britain. --``If CIC opened an office in London, that would help more U.K. fund managers win mandates from the fund,'' said Ke Shifeng,who helps manage about $5 billion of Greater China assets forMartin Currie Investment Management in Shanghai. ``It could alsodrive CIC to take more equity stakes in British companies.'' --China last year surpassed the U.K. as the biggest exporter to the Eurozone and Brown wants to sell British luxury brands to consumers, attract Chinese students to U.K. universities anddraw the country's estimated 300 million soccer fans to theEnglish Premier League.

China Discovers $119 Billion Banking 'Irregularities'

-- China discovered 860 billion yuan($119 billion) in banking ``irregularities'' last year, almost triple the profits by Industrial & Commercial Bank of China Ltd.and other ``major'' Chinese commercial banks, the regulator said. --``We must strengthen our regulatory capacity and nip theserisks in the bud,'' Liu Mingkang, chairman of the China BankingRegulatory Commission, said at the watchdog's annual planningmeeting, according to a statement posted on its Web site today. --China's ``major'' commercial banks posted combined profitsof 299 billion yuan in 2007, the statement said, withoutproviding a year-earlier figure. A July 5 report said the banks earned an aggregate pretax profit of 240.9 billion yuan in 2006. Assets at Chinese banks totaled 52.6 trillion yuan at the end oflast year, today's release said. --China's banking watchdog uncovered ``irregularities'' inits investigation of 79,200 domestic bank branches, thestatement said, without defining the term. --Domestic banks had a total of $267.4 billion in overseas assets as at the end of last year, which included their investments and branches abroad, the Chinese regulator said. --China will draft regulations on project finance and loansfor acquisitions, fixed assets, working capital and personal usein 2008, the watchdog said.

what is in stimulus program

--To be effective, Mr. Bush said the stimulus must be temporary, take affect right away and not include tax increases. He said the size of the package should be around 1% of U.S. gross domestic product, which would be around $140 billion to $150 billion. --A congressional aide familiar with Thursday's conference call between Mr. Bush and lawmakers said the White House is mulling giving individuals and households tax rebates of $800 and $1,600, respectively, and letting businesses deduct half of their new equipment purchases. --Mr. Bush's last stimulus plan in 2001 included rebate checks of either $300 or $600. It took around 10 weeks to issue those checks, and the Congressional Budget Office said a similar delivery time can be expected if rebates are included this time around. --In a concession that could help speed the process of implementing a stimulus plans, the White House said it would separate its campaign to make Mr. Bush's 2001 and 2003 tax cuts permanent from the stimulus negotiations. Mr. Bush, however, repeated this call to make the tax cuts permanent. --"A source of uncertainty in our economy is that this tax relief is set to expire at the end of 2010," he said. "Unless Congress acts

Thursday, January 17, 2008

MBIA's future looks bleak

Liquidity --MBIA has $4 billion of bonds due in 2008. It raised $1 billion of surplus notes at the cost of 3M Libor + 11.26%. It will be quite expensive to raise another $4 billion. In the context of a company with annual annual revenue ~1 bil and Market Cap 1 bil, $4 bil bond is a large number. Asset quality --Based on 10-k, MBIA’s guaranty portfolio increased 11 billion with regard to CDO in 2006. Most of increase might be from mortgage related Asset Backed CDO. Let’s assume 50% of these assets are AB CDO, with AAA rating. Given the fact that index ABX AAA dropped around 25% in the 4th quarter, we expect write-down of 1.375 billion. That is just for CDO alone. The company has nearly 40% of guaranty portfolio (618 billion by the end of 2006) exposed to Structure Finance portfolio. Outlook --The downgrades might be fatal for a bond insurer, which requires AAA rating to keep municipal clients. In addition, the rival company setup by Warrant Buffet will definitely steel its municipal bond insurance business. --Overall SF products market will shrink significantly in the near future, impacting its insurance business for SF products --Monoline bond insurer, relying heavily on insurance business which contributes nearly 90% revenue. No cushion from other business lines. Evaluation --Company market cap 1.1 bil, trading at P/B 0.2. A blow larger than 2 billion might be fatal. - It raised 1 bill capital last in surplus notes, yielding 3M LIBOR + 11.26%, even debt financing will be more costly. Pros: -- the business looks like really profitable business, with operating margin above 80%. --bail out risk might be high since the company is distressed significantly. --The key question is how can the company raise capital. Opinion --short the company

MBIA CDS widens

--Credit-default swaps tied to Armonk, New York-based MBIA'sbonds soared 15.5 percentage points to 31.5 percent upfront and 5percent a year, according to broker Phoenix Partners Group. Thatmeans it would cost $3.15 million initially and $500,000 a yearto protect $10 million in MBIA bonds from default for five years. --The price implies that traders are pricing in a 78 percentchance that MBIA will default in the next five years, accordingto a JPMorgan Chase & Co. valuation model. Contracts on New York-based Ambac, the second-biggestinsurer, rose 15 percentage points to 30 percent upfront and 5percent a year, prices from CMA Datavision in London show. Ambac's implied chance of default is also 78 percent,according to the JPMorgan data.

Wednesday, January 16, 2008

delinquency vs foreclousre

--delinquency: payment is behind the due date --Foreclosure is to shut out, to bar, to extinguish a mortgagor's right of redeeming a mortgaged estate. It is a termination of all rights of the homeowner covered by a mortgage. Foreclosure is a process in which the estate becomes the absolute property of the lending institution.

an interesting article from NYTimes - about Bernanke

Bernanke's view of bank panics

One line from his “Essays on the Great Depression” sounds especially prescient today: “To the extent that bank panics interfere with normal flows of credit, they may affect the performance of the real economy.”

junk bonds market

--At mid-month, risk premiums on speculative-grade bonds have ballooned to 6.66 percentage points over Treasury bonds according to the Merrill Lynch Master II High Yield Index. That's up from 5.92 percentage points at the end of last month and an all-time low of 2.41 percentage points last June. --At this point, yields on junk bonds have zoomed past their historical average of 5.08 percentage points over Treasurys, according to Merrill Lynch. Given their trajectory over the past couple of weeks, they show few signs of stopping. --There is a strong argument that the price of risk in this market has overshot its mark. Bond spreads -- which widen when prices fall -- expand when buyers demand better returns for the risk that some of their holdings may default. But the default rate is still at historic lows. --Several investors agreed that pervasive negative sentiment regarding credit markets is largely to blame for keeping buyers away at current prices.

Intel lower its forecast in 2008

Sales growth, reflecting macro environment --Intel, the world's largest computer-chip maker, droppedthe most in five years in Nasdaq Stock Market trading aftersaying first-quarter sales will be as much as 6.9 percent below analysts' estimates. --Q1 sales will rise to 9.4 bil, below 10.1 bil estimate --Intel's first-quarter forecast points to a 10% decline in revenue compared with the fourth period, where revenue typically falls 7% to 9% because of seasonal factors. "It certainly doesn't give us a good feeling that it would be better-than-normal seasonality," he said. Gross Profit Margin, reflecting company performance --For the year, the company put the percentage at 57%, plus or minus a few percentage points, dashing any hope that it would soon return to historic peaks of greater than 60%. NI --The company reported net income of $2.27 billion, or 38 cents a share, for the quarter, compared with $1.5 billion, or 26 cents a share, a year earlier.

JPMorgan Q3 2007 pre earning cut

--Fourth-quarter net income declined to $2.97 billion, or 86cents a share, from $4.53 billion, or $1.26, a year earlier, the, profi fell short of the 92 cent estimate. profit dropped 34 percent --The company added $2.3 billion to creditreserves, bringing the total to $10 billion. Citigroup Inc., the --revenue up 7% to 17.4 bil --JPMorgan arranged $170 billion of loans used to financeleveraged buyouts in the U.S. last year, more than any bank andrepresenting 16 percent of the market, according to data compiledby Bloomberg. --The company was also the largest underwriter ofU.S. high-yield corporate debt, with $20 billion in 2007. Investment Banking --revenu 3.2 bil, down from 4.9 bil last year a.investment banking fees, 1.7 bil, up 5% * Advisory fees were $646 million, up 34%, and *equity underwriting feeswere $544 million, up 66% *Debt underwriting fees of $467 million declined 39%, reflecting lower loan syndication and bond underwriting fees b.Fixed Income Markets * Fixed Income Markets revenue was $615 million, down $1.4 billion, or 70%, from theprior year. The decrease was due to markdowns of $1.3 billion (net of hedges) on subprime positions, including subprime collateralized debtobligations (CDOs). Fixed Income Markets revenue also decreased due tomarkdowns in securitized products on non-subprime mortgages and lossesin credit trading. These lower results were offset partially by strong c.Equity Markets revenue was $578 million, down 40% from the prior year, as weaker trading results -- Net income at the investment-banking division tumbled 88percent to $124 million in the fourth quarter, as credit-marketturmoil reduced revenue from debt underwriting 39 percent, to$467 million. Fixed-income revenue tumbled 70 percent because ofthe writedown, to $615 million, and ``weaker trading results''contributed to a 40 percent drop in equity market revenue, whichfell to $578 million.

Tuesday, January 15, 2008

Citigroup's consumer business set aside more serve

--The company's U.S. consumer business could be another source of pain. Citigroup surprised Wall Street yesterday by taking a $4.1 billion hit in order to set aside more money to cover possible future defaults on mortgages, home-equity loans, credit cards and auto loans -- areas in which the bank is seeing more borrowers fall behind on their payments. --Citigroup said those beefed-up reserves should be enough to cover 22 months worth of loan losses -- as long as they stay at current levels. But many industry observers expect a leap in defaults on credit-card and auto loans, where credit quality so far has remained solid. If that happens, Citigroup likely will be forced to bite the bullet and set aside additional reserves.

tally the loss in the Wall Street

--Citigroup, which yesterday announced a fourth-quarter loss of $9.83 billion, said it would write down the value of certain assets by $18.1 billion. Merrill's fourth-quarter write-downs, to be announced tomorrow, are expected to be nearly $15 billion. --That will push the toll on Wall Street from the current credit crisis past $100 billion in losses, equivalent to 0.7% of gross domestic product. By way of comparison, the total losses from savings and loans and related commercial bank loans from 1986 to 1995 were about $189 billion, or 3.2% of average GDP in that period. S&Ls alone were $153 billion.

Citigroup Q4 07 earning cut

overall --earning loss of $9.83 billion ($1.99 per share vs 1.03 exp) in the fourth quarter, bigget loss in 196 history. Revenue fell 70% to $7.22 billion --18 bil write-down and credit loss in trading business --4 bill credit loss in consumer business --it is raising another $14.5 billion in capital by selling stakes to investors including Singapore's Government Investment Corp., former CEO Sandy Weill, Saudi Prince Alwaleed and New Jersey's investment division. The bank will also cut its dividend by 41%. --Write-downs of $17.4 billion on sub-prime related direct exposures. These exposures on September 30, 2007 were comprised of approximately $11.7 billion of gross lending and structuring exposures and approximately $42.9 billion of net ABS CDO super senior exposures (ABS CDO super senior gross exposures of $53.4 billion). On December 31, 2007, sub-prime related direct exposures were comprised of approximately $8.0 billion of gross lending and structuring exposures and approximately $29.3 billion of net ABS CDO super senior exposures (ABS CDO super senior gross exposures of $39.8 billion). subprime exposure ----direct exposure 55 bil in Q3 ( quoted from 10-q in Q3: The $55 billion in U.S. sub-prime direct exposure in S&B as of September 30, 2007 consisted of (a) approximately $11.7 billion of sub-prime related exposures in its lending and structuring business, and (b) approximately $43 billion of exposures in the most senior tranches (super senior tranches) of collateralized debt obligations which are collateralized by asset-backed securities (ABS CDOs). ) ----indirect exposure: $70 mil of SIVs (The SIVs have no direct exposure to U.S. sub-prime assets and have approximately $70 million of indirect exposure to sub-prime assets through CDOs which are AAA rated and carry credit enhancements). Citi put $58 bil of SIVs to its balance sheet in Dec. its indirect subprime exposure must be above $70 mil... SIV exposure $ 58 bil --Approximately 54% of the SIV assets are rated triple-A and 43% double-A by Moodys, with no direct exposure to sub-prime assets and immaterial indirect sub-prime exposure of $51 million. In addition, the junior notes, which have a current market value of $2.5 billion, are in the first loss position. (Quoted in Dec 14th --potential loss: a.MBS - US resid. 7% of 58 bil, loss -10 - 20%, 0.4 bil - 0.8 b.other SF, 32% of 58 bil, -3-10%, 0.56 bil - 1.6 bil c.Financial Institute debt, 60% of , loss -4 - 10%, 1.4 bil - 3.5 bil --total: 2.5 bil - 6 bil Comments: --loss in SIVs will be another drag, possibly at $2.5 bil loss - 6 bil (if further downgrade occur, it is highly possible) --loss in ABS CDO is 13 bil of out 42.9, close to 30% loss rate, in line with to ABX trading price. --direct exposure of ABS CDOs, tied to ABX AAA, now trading around 70% (probably bottom out 60% by Q1) --long in the Q1 2008

issuance of CDO

--cash CDOs in all currencies totaled $102 billion in the second half of 2007, one thirld of the 313 bil in the first half. --fall in dollar denominated deals has been larger, as issuance has dropped by 80% from 244 billion in the first half to 49 billion. --primary cause is the evaopration of CDOs of ABS market, falleing from 155 bil in the firs half to just 11.9 bil in the second half --if it weren't for the continued issuance of CLOs, cash CDO would be almost nonexistent.

what history tells us about new products inivatives

the history of new product initiatives during periods of easy credit, rising leverage (whether transaction leverage in LBO's, minimal haircuts on risky collateral, lower counterparty quality standards, credit line size, etc.) and rising risk appetites has often been characterized by major setbacks (high yield in the 80s, mortgage toxic waste in derivatives in 1993-1994, local currency market market initiatives in emerging markts in 1997-1998, subprime in later 1990's etc.). This latest wave is anotehr one of those times, but on a scale that was stunning and that faced a pace of quality erosion that is unprecedented.

ABX implied loss rate

AAA ABX tranche trading in the mid 70s, market is pricing in cumulative losses of 15% to 17%, which would implay foreclosure rates of 40% with loss severity rates also raound 40%.

why is CLOs in favor - from Creditsights

--CLOs have very close relationship with their borrowers comparedto other asset classes within SF: protection with covenants --CLOs have experience management teams with deep credit benches. --several CLOs issuers have the in-house skills necessary to manage a workout situation in the committee level should one arise.

securization ratio for various assets and securitization earning

--credit card: 40-50% --auto laons: slightly less --home equity: 30-40% --Fed data $683 of 2.5 tril consumer loans are in pools of securitized assets (27%). It probably may not capture on-balance securitizations at the banks and financial institutions. --20-30% revenu is from securitization

Monday, January 14, 2008

China growth may slow at the worst time

--China is starting to gain control ofits turbocharged economy, just as a U.S. slowdown raises therisks of doing so. --A narrowing trade surplus and declining money-supply growth are among the first signs that the world's fourth-largesteconomy is pulling back from its fastest expansion in 13 years.The government has raised interest rates six times in a year,restricted credit, frozen some prices and let the currencyappreciate to damp growth and inflation. --The risk is that, with months of effort to cool off Chinafinally taking hold when the U.S. is already flirting withrecession, both main engines driving the global economy may power down at the same time. --China is still on a tear. Its economy expanded 11.5 percent last year, according to a government estimate, and it contributed 17 percent to global growth, the same as the U.S. With prices rising at the fastest pace in 11 years, the rulingPolitburo and the central bank are trying to engineer a coolingof growth that doesn't also throw millions of China's 1.3billion people out of work. --The two economies are closely linked. The U.S. buysabout 19 percent of China's exports. A cooling U.S. economycould magnify the impact of China's anti-inflation measures,says Qu Hongbin, chief China economist at HSBC Holdings Plc inHong Kong. ``A U.S. recession would cause a major disruption to theChinese economy,'' says Qu. ``Aggressive tightening could proveoverkill.'' -- A 1 percentage point slowdown in the U.S. would trimChina's export growth by 4 percentage points and reduce GDP by0.5 percentage point, according to Ma Jun, chief China economistat Deutsche Bank AG in Hong Kong. Exports rose 21.7 percent inDecember to $114.4 billion.

the severity of subprime loss beat Great Depression

--Banks haven't lost this much money, in relative terms,since the Great Depression, said Richard Sylla, a professor ofthe history of financial institutions and markets at New YorkUniversity's Stern School of Business. --U.S. banks, insurers and real-estate companies earned about $1 billion a year during the 1920s until the stock marketcrash of October 1929. The industry lost about $500 million in1930, $1.7 billion in 1931, and $2 billion in 1932, Sylla said. --Within days of being inaugurated in March 1933, President Franklin Roosevelt issued an emergency order declaring a ``bankholiday'' to stem a run on deposits. About 7,000 banks, or a third of the U.S. total, failed and financial companies didn't return to profitability until 1936, Sylla said. --Last year's collapse of the subprime mortgage market was worse than the third-world debt crisis of the early 1980s, when soaring oil prices and surging interest rates pushed Mexico and other developing countries into default on their loans, said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, and author of ``100 Years of Wall Street.'' --Citigroup, Bank of America and Merrill probably wereprofitable in 2007, earning about $23 billion on a combinedbasis, even after the second-half writedowns, according toBloomberg data. The banks earned about $50 billion in 2006. They may earn $44.8 billion this year, analyst surveys byBloomberg show. --Even with the Abu Dhabi investment, Citigroup's so-calledTier 1 capital ratio, which regulators monitor to assess banks'ability to withstand loan losses, may fall to 7 percent by theend of this year, he estimated. While above the 6 percent neededto maintain its ``well-capitalized'' status from federalregulators, the capital ratio is below Citigroup's own targetof 7.5 percent. Bank of America's Tier 1 ratio fell to 8.22 percent in thethird quarter, from 8.52 percent in the second quarter and 8.48percent a year earlier. JPMorgan's ratio was 8.4 percent in thethird quarter, down from 8.6 percent a year earlier. -- The resulting tightfistedness at the banks may help pushthe U.S. economy toward recession, RCM's Compton said. In the third quarter, less than a tenth of U.S. bank loan officers witnessed ``substantially'' higher demand for commercial loans,down from more than 50 percent in the second quarter of 2005,CreditSights reported, citing data from the Federal Reserve. -- The default rate on U.S. junk-grade corporate loans mayreach 2 percent to 3 percent this year, compared with about 0.9percent in 2007, according to Bank of America's Rosenberg.

Saturday, January 12, 2008

China's economic expansion peaked last year

-- China's trade surplus narrowed in December and money-supply growth dwindled, signaling that the fastest economic expansion in 13 years may have peaked. --The trade surplus shrank to $22.7 billion from $26.2billion in November, the Chinese customs bureau said in Beijing today. M2, the broadest measure of money supply, rose 16.7percent to 40.3 trillion yuan ($5.55 trillion) from a yearearlier, the smallest increase in seven months, the central bank said. --Exports grew at the slowest pace in two years, indicating that recent appreciation of yuan value, the cooling global economy, and export-tax disincentives towards polluting industries are beginning to weign on China exports. The central bank is still likely to take more measures tolimit credit, ease inflation from an 11-year high and preventthe economy from overheating just as the U.S. expansion isfaltering. --China's economy, the world's fourth largest, expanded 11.5 percent in 2007, according to government forecasts. Wangestimates it will grow between 8 percent and 10 percent over thenext three to five years. --Television sales at TCL Multimedia Technology Holdings Ltd., a unit of China's biggest consumer electronics maker,slumped 33 percent in November from a year earlier. --A 1 percentage point slowdown in the U.S. would trim China's export growth by 4 percentage points and reduce gross domestic product by 0.5 percentage point, according to Ma Jun,chief China economist at Deutsche Bank AG in Hong Kong. --China's foreign-exchange reserves, the world's biggest, rose 43 percent to a record $1.53 trillion at the end of 2007 from a year earlier, today's central bank statistics showed.

Countrywide beat stocks after takeover offer

-- Traders looking to profit fromCountrywide Financial Corp.'s takeover by Bank of America Corp.should have bet on the bonds. --Countrywide's $2 billion of 5.8 percent notes due in 2012 rose 29.75 cents on the dollar to 90.75 cents since Jan. 9, a gain of 49 percent, according to closing prices from Trace, the bondprice reporting service of Financial Industry RegulatoryAuthority. Countrywide shares climbed about 24 percent in the sameperiod on the New York Stock Exchange.

Fidelity investment's senior debt was downgraded by Moodys

-- Fidelity Investments, the world's largest mutual-fund company, had its long-term senior debt downgraded by Moody's Investors Service because it has lost its``dominating market share.'' --Moody's cut its rating on Boston-based Fidelity, owned by FMR Corp., by one level to A1. The move affects $2.1 billion of notes, Moody's said today in an e-mailed statement. Fidelity'srating outlook was raised to ``stable'' from ``negative,''Moody's said. -- ``FMR's downgrade reflects the loss of the dominating marketshare lead that the company formerly enjoyed over its nearestcompetitors,'' the statement from Moody's said. ``FMR's assetflows have not kept pace with the other major fund complexes andmany costly programs have left the firm with high overhead.'' -- Fidelity had $1.9 billion in deposits in the first 11 monthsof 2007, compared with $70.6 billion for Valley Forge,Pennsylvania-based Vanguard Group and $67.6 billion for Los Angeles-based American Funds, according to Boston-based FinancialResearch Corp. The numbers do not include Fidelity's money-marketfund deposits, which accounted for more than $60 billion as ofNovember, Fidelity said. -- In June, Standard & Poor's cut Fidelity's counterparty credit rating one level to ``AA-/A-1+'' because earnings growth is trailing that of competitors. New York-based S&P raisedFidelity's debt outlook to stable from negative. -- Fidelity, which is closely held, has not released 2007results. Fidelity's 2006 earnings fell for the first time in fouryears to $1.18 billion from $1.33 billion in 2005. Sales rose 16percent to $12.9 billion. Fidelity manages $1.5 trillion inassets.