Demand for Corporate Loans is drying up

--A new problem is rippling through credit markets: Many of the corporate loans used to finance giant buyouts in the past few years are reeling in secondary market trading, making it virtually impossible for banks to unload other commitments they have made. --The loans of First Data Corp., which was taken private in September by Kohlberg Kravis Roberts & Co. for about $28 billion, were sold into the market this past fall at a 4% discount to their par value; they now trade in the market at a steep 11.5% discount to par value, according to Reuters LPC. Market is reeling --The crisis started last summer, when investors turned up their noses at billions of dollars in buyout debt, just after many buyout firms and their bankers made commitments to history-making megadeals. Many investors say January was the worst performance for this market since those summer months. --"This is bizarre and baffling," said Thomas Ewald, chief investment officer of Invesco Senior Secured Management, on a panel at a Loan Syndication and Trading Association event Monday. "Loans trading in the 80s are typically on the verge of bankruptcy or a major restructuring event." Demand is drooping CLO market is reeling. --Investment vehicles called collateralized loan obligations were huge consumers of corporate loans in 2006 and early 2007. CLOs, as they are called, hold bundles of loans and are sold to investors in slices with varying levels of risk and return. As defaults rise, demand for the riskiest pieces of these instruments is undermined. Less Appealing because of lowering LIBOR. --Investment banks last year touted new investors in the loan market -- hedge funds and high-yield bond investors that crossed over into loans. Many investors were burned on their bets in buyout-related loans when their secondary market values dropped. --Some investors are turning to moving out of loans to find better yields in fixed-rate junk bonds Margin Call pushed out Hedge funds --Hedge funds are also being pushed out of the market as facilities called total return swaps unwind. --Total return swaps are set up by banks for hedge funds and other investors to buy loans with borrowed money. As the value of the loans declines, provisions in these swap agreements are being triggered that act like margin calls to unwind the contracts. Investment Banks Panic --The saga of Harrah's Entertainment Inc.'s loan sale is a sign of the distress in the market. Credit Suisse broke from a group of banks lined up to sell $7.25 billion in loans tied to Harrah's buyout. It offloaded its commitment of about $1 billion through derivatives transactions in December, says a person briefed on the transaction. The move sent other banks scrambling to sell some of their own Harrah's loan commitments in January, and the price of the loans dropped to between 91 and 92 cents on the dollar, bankers said. --The transaction roiled other underwriters involved in the deal who were unable to sell their portions of Harrah's debt, but didn't want to sell it at such a steep discount.

What banks can learn from this credit crisis - from FT

--There has been an increasing disconnection between the real and financial economies in the past few years. The real economy has grown at a brisk pace but nothing like that of the financial economy, which grew even more rapidly – until it imploded. --Formidable financial expansion was a response in part to the dynamism of economic activity and in part to a prolonged period of low interest rates. But there has also been the rise in securitisation and the development of structured investment vehicles, conduits, hedge funds, private equity, leverage loans and the like. These were probably the biggest stimulus to the credit multiplier. --The process has been driven by agents that have grown up (and made big profits) in unregulated areas without taking into account the basic principles of prudence and risk management. Some have been non-bank intermediaries. Others have been banks that have used different off-balance sheet vehicles to duck and dive through the regulations in order to join the party. --A clear underestimation of risk and huge flows of finance have been the results. In turn these have fed an unsustainable level of leveraging and asset inflation. The financial community ought to draw conclusions from all this in order to re-establish the normal functioning of the markets. --Regulators and supervisors need to get closer to the activities of unregulated agents that may have a strong bearing both on markets and on regulated firms. --The main question, however, is how to make sure that the activities of high-risk-taking agents do not contaminate the balance sheets of the traditional banking sector. Because the banking sector has a fundamental role in the payments system, there is a considerable amplification of systemic risks when it is hit. Negative knock-on soon filters through to affect the flows of credit and savings of businesses and individuals. --Moreover, it is the banks that have direct access to the liquidity supplied by the central banks and act as a transmission mechanism for changes in monetary policy. --It is clear that we are not up against a problem of lack of regulation. Any overreaction in this direction would be not only futile but also counterproductive. The real challenge is to apply regulation in the right way. And that means looking again at the use of judgment, procedures and incentives in applying the rules. --Various approaches to this challenge should be examined. --First, dealing with the risks of liquidity and funding. It is obvious that in the short term central banks will need to continue supplying ample liquidity to alleviate tensions in interbank and wholesale credit markets. --But beyond that it is clear that supervisors, auditors, rating agencies and, above all, companies themselves will have to pay a lot more attention to getting liquidity management right. This must include, among other things, the use of rigorous stress-testing scenarios. --Second, the mis-pricing of risk. Risk valuation models have improved enormously in the run-up to the incoming Basel II capital adequacy rules. This crisis, however, has revealed that they have their limitations and that it is the markets that provide the final measure of value. It is a reminder that transparency and prudence in decision-making procedures are just as important as the most sophisticated model. --The third approach that should be examined is making sure the incentives of agents are in line with some basic principles of prudent finance. For example, the crisis in the securitised assets markets suggests that origin­ators should be obliged to retain a significant part of the risk on their own balance sheets. --A further area that needs to be revisited is that of executive compensation schemes, to ensure that in future they adequately reflect performance in the medium and long term. --Fourth, it is necessary to enhance the transparency of the exposures of banks. The Basel pillar III, which deals with market discipline, is a good starting point. --But there are big differences in the internal models used by both banks and supervisors and a great deal of harmonisation is required. Harmonisation of models needs to be part of a much broader process. The nature of the global crisis demonstrates the need for greater co-ordination of what are currently national frameworks of regulation and supervision. Greater dialogue and contact among regulators, supervisors and the industry will be essential if they are to be effective in the future. --Finally, and most importantly, the crisis illustrates once again the relevance and usefulness of principles over and above even the most precise rules. All financial intermediaries’ decisions and actions must be morally and socially acceptable, not just legally enforceable, and should withstand any amount of public scrutiny. --We face a complex set of problems. But the good news is that the crisis has exploded during a phase of robust global economic growth and before it could produce long-lasting damage. If we all apply what we have learnt, our markets and firms have the resources to overcome the current crisis – as we have overcome others before. This will allow us to move forward towards a stronger financial environment, taking advantage of the new opportunities offered by globalisation and technological advance.

Budet Deficit, Stimulus package, Inflation will sap the apeal of 30y Bond

--a growing number of investors say buying the long bondis a surefire way to lose money, even as the Federal Reservecuts interest rates and Treasuries remain a haven from subprime-mortgage losses and a slowing economy. --A rising budget deficit and President George W. Bush'sproposed stimulus package of as much as $157 billion, combinedwith prospects for faster inflation and economic growth later inthe year, may sap the appeal. Falling prices will push yields to 4.70 percent by January, from 4.31 percent on Feb. 1, accordingto the median forecast of 51 economists surveyed by Bloomberg News. -- ``If the rate cuts and the stimulus package work, and theeconomy starts to stabilize or speed up again, you'll see arising interest-rate environment on the long end'' of yield curve -- Yields on 30-year bonds reached a record 15.2 percent in1981. The Treasury stopped selling the securities between 2001 and 2006 after the U.S. recorded a record budget surplus in2001.

Why Yahoo's Board Should not Cave in?

--Sure, the software giant's $31-a-share offer looks astronomical at first blush. That would deliver a paltry return on the investment for Microsoft of just about 3%. Yet Yahoo could be worth more to Microsoft than these metrics suggest. --Strip out the value of Yahoo's stakes in Alibaba and Yahoo Japan, as well as its cash, and the price for Yahoo's core business falls to some $31 billion. On that basis, Microsoft would be paying 23 times Yahoo's earnings before interest, tax, depreciation and amortization after accounting for stock-based compensation. But factor in the $1 billion in cost savings and the multiple comes down to 13 times. --That gives Yahoo room to negotiate a bump. The question is whether it has the leverage to get a big one. In theory, Yahoo could be worth another few dollars a share if its calcified management is willing to outsource its search business. But that's easier said than done. Microsoft is clearly not going to settle for a search deal when it wants to buy the business outright. --That leaves Google, which would love to monetize Yahoo's millions of eyeballs -- either as an owner of Yahoo or search partner. The trouble is that it would hand Google 74% of the U.S. market. That might have flown a year ago, when regulators' knowledge of the business barely would have fit a Wikipedia page. But Google's purchase of DoubleClick and Microsoft's of aQuantive forced them to scrutinize the industry. --Structuring a deal to appease antitrust watchdogs would take time, during which Yahoo would continue to struggle as the industry's mini-me in the capital-expenditure battle that Google and Microsoft are waging. Yahoo should resist folding right away -- but it should make every effort to elicit a higher offer out of the bidder who can make the most of its assets.

the Symbotic Relationship between Bond-rating firms and Bon insuers

--If the bond insurers are downgraded, Wall Street could face an additional $40 billion to $70 billion in losses on top of the $100 billion it has already suffered. --The crisis illustrates the symbiotic relationship between the bond-rating firms and the bond insurers, which include Ambac and the No. 1, MBIA Inc. This relationship proved very lucrative during the boom time for the housing market, but now their interests are diverging, and the resulting spiral could lead to billions more in losses. --The relationship changed last year when major ratings firms began to raise their estimates of losses for securities backed by subprime mortgages. The firms, Moody's Investors Service, a unit of Moody's Corp.; McGraw Hill Cos.' Standard & Poor's, and Fimalac SA's Fitch Ratings, had given many of these securities their top, triple-A, rating. --But when securities they've insured are deemed more risky, that can force the bond insurers to set aside more capital. And if they don't have it and can't get it, the insurers are at risk of losing their own triple-A ratings, which are essential for their business. --This threat has loomed larger as the ratings firms' view of the housing market worsened, and they lowered their ratings on even more securities tied to mortgages, including those insured by the bond insurers. And when that happens, bond insurers effectively had to put up more capital for the bonds they were holding. Moody's prepared investors for bond-insurer downgrades in a research note Thursday and subsequent investor call Friday.

Gloomy January Unemployment Numbers

--The Labor Department reported that nonfarm employment in January fell by 17,000 jobs, the first drop in more than four years. --The overall jobs decline in January suggested an unsettling scenario: The labor market, which had been resilient in the face of the subprime-mortgage crisis and the credit crunch, may now be succumbing. "When push comes to shove, the final linchpin is the employment number," said John Silvia, chief economist at Wachovia Corp. "When that number falls, you're in trouble." --The data vindicated the Federal Reserve's 1.25 percentage points of cuts in short-term interest rates to 3% in the last two weeks and suggest the central bank will lower rates again at its March 18 meeting, if not sooner. --The January data leave little doubt that the deepening housing recession is taking an increasingly heavy toll on the overall economy --A separate Reuters/University of Michigan report Friday found that consumer sentiment nudged up to 78.4 in January from 75.5 in December, but it was well below the 96.9 level a year ago. --In addition, government employment fell by 18,000 jobs in January, perhaps due to budget shortfalls in areas most affected by the housing crisis. Palm Beach County, Fla., has instituted a partial hiring freeze, with only public-safety jobs like firefighters exempt.

Internet era is entering a tumultuous new phase

--The software giant's unsolicited offer for Yahoo represents a 62% premium over the Internet company's recent share price and is a sign of Microsoft's determination to narrow Google's growing lead in the online advertising and Web search-engine wars. --By absorbing Yahoo, Microsoft hopes to gain the heft it has long sought with consumers, advertisers and other online publishers, providing access to roughly 500 million world-wide monthly users of Yahoo's Internet services. These range from email to online dating and help generate Yahoo's roughly 16% share of total U.S. online ad revenue. --Mr. Ballmer is taking Microsoft into waters braved only once before in the technology world: the ill-fated 2001 merger between AOL and Time Warner. Microsoft has been hesitant to make hostile bids since its founding in 1975. It would be the biggest deal financially in Microsoft's history and carry immense complexity: Mr. Ballmer will need to pull Yahoo's 14,300 employees into Microsoft's already-swelling ranks of 80,000 people. That challenge could mean job cuts at either Microsoft, Yahoo or both companies. --While combining the companies would pose enormous management and technical challenges, a Yahoo acquisition could make Microsoft a more viable one-stop alternative to Google for advertisers and media companies looking to spend money and distribute their content online. It could also help buttress Microsoft's core software business against encroachment by Google as more consumers access services and applications over the Web instead of installing software on their PCs. --The deal, more broadly, would reshape the competition among many other Web, media and telecommunications players. --For Microsoft, the move is an acknowledgment that its expensive foray into online services is failing, or at least not moving fast enough. The company has tried to build a strong presence in Internet search and other online services. But it hasn't dented Google's leading market share or stayed in step with the growth of online advertising. --Microsoft said that the union could result in at least $1 billion in annual savings. --The deal, meanwhile, could potentially be bad news for some smaller Internet players such as Time Warner Inc.'s AOL and IAC/InterActiveCorp's Ask.com search engine. Both could see themselves marginalized with consumers and advertisers. --Microsoft's $44.6 billion bid for Yahoo ranks as the second-largest among technology and media deals, only surpassed by America Online Inc.'s $112 billion deal to buy Time Warner Inc. in 2000, according to Dealogic. It would rank as the biggest-ever pure technology deal, nearly two times as big as Lucent Technologies' $23.9 billion purchase of Ascend Communications Inc. in 1999 and eclipsing Hewlett-Packard's $19 billion acquisition of Compaq Computer Corp. in 2002, the research firm says.