CDS: buyers and sellers

--banks are net buyers of credit protection. As dealers, they tend to run a matched book. As end-users, they are net buyers. --regional, still big, anks are net sellers of protection, especially in Europe --insuraners are net sellers a.credit default uncorrelated with their underwriten risk b.preimium is high c.financial strength

business phrase (update 3)

--leverage finance's cash engine has ground to a halt --worldwide sellof accerlated and concerns spread beyond financial companies and homebuilders --the cost of financing has skyrocketed, imperiling the raft of corporate buyouts that has fueled the bull market. --stock markets across Asia were pulled down sharply July 27 by the previous day's rout on WS that saw DJ and S&P500 fall 2.3% and register their biggest declines since late Feb. --WS woes hit hard. --China toughens stance on food safety --the bear event is a watershed event --Speculation has run rampant in recent years in real estate, private equity, merging market and levreage loans. Subprime is the first category to collapse. --Joe wrote a 23-year stretch that ended in 1958. For me, this lap on the track is sweet and bitter. Sweet because I relish a quest to become FORBES' longest-running columnist. Bitter because I've always believed that Joe was the best FORBES columnist. --As businesses of all sizes expand overseas, Asset backed lenders are following along... --the credit market is in disarray, and that disarray has given the stock market a worthy case of the jitters. --It is not a full rout. So far, there are no corporate defaults making the headlines. --there is an overhang of $225 billoin in debt from PE deals that need to be refinanced. --it would dent the sotck market by 5%. --do these perks (interest bearing account...ATM rebates) outweigh the hassle of switching (from banks to retail brokers) --If invetors get spooked, then the ability of lenders to fund loans may be hampered. --If a few of high quality deals get good prices, that may unclog the pipline. --assets around the world move in one lockstep. --this(credit market downturn) was their (mututal funds with long-short strategies) opportunity to prove their mettle, they came up short. --The common thread tying those companies together: they either have low or negative free-cash flow and in some cases those flows are unpredictable. --He takes ove the reins as sole president to help guide Bear. --No timetable has been set for the final report. --With the development late in the housing boom of subprime mortgages where borrowers needed to provide little or no documentation, and no money down, the market entered uncharted territory. --investors tend to look askance at such put selling because the losses can be catastrophic. --lenders stay tight with their money --second heaviest one-day plunge 09/2008 --GSE's ability to continue issuing senior debt could forstall govenment actions that have kept investors on edge and pummeled common/preferred stocks. --investors' risk appetite could turn on a dime. --

Thoughts about News Corps' takeover of DJ

--legacy or money is important? legacy of independance is gone. A legacy of family source of pride and prestige is gone --credibility will be maintained? will Mordoch meddle in the paper editorial affairs and import the band of sensationalist journalism found in some of his properties such as the NY Post.

ACC: CFC business segments

· Mortgage Banking—We originate, purchase, sell and service non-commercial mortgage loans nationwide. · Banking—We take deposits and invest in mortgage loans and home equity lines of credit, sourced primarily through our mortgage banking operation as well as through purchases from non-affiliates. We also provide short-term secured financing to mortgage lenders. · Capital Markets—We operate an institutional broker-dealer that primarily specializes in trading and underwriting mortgage-backed securities. We also trade derivative products and U.S. Treasury securities, provide asset management services and originate for sale loans secured by commercial real estate. Within this segment we also manage the acquisition and disposition of mortgage loans on behalf of the Mortgage Banking Segment. · Insurance—We offer property, casualty, life and disability insurance as an underwriter and as an insurance agency. We also provide reinsurance coverage to primary mortgage insurers. · Global Operations—We license proprietary technology to mortgage lenders in the UK. We also perform certain of the Company’s administrative and loan servicing functions through our India operations. Loan Production We produce residential and commercial mortgage loans within the Mortgage Banking, Banking and Capital Markets Segments. Nearly all of the mortgage loans that we produce in the Mortgage Banking and Capital Markets Segments are sold into the secondary mortgage market, primarily in the form of securities and to a lesser extent in the form of loans. We generally perform the ongoing servicing functions related to the residential mortgage loans that we produce. Loans produced in our Banking Segment have generally been held for investment. Types of Products We originate and purchase mortgage loans that generally fall into one of the following four categories: · Prime Mortgage Loans—These are prime credit quality first-lien mortgage loans secured by single-family residences. References to loans secured by single-family residences in this document include loans secured by one-to-four dwelling unit residential real estate. · Prime Home Equity Loans—These are prime credit quality second-lien mortgage loans, including home equity lines of credit, secured by single-family residences. · Nonprime Mortgage Loans—These are first- and second-lien mortgage loans secured by single-family residences, made to individuals with credit profiles that do not qualify them for a prime loan. · Commercial Real Estate Loans—These are prime credit quality first-lien mortgage loans secured by commercial properties, such as apartment buildings, retail properties, office buildings, industrial sites, hotels and other commercial properties.

edu: off balance sheet financing and SPV

--off balance sheet is to finance while aovid taking it on its own balance sheet --a common approach is SPV --Under most accounting regimes, if a sponsoring firm wholly owns an SPV, the SPV's balance sheets is consolidated into its own. Rather than have the SPV appear on its balance sheet as an asset, the sponsoring firm has all the SPV's individual assets and liabilities appear on its balance sheet just as if they were the sponsoring firm's assets and liabilities. This is on-balance sheet financing, which largely defeats the purpose of the SPV. For this reason, a sponsoring firm typically takes only a partial ownership position in the SPV. In other arrangements, it takes no ownership interest in the SPV whatsoever. --A pass-through is a security issued by a special purpose vehicle. The SPV holds assets and pays the pass-through's investors whatever net cash flows those assets generate. In this way, the SPV's assets and liabilities are automatically cash matched, so there is no asset-liability risk. Many securitizations are structured as pass-throughs. See, for example, the discussion of mortgage pass-throughs. --Off-balance sheet financing has other applications. SPVs can be used in tax avoidance. Banks use off-balance sheet financing to achieve reductions in their regulatory capital requirements. This is a compelling reason for many securitizations. It is also the purpose of trust preferred securities. --Off-balance sheet financing also affords considerable flexibility in financing. An SPV doesn't utilize the sponsoring firm's credit lines or other financing channels. It is presented to financiers as a stand-alone entity with its own risk-reward characteristics. It can issue its own debt or establish its own lines of credit. Often, a sponsoring firm overcapitalizes an SPV or supplies it with credit enhancement. In this circumstance, the SPV may have a higher credit rating than the sponsoring firm, and it will achieve a lower cost of funding.

CDS: correlation crisis

--mezzanine-hedged equity strategies backfired in May 2005. Because the tot spread changes across all tranches must add up to the index level (e.g CDX IG spread). So when equity tranches spread widen, mezzanine might actually tighten. --double loss: hedge funds and dealers take positions of buying protection on senior tranche while selling protection on CDX index. But when both positions are working against (tranche spread tighten and CDX index spread widen) them, the loss will accerlate because they have to reduce the hedging position by unwinding buying protection on CDX index, resulting wider CDX Index spread.

another higher profile hedge fund went down

--Sowood capital management lost 50% its capital to 1.5 bil and will wind down two hedge funds. --Founder Jeffrey Larson, who helped pick investments for Harvard Management before starting up his own hedge fund --Citadel Investment Group, a big Chicago hedge-fund firm, said it was buying bond-related and other positions of Sowood --Citadel has a history of looking for bargains in tough times

allowance for credit losses of banks

---allowance in year end (in BS) = allowance in year-begining - actual charge off + recover from charge off + provision (in income satement)

business phrase (update 2)

--leverage finance's cash engine has ground to a halt --worldwide sellof accerlated and concerns spread beyond financial companies and homebuilders --the cost of financing has skyrocketed, imperiling the raft of corporate buyouts that has fueled the bull market. --stock markets across Asia were pulled down sharply July 27 by the previous day's rout on WS that saw DJ and S&P500 fall 2.3% and register their biggest declines since late Feb. --WS woes hit hard. --China toughens stance on food safety --the bear event is a watershed event --Speculation has run rampant in recent years in real estate, private equity, merging market and levreage loans. Subprime is the first category to collapse. --Joe wrote a 23-year stretch that ended in 1958. For me, this lap on the track is sweet and bitter. Sweet because I relish a quest to become FORBES' longest-running columnist. Bitter because I've always believed that Joe was the best FORBES columnist. --As businesses of all sizes expand overseas, Asset backed lenders are following along...

Roger Altman commentary on credit market

--the pendulum of the market has swung from the far side of one direction with extremely favorable condtion to the other side --but underlying corporate credit have not deterioated much

CDS: convexity trades

--hedge a long term discount cash bond with a short to intermediate term protection --even notional: 10 mil cash bond + 10 mil CDS --jump to default (default exposure in BB): ensure neutral cash flow following a credit event. So for a discount bond, less than 10 mil CDS is needed to hefge 10 mil cash bond --DvV01 neutral: cash flow neutral for small spread moves. This strategy makes profit when credit event occurs. --most convexity trades use jump-to-default neutral hedge ratio. Yet jump-to-default neutral trades remain long spread risk. Investors will lose money if credit quality deteriorate, wihtout a corresponding credit event. In order to be neutral P&L for smaller spread moves, investors have to run DV01 neutral hedge. --the reason investors are still long the risk is because the duration of cash bonds is larger than the duration of CDS with less than 10 mil notional amount.

CDS: unwind a CDS constract

--unwind directly with the exisitng counterparty --new trade with a seperate counterparty: disadvantage is new risk and post-margin requirement for seller --assignment: match existing counterparty with the new counterparty.

CDS: transition from spread to points upfront

--once five-year CDS spreads approach the 700 bps range, the quoting convention often changes from running spread to points upfront plus a 5% running coupon. --protection buyer pays 1,570,000 at inception and 125000 per 10 mil notional quarterly

CDS: invididual names roll

--there is a tradeoff between carry and duration. If an investors rolls, he pays a higher cost of carry (roll fee) but keeps a roughly constant duration, like 5y. If an investor does not roll, he saves roll fee, but suffers from a progressively shortening duration and reduced liquidition for his off-the-run contract.

business phrase (update 2)

--leverage finance's cash engine has ground to a halt --worldwide sellof accerlated and concerns spread beyond financial companies and homebuilders --the cost of financing has skyrocketed, imperiling the raft of corporate buyouts that has fueled the bull market. --stock markets across Asia were pulled down sharply July 27 by the previous day's rout on WS that saw DJ and S&P500 fall 2.3% and register their biggest declines since late Feb. --WS woes hit hard --China toughens stance on food safety --there is an overhang of $225 billion in debt from PE deals that have to refinanced --It is not a full rout. --PE deals if stopped in their trackes would dent the stock market by 5% to 10%. --it is a tug of war between greed and fear. people can not make up their mind how this could turn out.

factors driving the difference between CDS spread and Cash Spread

--CDS spread often trade with a higher beta, higher volatility --the main determinant of the difference between CDS sprd and Cash sprd is the level of credit risk. When credit risk is rising, demand for buying protection rises and the basis becomes more positive. When credit risk declining, the opposite occurs. --repo rate might be high to prevent aribtraging positive basis. effective basis equals to the CDS, minus cash spread and repo rate. Also, repo market often drys up when the credit spreads widen, so that an investor may be unable to find the bond to borrow. --the demand of synthetic CDO market impact the CDS spread. e.g less demand of CDOs caused by subprime backed CDOs widen CDS spreads ove a wide spectrum of credit market --individual name CDS is more liquid ove cash

Credit Spreads in multiple forms

--I-Spread: the yield spread over matched maturity swap yield, not LIBOR spot curve... IYC1 US SWAP ACT/360 or curve I52 --ASW: par portion of hte bond is discounted a the risky rate (coupon rate) premium or discount portion is discounted at LIBOR rate, not LIBOR + Spread Asset swap is a seperate agreement between two parties, so if the underlying issuer defaults, an asset swap still continue --Z-spread: spread over LIBOR spot curve, OAS with zero volatitliy discount: LIBOR + Spread --Par CDS equivalent spread: when bond price is different from par, actual recovery rate for bond investor is different from 40%, the CDS investor's (protection seller) recovery rate. Because bond investor is expected to recover only 40% of initial par(100) investment, not 40% of current market value.

hints of broader problems arise in real-estate loans

--delinquencies on loans that back commerical mortgage-backed securities rose for the first time since 2003 in Q2 --CMBS delinquencies rose 13% in Q2 to $1.65 billion from 1.46 bil in Q1 --but issuance of these bonds also had risen sharply, as reflected in Q2 GDP where commericial construction shore up the Q2 growth. So delinquency rate might still be low. --fundamentsl such as vacancies and rents are still solid. --delinquencies on 2005 and 2006 vintages rose the most, possibly due to relaxed underwriting.

Fanni Mae (FNM) and Freddie Mac (FRE) exposure to subprime

--Freddie Mac, 124 bil of bonds backed by subprime mortgages, 17% of protfolio --Fanni Mae, 58 bil, 8% (Check out Mortgage Portfolio Composition in 10k) --vast bulk of the loans they own or guarentee are convervative fixed-rate prime mortgagtes. --turmol has helped them regain market share --paper losses wont's necessarily be realized as they are not forced to sell --they own a combined $1.4 trillion of mortgage and related securites, and guarantee paymens on more tha n$3 trillion of loans --Fanni Mae MBS approximately represent 23% of total U.S residential mortgae debt outstanding

commentary of GDP Q2 2007

--exports, commercial construction, and governments spending offset the weakness in consumer spending and house market slump --none of positive drivers are not sustainable --rising energy price and persistent housing slump will damp the consumer spending (core PCE), which has dropped to 1.3%.

will Bernanke bail out this credit meltdown

--cost of credit skyrocketed, imperiling the raft of corporate buyouts taht have fueled the bull market --entire spectrum of credit was being repiced --more important indicator has been the widening of spreads on corproate loans, the lifeblood of the deal business, evident in a further deterioration in the LCDX --the failure of two hedge funds set off a chain reaction through the markets. large banks, choking on LBO bridge loans, have likely tapped all traders to lower any and all risk positions and refrain from taking on any more.

some techncial phrases

--leverage finance's cash engine has ground to a halt --worldwide sellof accerlated and concerns spread beyond financial companies and homebuilders --the cost of financing has skyrocketed, imperiling the raft of corporate buyouts that has fueled the bull market.

GDP Q2 2007

--real GDP (QoQ, annualized) 3.4% first release , strong rebound due to exports, commercial construction, and government spending. Q1 is revised to 0.6% --real GDP (YoY, annualized) is 1.8% vs 1.5% is Q1 --Exports is strong because world economic growth is racing along and dollar is cheap. --Spending on commercial construction projects rose at thefastest pace in 13 years, helping to overcome another drop inhomebuilding. --Factories ramped up production to fill orders fromEurope and Asia that made up for a slowdown in consumer spending. --Fed's preferred inflation guage, core PCE (ex food and energy) QoQ, dropped to 1.4% from 2.4% in the Q1.

Synthetic CDO buyer universe

--at senior level attachment points, US and European insurance companies as well as banks are sellers of protection throguh STCDOs --down the capital structure, hedge funds are primarily sellers of protection at the equity (first loss) level. --thses strategies oftenreduce spread risk by buying protection at the mezzanine level, hedgin with credi default index products or single-name CDS

why CDS spreads are tight since 2004

--Synthetic demand is a large catalyst: technical factor, epspecially in the form of single-tranche CDOs --STCDO issuance repreents leveraged expoesure to the credit risk of an undelrying portfolio --dealers hedge their short credit risk expsure (buy protection) by selling protection in single-name secondary CDS market, so leverage magnify a small notional position in CDO into a larger market impact in CDS notional vol. --why CDO is in high demand since 2004 : because cash bonds spreads have compressed 85bps during 2003 while in 2004 CDS spreads actually widened, resulting in an increasing spread pickup in CDOs --

Meltdown of U.S. subprime market

--the low interest rate in 2003 alone would have given the housing market a nice pop, but a series of financial innovations opened the floodgate --the combination of low interest rates, securtization, and CDS created a powerful feedback loop --a new breed of players (nonbankers) take the field --carnage is far from over

Contagion of subprime slime

--First the warehouse loans to RMBS originators were pulled, and now CLO wharehouse lines have followed --Emerging CLO problems could pose a direct threat to a major factor that has helped to shore up sentiment in recent weeks: the equity market.

drivers of credit market in the past two weeks

These issuers will not fade away any time soon. --subprime defaults --rating rethinks --higher correlation

2007 1st Half review

--Global M&A volume is on pace to rival the late-90s boom years --fixed rate issuance is on track to be the largest in the last five years.... --froreigners raise their holding of US corp debt from 20% o 29% whereas insurance's holding decrease from 30% to 21% --the largest companies have been increasing indebtedness at the fastest pace

Synthetic CDO

--no debt obligations are issued to fund the senior section, cash CDO all tranches are up for sale --junior section is issued like CDO stuctue, different tranches --like CDOs, there is an asset manager who manages for junior section proceeds --motivation for synthetic balance sheet CDO a.no notification of selling the loans to another party... for synthetic arbitrage CDO a.no funding for senior section b.ramp-up period is shorter only high-quality need to be assembled

CDO structure

--there is an asset manager responsible for managing the portfolio of debt obligations --the fund to purchase the underlying assets are obtained from the issuance of debt ogligations (tranches) --the proceeds to meet the ogliations to CDO tranches can come from a. coupon interest payment of underlying assets, maturing assets in the underlying pool and sale of asset in the underlying pool Cash or Market CDO - actively managed portfolio --asset manager invest in fixed rate bonds, tranches pay floating rate, resulting in mismatch. --coverage test need to be paid...if all test passed, principal will be reinvested... --cash CDO is ensure cash sufficient to meet the obligations of the tranches --market CDOs generate trading profits to satisfy a portion of the obligations to the tranches

HEL ABS

--HEL tranches is different from CMO tranches that are backed only by fixed-rate loans

ABS continued ...

--in an ABS there are two principal parties: the issuer and the security holder --the third party is credit enhancer, usually a monoline insurance company. Unlike muni bond insurance, the garantee is only for a percentage of the par value --two less common forms of external credit enchancement are a letter of credit from bank and a guarentee by the seller of the assets

ABS securization process

--the larget sectors of ABS market in the U.S. are securities backed by credit card receivables, auto loans, home equity loans. --example --some home theaters are purchased using installment sales contracts, instead of cash. the credit department of manufacturers (QHT) will make the decision. --installment sales contract is a loan to the buyer of the home theater who agress to pay over a specified period of time --if QHT extend the loan to a customer, QHT is originator. --QHT will set up a legal entity refered to as a SPV --In the prospectus of ABS loans, SPV is refered as issuer and QHT is named as seller --the proprity and amount of payments is commonly referred to as the waterfall --trustee or trustee agent is the entiy that safeguards the assets, receiving the payments, provides periodic information

CFC Q2 2007

the most negative parts of the earnings release were two factors that the market had not anticipated: 1) CFC's admission that it is now concerned with credit performance in its prime home equity and Alt-A portfolios; and 2) CEO Mozilo's belief that the mortgage market could remain weak through 2008-some six months longer than he had suggested just three months ago.

buyout volume up despite credit blowout

--The rout in global credit markets in the past six weeks has many worried that the flow of leveraged buyouts that have supported equity markets will slow or dry up, but surprisingly so far, there is little sign of this happening. --Buyout volume has nearly doubled year-over-year since credit fears started to emerge, reaching $184 billion globally from June 18 through July 24 from $98 billion in the same period in 2006, according to research firm Dealogic. --Meanwhile, European high-yield credit spreads as measured by the iTraxx Crossover index have nearly doubled and over 25 loan and bond financings have been put on ice. --'Mega-cap' LBOs of 20 billion euros plus are off the table until the existing pipeline of loans can be re-priced and placed," --credit market is now driven more by investors sentiment rather than fundamental, in my opinion

chryslter's bankers may take on debt

--Chrysler's attempt to tap debt market for $20 bil will hit a critical juncture. --bankers will have to step up with a large part of the money because invesetors demand hasn't been strong enough --The $20 bil deal was announced on Mahy 14 and was expected to complete by Sep --The mood of the debt market could also influence Ford's asset sales, including its effort to eliminate the Jaguar and Land Rover brands from its portfolio. --Bill Gross, managing director of Pacific Investment Management Co, pointed to the Chrysler deal as a landmark for the debt marekt "their world has suddenly changed"

Antoy Leung is behing Balckstone China deal

--Antony used to be HK financial secretary, resigned because of a scandal in 2003 --his wife Hu Minxia is a Olympic Gold Medalist for diver --Antony used to worked Citigroup and Chase Mahatan Bank

The basis between ABX subindex and wght average sum of underlying ref obligagtions

sometimes large because --investor base for single name ABCDS is dominated by long-only CDO protection sellers whereas index is more actively traded by corproate cross-over accounts and hedge funds --the bid offer in the underlying 20 tranches is large enough to prohibit potentail arbitrage between the index until the basis detween single names and index is very large.

what structured products indexes trade on?

--ABX subindex (BBB, BBB-) trades on prices, which incorporate both credit and prepayment and durations. --Corproate CDS indices (CDX index) trade on spread --CMBS trade on spread

CDOs of Home Equity ABS vs standardized ABX tranches

--both targe BBB and BBB- --CDOs offer greater name, sector, and rating diversity than standardized ABX tranches --many CDOs of ABS feature a cashflow waterfall, or a payment priority than driverts interest away from junior tranches if performance deteriorates. ABX tranches use a simple linear write-down, where each principal wriedown on a reference tranche requires a protection payment by the first loss piece, and reduces subordination for more senior tranches. --CDOs of ABS are frequently managed, whereas the standardized ABX tranches will use a static protfolio. --CDOs of ABS do not use standardized attachment points, but they do give an initial sense of how spread is distributed across tranches

American Express Q2 2007

--3rd largest U.S. Credit-card network --revenue advanced 9% to 7.13 bil, profit climbed 12% to $1.06 bil --drivers: customer spending and merchan fees

more resistance from investors for leveraged loan

--$3.1 bil loan of Allison Transmission, buyout by Carlyle group, was postponed --the snag reflected the difficult conditions in the market for risky corporate loans --The Allison debt deal wasn't the only one sidetracked yesterday. --Expedia Inc., the online travel agency, drastically scaled back share buyback plans because it couldn't borrow the funds it needed for the buyback at acceptable terms. --The buyout itself still is on track to be copleted in Q3. Underwriters will be left holding the bag than can be sold when market condition improves.

China Development Bank joined the ABN deal

--Barclays said yesterday that China Development Bank, a Chinese government-controlled lender, plans to invest at least €2.2 billion ($3.04 billion) and up to €9.8 billion for a stake in Barclays of at least 3.1% and as much as 8%, if Barclays's bid for ABN succeeds and if regulators approve. --China Development, headed by Chen Yuan, has an extensive portfolio of Chinese customers it can introduce to Barclays for more complicated financial products and services that China Development doesn't provide, such as asset-management services. China Development's main business is lending to Chinese government-owned companies, a number of which are doing big business overseas, and as Chinese companies expand into places like South Africa, Barclays hopes to capture the banking business behind those deals. --Given China Development Bank's role in infrastructure and China's booming demand for commodities such as metals, Barclays plans to provide expertise in hedging commodities. The British bank, for example, will put employees on the ground to provide training and assist in infrastructure buildout. --China Development Bank's planned stake in Barclays PLC could become the largest overseas investment by a Chinese company to date, and underscores the growing role China Inc. is playing the global corporate arena. --China Development's stake will be the larger of the two: it will buy up to 2.2 billion euros of new shares in Barclays initially, amounting to a 3.1% stake, Barclays said. China Development will then buy as much as €7.6 billion worth of additional Barclays's shares, if the British bank's bid succeeds for ABN Amro Holding NV – and if the deal wins regulatory approval, Barclays said. If the whole deal is completed, China Development would spend a total of $13.5 billion for its stake in a newly enlarged Barclays, dwarfing other overseas deals by Chinese institutions.

U.S pension funds

--U.S. pension assets rose to $14.4 trillion in 2005 from$13.5 trillion in 2004, according the Employee Benefit Research Institute in Washington. The 2005 figure is the latest available. --The federal Pension Protection Act passed last year requires company pensions to bring assets in line with future liabilities. That means pensions, which in 2006 were underfunded by $350 billion as measured by the Pension Benefit GuarantyCorp., must be fully funded by 2013. --To catch up, many funds loaded up on stocks. The S&P 500has gained more than 9 percent this year, including the reinvestment of dividends. --The act was the first step in pension reform. Now, manyfund managers and their advisers speculate that accounting rule makers will eliminate accounting techniques companies have used to minimize the effects of volatility in their pension holdings. To minimize volatility, many funds decide to buy bonds, which experience lower swings in prices. --Pension managers often need approval from their boards of directors before changing investment strategy, which can take months to secure, suggesting that demand for longer-dated Treasuries will build gradually, said Ethan Kra, chief actuary at Mercer Human Resource Consulting in New York. Mercer callsitself the largest human resources consultant. --``You're seeing the beginning of a snowball at the top of the hill,'' Kra said. ``Pension plan managers don't move on a dime,'' so it may take some time before the snowball ``becomesan avalanche,'' he said. --The surge in equities this month to record highs has wiped out the pension deficits of the companies in the Standard & Poor's 500 for the first time in six years, according UBS Securities LLC.

Subprime Mess is new challenge for regulators

--the downturn in the subprime mortgage market is shaping up as a test of the globe's new financial architecture --shfit to market-oriented architecture: mortgage securtized and sold to inveetors.... --Risky investmetns are dispersed around the globe the way sprinkle system distributeds droplets of water around a lawn.

Dollar is on defensive amid subprime shakeout

--The snowball effect of U.S. subprime-mortgage problems keeps barrelling forward, and that is likely to extend the dollar's recent decline into this week (July 23rd) --risks are continubing to build and you are probabaly going to see the dollar back under pressure --what is devloping is an escalation of problems in subprime markets and know-on effects on other credit markets --potential saviors for the dollar are rebounding Q2 U.S. economic growth from the A1 2007

Banks and brokers are in the bull's eyes

--Concerns over mortgage loans collide with the increasing likliehood that banks could be left hodling the bag of debt-laden corp deals --risky home loand gone sour will crimp earnings and damp business in the banks' mortgage units --resistance from investors in high-yield debt market is forcing banks to setp up to the plate to provide financing for debt-heavy buyouts --Banks and brokers are in the bull's eyes

JPMorgan QA highlights

--The bottom is not at hand. subprime woes will continue and deepen, beause the subprime loans peaked year-end 2005 and all of 2006. --Most of the borrowers of the roughly $500 billion of ARMs scheduled to reset over the next 18 months. --it is hard to modify existing mortgages --futher declines in home prices will exacerate the default problem --contagion from subprime mortgages is currently a key issue across the credit markets. One possible scenario involves collaterized loan ogligations (CLOs). --CLOs own approximately $300 bi of leveaged loans, representing about 3/5 of all leveraged loans --underlying assets remain very healthy since corporate profits is still strong so credit quality underlying CLOs is dramatically better than the ABS CDOs that invest in subprime mortgages. --the contagion stems from techical factors and from a general repricing of risk across the credit markets --tech factor: massive pipeline, LCD $216 billion of leveraged loans await issuance.

Another delay of LBO laon offering

-- Kohlberg Kravis Roberts & Co.'s banks extended a deadline for investors in 9 billion pounds($18.5 billion) of loans for Alliance Boots Plc and plans to offer better terms, said a banker involved in the deal. --Alliance Boost, largest Europea deal --revised offer may discount the price of the debt by 1% to 2% of face value, and add an extra 50 basis points of interset on teh senior the debt.

China raise interest again

--The benchmark one-year lending rate will rise by 0.27 percentpoint to an eight-year high of 6.84 percent tomorrow, the People'sBank of China said. The deposit rate will increase by the sameamount to 3.33 percent and a tax on interest income will be cut onAug. 15 to encourage saving. --The tax on interest income will fall to 5 percent from 20percent to counter the erosion of savings by inflation, thegovernment said.

BAC major business line

top business segments consumer banking (50%) --Deposit: (40%) --Card Service (50%) Investment banking (30%) this quarter surprise is principal investing (equity investment)

BAC Q2 2007

--tot rev up 8% to 19.96 bil --noninterest income rose 17% to 11.18, driven by increase in equity investment gains, other income, investment bankign and service charges --segments (drivers) ---a.consumer bank, up 5% to 11.9 bil (55% of tot rev) ---b.investment banking, up 9% to 5.8 bil (20%) driven by capital markets nd advisory servies. It is inline with other banks ---efficiency ratio = non interest expense / (net interest income + non interet income) Analysis --similar to ML and JPM, it benefit from investment banking a lot

definition of managed basis???

--Widely used term in banks --Managed basis assumes that loans that have been securitized were not sold and presents earnings on these loans in a manner similar to the way loans that have not been sold (i.e., held loans) are presented. For more information and a detailed reconciliation, please refer to the data pages supplied with this Press Release.

JPM Q2 2007

--No.1 syndicated loan underwriter --revenue rose 25% to $18.91 bil --NI rose 20% to $4.23 bil --drivers: ---- a. investment banking revenue up 38% to $5.8 bil ( 30%) due to investment banking fees (advisory 50% and equity underwriting 40%) ---- b. asset management revenue up 32% to 2.14 bil (15%) ---- c. corporate up 1000% to 1,06 bil due to private equity

Credit Derivative Market Quo Status

--2006 $50 tril (buy and sell), 113% over 2005 --Leading the charge has been the traded indices, est $22.2 index products have been bought by year-end 2006 --CDX market will continue, with CDOs, LCDS, and traded indices as the biggest growth vehicles --while banks remain net buyers of protection, the global insurance and monoline industries continue to be key net sellers of protection at $396 and $355 bil, respecitvely, at year-end 2006. --concerns of market challenges near term: ----infrastructure: back office operations such as trade confirmations ----documentation (LCDS) --future concerns ----credit cycle --hedges are responsible for driving nearly 60% of all CDS trading volume and 1/3 of trading volume of CDOs. --future of hedge funds: large position + leverage will force some of them to close out positions --trading longer tenors is becoming more commonplace... --telecommunication and automotive companies along with sovereign occupied the top 10 slots on both a bought and sold basis for the most cited references entities.

STT Q2 2007 structure products

--securities portfolio average 67.7 bil, of which MBS reresented 38% of the portfolio and floating-rate ABS were 36% of the portfolio --exposure to subprime securitizations in ABS, 78% AAA and 22% AA

factors driving ABX index currently

--Investors have been buzzing for days, trying to explain the latest losses in the ABX index, which signaled a deepening panic in the mortgage market. Several factors have been at play, including the ratings downgrades. --It also could have been related to holders of mortgage- backed securities hedging their positions by making bets against the index. Or it could have been because speculators are betting the subprime woes will worsen. --"The decline in the ABX indexes has been significant, and certainly some people are panicking and shorting it further because many assets they own are going down in value," says Alan Fournier of hedge fund Pennant Capital, which has been betting against the subprime market.

commentary on PPI

--The 0.2 percent fall followed a 0.9 percent increase in May,the Labor Department said today in Washington. --Core prices, which exclude food and energy, rose 0.3 percent, reflecting a jump inautomobile prices. --Excluding passenger cars, core prices were up 0.1 percent. --It is a sign that inflation is moderatign

Schwab Q2 2007 Earning

--The biggest discount borkerage --profit increased 16% as rising stock prices boosted trading revenue --revenue rose 10% to 1.2 bil --client assets rose 23% to $1.38 trillion, might surpass ML in three years. --competiting directly ti TD Ameritrade Holding Corp. and Trade, two of which are rumored to merge. Fiedlity investmnets another competitor too. Pricing wars.

Investing's smartest players

--one trait: they saw opp well before the pack --get the top first, not following in the footsteps of others copy wholesale the investing style. --George Soros understand the conventioanl wisdom, but he is also willing to challenge it. --operate with a coherent investment philosophy, most important, they applied it consistently to all aspects of their portfolio..they never wavered --sometimes, even the best investor wish they could turn back the clock and undo the blunder. --ordinary investors may not able to match great investors results, they could certainly profit by taking one page or two from the methods and approaches

Buyout Game may soon see nature of love, Banks and Buyout firms will divorce

--for the past four years, WS and buyout firms have lived in a gilded, if not complacent, harmony. A coterie of banks supplied the ideas, while arranging debt and equity to back the buyout funds' huge deals. They in turn paied huge fees. --now we may get to see how much love flows between the two. It promises to be quite a reckoning, one that should reveal the new countours of WS. --the test arises from sharp changes in the debt markets. Now investors are slow to step up to the plate. Some $300 billion in loans and high-yield debt is coming up for sale soon, 4 times the amount in 2004. --This both heartens and terrifies WS banks. They relish the opp to apply some leanding discipline that evaporated during the leveraged buyout craze, but dread the loss of all those fees. --it is hard to sense a joyful compeuppance among bankers. The effect is something like a beleaguered chauffeur who, after years of back-seat direction, finally switches role with his passengers. --no doublt underwriters and borrowers will be more cautious. But some of this caution may be too late. Across the Street there is a gnawing sense of foreboding about this incoming wave of financings. That's because the banks have put up immense bridge laons to back the deal, setimated at some $13 bil for just 6 troubled deals in the last few weeks. If hedge funds, insurers, and other investors won't take the paper, the banks are obligated to put them on their books or sell at a loss. --Soem have also exteneded their warehouse lines of credit to specialized hege funds used to buy this debt. These lines of credit - also deployed in teh subprime-mortgage securities marekt - allow funds tobuy securiteis while keeping some risk at the banks. --firms like KKR are prvoing amenable. KKR's vision to that of a self-contained financing biosphere., where it can raise capital, ufnd deals, and place debt and equity. Of course, that is a model taking shape at GS --The appeal of the model is tantalizing for banks, which are realizing they are putting increasing amounts of capital at risk for others' benefit. --Who need these the buyout guys? Divorce....

U.S Bankcorp

--The 6th largest U.S bank --profit decline 3.7% due to mortgage defaults --its business model is consumer bankig driven(45%)

Wells Fargo (WFC) Q2 2007

--the biggest bank on the U.S West Coast --Record revenue of $9.89 billion, up 13% from prior year, due to higher fess from credit cards and commercial loans --Record Q2 net income of $2.28 bil, up 9.1% from 2.09 last year --revenues from debit and credit cards gained 24% to $517 million and interest income rose 4.3% to $5.2 bil --NIM widened from 4.76% to 4.89%. It insulated itself from industrywide slide in lending margisn by getting ride of lower-interest mortgages and making new laonds at higher rates. --It tightened loan standards and shut a unit buying subprimemortgages from lenders. --Loans ----Business lending increased 12% and set the tone of the company total loans, which increased 11% to $332 bil. The sucess was probably because the company used servcies such as electronic payroll and bill-paying to attract clients ----Business loans main encompassed commercial (65%, $400 mil) and commercial real estate loans(20%). ----Consumer loand inlcude first mortgage (65%, $600 mil), junior lien mortage (20%)

Merrill Lynch Q2 2007

--ROE increased from 18.6% to 22.4% --No. 1 CDO Underwriter --demand wanes for structured products and regulators tighten standards on subprime home loands. --gains in investment-banking due to stock market rebounds offset weakness in structure products origination fees --Merrill's brokerage unit, empllying about 16k financial advisors ( retail brokerage) benefit as SP advanced 5.8% in Q2 --main driver: a.principal transactions/proprietary trading: incread 30% to 3.5 bil (34% of tot revenue) 90% of principal is from GMI (global market investment banking business line - equity and FI markets)

some facts about FRN?

--it is a class of corproate bonds, sometimes classified under MTN. for instance, BSC 2y (0 07/16/2009) whose interest rate basis is LIBOR and spread is 27 bps. In bloomberg, use "Calc Type" to find out FRN.

FRN in the second half

--last week, S&P downgraded 612 subprime backed RMBS. Moodys downgraded 399 subprime backed RMBS and 184 classes of CDOs backed by subprime ABS. --None of the implicated RMBS was short-dated senior clases --Floater issuance has been on the rise since the FOMC embarked on its policy tightening campaign in mid-2004. The inversion in the yield curve also led to attractive coupons in floating rate debt. During the nine years prior to this tightening regime (1995 - 2003), flaater issuance as a percentage of total investment grade corproate bond issuance had average just over 25% of total supply per year. Since 2004, floaters have comprised over 54% of new supply. It is no wonder that many of hte issues entering the market since 2004 are up for redemption in 2007. --Record issuance in March ($115 bil) and May ($111 bil) set the tone for a first half. --long maturity floater issuance in the first half lead much of hte surge as banks, insurance, and ifnance companies place debt beyond four years, representing 72% more floater supply in this part of hte curve ove the same period last year. --In the second half of 2007, gross issuance will be close to $800 billion, with roughly $480 billion(60%) in flating rate supply. --increase in long-end floater supply coupled with the expectation of higher Treasury yields should continue to put pressure on returns of long dated floaters as non-traitional floating rate investors absorb the technicals and look for value in fixed rate paper of similar maturity.

Treasurys are poised to extend turbulent ride

--the wild ride in the U.S Treasury market is set to continued this week, with investors torn between worrying about strong growth and higher inflation and fretting about subprime-mortgage woes. --Drivers of Treasury Montary policy: --Some LT investors are keen on Treasurys because they are betting the U.S. economy will eventually slow, forcing the Fed to cut rates Supply: --Some cite less supply: with the governments' deficit outlook improving, issuance could slow, making U.S. government bonds more attractive. Technical: flight to quality --As the subprime story stay upfront and center in the headlines, we whould continue to see highe daily volatitlity.

what could topple Bulls' Wall of Worries'

--Stocks can still flourish through investors are nervous. It is climbing a wall of worry - rising to record heights despite deep worries that anyone of serveral risks could send it tumbling. --what could topple Bulls market a.skittishness over high risk securities and subprime market blow up subprime is a small corner of the total credit market. leveraged loans will be a potential concern. It might clog the PE deals pipeline. b.inflatilon - no brainer for me c.weak dollar - double edge sword d.liquidity - it is another concern given the fact that some investors are pulling money out of their hedge funds and PE funds. The situation might be building due to the concerns of blow up of two BSC hedge funds.

Another pushback of leveraged loan - KKR

--KKR canceled 1 bil euro (1.4 bil) of loans for Duetch home-improvement retailer Maxeda-BV --Notwitstanding that KKR cut the price of leveraged loans, investors are not buying it and they are nervous. --KKR palnnedto use loans to reduce financing costs for Maxeda, the biggest operator of home-improvemetn stores in the Benelux countries, following LBO in 2004. The debt is expected replace 275 million euros of HY bonds and 523 million euros of pay-in-kind (PIK) notes, which don't pay interest until maturity, with a lwoer ratre senior loands.

U.S banks' international strategy

--BAC will trail JPMorgan and Citi: only 13% revenue is from overseas, while around 50% for Citi --Europe and Asian account for more than half of the word economic output. European and Asiancompanies have accounted for 61 percent of equity-underwritingfees paid to investment banks this year, data compiled byBloomberg show. In 2000, U.S. companies paid 57 percent. --Analysts eye on Washington Mutual and Wells Fargo, Citi is on tap. --US. real GDP is 1.9% in the 1st qtr, compared to 11.1% in China. Inflation 2.7% in U.S vs. 3.4% in China --Citi first move advantage and deal with mult countriy at the same time --BAC penetrate one country each time and centered on parternship --BAC's purchase of MBNA makes it the leading credit-card issuer in U.K, Ireland, and Spain. Now the company want to sell banking products to credit card holder. --In the securities industry, U.K. brokers were snapped up by U.S. giants such as Merrill, which bought the biggest, Smith New Court, in 1995. Now, ``banks like Bear Stearns, Wachovia and Bank of America are finding entrenched and stiff competition from U.S. banks that were there before,'' Questa said. ``Largely, they have missed the boat.'' --International markets don't come without the kinds of risks Bank of America's Lewis prefers to avoid. Citigroup said it would shut about 80 percent of its consumer-finance branches in Japanearlier this year after the government passed legislation cappinginterest rates. The company raised its loan-loss reserves inJapan by $375 million and had closure costs of $40 million.

特别国债的政策解读

? 全国人大常委会最近批准了财政部发行15500亿元特别国债，用于购买2000亿美元国家外汇储备投资海外的议案，使得组建国家投资公司（SIC）或中国投资公司（CIC）的工作又迈出了实质性的一步。虽然这样的安排早已在市场的预料之中，但是近期市场的振荡表明，相关政策变化对市场流动性、利率、汇率和资产价格等的影响存在很大的不确定性。 ??? 特别国债的发行蕴涵了丰富的政策信息，把握这些信息有助于预见市场的走向。特别国债的发行与国家投资公司组建，其主要目的在于减少国内过多的流动性并降低外汇储备过快增长对人民币升值的压力，并实现外汇资产的保值与升值。这些目标能否实现，不仅取决于外部环境的变化，也取决于政府的目标和相关政策设计。 对流动性的影响在于政府的目标而非工具 ??? 这次准备发行的特别国债数额巨大，大约相当于过去五年发行的国债总和，或约相当于提高银行存款准备金率近10次。一旦发行完成，有可能对市场流动性产生巨大的冲击。投资者对流动性的担心表现在市场利率上，7天Shibor利率从年初的不到2%提高到了目前的3%-3.5%甚至更高。 ??? 尽管财政部有关官员指出特别国债的发行对宏观调控而言是中性的，投资者对流动性的疑虑仍没有完全消除。这些疑虑主要来自特别国债发行本身的不确定性，如：特别国债究竟是向人民银行定向发行，还是向市场公开发行，或者通过其他渠道发行？是一次性发行还是多次发行？以市场价格确定的利率水平究竟是多少？有关特别国债发行的模糊有些可能是策略性的，目的是为了增加市场的不确定性，从而达到抑制市场投机的目的。策略性的模糊使得市场预期难以有效形成，从而导致市场价格的大幅度波动。 ??? 中国政府在上个月警告说，中国经济有可能从偏快转向过热，并认为流动性过剩是当前经济运行中存在的突出问题之一。因此，解决流动性过剩肯定是发行特别国债并建立国家投资公司的一个主要原因。但是，紧缩流动性到什么程度，却不取决于工具而是政府的调控目标。 ??? 从潜力上来看，发行特别国债对目前的流动性过剩有明显的遏制作用，而政府对流动性问题的严重程度的判断——或者政府认为的理想流动性水平——是决定未来流动性水平的关键因素。如果政府希望温和收紧流动性，那么特别国债在很大程度上可能会被用来替换现有企业的央行票据，减轻央行的对冲压力；反之，如果政府担心经济进一步过热，同样的工具对紧缩流动性的力度就会加大。我们认为，政府的近期目标是经济的稳定发展，大幅度收紧流动性的可能性不大。 财政政策与货币政策并重 ??? 在结构扭曲的环境中，货币政策或价格政策的作用受到了一定程度的限制。央行在今年以来加息两次，提高银行存款准备金率五次，但仍然不能有效阻止经济“从偏快转向过热”。 ??? 未来财政政策在宏观调控中的作用将逐步提高，这主要是因为与货币政策相比，财政政策在解决结构失衡方面有其独特的优势。在上个世纪90年代后期开始的通货紧缩中，积极的财政政策在刺激内需上发挥了积极的作用，但在近一轮的宏观调控中财政政策的作用还没有完全显现出来。 ??? 从去年开始，财政政策的作用在逐步加大，从调高个人所得税的抵扣额度、取消农业税、在全国范围内全面推广义务教育等，通过财政调节收入分配以刺激消费的效果将有可能越来越明显。特别是今年以来，财政政策在宏观调控中的作用日益明显。财政部今年两次大幅度调整或取消出口退税、对部分产品征收出口关税、并积极探讨征收汽油税和减征利息税等的可能性，直到最近的特别国债的发行，都反应了财政政策的作用在加强。 ??? 最近几年国家财政收入的快速增长，使得财政在国内结构调整特别是刺激国内消费方面能够发挥更加重要的作用。自1995年以来，财政收入的年均增长率达到了18%，比同期11.9%的名义GDP增长率高了6个百分点。进一步改革财政体制，有助于结构调整，并提高货币政策的有效性。可能的改革包括：发行国债的方式为社保融资、进一步减免个人所得税、国有企业分红等。 海外投资不能替代结构调整 ??? 建立国家投资公司不是对结构调整的替代。中国目前面临的“外贸顺差过大，投资增速继续在高位运行，流动性过剩问题依然突出”等问题的主要根源在于长期存在的结构性问题。发行特别国债可以减轻由于结构性问题带来的一些后果，但不能解决结构性问题本身。特别是，与通过外贸顺差和其他途径流入的资金相比，2000亿美元只相当于过去不到10个月的外贸顺差和大约五个月左右的新增外汇储备。 ??? 解决结构性问题取决于两个主要的方面：调整内部价格以刺激消费；调整外部价格以降低外贸顺差。 ??? 建立新的投资公司对结构调整的影响可能是两方面的：首先，对国内而言，鼓励海外投资有可能降低国内投资的增长速度，防止投资过热。然而，中国作为全球制造业中心的吸引力有可能使得出去资金重新流入国内，形成所谓的第二次结汇，这有可能部分抵消特别国债对流动性的影响。其次，发行特别国债有可能加快人民币升值的速度。 ??? 国家投资公司可以通过两种形式部分化解汇率风险：一是分批发行，降低平均换汇成本；二是在特别国债发行之前先允许人民币适当地快速升值。然而，在国家投资公司成立之后，其强大的盈利压力有可能成为未来人民币升值的阻力，事实上起到放缓人民币升值的结果，不利于结构调整的推动。 投资限制与贴水 ??? 由政府主导的投资公司一般分为两大类：只能投资海外，如新加坡的政府投资公司（GIC）；没有投资区域的限制，如新加坡的淡马锡。新加坡政府投资公司成立25年来，其平均年投资回报率如果按美元计价为9.5%，按新加坡元计价为8.2%。这两者之差代表了新加坡元的汇率变动对回报的影响。与此同时，淡马锡成立32年以来，投资的平均回报大约在18%左右。根据淡马锡的资料，到2006年3月21日，该公司44%的投资在新加坡国内，而2005年同期为49%。这两类公司回报水平的差异主要代表了限制投资区域与不限制投资区域之间的差异，或贴水。 ??? 假设新加坡的这两家公司代表了最佳的国际实践，只限海外投资的中国国家投资公司的平均回报应该接近于新加坡的政府投资公司而不是淡马锡。在未来几年里，人民币升值可期，这意味着，以人民币计价的回报将会大大低于以美元计价的回报。如果考虑到发行10年期特别国债的资金成本大约为5%，只要人民币年升值超过3%，就有可能使以人民币计价的回报为负。 ??? 中国国家投资公司的目标是商业化运作，提高外汇资产的收益。这样的目标有可能是指：（1）以高于美国国债收益率为目标（目前大约是5%）；或（2）与一般投资公司一样，以盈利为目标（以美元计价的回报应在10%以上）。相比之下，在人民币币值接近于稳定之前，要实现第二个目标将面临严峻的挑战。■ http://www.caijing.com.cn/newcn/home/column/smg/2007-07-11/24405.shtml

Global booming means global inflation -bubble, watch ahead

--The last global boom was in the 1970s while the world grew at 5.4% average annual rate from 1970 to 1973 vs. a projected 4.9% from 2003 to 2007. --Now GDP is around$36 trillion vs $13 trillion at that time --The last global good time in the 1970s ended in a nasty bout of double-digit inflation, spawning hte worst stock market crash since the Great depreciation. --Skittness over the battered BSC hedge funds and tighenting stds that could clog the PE deal pipeline. --truth is every boom leads to financial execesses that spark its undoing. --the necessary condition for a bubble is a.fundamental economic conditions must look at least excellent - and near perfect is better... yes for Asia and Euro... b.liquidity must be generous in quantity and price: easy to leverage.... yes in U.S thoughts: --rise in global interest rate is another sign of a gloom inflaton. global bubble is building readily. --key question is when will the bubble burst and what will trigger this. I forecast sometime next year at the end of next year when Asia and Euro continue the momentum and U.S recovers its economy to grow at a normal GDP 4% YoY. The trigger is from Asia.

China buy MBS from Ginni Mae?

--U.S. Department of Housing and Urban Development Secretary is in China to persudate central bank to buy MBS --The nation held $107.5 billion in U.S. mortgage-backed ecurities as of June 2006, up from $3 billion three years earlier, according to HUD's Web site.

GE Mortgage loss in Q2 2007

GE confirmed that it is seeking a buyer for its WMC Mortgage unit, which has racked up big losses on subprime loans. GE recorded a $182 million expense for WMC's losses in its second quarter, on top of a $500 million loss in the first quarter. Despite the losses at WMC, GE's consumer-finance unit recorded an 8% increase in operating profit, to $952 million. Operating profit increased 26% in Europe, and 29% at its credit-card and finance division in the Americas. Division 2Q '07 2Q '06 Change Infrastructure 2,589 2,107 23% Industrial 482 478 0.8% Commercial Finance 1,250 1,057 18% GE Money 952 880 8.2% Health Care 731 795 -8.1% NBC/Universal 904 882 2.5% GE Money - formerly consumer finance GE Money (13.3%, 13.1% and 11.7% of consolidated revenues in 2006, 2005 and 2004, respectively), formerly Consumer Finance, is a leading provider of financial services to consumers and retailers in over 50 countries around the world. We offer a full range of innovative financial products to suit customers’ needs. These products include private-label credit cards; personal loans; bank cards; auto loans and leases; mortgages; corporate travel and purchasing cards; debt consolidation; home equity loans; deposit and other savings products, and credit insurance on a global basis. Commercial Finance Commercial Finance (14.6 %, 14.0% and 14.5% of consolidated revenues in 2006, 2005 and 2004, respectively) offers a broad range of financial services worldwide. We have particular mid-market expertise and offer loans, leases and other financial services to customers, including manufacturers, distributors and end-users for a variety of equipment and major capital assets. These assets include industrial-related facilities and equipment; commercial and residential real estate; vehicles; corporate aircraft; and equipment used in many industries, including the construction, manufacturing, telecommunications and healthcare industries.

Rating agencies are under fire

--Ohio attorney generarl is building a base against rating agencies based on their conficts of interest --Moodys claimed that ratings are just their opinions --Structured Products are complex and ratings are key drivers --Agencies are plicing themselves. Moodys downgraded 19% of the issues they've rated and put 30% on a watch list

June retail sales commne - by W. Cunningham

Retail Sales Show Adjustment To Lower Spending Going Forward - June retail sales below expectations at -.9% total and -.4%ex-autos MOM versus expected -.1% total and +.2% ex-autos, withmoderate upward revisions in May slightly mitigating weakness; - Strong May sales due to large ticket items funded by strong$12.9 bil. consumer credit growth was mostly reversed in Juneexcept for Hlthcare, Internet, Food, Sport Goods, and Restrnts; - Furniture, autos, building materials were weak MOM and YOY; - Consumers cutting back on large items and housing spending, but steady jobs keeps confidence to spend on smaller luxuries; - Fed on hold, jobs slow with profits, but gradually, allowingequities to focus on global growth and rally somewhat further,but spreads move sideways near-term on supply, LBO fears.

Retail sales in June

--retail sales in U.S. fell by the most in two years --raised concern near-record gasoline prices and falling home values are taking a bigger toll on consumers than economist forecast. --consumer spending accoutns for 2/3 economy and retail sales account for half of all consumer spending. So retail sales is contributing 1/3 of GDP

Health of the job market

--The quality of new jobs shapes the perceptions about the health of the U.S. job market. --Notwithstanding assertions by some WS analysts that new jobs are mostly low quality and low paying - and that globalization is "gutting" the middle class - the facts indicate otherwise. According to the Bureau of Labor Statistics, most new jobs were in cateogries that tend to pay above the median wage. At the same time, job losses have been centered disproptionately in factory jobs that pay below the median wages.

Capital One June Credit Card Trust Data

--showed improved in delinquency and loss performance, dropping 8 bps to 3.48% --sign: subprime issue has not ripple through credit cards portorfolio trusts

Subsidys cut may flop SLM deal

--House approved $19 billion in subsidy cuts to student lenders over five years --Buyers can withdraw the offer --SLM's statement underscores the growing hostility in Washington toward the student-loan industry amid allegations of corruption and conflict of interest. It also reflects the growing skittishness of private-equity investors --House voted to used money to increase grants to low-income students --Student loan industry has been under fire following a string of revelations about payments --Unless buyers can show "material adverse effect", they will have to pay $900 million to walk away. --Offer has 50% premium --Buyer's cold feet may be a ploy to negotiate a lower pride of Sallie Mae

June Same Store Sales

--Retailers rang up modest sales gains for June, confirming that shoppers are hunting for bargains amid a weak housing market that is expected to persist in the coming months. --WM beat estimate, but price discounts help --Mall based specialty chains take steep markdowns --Demand for home related goods is languishing --Middle market, such as JC Penny and Kohn, posted a loss

CDOs are hit

Turmoil in the subprime-mortgage market fanned out yesterday, hitting a group of investments exposed to the struggling class of home loans. --Moodys might slash rating of 91 CDO about $5 bil worth of securities, signalling subprime fallout is rippling through financial markets to an important class of investments. --Fitch release reports cautioning against commercial real-estate market --S&P just threated to downgrade subprime-mortgage backe securities held by CDOs --CDOs typically hold hundreds of bonds or loans, much in the way a mutual fund holds stocks. Many mortgage-backed securities tied to subprime home loans reside in these CDO investment pools. Unlike those of mutual funds, CDO managers, which include the big Wall Street investment banks and smaller boutique investment managers, dice and slice their holdings so investors can choose the amount of risk they take on with their CDO holdings. --The riskier slices of some CDOs are now coming under assault. Deutsche Bank data show that investors were demanding 7.75 percentage points above a popular interest rate benchmark in mid-June to hold triple-B-rated CDOs, up from about 3.70 percentage points at the beginning of 2007, evidence they want more return for their risk. --Credit Suisse estimated that potential losses to CDOs heavily steeped in the subprime market could range from $26 billion to $52 billion.

Spectrum Sale may open telecom market

--A coming government auction is estimated to bring $15 billion to the Treasury --The auction will hande Google and other tech companies a victory in battle to loosen the grip held by telecom operators on the wireless and broadbank markets --Telecom operators are accused to stifle innovations by controlling mobile devices, software, and servcies

Fear of Taxation by Association

http://online.wsj.com/article/SB118411051694462654.html?mod=home_whats_news_us After getting caught flat-footed on Capitol Hill, private-equity and hedge-fund firms are going on the offensive to lobby against steep new taxes. But their nascent campaign to enlist other industries to join them is off to a bumpy start, as some players worry about being associated with such high-profile targets. --A proposed House bill would deem the profits, received by PE and hedge funds, as ordinary income, and tax them at rates as high as 35% --The proposed bill explicitly hits managers in PE, hedge funds, VC and real estate parternship, but steers clear of oil and gas ventures. --Not everyone who might be affected wants to pool their efforts. VC work independently. Public-employee pension funds are also steering clear of the fight, a big blow to the lobby effort. Mututal funds, investment firms, large banks,...are remaining on the sidelines. --Even a prominent target of the proposed bill hasn't been able to muster a united front.

Another day, another development on the subprime front

--SP downgraded 612 bonds backed by subprime mortgages, with a value of $12 billion --Moodys' downgraded 399 MBS and review an additional 32 for downgrade, affecting $5.2 billion. It has slashed ratings on 131 --Moody's latest downgrades affected around 1.2% of the dollar value of subprime bonds it rated in 2006 alone, most of them investment grade. The downgrade of investment grades bonds is a sign of the depth of the fallout. --Both are accused for being too slow to cut ratings --Subprime loans have played an increasingly important role in the mortgage market, accounting for 20% of all mortgages originated in 2006, according to Inside Mortgage Finance. In all, $2.3 trillion of subprime loans were taken out by borrowers between 2002 and 2006, according to Inside Mortgage Finance. --Home Depot and D.R Horton lowered their earning estimates --investors are flying to safety, pushing up Treasuries prices --Investors balked at leverage bond offerings --That triggered a plunge in the ABX(BBB-), touching 50

S&P may cut the credit ratings on subprime mortagage abcked bonds

--S&P may cut the credit ratings on $12 bil of bonds backed by residential subprime mortgage --ratisn of 612 pieces of residential mortgage-backed securities were place on CreditWatch with negative implications, potentially driving down prices of $800 billion in subprime mortgages and $1 trillion of CDO. --Investors in CDOs alone stand to lose as much as $250 billion, according to Institutional Risk Analytics

Junkyard dogs investors in some funds

--Investors have already stasrted voting with their feet, pulling out more than $1.6 billion from high-yield funds and exchange-traded funds in thefour weeks through July 3, according to AMG Data Service. --high-yield funds and ETFs tracked by AMG currently hold about $133 billion in assets, up from $120 billion at the end of 2005

CBOT sharesholders agree to be acquired by CME

CME merge with CBOT -economies of scale, sharing platforms -complementary nature of product offerings, futures -common clearing link -massive back-office sharing

Credit market dilemma

The June swoon in junk bonds market poses a dilemma for many investors: Is it time to move in and buy at lower prices, or should they wait to see how the scenario unfolds? In recent years, whenever junk suffered a setback, those who rushed back quickly were well-rewarded. But the current situation could be different, some fear. One worry is the massive new-issuance calendar... Concerns have been exacerbated by problems at BSC hedge funds. Meanwhile, pressure on mutual funds to invest has been reduced by withdrawals of investor moeny. HY funds have lost $1.6 bil during hte past four weeks, according to AMG Data Services.

KKR managers vs public company managers

Managers at public companies can muddle along, even prosper, simply by not rocking the boat. That does not work at KKR companies. "You do not have the luxury of managing issues at margin," says Chu, a founder of xxxx. "If the market changes, you change the strategy. If the CEO does not work out a year into the deal, you never shy away from the tough questions. You change the CEO. ...Even so, when KKR pulls the levers, someone ususally gets ground up in the gears (meaning lay off)

Finance employees with tech expertise will be popular in the coming years

Demographic crunch The Millennials' (born in 1980s) arrival in the workforce heralds a demographic crunch. The baby boomers' child-bearing years peaked in 1990. Those born that year are the cohort graduating from high school in 2008. The birthrate fell 9% in the following nin years, according to the National Center for Health Statistics. Fighting for employees with tech background The securities industry earned 19.5% of ites net revenue from computerized trading in 2006, up from 12.6 percent in 2005, a Sifma report says. Meanwhile, the number of U.S students choosing computer science as a major plummeted 39% in the five academic yers ended in 2006, according to the Washinton-based Computing Research Association. Probably due to the dot.com meltdown.

亚洲经济会与中国脱钩吗? (From Cai Jin)

亚洲对中国的贸易顺差在下降，这意味着他们从中国增长的直接获益已经减小，同时中国作为大国崛起的国际压力也会日益增强 　　中国对美国和欧洲的贸易顺差已经成为当今世界经济的一个主要问题之一。但事实上，它们所反映的仅仅是中国贸易的一个方面。在过去五年间中国对亚洲其他经济的贸易一直存在逆差。 　　但是这一现象在最近已经开始发生变化。中国的贸易顺差总额保持了高速增长的势头，在2006年上升73%，今年头五个月再增加了84%。但是中国对东盟国家、韩国、台湾和日本的贸易逆差却开始停滞不前甚至下降（见下图）。韩国对中国的顺差在2005年下半年时达到最高峰，台湾对大陆的贸易顺差也在最近几个月出现回落。 　　东盟国家的变化出现得更早一些。在中国加入WTO的头几年，东盟对中国的贸易顺差由2001年的50亿美元上升到2004年的200亿美元。但自那以后，月均顺差一直在15亿美元左右徘徊。日本的情形也基本类似。 图一、亚洲各经济对中国的双边贸易顺差，2001年1月至2007年5月（10亿美元，6月移动平均） http://www.caijing.com.cn/newcn/home/column/jrgc/2007-07-04/23857.shtml 资料来源：CEIC数据公司和花旗集团。 　　按年度计算，对中国的净出口占各个经济体的GDP的比例在菲律宾、马来西亚、印度和新加坡都出现了下降，只有三个经济体是例外：韩国、台湾和印尼。净出口占GDP的比例下降意味着这些经济从中国快速增长中得到的直接好处开始减弱。 　　这就引出了一个亚洲经济会否与中国脱钩的重要问题。在中国加入WTO的时候，在东亚存在一种普遍的担忧，即中国可能将抢走所有人的饭碗，东亚经济将出现严重的空洞化。在东亚向中国出口增长的情况下，这样的担忧很快就被更为乐观的看法替代了——也许中国的崛起将有益于所有的经济。不过按照现在的发展看，担忧也许会再次出现。 　　亚洲经济对中国净出口的上升和回落可能反映了制造业产业链向中国迁移并扩张的过程。当中国刚刚加入WTO的时候，很多投资者开始转向中国，但绝大部分都是劳动密集型的包装、组合等工序，中国仍然需要大量从其他亚洲经济进口半成名。在中国最终完成的产品随后被出口到美国和欧洲。这就是为何中国对欧美的贸易顺差和对亚洲的贸易逆差同时高速增长。 　　但渐渐地，为了节省生产和运输成本，半成品制造商也开始迁移到中国，中国国内的生产厂商也随着经济发展和资本积累而开始提升产品质量和档次。因此中国对进口半成品的依存度开始下降。 　　产业供应链扩张在机械和电子行业表现得最为明显。该部门在2004年以前一直存在贸易逆差，但随后发生了惊人的变化，过去几年的月均顺差一直保持在100亿美元以上。事实上在最近几个月，机械和电子行业的贸易顺差已经开始超过纺织服装行业的顺差。 　　纺织服装和机械电子行业同时出现巨大贸易顺差，表明中国也许可以在国际市场上形成多层次的竞争力，这一点是以前相对小规模的东亚经济所无法比拟的。中国庞大的人口和辽阔的国土意味着经济结构多样化的可能性，比如在相对比较发达的上海、广东等地区具有竞争力的高新技术产业正在逐步成型，而其他地区在劳动密集型产业上仍然拥有很强的竞争力。 　　面对中国经济巨大的成本优势，其他亚洲生产厂商在短期内将很难与中国展开白热化的竞争。对他们来说，一条有效的出路也许是尽量与中国经济形成互补关系。这可能是为什么目前只有韩国、台湾和印尼仍然能保持对中国的净出口的稳步增长，相对于中国而言，前两者依然占据一定的技术优势，而后者则出口大量中国短缺的原材料。 　　但对大部分亚洲经济体来说，要继续保持2001-2004年间对中国净出口的快速增长已经不再可能。这将明显限制这些经济从中国经济高速增长所获得的直接好处。 　　当然，笔者并不认为从此亚洲将于中国经济脱钩。亚洲区域内经济融合已经达到了相当高的程度，即使亚洲对中国的净出口不再增长，他们对中国的总出口占各自GDP的比例已经达到平均10%左右，因此中国经济的波动仍然会影响到这些经济的国内消费和投资。更重要的是，在过去几年内亚洲经济整合已经延伸到资本和政策等领域，相互之间的依存度已经不再仅仅用贸易可以概括。 　　笔者曾经用牛津宏观经济预测模型做过一个分析，结果表明：如果中国经济增长速度放慢一个百分点，亚洲经济增长将平均降低半个百分点，受影响最大的是香港（1.3个百分点），最小的是印度（0.1个百分点）。 　　但是不容否认，亚洲区内贸易关系的变化将对中国的国际经济关系带来重大影响。过去几年，亚洲的支持在一定程度上平衡了美国和欧洲对中国贸易政策尤其是汇率政策的压力，因为中国其实是发挥了一定的中间商的功能。但随着中间商功能的减弱，也许亚洲的制衡作用也会逐步弱化。这是中国作为大国崛起的过程中必须面对的一个客观现实。■ 作者为花旗集团亚太区首席经济学家。本文观点不代表作者所在单位的意见

货币度量没有问题

官方统计的M2增速的放缓，主要反映的是货币需求的放缓，而与不是货币度量上出了问题。原因在于，2006年以来，迅速繁荣的股市使得中国的货币需求函数发生了深刻变化，人们提取银行存款投资于股市，因而降低了货币需求，从而引起经济整体货币需求的增长放缓 　　在《财经》杂志2007年第13期（6月25日出版）刊登的题为“货币度量有问题”文章中，宋国青教授指出一个很重要的现象：2006年下半年以来，M2（广义货币）的增长率显著低于银行外汇占款与贷款之和的增长率。由此，宋教授得出的判断是，货币的真实增长速度，要比中国人民银行公布的M2的数据显示的高很多。 　　笔者也注意到了这一货币量统计数据上的变化，但笔者对其的解读结果与宋教授有很大的不同。 　　笔者认为, 货币度量没有问题,“问题”出在了货币需求函数的变化上。需要讨论的是：M2的增速放缓到底是什么原因？宋教授文中判断是，货币度量出了有问题。如果能准确度量的话，广义货币的增长速度实际上比较高；在其它条件（包括货币需求）保持不变的情况下，较高的货币增速，会在未来产生较大的通货膨胀压力。换句话说，货币供应量的增速被官方的M2数据低估了，未来的通涨压力要比官方的M2数据所反映的大。 　　笔者认为，官方的M2增速的放缓反映的是货币需求的放缓，和货币度量没有太大关系。首先，有必要在概念上澄清一点，我们所观察到的M2的统计数据，既不是货币供给也不是货币需求，而是二者相互作用的事后结果。一般来说，货币需求涵数在短期内是比较稳定的，所以观察货币政策及其影响时，人们往往把M2的变化看成货币供给变化的反映。这也就是为什么当M2增速较快时人们担心这可能意味着货币供给会快于货币需求，从而可能产生通涨压力。 　　但中国货币需求近来却的确发生重大变化。长期以来，中国货币需求的变化，除了反映一般意义上的货币需求以外，还反映了中国居民对金融资产的需求。由于资本市场（如股票及债券）的不发达甚至缺位，中国居民只好通过增加银行存款的方式来达到持有金融资产的目的。长期以来，中国的M2增长速度明显超过名义GDP的增速，中国的M2占GDP的比例高达160%，是世界上最高的国家之一。这正是因为M2中的相当一部分反映的是超出一般货币需求以外的对金融资产的需求。 　　中国的货币需求函数所发生的深刻变化始于2006年。迅速繁荣的股市为中国居民提供了一个重要的金融投资渠道，在现实中，就表现为人们提取银行存款投资于股市。这样一来，人们为了持有金融资产而产生的货币需求就会降低， 从而引起经济整体货币需求的增长放缓。笔者认为，官方统计的M2增速的放缓，主要反映的是货币需求的放缓，而与不是货币度量上出了问题。 　　在这一问题上，台湾的经验很有借鉴意义。在1987-1990的四年间，台湾的股指飙升了九倍， 同时台湾的M2的增速也从1987年的23% 大幅下降到1990年的11%！而且，M2的增速在如此短的时间内下降如此之快，却并未造成通货紧缩效应，相反，台湾的CPI从1987年0.5% 左右跳升到1990的4%。一个重要原因是, 股市泡沫引致货币需求下降。换句话说，尽管货币供给增速下降，货币需求的增速下降的更快，结果的货币条件不适收缩了而是变得更宽松了。 　　由于没有足够详实的统计资料，笔者这里只能做一个猜测：宋教授文中所提及的，商业银行对其它金融性公司的负债中未记入M2部分的大幅度变化，也许正是货币需求变化的具体体现。 　　对未来货币政策的走向的判断，笔者的观点与宋教授大体一致， 即货币政策应进一步收紧，但这一判断的出发点是不同的。笔者的观点是，由于居民重新分布其金融资产的构成（即从银行存款到持有股票）, 货币需求增长会相对放缓。倘若货币政策制定者惯性地沿用过去的M2增长目标，有可能导致偏松的货币政策倾向。鉴于此，即使当前官方的M2增速放缓，由于货币需求增长的放缓，货币供给的扩张速度仍有可能高于货币需求的扩张速度，从而导致较宽松的货币政策环境。所以，继续保持偏紧的货币政策很有必要。 　　今年以来，鉴于股市的快速发展出乎大多数人的预料，货币需求增长放缓的程度也可能出乎各方（包括货 币政策制定者）的预期。所以，即使央行最终实现年初制定的M2增长16%的目标，货币政策仍然可能是偏宽松的。 　　这里涉及到一个更一般的问题。当前的中国经济中，资本市场的快速发展，金融创新的层出不穷，这给制定货币政策和判断其适宜性带来了前所未有的挑战。在这种情况下，通过关注货币数量变量（如M2）来调控货币政策，将会越发变得不可靠。现在，也许正是该考虑使用价格变量（如利率或通货膨胀）作为货币政策目标的时候了。如果仍然需要参考货币数量变量，也许应该使用比M2更宽泛的货币数量定义（如M3），以期寻求一个与实体经济更稳定的函数关系。■ 作者为摩根士丹利大中华区首席经济学家。本文观点不代表所供职机构的意见 小资料： 我国现行货币统计制度将货币供应量划分为三个层次： M0 －－流通中的现金 M1 －－ M0 ＋企业单位活期存款＋机关团体部队存款＋农村存款 ; M2 －－ M1 ＋企业单位定期存款＋自筹基本建设存款＋个人储蓄存款＋其他存款。 M1 是狭义货币供应量， M2 是广义货币供应量； M1 与 M2 之差是准货币。 http://www.caijing.com.cn/newcn/home/column/scsp/2007-07-05/23956.shtml

Introduction to Value-at-Risk (VaR)

Define VAR for me VAR summarizes the predicted maximum loss (or worst loss) over a target horizon within a given confidence interval. How can I compute VAR? Assume you hold $100 million in medium-term notes. How much could you lose in a month? As much as $100,000? Or $1 million? Or $10 million? Without an answer to this question, investors have no way to decide whether the returns they receive is appropriate compensation for risk. To answer this question, we first have to analyze the characteristics of medium-term notes. We obtain monthly returns on medium-term bonds from 1953 to 1995. Plot History of Returns Returns ranged from a low of -6.5% to a high of +12.0%. Now construct regularly spaced ``buckets'' going from the lowest to the highest number and count how many observations fall into each bucket. For instance, there is one observation below -5%. There is another observation between -5% and -4.5%. And so on. By so doing, you will construct a ``probability distribution'' for the monthly returns, which counts how many occurrences have been observed in the past for a particular range. Plot Distribution For each return, you can then compute a probability of observing a lower return. Pick a confidence level, say 95%. For this confidence level, you can find on the graph a point that is such that there is a 5% probability of finding a lower return. This number is -1.7%, as all occurrences of returns less than -1.7% add up to 5% of the total number of months, or 26 out of 516 months. Note that this could also be obtained from the sample standard deviation, assuming the returns are close to normally distributed. Therefore, you are now ready to compute the VAR of a $100 million portfolio. There is only a 5% chance that the portfolio will fall by more than $100 million times -1.7%, or $1.7 million. The value at risk is $1.7 million. In other words, the market risk of this portfolio can be communicated effectively to a non-technical audience with a statement such as: Under normal market conditions, the most the portfolio can lose over a month is $1.7 million. What is the effect of VAR parameters? In the previous example, VAR was reported at the 95% level over a one-month horizon. The choice of these two quantitative parameters is subjective. (1) Horizon For a bank trading portfolio invested in highly liquid currencies, a one-day horizon may be acceptable. For an investment manager with a monthly rebalancing and reporting focus, a 30-day period may be more appropriate. Ideally, the holding period should correspond to the longest period needed for an orderly portfolio liquidation. (2) Confidence Level The choice of the confidence level also depends on its use. If the resulting VARs are directly used for the choice of a capital cushion, then the choice of the confidence level is crucial, as it should reflect the degree of risk aversion of the company and the cost of a loss of exceeding VAR. Higher risk aversion, or greater costs, implies that a greater amount of capital should cover possible losses, thus leading to a higher confidence level. In contrast, if VAR numbers are just used to provide a company-wide yardstick to compare risks across different markets, then the choice of the confidence level is not too important. How can we convert VAR parameters? If we are willing to assume a normal distribution for the portfolio returns, then it is easy to convert one horizon or confidence level to another. As returns across different periods are close to uncorrelated, the variance of a T-day return should be T times the variance of a 1-day return. Hence, in terms of volatility (or standard deviation), Value-at-Risk can be adjusted as: VAR(T days) = VAR(1 day) x SQRT(T) Conversion across confidence levels is straightforward if one assumes a normal distribution. From standard normal tables, we know that the 95% one-tailed VAR corresponds to 1.645 times the standard deviation; the 99% VAR corresponds to 2.326 times sigma; and so on. Therefore, to convert from 99% VAR (used for instance by Bankers Trust) to 95% VAR (used for instance by JP Morgan), VAR(95%) = VAR(99%) x 1.645 / 2.326.

GS 1Q mortgage exposure

-Warehouse finance shows the GS's exposure to structured credit business has reduced

-The company also reduced securization of these residual mortgage securities, but still keep up securization of CDO and CLO.

-Retained interest for CDO/CLO is consistent. But the company tends to hold a reltive higher portion of MBS, possible due to illiquidity of these risky assets.

June Employment Report Commen from our stategist

Employment data shows the economy is still robust, although it repeats the story of job growth in the service industry -- U.S. added 132K jobs to nonfarm payrolls in June, higher than the market expectation 125K; -- The previous nonfarm payroll number in May was revised upward from 157K to 190K; -- Most of the job increases were in state and local governments (41K, mostly in public education), leisure (39K), health (42K), and private education (17K); -- Manufacturing continued to lose another 18K jobs; -- Finance added only 1K jobs, due to job cuts in commercial banks in the downturn of the real estate market; -- It seems the current job growth is still supported by government tax receipts and earned income spent on leisure activities; -- This indication of a robust economy will possibly abate the current risk aversion due to the subprime debacle; -- Expect Stocks rally, Treasuries decline, and LBOs continue for a while.

June employment number... strong

-June has seen another 132k workers added into the job market, higher than expected 125k -May employment number is revised up with another 75k jobs. -Jobless rates held at 4.5% for a 3rd month -still strong job growth is holding up consumer power, offseting the weakness in decline home values and risign gasoline prices. -concerns about higher inflation and fund rate hike increases -10y Treasury yield increased another 6 bps to 5.19%

Demand for insurance-linked securities is still high

July 6 2007, Axa SA, Europe's second-largest insurer, sold 450 million euros ($611 million) of securities backed by European car-insurance policies to transfer risk to investors and free up capital. The company bundled together 6 million individual insurance contracts representing 2.6 billion euros of premiums, the Paris-based insurer said today in an e-mailed statement. The notes were``close to'' being three times oversubscribed, Axa said.

Globalizaton drives finance market

Due to globalization, more companies need currency exchange and forwards. Some companies can borrow money at their local nations cheaply but they need money denominated in a foreign currency, so they can swap currencies.

Bond secondary market

Some are traded on exchange, NYSE. Majority trading occur in the OTC market. Stocks, NYSE and OTC (Nasdaq)

WS redues warelhouse credit lines in the wake of subprime fallout

WS bnks provide warehouse credit lines to mortgage lenders so they can make loans to homeowners. The warehouse provider typically buys most of those loand from the mortgage lenders, holding or "warehousing" them until there are enough to parckage into securities that can be sold to invvestors. Facing the high deliquency rates in subprime mortgage market, WS banks reduce their warehouse credit lines to mortage lenders, especially subprime mortgage lenders. For instance, BoA halved its warehouse line in May. H&R Block Inc.'s mortgage unit lose $1.5 billion credit line.

Pushbacks from LBO bonds investors

TIAA-CREF, which oversees $414 billion in retirement funds for teachers and college professors, is boycotting some debt offerings used to finance LBOs. Fidelity International, a unit of the world's largest mutual fund company, and Lehman Brothers Asset Management LLC, the money-management arm of the third-biggest bond underwriter, say they're avoiding debt from buyouts. Investors are getting skittish just as private-equity firms led by Kohlberg Kravis Roberts & Co. and Blackstone Group Inc. prepare to sell $300 billion of bonds and loans to finance LBOs, according to Bear Stearns Cos. In the past two weeks alone, more than a dozen companies were forced to postpone or restructure debt sales. Last week, WS bond underwriters postponed the sales of U.S Foodservice Yesterday, WS bond underwriters called off a deal of $1.5 bil sale of junk bonds for the leverage buyout of ServiceMaster Co. Bond investors in the case of ServiceMaster Co balked at provisions in the ServiceMaster bonds, known as PIK toggle. http://online.wsj.com/article/SB118359370108357607-search.html?KEYWORDS=servicemaster&COLLECTION=wsjie/6month In the case of U.S Foodserivce - equtiy bridge loans

How much mortgages will reset this year?

Homeowners with about $515 billion of adjustable-rate homeloans will pay more this year, and another $680 billion worth of mortgages will reset next year, Bank of America analysts saidlast month. More than 70 percent of the total was granted tosubprime borrowers, they said.... So it is about 1.2 tril mortgage will reset, 800 billion subprime mortgages.

Key trends and drivers in European Leverage Acquisitions

Richard Sharples of Clifford Chance discusses recent developments in terms and structures for European leverage acquisition financing This is an exciting time to be a leverage acquisition finance lawyer in the European market. The market has grown in recent years and continues to do so, with strong structural factors driving change and resulting in rapid development of new products and new combinations of those products. This article will look at these changes and key drivers and at the resulting products, combinations and structures which have been seen recently, together with some of the linked changes in common financing terms and conditions. The growth in the market has been mainly driven by two factors: (i) The large funds now raised by private equity sponsors ($300 billion was raised globally in 2006 giving $1 trillion of funds for acquisitions when leveraged – of these amounts $100 billion ($350 billion) was raised for European funds), and (ii) Perhaps even more significantly, the size of the subordinated debt market has grown with CLOs, CDOs, hedge funds and other investors such as insurance companies and pension funds scrambling over each other to invest in certain of the higher yielding financing products (for example, active CLO managers in Europe doubled from 22 in 2005 to 52 in 2006 (Standard & Poor's)). The results of these drivers include the following: Private equity sponsors are under pressure to invest the much larger funds within the usual time frames. This has led to competition in auctions resulting in high purchase prices and target size increasing dramatically (TDC (€15 billion), BAA (£15 billion)). Increasing leverage on financing structures (Pages Jaunes was 9.6 times total debt to Ebitda). Multiple debt layer structures used to maximize the potential investor base. Margins falling and reverse flex common. Covenants terms weakening – so-called covenant lite products being introduced. Zero amortization products dominating. Thinly spread syndications with low allocations – some investors are now using the loan credit default swap market to achieve additional exposure. One of the key structural developments has been that, whilst European high yield issuances been strong (2006 being a record year with over €42 billion issued), leverage loans have seen much more significant growth (rising from €75 billion in 2002 to €200 billion in 2006) this has been driven partly by the benefits of leverage loans for private equity sponsor borrowers in contrast to high yield bonds, some of which we will look at below, and partly by the preference of new investors in the market, such as CLO funds, for loan products. Why have leveraged loans grown faster than high yield? The key reasons for this are as follows: Inflexible call protection of high yield (five year non-call). Length of high yield implementation process. Ongoing high yield disclosure obligations. Easier amendment flexibility with loans. Significant increase in investor liquidity for BCD and mezzanine loans. Funds raised in the last year or so for investing in leveraged transactions have often had their investment parameters widened so as to allow investments across a number of different leveraged instruments including B and C loans, second lien loans, mezzanine loans and PIK loans. Transactions have even been seen where funds have taken portions of A loans and revolving working capital facilities. It is expected that this trend for institutional lending dominating structures will continue. For instance, institutional lending in European LBOs is not yet anywhere near the current US levels where B loans count on average for over 60% of structures (as opposed to just over 20% in Europe). In parallel, second lien loan volumes have also increased and become commonplace with second lien pieces developing from stretched senior seen in some recapitalizations to be standard tranches in most primary LBOs and almost all recaps. Until recently, it has been accepted that, in order to successfully syndicate a second lien piece, a subordinated instrument ranking behind the second lien would be required (mezzanine or high yield). However, very recent deals have the subordinated piece missed out or replaced with PIK/Holdco notes. These PIK/Holdco notes have traditionally been used to boost the equity portion of financing structures. But it appears that they now may perform the role of the main subordinated debt instrument behind senior and second lien tranches. Obviously, one of the key attractions of PIK (Payment In Kind) notes is that they are just that. They do not require any cash outflow, as there is no amortization and interest is rolled up into additional principal. Additionally, these notes do not benefit from any upstream guarantees or security but simply a share pledge over their issuer and security over the loan by which the PIK note proceeds are lent into the group structure below the issuer. As the sponsors increasingly grasp opportunities to refinance debt structures very soon after acquisition, by taking advantage of the current UK market liquidities, the attractions of instruments which minimize cash outflow receive considerable focus. One result of this has been the introduction of so-called toggle notes into the market. These notes allow the issuer, for a period of time, to toggle back and forth between cash and PIK interest. As an example, for the first five years of a 10-year bond or loan, an issuer/borrower will be able to pay interest: all cash; all PIK (by issuing new toggle notes); or say 50% cash and 50% PIK. Another recent development has seen the call protection inflexibility in fixed rate high yield bonds drive an increase in floating rate high yield bond issues. Many of the investors in these instruments are the same investors that have driven the increasing B (and to a lesser extent C) tranche domination of recent structures and recapitalizations. In 2006, almost 50% of European high yield bond issues were floating rate (less than 10% in 2004). These FRN structures have usually been accompanied only by a revolving credit working capital facility. Another attraction of the FRN option has been the avoidance of loan style maintenance covenants in preference for bond style incurrence covenants. Revolving credit facilities included in these packages have adopted the incurrence covenants from the related FRN issues. It seems that it will only be a matter of time before the factors which have recently influenced sponsor preference for loan structures as opposed to bond structures (see above) will be put together with recent sponsor successes in achieving finance packages based solely on incurrence covenant provisions, to result in incurrence-based loan facilities. Recent FRN/RCF financings have included Cablecom (€825 million), Tim Hellas (€925 million), Impress (€800 million), NXP (€5 million), Grohe (€800 million), and Lecta (€750 million). Another recent trend has been the drift of infrastructure-style financing packages into acquisitions within the mainstream LBO arena. Infrastructure facilities are structured quite differently from traditional LBO facilities. They are based on cash sweeps rather than amortization, they have lower pricing and allow dividends out where lock-up ratios are satisfied and they include project finance concepts such as maintenance of debt service reserve deposit accounts. Historically, these structures have been used to finance the acquisition of true infrastructure targets (utilities, airports, toll roads, car parks, ports and other long-term concessions and monopolies). On the basis of the certain cash flows of these businesses, leverage for these transactions has been greater than in traditional LBOs; generally over 10 times and sometimes approaching 20 times Ebitda. We have recently seen these structures used in financing packages for targets which are not truly infrastructure, for example for use in short-term concessions such as bus routes. Against the backdrop of the potential move to incurrence-based loan agreements, it is perhaps worth looking briefly at some of the recent changes in terms in traditional maintenance-based leveraged loan agreements which have been achieved by sponsors taking advantage of the current highly liquid investor base. These have included the following: Back loaded amortization schedules. Restrictions on prepayment requirements (for example 18/24 month reinvestment periods with no holding accounts, no cash sweeps, no clean-downs on RCFs). Transferable facilities – non-repayment on change of control (provided sale is to one of an agreed list of purchasers and sometimes if a small change of control fee is paid to the syndicate). Yank the bank clause is now generally set at majority bank level (66%). Material adverse effect definitions now refer to payment obligations only as standard. So-called mulligans recently introduced whereby certain financial ratio breaches only result in an event of default if repeated. Borrower consents required for lender transfers is now common. Guarantor/security coverage now set at 80% (Ebitda/gross assets) as standard. Target guarantees and security generally not required until 90 days after closing. Generally reduced asset security due to high costs of taking and maintaining European asset security packages (legal, notarial and registration costs). Increased flexibility for permitted acquisitions (for example, limited due diligence, ability to increase leverage up to closing leverage, proforma anticipated synergies accepted). Prepayment fees on junior debt restricted – often now 2% (nine months), 1% (18 months), and sometimes just 1% (12 months). Increasing inclusion of QIPO (qualifying initial public offering) provisions whereby many undertakings fall away in the event of a QIPO and/or a commensurate reduction in leverage. Equity cure provisions now commonplace and increasingly flexible. Financial ratio headroom up from 20% to more than 25%. Baskets often larger than seen historically and with up to 100% carry forward and carry back. Facility change permissions now common and extensive (whereby changes to pricing or repayment terms for particular facilities require only majority banks and affected banks consent). Finally, it is also worth noting that many transactions are now done with only a commitment letter, term sheet and interim facility agreement in place. One or two transactions have even funded off the interim facility agreement. This trend is driven by the perceived need for fully documented, certain funds-based financing to be put in place very quickly in order to maximize the attractiveness of auction bids. These short term loan agreements, which were initially only used to enable a bidder to satisfy the certain funds requirements of a public takeover bid or for the benefit of the vendor in a private leveraged acquisition, and are now being used to put certain funds financing in place quickly for the purposes of auction bids which need to be made in time periods which do not allow a complex permanent financing arrangement to be finalized. Maturity for these loans is now stretched to 60-90 days, many typically include working capital and capex facilities alongside the acquisition term with the term loan carrying a blended floating rate which may ratchet up over the short loan period. Security is generally limited to a share pledge over the target and an assignment of SPA rights.

Pay In Kind Toggle Notes

The debt floated in private equity leveraged buyouts is increasingly innovative on a very old theme. How does one make equity look enough like debt for the IRS?? The newest old trick is Pay In Kind Toggle Notes: When cash is short, in essence, the debt may postpone cash interest payments but the interest rate is bumped up. This is very close to preferred stock. I am sure there are numerous lawyer opinion letters on the fact that PIK Toggles are debt for the IRS. I hope the IRS agrees. The legal divide between debt and equity for tax purposes is less and less sustainable and ought to be reconsidered. At minimum we would not have so many lawyers and accountants charging fees for creating instruments that sit on the boundary.

Who print outs Fed Reserve Notes (bills)

In U.S the department of Treasury is in charge of bureau of engraving and printing. The treasuer was originally charged with the receipt and custody of government funds. The treasure reports to the secretary of the Treasury, the head of the Departmetn of Treasury and principal economic advisor to the President.

credit crunch: definition and causes - opposite of credit spree

-credit-worthy borrower cannot obtain credit A credit crunch is generally defined as a decline in the supply of credit because, although banks are less willing to lend, lending rates do not rise. According to Green and Oh (1991), a credit crunch is an inefficient situation in which credit-worthy borrowers cannot obtain credit at all, or cannot get it at reasonable terms, and lenders show excessive caution, which may or may not be traceable to regulatory distortion, leaving would-be borrowers unable to fund their investment projects. -Cause of credit: regulatory pressure and overreaction A credit crunch can have several causes, such as regulatory pressures and over-reaction to deteriorating bank asset values and profitability. If regulatory pressure is the obstacle to credit growth, it should be removed, and credit growth can be restored. But if the crunch is caused by inefficient conservative lending by banks, it is an open question whether easing monetary policy can help. -monetary policy can help relieve credit crunch What can monetary policy do to help during a credit crunch when reduced bank lending leads to a shrinking economy? The question is related to the transmission mechanism of monetary policy. One transmission channel of monetary policy is credit. Expansions and contractions of credit affect both aggregate demand and aggregate supply, thus influencing aggregate activities and prices.

China Speical Govern Bond

http://www.caijing.com.cn/newcn/home/column/gzj/2007-07-02/23717.shtml --如此巨额的资本金，不太可能一次注入。其原因有三： 首先，很难迅速筹集如此大量资金；其次，注入资金必须很快派上用场，这涉及资金的运用效率；第三，从公司设立的角度，按现行《公司法》的要求，股东的首次出资额高于注册资本的20％即可。所以，财政部首次向外汇投资公司注资，超过400亿美元即3100亿元，便可满足要求。 --对于融资方式，当前议论颇多的是直接对央行发行国债，购得外汇储备。但实际上，按照2003年底修正的《中国人民银行法》，中国人民银行不得对政府财政透支，不得直接认购、包销国债和其他政府债券。以此来看，财政部直接向央行发行国债，有法律障碍，并不具可行性。当然，也可通过人大特别豁免来解决这个问题，但这并非常规手段。 --中国社会科学院世界政治经济研究所所长余永定撰文：《综合考虑特别国债对宏观调控的影响》。他指出：“据媒体报道，财政部特别国债的发行对象是公众和金融机构而不是央行，而向“社会”发行特别国债，相比于外汇储备直接划拨，这一措施更加市场化

PE deals make inroads to cable companies

-Global private equity volume for the first half of this year hit a record $630.9 billion, up 37% from a record $459.2 billion during the first half of 2006, according to researcher Dealogic. -Carlyle's bid for British cable company Virgin Media is a sign investment dollars are clamoring to push into global cable market. -Who's likely to be next? Investment bankers say there are several targets attracting attention in the European cable TV market. Malone's Liberty Global (LBTYA) is the largest of the lot, with 13 million video subscribers. -The cable market outside of the U.S. and Europe is in its nascent stages. The greatest opportunity for cable acquisitions in Asia may exist in the highly fragmented Indian market. -There's quite a bit of room for consolidation in the U.S. market as well. Insight Communications, which has 1.4 million subscribers in four Midwestern states, has put itself on the block.

How Citgroup fixed its M&A business

http://www.businessweek.com/bwdaily/dnflash/content/jun2007/db20070630_760955.htm?chan=top+news_top+news+index_businessweek+exclusives -Its M&A business neck to neck with leaders GS and MS, JPM -Its M&A busiuness was crashed in dot.com bust when its former telecom banker and anslyst Jack Grubsman was enmeshed in Worldcom scandal -Trend of PE is larger deals and cross-border -Citi has the scale and scope to make large deals and local expertise to serve cross-border deals -Different from GS, MS, JPM, Citi does not build up its own private equity, hedge funds, and proprietary trading. -Citi worked on 9 out of 10 deals