siv0 Headlines Watch
Here are some links and snippets from recent articles on structural investment vehicles and related:
World must brace itself as the US banking sector 'fesses up' to losses(Telegraph UK)
Liam Halligan
8/23/2008
It's August. Nothing is meant to happen. Global markets are supposed to be asleep. If only that were true. Last week attention focused, or refocused, on the world economy's much weaker growth prospects. The catalyst was alarming new evidence that the credit squeeze, far from abating, is tightening its vice-like grip.
U.S. and Global Economies Slipping in Unison(NY Times)
Peter S. Goodman
August 23, 2008
Economic trouble has spread far beyond the United States to major countries in Europe and Asia, threatening American businesses with the loss of foreign sales and investment that have become increasingly vital to their sustenance.
Only a few months ago, some economists still offered hope that robust expansion could continue in much of the world even as the United States slowed. Foreign investment was expected to keep replenishing American banks still bleeding from their disastrous bets on real estate and to provide money for companies looking to expand. Overseas demand for American goods and services was supposed to continue compensating for waning demand in the States.
Now, high energy prices, financial systems crippled by fear, and the decline of trading partners have combined to choke growth in many major economies.
Crude Oil Trades Near $119 After Supply Gains, Dollar Climbs(Bloomberg)
By Nesa Subrahmaniyan
Aug. 7, 2008
Crude oil futures traded near $119 a barrel in New York after falling yesterday as U.S. supplies unexpectedly gained amid slowing demand, and the dollar climbed, reducing the appeal of commodities as an inflation hedge.
Crude oil supplies rose 1.61 million barrels last week, and fuel consumption was 2.6 percent lower in the four weeks ended Aug. 1 from a year ago, the U.S. Energy Department said yesterday. New York oil futures fell as low as $117.11 a barrel yesterday, 20 percent below the record $147.27 on July 11, a threshold commonly seen as the start of a bear market.
Gold falls for 4th day on oil drop, dollar gain(AP)
STEVENSON JACOBS
August 6, 2008
Gold closed lower for a fourth straight session Wednesday as another drop in crude prices coupled with a stronger dollar diminished the metal's appeal as a safe-haven asset.
Other commodities traded mostly lower, with corn hitting a four-month low and soybeans also falling sharply.
Gold has faced strong downward pressure in recent weeks — dropping 5 percent in the past month — as dwindling demand for energy and a weakening U.S. economy cuts into the price of crude and other commodities.
AIG Falls After Insurer Posts Third Straight Loss on Writedowns(Bloomberg)
Hugh Son
Aug. 7, 2008
American International Group Inc., the world's biggest insurer, fell 7.9 percent in extended trading yesterday after housing-related writedowns wiped out profit for a third straight quarter.
The loss of $5.36 billion, or $2.06 a share, in the second quarter was worse than analysts expected and renewed concern that the New York-based company may need more capital. AIG earned $4.28 billion, or $1.64 a share, a year earlier.
``It was a pretty horrific quarter, just scary,'' said Donn Vickrey, analyst at research firm Gradient Analytics Inc., who has the equivalent of a ``sell'' rating on AIG. ``Operations suffered across the board; I don't think you can rule out another capital raise.''
The results intensify pressure on Chief Executive Officer Robert Willumstad to turn around AIG, which declined 50 percent in New York trading this year before today and posted three quarterly losses totaling more than $18 billion. Willumstad, 62, promised to reveal a plan by late September to fix the company after replacing Martin Sullivan on June 15.
Freddie Mac’s Big Loss Dims Hopes of Turnaround(NY Times)
CHARLES DUHIGG
August 6, 2008
The gloom over the nation’s housing market deepened on Wednesday as Freddie Mac, the big mortgage finance company, reported a gaping quarterly loss and predicted that home prices would fall further than previously projected.
Freddie Mac’s chief executive, Richard Syron, told analysts that home prices had declined faster than anticipated.
The announcement disappointed those hoping that the housing market might be bottoming out and heightened worries that the government could be forced to rescue Freddie Mac and the other mortgage finance giant, Fannie Mae. The news also signaled that mortgage rates were likely to rise.
HK's Bank of East Asia H1 net profit falls 52.4 pct on CDO valuation losses(Trading Markets)
August 05, 2008
Bank of East Asia said its first-half net profit dropped 52.4 pct from a year earlier to 894 mln hkd due to valuation markdowns on its collateralised debt obligations (CDO) holdings.
Gordian Knot says $30 bln Sigma fund solvent(Reuters)
Aug 6, 2008
Sigma Finance, the $30 billion structured investment vehicle managed by Gordian Knot, said the fund is solvent and paying its debts fully and timely.
"Sigma is solvent and both senior debt and capital notes of Sigma continue to be paid in full and on a timely basis," Gordian Knot said on Sigma's Web site.
...Sigma said it has $2.95 billion of medium term notes due by Sep. 30th, substantially less than the $8.3 billion reported by analyst research notes, including Moody's Investors Service.
Sigma creditors name advisors, may form committee(Reuters)
Elena Moya
Aug 5, 2008
Creditors of structured investment vehicle Sigma Finance have appointed advisors and may join forces to discuss the future of the $30 billion fund amidst concerns about Sigma's abilities to pay its debt.
Joint advisers accountancy firm Deloitte [DLTE.UL] and law firm Orrick will lead a conference call on Thursday, said Mark Fennessy, partner at Orrick in London.
"The purpose of the call is to listen to what investors have to say, and if appropriate, to form a creditors' committee," Fennessy told Reuters on Tuesday.
Wall Street Report Tries to Dissect Financial Meltdown(NY Times)
LOUISE STORY
August 6, 2008
A group of Wall Street executives released a report on Wednesday that outlined how the industry failed to foresee the financial meltdown of the last year and what companies can do to improve risk management.
The 172-page report, written by chief risk officers and senior executives at banks like Lehman Brothers, Merrill Lynch and Citigroup, also provides suggestions about technical issues at the same time as it offers a bit of a mea culpa.
“Virtually everybody was frankly slow in recognizing that we were on the cusp of a really draconian crisis,” said E. Gerald Corrigan, a managing director at Goldman Sachs and a chairman of the Counterparty Risk Management Policy Group III , which released the report.
Wall Street failed to anticipate how wide-reaching problems with mortgage bonds would spread into seemingly distant corners of the financial markets, the report said. Awash in easy money, banks doled out credit without sufficiently charging for the risk. Wall Street also created complex structures that masked connections between asset classes as well as compensation incentives that pushed traders to take risky steps for short-term gain. The industry’s failings have now translated into pain for the broader economy, the report said.
Fed banks on ongoing banking emergency Aid extended to international financial system(Financial Post)
Hugh Anderson
August 05, 2008
Stock jockeys rarely have to pay much attention to what's going on in the often murky dealings between the U. S. Federal Reserve and the country's banks and other financial institutions - in reasonably untroubled times, that is.
But these are not untroubled times, of course. Some of us even worry that the financial industry has not been so troubled since 1930. One hopes these worries are overblown, but we won't know until afterward.
Meanwhile, eager buyers of financial stocks especially should note that the Fed does not seem to agree that the worst is over. The evidence? Late last week, it opened the emergency lending tap even wider. It also extended the so-called temporary program until the end of January. The cynical among us might say that everything starts out as emergency action and then becomes standard practice. Remember those "temporary" income taxes to pay for the war. Which war was that again?
The Fed's official reason for these moves was "continued fragile circumstances in financial markets."
So it has extended the precedent-shattering access for investment banks to its primary last-resort lending window, introduced in March as investment bank Bear Stearns foundered. Previously that window was open only to regular banks.
The Fed will also make available 84-day loans for the first time under another emergency loan program introduced earlier as an alternative to the traditional overnight window. Previously only 28-day loans were available.
The Fed is not alone in these changes. Its announcement made clear that this is a joint operation, even including with the online version helpful links to similar announcements by two other central banks.
The European Central Bank will make available 84-day loans at its dollar auctions, as will the Swiss National Bank. The Fed said it will help the European Central Bank pay for this change with a US$5-billion increase to US$55-billion in its swap line of credit with the European bank.
Rhinebridge backers set to recover 55% of investment(Irish Times)
ARTHUR BEESLEY
Thursday, August 7, 2008
THE BACKERS of debt fund Rhinebridge, one of the first Dublin-based casualties of the credit crunch in international markets, are set to recover some 55 per cent of their $1.1 billion (€713.51 million) investment under a distribution and partial redemption finalised yesterday by the receivers of the fund.
Receivers Deloitte & Touche said last night they had concluded the sale of the portfolio of debt securities held by the collapsed fund, which defaulted last year. Senior investors in its commercial paper stand to recover 55 per cent of their money, but junior-ranking creditors will receive nothing.
Central banks fire new round at credit crisis(Reuters)
Jul 30, 2008
Glenn Somerville
The U.S., European, and Swiss central banks on Wednesday extended emergency lending facilities for investment banks and expanded other liquidity programs to ease credit market strains that have weighed on the global economy for nearly a year.
The joint measures helped lift share prices in the United States and Europe, and were a factor in pushing up U.S. bond yields and the U.S. dollar.
The U.S. Federal Reserve said it was prolonging the emergency credit facility for primary dealers to January 30 which had been due to expire in mid-September.
The Fed said it acted "in light of continued fragile circumstances in financial markets," and said it would close down the lending program once it determined credit market conditions were no longer "unusual and exigent."
The Primary Dealer Credit Facility was launched in March after the near bankruptcy of Bear Stearns and it marked the first time since the Great Depression that the Fed had opened its emergency lending to investment banks.
Merrill Lynch 2007 CDOs under water: consultant(Reuters)
Jul 30, 2008
Merrill Lynch & Co Inc repackaged debt deals from 2007 have all performed poorly, which the bank should have predicted based on what was going on in the mortgage market at the time, consultant Janet Tavakoli said on Wednesday.
Tavakoli said in a report to clients that of the 30 collateralized debt obligations (CDOs) Merrill sold in 2007, every one has either had its best-rated portion cut to junk, is in technical default, is being liquidated, or is in danger of being liquidated.
The poor performance suggests that Merrill was underwriting deals it knew or should have known were bad, Tavakoli said. That underwriting, combined with similar moves from other banks -- has shaken investor faith in CDOs, Tavakoli wrote in the report. Her company is Tavakoli Structured Finance Inc.
Merrill Lynch spokesman Mark Herr declined comment.
"Investment banks have a huge credibility problem when trying to explain that they 'didn't know the gun was loaded," Tavakoli wrote.
Additional disclosure of loan data is not enough to jump start the securitization market, Tavakoli said, adding that the risks embedded in these securities were disclosed in the prospectuses.
"It is one thing to have documents that disclose risks ... it is quite another to bring deals to market that you knew or should have known were overrated and deeply troubled the day the deal closed," Tavakoli wrote.
Bank of America, Wells Fargo Say Loan Changes Rising (Update3) (Bloomberg)
July 25 2008
Alison Vekshin
Bank of America Corp. and Wells Fargo & Co., the top mortgage lenders, told Congress they have accelerated the pace of loan modifications to avoid foreclosures amid criticism they are slow to help keep people in their homes.
Both banks added staff and contacted more homeowners to reduce loan rates or to arrange repayment plans to cut monthly payments, executives said today at a House Financial Services Committee hearing in Washington. Bank of America doubled its modifications in the first half of this year from the second half of 2007, and Wells Fargo increased staffing fivefold.
``Bank of America remains committed to helping our customers avoid foreclosure whenever they have a desire to remain in the property and a reasonable source of income,'' said Michael Gross, the Charlotte, North Carolina-based lender's managing director for loss mitigation, mortgage, home-equity and insurance services.
F.D.I.C. Takes Over 2 Banks (NY Times)
July 27, 2008
Federal regulators on Friday closed two banks operating in Arizona, California and Nevada: First National Bank of Nevada and First Heritage Bank, N.A.
The 28 branches of the banks, owned by First National Bank Holding Company, based in Scottsdale, Ariz., are scheduled to reopen on Monday as branches of Mutual of Omaha Bank, the Federal Deposit Insurance Corporation said.
What Hath Merrill Wrought? Tally of Likely Fallout from CDO Writedown Rises (Updated)(Naked Capitalism)
Wednesday, July 30, 2008
Merrill's surprising, mere ten days after its last investor combo writedown/fundraising announcement still has financial analysts toting up the collateral damage. Remarkably, the US stock market staged a peppy rally, clearly choosing to ignore the implications.
The cause for pause was the sale of $30.6 billion in face amount of super senior CDOs at a ostensible price of 22 cents on the dollar. But the sale was 75% financed, non-recourse, and could almost be characterized as a call rather than a sale. Worse, the CDOs were mainly 2005 vintage, and thus should have better quality underlying assets than 2006 and 2007 deals.
Barry Ritholtz argues that the real sales price was 5.47%, the amount paid in cash. That's debatable (you'd need to look at the financing terms and do a bit of math), but the general point is well taken: the real number is lower than 22%. But even that figure has knock-on consequences.
Has Deleveraging Even Begun? (Not For the Fainthearted)(Naked Capitalism)
Monday, July 28, 2008
It no doubt seems absurd to question the idea that deleveraging in underway. We've had three heroic central bank interventions, starting in August 2007, to reverse seize-ups in the money markets. The asset backed commercial paper market has been almost in run-off mode. Leveraged buyout loans have been scarce to non-existent. Banks have cut home equity credit lines and credit card borrowing limits. Commercial and industrial loans have fallen. The private mortgage securitization market is a shadow of its former self.
Yet the macro level data, at least as far as the US is concerned, tells a dramatically different, indeed troubling story...
Cheyne’s fire sale has begun to set a floor for ABS prices(Euro Week)
July 22, 2008
Cheyne’s fire sale has begun to set a floor for ABS prices(Euro Week)
July 22, 2008
Last week Cheyne Finance, the defaulted structured investment vehicle, sold a fifth of its assets in an open auction, partly to set a value for its restructuring. The bids were not high — 44% of par was the most anyone would offer for a slice of the portfolio — but this was a genuine sale which paves the way for other auctions and goes some way to establishing a bottom for ABS values.
This was on the front page of the Los Angeles Times today.
Why the Oil Crunch May Grow Worse(LA Times)
Elizabeth Douglass
July 22, 2008
The fear is that all the easy-to-reach crude has been found. These may be 'the good old days,' one expert says.
With gasoline and oil costing once-unthinkable barrels of cash, the notion that things in our petroleum-addicted world soon will get worse -- maybe much, much worse -- is spreading fast.
...But behind today's oil mania lies a deeper dread: that the world has found all the easy-to-reach oil, and the daily supply of the essential black goo will fall further and further behind escalating global demand.
"As much as you're uncomfortable with today's oil prices, these are going to be the good old days," oil expert Robert L. Hirsch told a recent Santa Barbara gathering of policymakers and environmentalists. "We're talking about pain here that is unimaginable."
This one takes a more optimistic perspective
The Oil Price How Long Can It Go on Rising?(Red Orbit)
Pamela Ann Smith
July 20, 2008
IN AN EXCLUSIVE INTERVIEW WITH THE MIDDLE EAST, ROBERT MABRO, A WORLD-RENOWNED EXPERT ON OIL AND GAS, TALKS TO PAMELA ANN SMITH Robert Mabro is widely regarded as one of the world's foremost experts on oil and gas...
In this wide-ranging interview with The Middle East, Mabro explains why he feels it is the banks and hedge funds, rather than Opec, that are driving the oil price to record highs, and why he believes, sooner or later, it will come down.
This does not portend well for Orange County, California, who hold several hundred billion in SIV investments.
Little comfort in SIV Portfolio asset auction(Financial Times)
Anousha Sakoui
July 17 2008
A benchmark auction of distressed debt assets has given investors a gloomy guide to the prospects of recovering cash from the troubled structured investment vehicles that have been at the heart of the credit crunch.
The assets auctioned from a $7bn (£3.5bn) SIV formerly known as Cheyne Finance this week drew bids that would pay only 44 cents in the dollar if investors opted for a cash exit from the vehicle, it was revealed on Thursday.
Merrill Posts Another Loss;
Write-Downs Keep Coming(WSJ)
SUSANNE CRAIG and RANDALL SMITH
July 18, 2008
...The brokerage firm's second-quarter loss of $4.65 billion, or $4.95 a share, was one of the worst in Merrill's history and more than twice as steep as the loss for which analysts had been bracing. Already clobbered by subprime-related write-downs of more than $30 billion in the previous three quarters ended in March, Merrill took an additional $9.7 billion hit in the second quarter, which caused the bulk of the company's net loss.
The results underscore why Merrill is parting with valuable assets, such as its 20% stake in news and data provider Bloomberg LP, which is being sold back to the news and information provider's parent Bloomberg Inc. for $4.4 billion. Merrill also announced Thursday its plan to sell Financial Data Services Inc., valued at $3.5 billion.
Banks Fight EU Plan for Credit Derivatives Reserves (Update1)(Bloomberg)
John Rega and Neil Unmack
July 17
The financial industry is fighting a European Commission plan to boost capital requirements on credit- default swaps and other instruments used to transfer risk in response to the market turmoil of the last year.
Banking groups object to a draft from the European Union that broadens new capital rules beyond asset-backed securities to cover syndicated corporate debt as well as the $62 trillion market for credit-default swaps. The plan would force banks to maintain a 10 percent stake in any such instruments they sell.
The initiative, which isn't yet a formal proposal, seeks to give banks more incentive to make safe loans. Policy makers argue that standards loosened as banks sold off their loans, leading to U.S. mortgage defaults that touched off a credit crunch and more than $423 billion of losses and writedowns at banks.
Home construction marks slowest pace since 1991(Biz Journal)
July 17, 2008
Construction of single-family homes fell nationwide in June to its slowest pace in 17 years.
The U.S. Commerce Department reported Thursday that construction of single-family homes dropped 5.3 percent from June 2007 to June 2008 to a seasonally adjusted annual rate of 647,000 units, the weakest performance since January 1991.
Construction of multifamily units, however, surged by more than 43 percent in the year-to-year comparison, driven by a change in New York City building codes that spurred a wave of apartment construction. Taken together, single-family and apartment construction rose by 9.1 percent to an annual rate of 1.07 million units.
Banks expected to feel pain until 2010(Financial Times)
James Mackintosh
July 16 2008
Traders are betting that the credit crunch will still be hurting banks at the end of 2010 with financial institutions expected to be scrambling for cash to shore up their end-of-year balance sheets.
A popular so-called butterfly trade in the money markets is showing expectations of three to four times the stress at the end of 2010 as before the credit crisis started to bite last summer, although it implies the situation will have improved sharply compared with today.
Oil tumbles for 3rd day following natural gas(AP)
Adam Schrek
July 17, 2008
Oil prices fell sharply Thursday following two days of declines, dragged down further by a massive sell-off of natural gas.
The slide accelerated amid growing concerns about the weakening U.S. economy.
Light, sweet crude for August delivery was down $4.08 at $130.52 a barrel before midday on the New York Mercantile Exchange. Prices have fallen about $14 in just the past three days.
"This market is acting much different than it has during this entire bull run," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com. "I think it's because the fundamentals are finally turning from extremely bullish to slightly bearish. But slightly bearish is enough to tip the market."
Natural gas futures for August delivery fell as much as 8.2 percent in the day, the biggest one-day drop in nearly a year. Natural gas fell 13.8 percent on Aug. 20, 2007, according to Nathan Golz, researcher at Wachovia Securities in St. Louis.
Prices for the key heating, cooking and power generation fuel have tumbled more than 20 percent since their peak before the Fourth of July, and are now trading at their lowest point since April.
Wachovia Securities hit with inspection in probe(Reuters)
Jul 17, 2008
Carey Gillam
Securities regulators from six U.S. states mounted a surprise inspection Thursday of the headquarters of Wachovia Corp's (WB.N: Quote, Profile, Research, Stock Buzz) brokerage affiliate, as part of a probe into the firm's sales of auction-rate debt.
The office of Missouri Secretary of State Robin Carnahan said a team of 10 regulators went to the St. Louis headquarters of Wachovia Securities, seeking information about sales practices, internal evaluations of the auction-rate securities market and marketing strategies.
The move came after Wachovia Securities failed to comply with information requests from Missouri securities regulators, state officials said. More than a dozen subpoenas were also issued, according to the state.
The $330 billion auction-rate securities market normally allows issuers such as municipalities to borrow money for the long term, but at lower, short-term rates.
Roughly half of the market remains frozen after a February meltdown in which brokerages abandoned their role as buyers of last resort. Investors flooded dealers with paper backed by bond insurers whose credit ratings were in question, forcing many issuers to pay uncommonly high interest rates.
UBS Stops Offshore Banking Services for U.S. Clients (Update3) (Bloomberg)
Ryan J. Donmoyer and Elena Logutenkova
July 17 2008
UBS AG, the world's largest wealth manager, will stop offering offshore-banking services to U.S. clients through non-U.S. branches, said Mark Branson, chief financial officer of UBS's global wealth-management unit.
``We have decided to exit entirely the business in question,'' Branson said today in Washington. ``UBS will no longer provide offshore banking or securities services to U.S. residents through our bank branches. Such services will only be provided to residents of this country through companies licensed in the United States.''
Branson disclosed the step during testimony to a U.S. Senate subcommittee that's investigating tax compliance by banks in so-called tax havens. UBS, the biggest Swiss bank, is cooperating with tax-evasion probes by U.S. prosecutors and regulators; tax evasion through offshore accounts robs the U.S. Treasury of $100 billion annually, the subcommittee said.
``One of the things that current management is trying to do is maintain the reputation of the core Swiss business, and that has been undermined'' during the U.S. tax probe, said Derek Chambers, an equity analyst at Standard & Poor's in London, who rates the stock ``hold.'' The decision to close the U.S. business is ``fairly drastic,'' he said.
2nd UPDATE: JPMorgan 2Q Net Down 53% On Credit Woes, Markdowns(CNN Money)
Matthias Rieker and Mike Barris
July 17, 2008
With more than $2 billion in second-quarter profit, JPMorgan Chase & Co. (JPM) again demonstrated that it can manage even a tough market and credit environment.
Nevertheless, not all was well at JPMorgan Chase, and Chairman and Chief Executive James Dimon, known for his bluntness about all things good or bad, didn't hold back from a frank assessment of the company's rise in prime mortgage losses.
JPMorgan posted a 53% plunge in second-quarter net income Thursday morning. Credit-loss provisions more than doubled, and its investment bank cut the value of leveraged-loan and mortgage-related securities by an additional $1.1 billion.
However, JPMorgan's earnings per share, at 54 cents, beat analysts' average expectations of 44 cents, as calculated by Thomson Reuters. Revenue of $18.4 billion for the quarter exceeded expectations of $16.55 billion. JPMorgan's stock was up 10% in morning trading.
Did Goldman Traders Manipulate Bear, Lehman Stock?(Naked Capitalism)
July 16, 2008
Has Goldman gone over the line of permitted behavior, particularly now that the SEC has decided to go after firms who may have contributed a bit too actively to share price declines of troubled brokerage firms and banks? The Wall Street Journal, in "Goldman Is Queried About Bear's Fall," says that the CEOs of Bear and Lehman thought so...
FACTBOX: How "naked" short selling happens(Reuters)
Emily Chasan; Editing by Andre Grenon
July 16, 2008
U.S. securities regulators issued an emergency rule on Tuesday to limit certain types of short selling in major financial firms, including Fannie Mae and Freddie Mac.
Investors who sell securities "short" profit from betting that a stock is overvalued and its price is likely to fall. Short-sellers borrow shares, then sell them, waiting for the stock to fall so that they can buy the shares at the lower price, return them to the lender and pocket the difference.
The emergency rule, which takes effect on Monday and could last up to 30 days, specifically works to prevent investors from making "naked" short sales, which occur when an investor sells stock that has not yet been borrowed. If "naked" shorting is done intentionally it is illegal.
The following explains how a "naked" short sale occurs:
*When investors call a broker to arrange to borrow stock to short, they are aware that short sales are subject to a standard three-day settlement period. This means the sell-side broker has three days to deliver the shares to the investor.
*The broker is supposed to locate shares available to short prior to executing a short sale and make a determination that the shares will be delivered to the investor within the three- day settlement window. However, there are certain exceptions to that rule...
...The agency identified the following securities affected by its order:
[consolidated]...BNP Paribas Securities Corp, Bank of America, Barclays Plc, Citigroup Inc, Credit Suisse Group, Daiwa Securities Group Inc, Deutsche Bank Group AG, Allianz SE, Goldman Sachs Group Inc, Royal Bank ADS, HSBC Holdings Plc ADS, JPMorgan Chase & Co, Lehman Brothers Holdings Inc, Merrill Lynch & Co Inc, Mizuho Financial Group Inc, Morgan Stanley, UBS AG, Freddie Mac, Fannie Mae.
Bush lifts executive ban on offshore drilling(Marketwatch)
Laura Mandaro
July 14, 2008
President Bush said Monday afternoon he had ordered a reversal of an executive ban on oil and natural gas drilling in offshore U.S. waters, adding it was now up to Congress to turn his decision into law.
"The executive branch's restrictions have been cleared away," said Bush in a news conference, which was broadcast. "Now the ball is squarely in Congress' court."
Treasury Acts to Save Mortgage Giants
(NY Times)
Stephen Labaton
July 14, 2008
Alarmed by the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration on Sunday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.
In a separate announcement, the Federal Reserve said it would make one of its short-term lending programs available to the two companies, Fannie Mae and Freddie Mac. The Fed said that it had made its decision “to promote the availability of home mortgage credit during a period of stress in financial markets.”
An official said that the Fed’s decision to permit the companies to borrow from its so-called discount window was approved at the request of the Treasury but that it was temporary and would probably end once Congress approved Treasury’s plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion.
The actions, which taken together could provide an overwhelming surge of capital to the companies, were the second time in four months that the housing crisis had prompted the government to scramble over a weekend to rescue a major financial institution. Last March, the Treasury Department engineered the sale of Bear Stearns to prevent it from going into bankruptcy and cause a shock to the financial system.
The plan was disclosed on Sunday evening to calm jittery markets overseas and on Wall Street in advance of a debt sale by Freddie Mac on Monday morning. Officials said that after talking to senior lawmakers through the weekend, they expected that Congress would attach the proposals to a housing bill that could be completed and sent to the White House for approval as early as this week.
Fannie and Freddie fears, oil over $147 hit Wall St(Reuters)
Kristina Cooke
July 12, 2008
U.S. stocks tumbled on Friday as fears about the stability of the top two home financing providers, Fannie Mae and Freddie Mac, combined with oil at a record above $147 to cloud the economic outlook.
Friday's slide capped a tumultuous week in which the S&P 500 joined the Nasdaq and the Dow in a bear market. It was the Nasdaq and the S&P 500's sixth straight weekly decline, their longest weekly losing streaks since 2004.
The broad market ended Friday's session down 1 percent as investors worried that the two pillars of the U.S. housing market could run short of capital, placing the fragile U.S. economy at even greater risk.
Fannie Mae and Freddie Mac traded erratically and ultimately ended lower. Pressure mounted for the U.S. government to act more swiftly to prevent the housing crisis from dragging down the nation's top mortgage finance agencies, as Treasury Secretary Henry Paulson indicated that a bailout was unlikely.
The anxiety surrounding the health of the financial system was heightened all the more late Friday when U.S. banking regulators swooped in to take over mortgage lender IndyMac Bancorp Inc., the second-largest bank failure in U.S. history and the fifth bank to close this year.
A jump in U.S. crude oil prices to a record above $147 per barrel further soured investor sentiment on concerns about the impact of higher fuel costs on corporate profits and consumer spending.
"The bottom line is that we're in the middle of a financial tsunami. This is a storm the likes of which this country hasn't seen," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.
Latest victim of mortgage crisis, IndyMac taken over(Marketwatch)
Jonathan Burton & John Letzing
July 11, 2008
IndyMac Bancorp Inc. became the biggest casualty of the subprime mortgage crisis on Friday, as federal regulators shut down the troubled Pasadena, Calif.-based savings bank in one of the largest U.S. bank failures ever.
...The Federal Deposit Insurance Corp. said in a statement it will take over operations of IndyMac (IMB:IndyMac Bancorp Inc which will open for business on Monday as IndyMac Federal Bank. The thrift had total assets of $32.01 billion as of March 31...
...Regulators said the "immediate cause" of IndyMac's failure was a deposit run in recent days that began after a June 26 letter to the OTS and the FDIC from New York Senator Charles Schumer was made public. The letter voiced concerns about IndyMac's soundness.
Lehman, bank shares caught in mortgage storm(Marketwatch)
John Spence, Market
July 11, 2008
Shares of Lehman Brothers and some of America's best-known financial firms continued to crumble Friday on growing concern the federal government will need to bail out government-sponsored mortgage giants.
Lehman Brothers was under pressure again amid the rout in financial stocks. Shares of the embattled investment bank were off more than 16%.
Shares of mortgage buyers Fannie Mae ended the session down after volatile trading Friday. Freddie stock turned briefly positive Friday afternoon although the rally fizzled heading into the closing bell.
Freddie shares were on a wild ride Friday and closed down more than 3%, while Fannie lost over 22%.
Foreclosures Rose 53% in June, Bank Seizures Triple (Update2) (Bloomberg)
Dan Levy
July 10
U.S. foreclosure filings rose 53 percent in June from a year earlier and bank repossessions rose the most on record as deteriorating property values and higher rates on adjustable mortgages forced more people to give up their homes.
Movers roundup: Lehman Brothers, Columbia Banking (CNN Money / AP)
July 10, 2008
Lehman Brothers Holdings Inc. shares plunged as much as 19 percent Thursday as continued credit fears shook Wall Street, and government policy makers again reiterated that no bank is too big to fail.
Protection costs soar for less secure Fannie, Freddie debt(Reuters)
Jul 10, 2008
Anastasija Johnson
The difference between credit spreads on less secure subordinated debt and safer senior debt of Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) hit a record on Thursday amid a fresh wave of anxiety over solvency of U.S. mortgage giants.
Credit spreads on the subordinated debt of Fannie Mae and Freddie Mac are widening faster than on senior debt amid increased worries about the ability of the two major U.S. mortgage finance companies to get the capital they need to survive.
Stoking concerns, former St. Louis Federal Reserve President William Poole said the two major U.S. mortgage finance companies were insolvent and may need a U.S. government bailout, according to Bloomberg News.
The outlook was so dire that Bush administration officials were meeting with regulators to discuss contingency plans should they be unable to raise funds and support the worst housing market since the Great Depression, according to a report in The Wall Street Journal.
"There is a lot of fear about the solvency of these companies," said Tim Backshall, chief credit strategist at Credit Derivatives Research.
Fannie, Freddie `Insolvent' After Losses, Poole Says (Update1)(Bloomberg)
Dawn Kopecki
July 10
Borrowing at Fannie Mae, the U.S. government-sponsored mortgage company, has never been so expensive and it may not get better any time soon.
Fannie Mae paid a record yield relative to Treasuries on the sale of $3 billion in two-year notes yesterday amid concern the biggest provider of financing for U.S. home loans won't have enough capital to weather the worst housing slump since the Great Depression. The company's credit-default swaps show traders are treating the AAA rated debt as if it were five steps lower. Fannie Mae shares tumbled 13 percent yesterday in New York to the lowest level in almost 14 years.
Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview.
``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in the interview yesterday.
Fannie, Freddie Downgraded by Derivatives Traders (Update4) (Bloomberg)
Shannon D. Harrington and Dawn Kopecki
July 9
Fannie Mae and Freddie Mac, ranked Aaa by the world's largest credit-rating companies, are being treated by derivatives traders as if they are rated five levels lower.
Credit-default swaps tied to $1.45 trillion of debt sold by the two biggest U.S. mortgage-finance companies are trading at levels that imply the bonds should be rated A2 by Moody's Investors Service, according to data compiled by the firm's credit strategy group. The price of contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac and to protect against a default doubled in the past two months.
Traders are overlooking the government's implied guarantee of the debt as credit losses grow and concern rises that the companies don't have enough capital to weather the biggest housing slump since the Great Depression. Washington-based Fannie Mae fell 73 percent in the past year on the New York Stock Exchange and McLean, Virginia-based Freddie Mac lost 60 percent.
Iran tests missiles, vows to hit back if attacked(Reuters)
Jul 9, 2008
Zahra Hosseinian and Fredrik Dahl
Iran test-fired nine missiles on Wednesday and warned the United States and Israel it was ready to retaliate if they attacked the Islamic Republic over its disputed nuclear projects.
Washington, which says Iran seeks atomic bombs, told Tehran to halt further tests if it wanted the world to trust it. Iran, the world's fourth largest oil producer, insists its nuclear program aims only at generating electricity.
Rising tensions have rattled financial markets. Oil prices, which had slipped from record highs, rebounded about $2 a barrel after Wednesday's tests.
Speculation that Israel could strike Iran has mounted since its air force staged an exercise last month that U.S. officials said involved 100 aircraft. The United States has not ruled out military action if diplomacy fails to resolve the nuclear row.
Hedge funds stumble in first half of '08
The industry endures the worst half-year performance on record, dragged down by woes in the broader market.(CNN Money)
David Ellis
July 9, 2008
Hedge funds delivered their worst performance on record during the first half of 2008, revealing that the industry has not been immune to the broader market turmoil.
Hussman "The Likelihood of $60 Oil"(Naked Capitalism)
July 8, 2008
The oil bulls will take offense at Hussman's contention that high oil prices will break, and probably break pretty seriously. Note we think high oil prices would be desirable if phased in over several years via a carbon tax to discourage use, but as everyone know from direct experience, a sharp runup is destabilizing, and if prices did fall back sharply, that would discourage the push for alternative energy sources (as well as plain old conservation).
Mercedes to cut petroleum out of lineup by 2015(Green Yahoo)
Jaymi Heimbuch
Jun 26
In less than 7 years, Mercedes-Benz plans to ditch petroleum-powered vehicles from its lineup. Focusing on electric, fuel cell, and biofuels, the company is revving up research in alternative fuel sources and efficiency.
Moody's Loses a Key Player
Amid Probe About Error(WSJ)
Aaron Luccetti
July 2, 2008
Bond-rating firm Moody's Investors Service said Noel Kirnon, a key figure in what had been its fast-growing "structured finance" business, was leaving amid an internal investigation.
At issue is how his department handled a modeling error that affected ratings of about $1 billion in complex credit products.
...The revelations followed an internal investigation by law firm Sullivan & Cromwell LLP that began in May and focused on an error in Moody's models that affected 11 debt products known as constant-proportion debt obligations, or CPDOs.
After the error was detected, Moody's found through model testing that correcting the error would have lowered triple-A ratings given to the 11 CPDOs to double-A territory -- or a reduction of one to three notches.
...Some Moody's employees involved with CPDOs could be terminated for breaking company rules, Moody's said. Specifically, committee members aren't allowed to consider the potential impact of rating changes on Moody's or other market participants when determining a rating.
Moody's disciplines staff over ratings breach(Times Online)
Tom Brawden
July 1, 2008
The US ratings agency initiated disciplinary proceedings following a review of its rating process for CPDOs Tom Bawden Moody’s Investors Service has ousted the head of a key division and pledged to discipline other staff after an investigation concluded that employees at the credit agency knowingly rated about $1 billion-worth of securities incorrectly.
...The inquiry concluded that about $1 billion-worth of CPDOs were wrongly given the top AAA credit rating, four notches higher than the AA that they merited, because of a computer error. When some senior staff became aware of the mistake early in 2007, they chose to change the rating methodology, to mask the error, rather than assigning a lower rating, the investigation found.
Oil market oversupplied: Qatar(Qatar Times)
June 30, 2008
Oil markets are oversupplied but it would not be wise for any OPEC exporter to tighten the taps given the risk of exacerbating prices, Qatari Oil Minister Abdullah Al-Attiyah said yesterday. Attiyah's remarks came after Libya's most senior oil official said on Thursday he was studying the possibility of reducing output in response to a US threat to sue OPEC members, although he said the North African country had no concrete plans to do so for now. "It is not wise today to cut supplies even though there is a surplus because we do not want to create a psychological problem," Attiyah told Reuters. "I'm not in favor of it at all. We want to try to help to ease the psychological heat.
UPDATE 1-S&P, Moody's raise Countrywide after BofA takover(Reuters)
July 1, 2008 8:45pm
Two rating agencies on Tuesday raised their debt ratings on Countrywide Financial Corp. after the largest U.S. mortgage lender was acquired by Bank of America.
S&P raised Countrywide's counterparty rating to "AA," the third-highest investment-grade level, from the highest junk level of "BB-plus" to align it with ratings of Bank of America. The upgrade reflects expectations that Bank of America will honor Countrywide's debt, S&P said in a statement.
...Fitch Ratings, kept its "BBB-minus" Countrywide rating on review until details of the new corporate structure are announced.
Tower of Babel Economy(The Trumpet)
Robert Morley
July 1, 2008
The economy resembles a financial tower of Babel. And it is starting to crumble.
...According to the bis, the number of outstanding derivative contracts in the global marketplace soared by double-digit percentages last year. Anything going up by double digits should elicit interest in and of itself, but in this case it is the sheer magnitude of the numbers involved that raises red flags.
The bis reported the total amount of outstanding derivatives has reached a practically incomprehensible $1.28 quadrillion. Yes, you read that correctly—quadrillion! And as astounding as this astronomically huge number is, the actual totals are even bigger because this number does not include derivatives related to the commodity markets (which the bis says it can’t track because values aren’t available).
A quadrillion dollars is hard to wrap your mind around. It takes a thousand trillion to make a quadrillion. Start with 1 million and multiply by 1,000, then multiply by 1,000 again, then multiple by 1,000 yet a gain—and then finally you get to 1 quadrillion. You can think of it as more than 92 times the value of all goods and services produced in America during 2007, or almost 20 times global gross domestic product.
Don’t be surprised if you haven’t heard of derivatives. Outside of banking circles they are less known, but you can think of them as essentially unregulated, high-risk credit bets.
...The danger now becoming evident is that the derivatives market isn’t just farmers and other business people trying to protect against risk. The market is increasingly dominated by industries of “investors” and hedge funds that only exist to make money through derivative speculation. And a big part of that speculating is done with borrowed money.
“Unlike the earnest farmer … many of today’s institutions use futures, forwards, options, swaps, swaptions, caps, collars and floors—any kind of leverage device they can cook up—to bet the h- - - out of virtually anything,” confirms DeMeritt (emphasis mine throughout).
But when you play with borrowed money, the risk of getting burned beyond recovery increases rapidly.
According to DeMeritt, the majority of the $1.28 quadrillion in derivatives is “owned” on somewhere near 95 percent margin!
That has got to be “one of the scariest phenomena in economic history,” he says.
...But making this derivatives tower of Babel all the more dangerous is the fact that, instead of reducing risk, a growing number of analysts warn that derivatives traders are actually concentrating it—and concentrating it here in America.
Out of the top 10 commercial banks with derivatives (as of last September), nine are American. Of the top 25, all but five are U.S. corporations.
...“It’s going to get far worse than anyone wants to admit. Even respected newsletter writers hesitate to suggest the truth,” says economic analyst Bob Moriarty. “It’s the end of the financial system, as we know it. Central banks might be able to paper over a few trillion dollars but the fraud is 10 times what they can paper over.”
The Short View: Credit fears resurface(Financial Times)
Jamie Chisholm
June 25 2008
Fears are mounting that conditions are set to deteriorate markedly in credit markets.
Lehman Brothers warned this week that spreads on credit default swaps, which track the cost of insuring corporate debt against default, could soon spike beyond the levels seen at the time of the Bear Stearns rescue in March.
Spreads tightened a touch on Wednesday as the market hoped the £4.5bn ($8.9bn) secured by Barclays augured well for raising capital in the banking sector. However, the trend since mid-May has been disturbing.
The Markit iTraxx Europe index of investment-grade debt has crept back up from the recent low of 66 basis points to 96bp today. Across the Atlantic, the CDX has moved over the same period from 91bp to 130bp.
Sentiment has soured as investors have become more worried that the fallout from the subprime debacle is increasingly infecting the real economy.
A data-rich week has offered little solace. Private sector output in the eurozone has contracted for the first time in five years, while consumer confidence and housing metrics in the US continue to be dire.
Sharply rising input prices that can’t easily be passed on will further crimp business profit margins, increasing the risk of corporate failure.
Adding to the woe are more ratings downgrades for the monoline bond insurers, crucial cogs in the financial system.
The Death of Securitized Mortgages(Naked Capitalism)
Yves Smith
June 29, 2008
In yet another example of synchronicity, Jim Hamilton provides a chart from Peter Hooper that illustrates why the housing market is in the doldrums: securitized credit has all but vanished. This topic came up in the previous post as a explanation of why the real estate market is coming to look like a war zone.
Back to the Great Depression?(Times Online)
David Smith and Dominic Rushe
June 29, 2008
Wall Street has had its worst June since 1930. How much worse could the world economy get?
When Wall Street slumped on Thursday, in response to the oil price surging above $140 a barrel and renewed fears about the banking system, the alarm bells rang more loudly than usual.
Barring a miraculous recovery tomorrow, the Dow Jones industrial average is heading for its worst June since 1930, when it plunged by almost 18%.
That month is ingrained in the Wall Street psyche. After the crash of October 1929, the stock market continued to slide through the winter. By the spring the worst seemed to be over. Then shares lurched low in June 1930, signalling deep problems for the economy and the stock market.
America entered depression and the stock market went into a deep freeze that lasted a quarter of a century, taking until 1954 to get back to its precrash high. Are there any parallels with today?
What we can do in this dangerous moment(Financial Times)
Lawrence Summers
June 29 2008
It is quite possible that we are now at the most dangerous moment since the American financial crisis began last August.
Staggering increases in the prices of oil and other commodities have brought American consumer confidence to new lows and raised serious concerns about inflation, thereby limiting the capacity of monetary policy to respond to a financial sector which – judging by equity values – is at its weakest point since the crisis began. With housing values still falling and growing evidence that problems are spreading to the construction and consumer credit sectors, there is a possibility that a faltering economy damages the financial system, which weakens the economy further.
Preparing the Battlefield(New Yorker)
Seymour M. Hersh
July 1, 2008
The Bush Administration steps up its secret moves against Iran.
Operations outside the knowledge and control of commanders have eroded “the coherence of military strategy,” one general says.
Late last year, Congress agreed to a request from President Bush to fund a major escalation of covert operations against Iran, according to current and former military, intelligence, and congressional sources. These operations, for which the President sought up to four hundred million dollars, were described in a Presidential Finding signed by Bush, and are designed to destabilize the country’s religious leadership. The covert activities involve support of the minority Ahwazi Arab and Baluchi groups and other dissident organizations. They also include gathering intelligence about Iran’s suspected nuclear-weapons program.
...The Joint Chiefs of Staff, whose chairman is Admiral Mike Mullen, were “pushing back very hard” against White House pressure to undertake a military strike against Iran, the person familiar with the Finding told me. Similarly, a Pentagon consultant who is involved in the war on terror said that “at least ten senior flag and general officers, including combatant commanders”—the four-star officers who direct military operations around the world—“have weighed in on that issue.”
BIS slams central banks, warns of worse crunch to come(Telegraph)
July 1, 2008
Ambrose Evans-Pritchard
The central bankers' bank renews fear of second depression...
A year ago, the Bank for International Settlements startled the financial world by warning that we might soon face challenges last seen during the onset of the Great Depression. This has proved frighteningly accurate.
The venerable body, the ultimate bank of central bankers, said years of loose monetary policy had fuelled a dangerous credit bubble that would entail "much higher costs than is commonly supposed".
In a pointed attack on the US Federal Reserve, it said central banks would not find it easy to "clean up" once property bubbles have burst.
If only we had all listened to the BIS a long time ago. Ensconced in its Swiss lair, it has fired off anathemas for years, struggling to uphold orthodoxy against the follies of modern central banking.
Bill White, the departing chief economist, has now penned his swansong, the BIS's 78th Annual Report, released today. It is a disconcerting read for those who want to hope the global crisis is over.
...Dr White says the US sub-prime crisis was the "trigger", not the cause of the disaster. This is not to exonerate the debt-brokers. "It cannot be denied that the originate-to-distribute model (CDOs, CLOs, etc) has had calamitous side-effects. Loans of increasingly poor quality have been made and then sold to the gullible and the greedy," he said.
Nor does it exonerate the watchdogs. "How could such a huge shadow banking system emerge without provoking clear statements of official concern?"
...After almost two decades of this experiment - more or less the Greenspan years - the game is over. Debt has reached extreme levels, and now inflation has come back to life.
...If there are going to be more bail-outs on both sides of the Atlantic - as there will be - the "socialised risks" should be taken on by political systems, and not dumped on the books of central banks.
"Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.
"To deny this through the use of gimmicks and palliatives will only make things worse in the end," he said.
Barclays warns of disaster as Fed loses all credibility(The Telegraph / GATA)
Ambrose Evans-Pritchard
June 27, 2008
Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero."
"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock under way. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."
Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.
Wall Street Sold Auction-Rate Debt, Warned Issuers (Update1) (Bloomberg)
Darrell Preston and Michael McDonald
June 26 , 2008
Yanping Cui, 57, says she invested in auction-rate bonds last December at the urging of a broker at UBS AG in Long Beach, California. The same month, UBS told one of the issuers of those securities, a New Hampshire student-loan agency, that the $330 billion market was in danger of failing.
That's exactly what happened in February, when mounting mortgage losses forced dealers who underwrote and managed the market for more than 20 years to stop acting as buyers of last resort. Cui was told she wouldn't get her money back until the market recovered.
``He said it's very safe and as liquid as possible,'' Cui said of the advice she received from UBS broker Brian Meehan. ``I'm so angry. That's my bloody money.'' Meehan, now at Wells Fargo Investments in Newport Beach, declined to comment.
Cui is one of dozens of investors who say they were sold auction-rate securities as a low-risk alternative to cash at the same time underwriters, including UBS and Citigroup Inc., were telling issuers that demand was softening, bond documents and interviews with investors show.
The chronology shows that dealers ``knew they didn't have enough demand,'' said Christopher ``Kit'' Taylor, executive director of the Municipal Securities Rulemaking Board from 1978 to 2007, who now consults investor groups on financial markets and regulation. ``They were not telling the other side of the story.''
Oil costs force P&G to rethink supply network(Financial Times)
Jonathan Birchall and Elizabeth Rigby
June 26 2008 23:33
Soaring energy prices are forcing Procter & Gamble to rethink how it distributes its products, with the world’s biggest consumer goods company shifting manufacturing sites closer to consumers to cut its transport bill.
Keith Harrison, head of global supply at P&G, the maker of Tide detergent, Crest toothpaste and Pampers, said the era of high oil prices was forcing P&G to change.
The Shrinking Influence of the US Federal Reserve(Der Spiegel)
Gabor Steingart
June 26, 2008
Humiliation for Mr. Dollar: Ben Bernanke, the chairman of the United States Federal Reserve Bank, faces a general investigation by the International Monetary Fund. Just one more example of the Fed losing its power.
Fed, SEC Near Accord To Redraw Wall Street Regulation
(WSJ)
KARA SCANNELL , DEBORAH SOLOMON and SUDEEP REDDY
June 23, 2008
The Federal Reserve and Securities and Exchange Commission are finalizing a formal agreement that will start the process of redrawing how Wall Street is regulated in the wake of Bear Stearns Cos.' near collapse.
...Since mid-March, the Fed has placed staff inside the four largest investment banks to assess their risk by looking at liquidity, capital requirements and banks' ability to test their own systems, areas the SEC examines.
Its on-site presence has dwindled to one or two examiners from as many as six, people familiar with the matter say, while the SEC conducts its supervision over the phone and with periodic visits.
The Fed has wanted on-site access so that it can better understand the risk that a bank may pose to the entire financial system.
Treasury has also taken the position that the Fed must maintain some presence at the investment banks if it continues to lend money to those institutions.
MBIA Credit Rating Downgrades Prompt $7.4 Billion of Payments (Bloomberg)
Christine Richard
June 23
MBIA Inc.'s credit rating downgrade by Moody's Investors Service is likely to trigger $7.4 billion of payments and collateral postings.
The company's stock dropped 13 percent on June 20 after Moody's reduced MBIA's insurance financial strength rating five levels to A2 from Aaa. Armonk, New York-based MBIA issued a statement June 20 saying it had $15.2 billion of assets to meet the posting requirements.
The payments are required for the company's asset-management unit, which oversees $25 billion for investors, including municipalities. After the downgrade, MBIA's asset management business is on the hook to protect the value of guaranteed investment contracts, or GICs, by posting collateral. The obligation highlights another part of MBIA's business that has come under stress since the collapse of the subprime mortgage market.
``MBIA is leveraged through their own rating and that can make a downgrade very harsh,'' said Matt Fabian, a senior analyst with Municipal Market Advisors. ``It's very hard for an outsider to piece together the impact of these downgrades.''
Corn Rises With the Waters(Barrons)
Debbie Carlson
June 23, 2008
Cresting floodwaters ruin corn crop, sending futures prices over the roof.
Hope for bumper U.S. corn and soybean crops has been washed away by historic flooding in the heartland, and the best farmers can wish for is normal weather -- with fingers crossed for a late frost.
RBS issues global stock and credit crash alert(Telegraph)
Ambrose Evans-Pritchard
June 18, 2008
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.
A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
Such a slide on world bourses would amount to one of the worst bear markets over the last century.
The "Enron Loophole"(Economist's View)
June 17, 2008
Michael Greenberger used to run the ... [Division of Trading and Markets for the Commodities Futures Trading Commission. He now teaches law at the University of Maryland.]
Ryssdal: Why is it so hard to figure out what's going on in commodities markets -- oil specifically?
Greenberger: Well, the reason it's hard to figure out is about 30 percent of our crude oil energy futures are traded in what is called a dark market -- that is a market that was deregulated in December of 2000 at the behest of Enron. Prior to that legislation..., all energy futures traded in the United States or affecting the United States in a significant fashion were regulated ... under a very careful regime that had been perfected over about 78 years and many observers believe that because those markets are not being policed, malpractices are being committed and traders are able to boost the price virtually at their will.
Ryssdal: You're not really telling me that seven years on, we're still paying the price for Enron, are you?
Greenberger: Well, this has been called the "Enron Loophole" and there are many legislators working very hard to close that loophole ...[and] bring the speculation under the kind of time-tested controls that were used until Enron had its way and amended the law...
...Greenberger: From my own experience as a commodity regulator, I believe that if the Bush Administration were serious about its regulation, we could begin seeing prices drop within a month. If we don't get the kind of regulation that has been done for decades and the market proceeds along the pace its proceeding, we will have to go through a very, very serious recession. The question is do you want to deflate the bubble by that kind of suffering or do you want to deflate the bubble by applying tight U.S. regulatory controls? ...
SIV civilisation(FT)
June 18 2008
The deal to restructure the $7bn investment vehicle formerly known as Cheyne Finance is a breakthrough. The backlog of broken and insolvent financial structures has been a dead weight on credit market confidence; now there is a successful model of how to resolve them. Whether the deal can solve the wider problem - properly valuing the instruments that Cheyne invested in and building liquid markets in them - will depend on the auction system at its heart.
Cheyne Finance was a structured investment vehicle, or SIV. It borrowed short term in order to buy longer-term bonds backed by mortgages. When the price of mortgage-backed bonds fell last year, Cheyne, and many others like it, were un-able to service their debts as investors demanded their money back.
...For the wider market, however, a crucial question will be the price at which Cheyne's assets are liquidated or transferred. That will be determined by an auction among other investment banks.
One of the central problems in the credit squeeze has been the difficulty of, first, finding a market price for asset-backed securities and, second, finding somebody willing to trade in volume at that price...
It would be desirable, therefore, if Goldman's auctions could sell a significant amount of Cheyne assets to establish a market clearing price...
Goldman completes $7 billion SIV restructure(Reuters)
Jun 17, 2008
Goldman Sachs Group Inc has completed a long-awaited rescue of a $7 billion structured investment vehicle, the receivers said on Tuesday, paving the way to clear up more troubled mortgage assets.
The deal to restructure the SIV, formerly run by British hedge fund Cheyne Capital, comes as Wall Street's biggest investment bank beat expectations by avoiding major losses on assets, though quarterly earnings dropped by 11 percent.
"We are delighted ... we are in a position to sign a restructuring agreement in respect of the Cheyne Finance portfolio today," said Neville Kahn, of accountancy firm Deloitte and Touche LLP DLTE.UL, who act as receivers.
Under the restructuring, Deloitte will price the assets in the market, selling a minority part of the portfolio to the group of creditors who want to cash out, the parties involved said in an official statement.
That will allow Deloitte to sell the rest of the assets to the remaining creditors -- who have already agreed to reinvest that money in a newly established vehicle set up by Goldman Sachs -- which will hold the rest of the portfolio.
The sale of the securities is expected to be completed on or about July 17, Deloitte said in the statement.
Other SIVs, including Golden Key, Whistlejacket and Rhinebridge, are expected to follow Cheyne's model, being restructured by Goldman, said Stephen Peppiatt, at Bingham McCutchen, a legal advisor to a Cheyne senior creditor.
UPDATE 1-U.S. mortgage refinance applications plunge -MBA(Reuters)
June 18, 2008
Applications for U.S. home mortgages dropped for the fourth week in the last five as soaring interest rates choked off refinancing opportunities and soured the housing outlook, an industry group said on Wednesday.
Morgan Stanley's profits take a tumble: Earnings drop 57%, hurt by slower investment banking, fixed income activity; stock slumps.(CNN Money)
David Ellis
June 18, 2008
Ambac to End Contract For Ratings From Fitch(WSJ)
Lauren Pollock
June 18, 2008
Ambac Financial Group Inc. will terminate its ratings contract with Fitch Ratings, three months after larger bond-insurer MBIA Corp. asked Fitch to withdraw its ratings on the company.
Goldman Sachs does it again(CNN Money)
David Ellis
June 17, 2008
Wall Street powerhouse books $2.1 billion profit, topping forecasts and proving yet again that it is largely avoiding credit crunch pain.
China: can't you see how fine the emperor's clothes are?
U.S. Tells China Subprime Woes Are No Reason to Keep Markets Closed (NY Times)
Steven R. Weisman
June 18, 2008
Bush administration economic officials, frustrated over the pace of change in China, warned Chinese leaders Tuesday not to let American regulatory failures in the subprime mortgage crisis become an excuse for not deregulating Chinese markets and opening them to foreign investment.
Lieberman Seeks Limits to Reduce Speculation( NY Times)
DIANA B. HENRIQUES
June 12, 2008
A prominent Washington lawmaker said Wednesday that he would propose next week to ban large institutional investors, including index funds, from the nation’s booming commodity markets.
The idea is one of several outlined by Senator Joseph I. Lieberman, independent of Connecticut, who is chairman of the Senate Homeland Security and Governmental Affairs Committee. That committee will hold a hearing on June 24 to continue examining whether financial speculation is affecting the prices of crops and fuel.
“There is excessive speculation in the commodity markets that is driving up the cost of food and energy,” the senator said in an interview. “The question is, do large institutional investors play a positive role?” His concern, he said, is that they do not.
Fixed-rate mortgage rates at highest since October
Renewed concerns about inflation prompt rates to rise: economist (Marketwatch)
Amy Hoak, MarketWatch
June 12, 2008
Rates on fixed-rate mortgages rose to their highest levels in almost eight months this week after Federal Reserve officials expressed concern about inflation, Freddie Mac's chief economist said on Thursday.
United to charge for checked luggage(CNN Money)
June 12, 2008
Citing higher fuel prices, United Airlines said Thursday it will begin charging domestic passengers $15 each way for one checked bag.
...The $15 service fee will not apply to customers flying in United First or United Business or who have premier status with United or Star Alliance airline network, the carrier said.
Retail sales rise much more than expected(Reuters)
Jun 12, 2008
Total sales at U.S. retailers rose a full percentage point in May as many consumers had more spending cash in their wallets from government rebate checks, a report on Thursday showed.
Citigroup to Shut Hedge Fund Co-founded by CEO: Report (Reuters)
June 12, 2008
In a blow to Citigroup Inc. Chief Executive Vikram Pandit, the bank plans to close a hedge fund he co-founded and will buy what is left of its assets, the Wall Street Journal reported on Thursday [June 12].
Spitzer’s Next Act: Distressed Real Estate(AP)
June 10, 2008
Forced out of office by a sex scandal, former New York governor Eliot Spitzer is reportedly considering his next act — in distressed real estate.
The New York Sun reports that Mr. Spitzer is proposing to start a vulture fund that would buy distressed real estate around the country and then flip it for a profit. Mr. Spitzer, whose father manages a real estate company in New York, is proposing to invest pension money from labor unions, according to the newspaper.
OCC’s Dugan Takes Aim at HOPE NOW’s Workout Claims(Housing Wire)
Paul Jackson
June 11, 2008
After first requiring servicers to report loan level data to his agency in early March, Comptroller of the Currency John Dugan said Wednesday that the OCC had released a new, comprehensive report on mortgage performance during the fourth quarter of 2007 and first quarter of 2008.
What the report found is telling, to say the least. The OCC study seems sure to create the latest firestorm among industry participants, coming at stark odds with the workout claims made recently by the HOPE NOW coalition, which has been reporting on the voluntary industry groups’ loss mitigation efforts since the early part of this year — disparities that clearly underscore just how difficult obtaining data can be in an industry where one firm’s Alt-A mortgage is another’s subprime loan.
Exchanged-traded derivatives near $700 trillion (efinance news)
Tom Fairless and Renée Schultes
June 9, 2008
The value of derivatives traded on exchanges surged 30% to a record $692 trillion (€438 trillion) in the first quarter compared to the same period a year earlier, as investors regained their enthusiasm for bets on short-term interest rates.
Lehman Loss Deepens Fears On Credit Market(Washington Post)
Tomoeh Murakami Tse
June 10, 2008
Lehman Brothers stunned analysts Monday by reporting that it expects a quarterly loss of $2.8 billion and would raise $6 billion in capital to shore up its balance sheet, signaling that turmoil in the credit market is far from over.
Saudi calls for talks; oil experts see no change(AP/Yahoo News)
Donna Abu-Nasr
6/9/2008
Saudi Arabia will call for a summit between oil producing countries and consumer states to discuss soaring energy prices, Information and Culture Minister Iyad Madani said Monday.
The kingdom will also work with OPEC to "guarantee the availability of oil supplies now and in the future," the minister said following the weekly Cabinet meeting, held in the seaport city of Jiddah.
Madani said that the kingdom has informed "all oil companies it deals with as well as countries that consume oil that (the kingdom) is ready to provide them with any additional oil they need."
..."There is no justification for the current rise in prices," he said.
Why gas costs more, more, more(Mercury News)
Matt Nauman
June 8, 2008
More reasons for higher gas pricesThis much is certain: Gas will never be cheap again. Weeks of record-setting prices for gasoline - which reached $4.42 a gallon in California on Saturday - have helped cement that notion.
Less than 10 years ago, gas was 99 cents a gallon. But since May 2004, when the U.S. average first topped $2, the upward movement has been fairly steady. The $3 plateau was topped in September 2005, and the U.S. average could rise above $4 this week - even as it moved closer to $5 in the Bay Area.
The price of gas is directly tied to the cost of oil, with experts agreeing that every time the oil goes up $1 a barrel, gas goes up about 2.5 cents a gallon.
I guess I am an "expert" now. In my June 4th article, Oil and Gas Prices: Dollar and Euro, I calculated that every time a barrel of oil goes up $1, the price of gasoline goes up $0.0276 (about $0.025).
SEC reportedly probing AIG's swaps: Insurer says it has 'consistently and promptly' updated value of positions
(Marketwatch)
Riley McDermid & Alistair Barr, MarketWatch
June 6, 2008
American International Group Inc. is being investigated by federal regulators about whether the giant insurer overstated the value of derivatives partly linked to subprime mortgages, The Wall Street Journal reported on Friday, citing unidentified people familiar with the matter.
The Derivatives Market is Unwinding!(OpEd News)
George Washington
June 4, 2008
A couple of months ago, a financial analyst who sells derivatives told me that fears about a meltdown in the derivatives market were unfounded.
Yesterday, he told me - with a very worried look - "THE DERIVATIVES MARKET IS UNWINDING!"
What does this mean? What are derivatives and why should you care if the market is unwinding?
The Derivatives Market is Unwinding!(OpEd News)
George Washington
June 4, 2008
A couple of months ago, a financial analyst who sells derivatives told me that fears about a meltdown in the derivatives market were unfounded.
Yesterday, he told me - with a very worried look - "THE DERIVATIVES MARKET IS UNWINDING!"
What does this mean? What are derivatives and why should you care if the market is unwinding?
Bond sell-off in focus(Reuters)
Sun Jun 1, 2008
Investors will be closely watching bond markets this week after a sharp sell-off that has raised the prospect of higher borrowing costs for governments, companies and, ultimately, consumers.
At the same time, markets will be hoping for new guidance on the state of the world economy -- with a focus on lagging growth and rising inflation -- with a raft of central bank meetings, economic outlooks and key data.
These culminate on Friday with the monthly U.S. jobs report for May, a pointer to everything from economic growth to consumer sentiment and interest rate expectations.
It is the bond market, however, that should grab most of the limelight, particularly at the beginning of the week...
"It is a delicate moment for bond markets," said Ken Adams, head of global strategy at Scottish Widows Investment Partnership. "The extent of the (yield) rise has been very rapid. You have headline inflation in the developed world rising at clip."
Paulson Says Dollar Pegs Don't Worry Mideast Leaders (Update5)(Bloomberg)
John Brinsley
June 1
U.S. Treasury Secretary Henry Paulson said Middle East leaders haven't indicated concerns with their fixed exchange rates to the dollar and understand that abandoning the peg would have little impact on rising prices.
``There's quite an awareness that the dollar peg does not influence inflation to a significant degree,'' Paulson told reporters en route to Abu Dhabi after meeting with Qatari central bank Governor Abdullah Bin Saud al-Thani and Prime Minister Sheikh Hamad bin Jasim bin Jaber al-Thani in Doha. ``Ending the peg is not the solution to the inflation problem.''
Asked whether he was ruling out any change to the peg by Gulf nations, he said: ``I'm not ruling anything out. I don't want to characterize it. This is their sovereign decision.'' At an earlier press conference in Doha, Paulson said: ``I haven't heard anyone say to me that the peg is a problem.''
Liquidity levels hit funds of hedge funds (Financial Times)
Sharlene Goff
May 30 2008
Investing in funds of hedge funds should, in theory, smooth out the volatility of financial markets and generate a steady stream of returns. But, in reality, a rather different picture has emerged in recent months.
Some hedge fund managers have classed the first quarter of this year the worst on record. Very few have met their performance targets and many have fallen into negative returns.
British court ruling supports O.C(OC Register)
Ronald Campbell
May 29, 2008
Whistlejacket receivers must treat county, other creditors equally.
A British appellate court has reversed a ruling that could have cost Orange County $80 million.
The court said receivers of Whistlejacket Capital must treat the county and other senior creditors equally.
A lower court had ruled in March that creditors must be paid in the order their notes come due. That would have put the county, whose investment matures in late January 2009, behind at least 75 other cash-hungry creditors.
"From the legal standpoint, it seems to be the best possible outcome," Senior Deputy County Counsel John Abbott said of the latest ruling.
Still unclear, however, is whether Whistlejacket will be able to pay all the billions it owes.
First Comes the Swap. Then It’s the Knives. (NY Times)
Gretchen Morgenson
June 1, 2008
Investors don’t often get a peek inside the vast, opaque and unregulated world of credit default swaps, those privately traded insurance contracts that essentially allow participants to bet on or against a debt issuer’s financial condition. (Remember, these are the same instruments that played such a pivotal role in the collapse of Bear Stearns.)
But the legal battle between UBS, the Swiss investment bank, and Paramax Capital, a group of hedge funds in Stamford, Conn., is giving investors a gander at how this freewheeling market works.
The view is instructive, given the unknowns in the huge and growing credit default swap market and the unease about its potential to wreak havoc on the financial system. Experts say the legal case is also the first of what will probably be a flood of disputes between the big banks and hedge funds that typically strike swaps deals.
The conclusion of the authors is that what is needed is "more innovation, not less". The conclusion of siv0 is that we need to Take Back the Fed, and rework our financial system.
Derivative thinking(Financial Times)
Gillian Tett
May 30 2008
Just over a decade ago, a british banker made a small piece of financial history. ...one day an unusual trade crossed Reoch's desk: one of his clients wanted to buy a contract which would effectively protect him from the chance that any one of three government bonds might turn sour... "...I guess you could call it one of the first credit derivatives,” Reoch proudly recalls, noting that the trade was so “cutting edge” that the team only sorted out the legal documentation several weeks later. ...Reoch's dance has taken a new twist. Before turmoil took hold of the global credit markets last summer, his consultancy spent most of its time advising clients how to get into credit derivatives. Now he is swamped by investors who want to extricate themselves from derivatives-linked messes, or simply to understand the products that came out of the past few years of intense financial innovation... To outsiders, this tale might smack of everything that is dubious about modern finance. In the past 10 years, as an extraordinary wave of innovation has swept through the industry, many bankers have become wealthy by creating ever-more complex products. ...some in the banking industry argue that restricting innovation is the wrong thing to do...If you believe the bankers, the best response to the current crisis is more innovation, not less.
Bear's top economists won't join JPMorgan(Reuters)
May 30, 2008
Bear Stearns' two top economists, David Malpass and John Ryding, will not join JPMorgan Chase & Co, which is set to close its purchase of Bear, a source familiar with the situation said on Friday.
It was not known whether Malpass and Ryding have accepted positions at another company, according to the source.
Malpass and Ryding declined to comment. JPMorgan also declined to comment.
Bob Barr, ex congressman, and current Libertarian candidate for president made this comment on the Glenn Beck show on May 22nd.
Glenn talks with Bob Barr(Glenn Beck)
May 22, 2008
[Bob] BARR: ...If I could wave a magic wand and the Federal Reserve Bank would disappear tomorrow, I would do so. It's a group of unelected governors that are not answerable to or accountable to the people of this country and yet they wield considerable influence over the economy...
Credit Default Swap Clearing Facility Debuts (Hedgeworld)
Emma Trincal, Senior Financial Correspondent
May 29, 2008
After months of anticipation, a centralized clearinghouse that would guarantee payments on credit default swaps is finally a done deal. The Clearing Corp. and the Depository Trust & Clearing Corp. said Thursday morning [May 29] that they have reached an agreement whereby The Clearing Corp. will provide central counterparty clearing services for credit default swaps traded over-the-counter. Eligible contracts will have to be registered in the Depository Trust & Clearing Corp.'s trade information warehouse. The service will be launched in the third quarter.
"Through the use of multilateral netting, margin collateral, and daily marking-to-market of positions, [the Clearing Corp.'s] clearing facility will improve capital efficiency, increase regulatory transparency, lessen direct counterparty risk and reduce systemic risk relating to the multi-trillion dollar market in credit default swaps" said Michael Dawley, chairman of The Clearing Corp. in a statement.
Cayne Apologizes as Bear's Takeover Approved(Hedgeworld)
Reuters
May 29, 2008
Bear Stearns Cos. Inc. Chairman James Cayne told employees and shareholders he was sorry for the demise of the 85-year-old investment bank, as shareholders voted on Thursday [May 29] to sell the company to JPMorgan Chase & Co. for less than $10 a share.
In a five-minute meeting at Bear's Manhattan headquarters, Mr. Cayne apologized and said a "hurricane" in the markets brought down the bank, according to attendees.
Members of the press were excluded from a session that attracted roughly 400 shareholders, many of them employees whose personal wealth was gutted by the collapse of Bear's stock price.
"I personally apologize," Mr. Cayne said, according to shareholders who attended the meeting. "Words can't describe the feelings that I feel."
No Dice for Bear Bankruptcy in Caymans(Hedgeworld)
Christopher Faille
May 29, 2008
A federal district court in Manhattan has upheld a ruling by the bankruptcy court there, refusing to recognize the Chapter 15 filing by liquidators of two Caymans-registered Bear Stearns hedge funds.
It's been a year now since the two funds failed due to the subprime debacle, and it's been nine months since bankruptcy judge Burton R. Lifland declined to treat the funds' bankruptcy filings in the Cayman Islands as either the ‘main' or ‘non-main' proceedings for the purposes of protecting their assets from civil lawsuits and liabilities in the United States.
The official liquidators, Simon Whicker and Kristen Beighton, appealed Mr. Lifland's order to U.S. District Court Judge Robert W. Sweet. They argued that Congress' intent in enacting Chapter 15 of the U.S. Bankruptcy Code was to foster comity and cooperation between courts in the United States and those of other jurisdictions.
Intermediate Capital assuming UK and US recession as core income surges(Telegraph)
Peter Taylor
May 29, 2008
The collapse last year of the sub-prime mortgage market was "merely a catalyst" to end a credit bubble that would have burst regardless, according to the head of Europe's pre-eminent mezzanine finance house.
Unveiling a 2pc increase in annual pre-tax profits yesterday, Intermediate Capital managing director Tom Attwood said the company now assumed there would be a recession in the UK, US and Spain in evaluating potential investments.
US and European debt markets flash new warning signals(Telegraph)
May 29, 2008
The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.
The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.
Credit default swaps (CDS) on Lehman debt have risen from around 130 in late April to 247, while Merrill debt has spiked to 196. Most analysts had thought the coast was clear for such broker dealers after the US Federal Reserve invoked an emergency clause in March to let them borrow directly from its lending window.
Bush 'plans Iran air strike by August'(Asia Times)
Muhammad Cohen
May 28, 2008
The George W Bush administration plans to launch an air strike against Iran within the next two months, an informed source tells Asia Times Online, echoing other reports that have surfaced in the media in the United States recently.
Two key US senators briefed on the attack planned to go public with their opposition to the move, according to the source, but their projected New York Times op-ed piece has yet to appear.
The source, a retired US career diplomat and former assistant secretary of state still active in the foreign affairs community, speaking anonymously, said last week that the US plans an air strike against the Iranian Revolutionary Guards Corps (IRGC). The air strike would target the headquarters of the IRGC's elite Quds force. With an estimated strength of up to 90,000 fighters, the Quds' stated mission is to spread Iran's revolution of 1979 throughout the region.
New surveys on August quant meltdown: Investors have learned a lesson. But have managers?(All About Alpha)
May 28, 2008
“We essentially have 10,000 Ph.D.s looking at the same data.”
That’s how Vadim Zlotnikov, CIO for growth equities at AllianceBernstein described the world of quant funds to the Annual Meeting of the CFA Institute last week in Vancouver. Zlotnikov was talking about the findings of a new paper by the Research Foundation of the CFA Institute based on a survey of asset managers, consultants and investors.
A press release announcing the study confirms what is now commonly believed, that August’s mayhem was mainly the result of quant hedge funds yelling “Fire!” and running for the exits (see related posting).
Ambac writes down $228 million in CDOs in April(INO.com)
May 28, 2008
Bond insurer Ambac Financial Group Inc. said Wednesday it continued to take millions of dollars in charges in April tied to its credit derivative and investment portfolios.
Net write-downs on its credit derivatives holdings totaled $176 million in April, with the bond insurer taking a write-down of $228 million on the value of collateralized debt obligations. Those write-downs were partially offset by $52 million in gains among other credit derivative holdings.
So-called CDOs are complex financial instruments that combine various slices of debt, many of which include subprime mortgage-backed securities.
AIG Falls as Citigroup Sees Need for More Capital (Update2) (Bloomberg)
Hugh Son
May 28
American International Group Inc., the world's largest insurer, fell 4.9 percent in New York trading after Citigroup Inc. analyst Joshua Shanker said it may need more capital beyond the $20.3 billion already collected.
AIG may seek $5 billion to $10 billion rather than let its credit ratings be cut again and risk higher borrowing costs and lower sales, Shanker said yesterday in a research note. Standard & Poor's, Fitch Ratings and Moody's Investors Service downgraded New York-based AIG this month after the company posted a $7.81 billion first-quarter loss.
``The ramifications of another downgrade would be devastating,'' Shanker, who rates AIG ``hold,'' said in a note published after the close of regular U.S. markets. ``A downgrade would be so detrimental to AIG that it will not allow this to happen.''
U.S. Ethanol Isn't Up to Brazilian Smackdown: Alexandre Marinis(Bloomberg)
Alexandre Marinis
May 27, 2008
Sometimes two things look pretty much the same, like a Cartier diamond and a Home Shopping Network cubic zirconia.
There's a world of difference between the two.
The same is true of ethanol made in the U.S., mainly from corn, and ethanol from Brazil derived from sugar cane. They look the same, though that's where the similarities end between what I like to call ethacorn and ethacane.
Although ethacane doesn't produce a fraction of the negative economic, environmental and social problems that ethacorn does, as international food prices soar and environmental concerns mount, both are being thrown into the same pinata to get hammered. Ethacorn deserves the beating, not ethacane.
Monoline Death Watch: CDO Unwind Disputes(Naked Capitalism)
May 28, 2008
Reader Abdul sent me a piece that ran in the New York Post on simmering disputes between investment banks trying to unwind CDOs and monolines that provided credit enhancement. Yes, I know the Post isn't the usual place to see what amounts to breaking financial news, but it was the first out with some stories on quant meltdowns, so it isn't completely unheard of.
Fed Keeps Watch on Wall St. -- From the Inside(Washington Post)
Neil Irwin
May 27, 2008
In the two months since the government rescue of Bear Stearns, the Federal Reserve has built on the fly a new system of monitoring investment banks, radically redefining the central bank's role overseeing Wall Street.
New York Fed employees are working inside major investment banks every day, alongside the Securities and Exchange Commission staff members who are the firms' main regulators. The Fed employees are trying to gather information the central bank can use to make sure the billions of dollars it is lending the investment firms, through a special emergency loan program enacted in March, are not being put at undue risk.
Libor Cracks Widen as Bankers Struggle With Reforms (Update2) (Bloomberg)
Gavin Finch and Ben Livesey
May 27
...Libor Exposed
Every morning the BBA, an unregulated trade group, asks member banks how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. It then calculates averages, throwing out the four highest and lowest quotes, and publishes them at about 11:30 a.m. in London. Three-month dollar Libor was set at 2.64 percent today. ...Rates `a Lie'
In the first four months of 2007, the difference between the highest and lowest rates for three-month Libor didn't exceed 0.02 percentage point, according to JPMorgan. In the same period this year, it was as wide as 0.17 percentage point.
The BIS said in a March report that some lenders may have ``manipulated'' rates. Strategists such as Bond at Barclays went as far as calling the reported rates a ``lie.''
The BBA said on April 16 that any member deliberately understating rates would be banned. The cost of borrowing in dollars for three months rose 0.18 percentage point to 2.91 percent in the following two days, the biggest increase since the start of the credit squeeze in August.
Lesley McLeod, a BBA spokeswoman in London, would only say the association's review is ``ongoing'' and a ``robust process.''
George Soros: rocketing oil price is a bubble(Telegraph)
Edmund Conway
May 2, 2008
Speculators are largely responsible for driving crude prices to their peaks in recent weeks and the record oil price now looks like a bubble, George Soros has warned.
The billionaire investor's comments came only days after the oil price soared to a record high of $135 a barrel amid speculation that crude could soon be catapulted towards the $200 mark.
In an interview with The Daily Telegraph, Mr Soros said that although the weak dollar, ebbing Middle Eastern supply and record Chinese demand could explain some of the increase in energy prices, the crude oil market had been significantly affected by speculation.
Global Derivatives Market Hits USUS$596 Trillion (Stockhouse)
Kanaga Raja
May 26, 2008
The global market for over-the-counter (OTC) derivatives showed a relatively steady growth in the second half of 2007 - amid the turmoil in global financial markets - with notional amounts of all categories of OTC contracts rising by 15% to US$596 trillion at the end of December 2007, following a 24% increase in the first half of the year.
Everybody’s Business
Running Out of Fuel, but Not Out of Ideas(NY Times)
BEN STEIN
May 25, 2008
...In my humble view, we are now in a short-term oil bubble. It will pass and correct, as bubbles do. And speculators will make millions, whichever way it goes. But the long run is terrifying. If we are at or past peak oil, if oil states stop or even hesitate to send us the juice, if Canada decides not to fill our needs, we are in overwhelming trouble.
So, what to do? First, we do not kill the geese — the big oil companies — that lay the golden eggs. We encourage them and cheer them on to get more oil. They need incentives, not hammer blows.
BUT most of all, we treat this as a true crisis. As my pal Glenn Beck, the conservative commentator, says, we need a new moon-shot mentality here. We need to turn coal into oil into gasoline, to use nuclear power wherever we can, and to brush aside the concerns of the beautiful people who live on coastal pastures (like me). And we need to drill on the continental shelf, even near where movie stars live. This must be done, on an emergency basis. If we keep acting as if the landscape were more important than human life, we will make ourselves the serfs of the oil producers and eventually reduce our country to poverty and anarchy.
In that long message sent to Congress 35 years ago, there was an outline of what we needed to do on coal-to-oil and shale-to-oil, as well as wind, solar and wave power. For a generation plus, we have done next to nothing. The hour is late. The clock of destiny is ticking out, as the Rev. Dr. Martin Luther King Jr. said. Let’s roll.
UPDATE 1-FASB changes accounting rules for US bond insurers(Reuters)
May 23, 2008
In a move that could hurt U.S. bond insurers, the U.S. accounting rulemaker on Friday said it is changing standards for when the insurers have to set aside money for expected losses.
Under the new rule by the Financial Accounting Standards Board, insurers that have guaranteed bonds must boost their claims liabilities, or funds set aside to cover expected losses, when the bonds' credit quality has deteriorated.
At least some bond insurers currently set aside reserves only when they believe they can estimate the losses, and the losses are likely to take place. The new rule would force those insurers to set aside money sooner.
Merrill Trader Is Suspended After Derivatives Review (NY Times)
May 24, 2008
Merrill Lynch is investigating one of its trading desks in London and has suspended a trader after discovering that he may have overstated the value of some of the bank’s equity derivatives. “The firm routinely reviews the marks our traders set,” a Merrill spokesman, Jezz Farr, said Friday, referring to the values given to securities. ”Our preliminary review determined that one desk used marks that appear to be outside of our accepted policy.” Merrill declined to identify the trader.
Senior Bear Departures: Signs of Valuation Headaches for JP Morgan?(Naked Capitalism)
May 24, 2008
When the consensus was that JP Morgan got a screaming deal in its acquisition of Bear Stearns, I thought it was way too early to make that call. Yes, it certainly looked like the New York bank pulled a master stroke in getting the Fed to eat $29 billion of exposures, guaranteed to be the worst stuff that Morgan could hoover up.
But Bear also had a very large derivatives book, and as we well know, was a large credit default swaps protection writer. Those contracts are traded bi-laterally; JPM would not have particularly strong insights (its role as Bear's clearing bank wouldn't be of much help) and a mere weekend was clearly not enough time to do more than have a few key questions answered in the heat of putting a deal together. Similarly, Bear had two valuable assets: its headquarters building and its prime brokerage operation. The building, though still a good investment, will be worth less as Wall Street fires more people and Class A vacancies rise. Moreover, Bear was losing market share in prime brokerage, and in a period of deleveraging, it's the riskiest exposures that get cut deepest (and don't kid yourself, the real money in prime brokerage is in the lending).
...Update 3:45 AM: Alert reader Steve wrote to tell me another shoe has already dropped, and has been curiously gone largely unnoticed. JP Morgan's option to buy the headquarters is being contested by the ground lease holder. This is a huge oversight. I can't imagine someone at Bear didn't know that this is the sort of thing that its acquirer would want to know, but hey, you pay a knocked-down price in haste, it's your obligation to know what exactly you are getting. At a minimum, this is pretty embarrassing. I assume that the bank will have to pay the plaintiff to go away. Wonder if they'll be able to avoid disclosing the amount.
OCC Chief Warns on Second Liens(Housingwire)
PAUL JACKSON
May 23, 200
Mounting losses in home equity loans and lines of credit have officials at the Office of the Comptroller of the Currency taking notice, with OCC chief John Dugan warning yesterday that banks need to build reserves for losses in the area and suggesting that many need to “return to the stronger underwriting standards of past years.”
The call for tighter underwriting standards from OCC officials would seem to contrast pretty sharply with the relaxing of underwriting standards now quickly taking place at Fannie Mae (FNM: 26.64, -3.44%) and Freddie Mac (FRE: 24.86, -3.38%), both of whom this week nixed long standing so-called declining market policies in the face of consumer criticism.
Why derivatives are getting much more dangerous(Moneyweek)
May 23, 2008
Sometimes when you’re scouring the news, you see a statistic that renders you almost speechless. You can't quite get your head around what it really means, you just know that it’s a knockout number.
One such figure came up yesterday. The total ‘value' of global derivatives - financial instruments which are priced on the back of the underlying assets that they track - has now reached a breathtaking $596 trillion, after a mammoth rise over the previous twelve months.
That started the warning lights flashing…
So what, apart from containing more noughts than a normal human being can cope with, is this titanic number all about?
Merrill Lynch sets up group to shed bad assets(Reuters)
May 23, 2008
Merrill Lynch & Co Inc is setting up a group to get rid of troubled or underperforming assets and named U.S. fixed income sales head Doug Mallach its head, according to an internal memo.
The group will help the brokerage figure out what to do with assets such as collateralized debt obligations that have been hammered by the subprime mortgage crisis. Mallach is putting together a team to figure out whether to sell, restructure, or hold onto these assets, a person briefed in the matter said.
Moody's Cuts AIG Rating(WSJ)
Kevin Kingsbury
May 23, 2008
Moody's Investors Service lowered the senior unsecured debt rating of American International Group Inc. and several subsidiaries "whose ratings have relied on material support from" AIG and those "with significant exposure to the U.S. residential-mortgage market."
The move follows the insurance giant's first-quarter report issued two weeks ago, in which AIG disclosed a net loss of $7.8 million and said it plans to raise billions more in capital.
Hey what a coincidence!
Iraq could have largest oil reserves in the world
(Alternative Energy Investor)
Sonia Verma
May 20, 2008
Iraq dramatically increased the official size of its oil reserves yesterday after new data suggested that they could exceed Saudi Arabia’s and be the largest in the world.
The Iraqi Deputy Prime Minister told The Times that new exploration showed that his country has the world’s largest proven oil reserves, with as much as 350 billion barrels. The figure is triple the country’s present proven reserves and exceeds that of Saudi Arabia’s estimated 264 billion barrels of oil. Barham Salih said that the new estimate had been based on recent geological surveys and seismic data compiled by “reputable, international oil companies . . . This is a serious figure from credible sources.”
Megabubble waiting for new president in 2009(Marketwatch)
PAUL B. FARRELL
May 20,2008
'Numbers racket' exposes potential disaster for economy, markets
...No matter who's elected president, America will soon see a massive statistical curtain pulled back, exposing a con game of historic proportions. And when that happens, you and I will suffer another ear-splitting global meltdown, bigger than today's housing-credit crisis, dragging us deep into a recession and bear market for years. ...
Confidence is lost in the ratings agencies. Confidence is lost in the Fed. Now confidence has been lost in the LIBOR. The finacial banks and others are trying to create alternatives: It's a bit like rearranging the deck chairs on the Titanic.
ICAP to Release U.S. Version of LIBOR (Hedgeworld)
Emma Trincal
May 22, 2008
ICAP plc, a London inter-dealer broker, is prepping a U.S. alternative to the London Interbank Offered Rate (LIBOR). The firm is in a final round of talks with the New York offices of multiple global banks to release the rate, to be called the New York Funding Rate, this month. "It's certainly going to be released this month," Lou Crandall, ICAP's New York-based chief economist, told HedgeWorld on Wednesday [May 21]. "We've talked with about 40 banks. We're talking to their U.S. offices but these are global banks. In fact, those banks constitute the same makeup as the LIBOR panel."
The implications of the emergence of an alternative short-term lending rate to LIBOR could be enormous for the derivatives market, and consequently for hedge funds. LIBOR is the most widely used benchmark, or reference rate, for short-term interest rates. LIBOR measures the rate at which large banks lend to each other in the London market across 10 currencies and 15 lending periods ranging from overnight to one year. It is a leading global credit benchmark used to price mortgages, bonds, loans and derivatives, and to set the rate at which banks make unsecured loans to one another.
...ICAP's initiative follows press reports last month that questioned the reliability of the daily quotes the BBA obtains from banks, which is uses to calculate LIBOR Previous HedgeWorld Story. Given the credit crunch, many argued that LIBOR rates were too low to be factual.
This is pretty negative, but let's not dismiss it out of hand. We really need to get going on developing alternate energy sources.
'Squawk Box' Guest Warns of $12-15-a-Gallon Gas (Business and Media)
Jeff Poor
May 21, 2008
Robert Hirsch an energy advisor, says CNBC morning show prediction was a citation of the 'Dean of Oil Analysts.'
It may be the mother of all doom and gloom gas price predictions: $12 for a gallon of gas is “inevitable.”
Robert Hirsch, Management Information Services Senior Energy Advisor, gave a dire warning about the potential future of gas prices on CNBC’s May 20 “Squawk Box”. He told host Becky Quick there was no single thing that would solve the problem, due to the enormity of the problem.
“[T]he prices that we’re paying at the pump today are, I think, going to be ‘the good old days,’ because others who watch this very closely forecast that we’re going to be hitting $12 and $15 per gallon,” Hirsch said. “And then, after that, when oil – world oil production goes into decline, we’re going to talk about rationing. In other words, not only are we going to be paying high prices and have considerable economic problems, but in addition to that, we’re not going to be able to get the fuel when we want it.”
Hirsch told the Business & Media Institute the $12-$15 a gallon wasn’t his prediction, but that he was citing Charles T. Maxwell, described as the “Dean of Oil Analysts” and the senior energy analyst at Weeden & Co. Still, Hirsch admitted the high price was inevitable in his view.
Fed losing appetite for more rate cuts(Marketwatch)
Greg Robb
May 21, 2008
Forecasts for inflation this year soar on high gasoline, food prices
As they have watched oil and food prices swirl ever higher, Federal Reserve officials have lost their appetite for more interest-rate cuts, even if the economy sinks into recession, according to the minutes of their last policy meeting released Wednesday.
Blame Wall Street for $135 Oil on Wrong-Way Betting (Update2) (Bloomberg)
Alexander Kwiatkowski and Grant Smith
May 22
Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.
The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.
``In a market like today, which is trending higher while open interest is falling, it's a sign that money is moving out of the market,'' said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Open interest in Nymex crude futures peaked this year at 1.5 million on March 13.
Look for more trouble in credit def