The civil fraud charges filed by the Securities and Exchange Commission Friday accused Goldman Sachs of "defrauding investors by misstating and omitting key facts". These financial charges also mark a new era of government regulatory enforcement of Wall Street. No longer will the SEC simply come to consent decrees with financial firms where they do not admit guilt and in most cases pay a small fine viewed as a cost of doing illegal business.
One immediate question is how do the SEC charges filed against Goldman Sachs change the playing field? Do these charges even mean anything in a broader regulatory context? In my opinion, the actions from the SEC on Friday defines a new playing field by Washington marked with the following game-changing alterations:
a) A broader effort to get the derivatives market properly regulated to minimize the possibility of future meltdowns.
b) The Goldman Sachs charges are expected to be the first of a lengthy string of government actions against multiple firms that contributed to the financial meltdown. The lack of accountability by firms which accepted bailouts is no longer acceptable to main street and their representatives in Washington.
c) A dismantling by regulation of firms that are "too big to fail"; including the scaling back of previous government legislation that allowed the merger of commercial and investment banks.
d) The teeth of the SEC are back in place. For the last twenty years the SEC has been a toothless enforcement entity; forcing state AGs to take a leading prosecution role in financial malfeasance. This is likely to be the start of a change where the federal government will have deep roots in the policing of problems involving large financial firms.
The roll out of these regulatory reforms are expected to take years; however as noted by an AFP news article "We suspect that after Friday, others on Wall Street may have a harder time sleeping."
Another good clip is Ratigan on MSNBC where he compares Goldman Sachs to an automobile manufacturing company that deliberately took critical component from the inside of cars (CDOs) and then sold the cars as being great investments while betting on the side that the cars they created would all blow up spectacularly. An apt analogy - watch it here.
Showing posts with label CDO. Show all posts
Showing posts with label CDO. Show all posts
Saturday, April 17, 2010
Tuesday, February 24, 2009
The Math that Destroyed Wall Street...... and Main Street
Wired magazine recently presented a good article about the underlying math which destroyed Wall Street.
Recipe for Disaster: The Formula That Killed Wall Street
Page 3 actually outlines the basic math of the Copula Function approach which underlies the CDO market.
Recipe for Disaster: The Formula That Killed Wall Street
Page 3 actually outlines the basic math of the Copula Function approach which underlies the CDO market.
Thursday, April 3, 2008
From across the pond: The Banking Crisis
The mortgage credit crunch has not only impacted banks in the U.S., but has shocked financial institutions overseas. Filmed after the demise of Northern Rock in the U.K., this edition of Dispatches featuring Jon Moulton outlines the financial meltdown. The clip is an excellent educational summary of the greed-driven problems in the credit market that has left the world on the brink of recession.
Monday, March 24, 2008
Quick Takes: Credit Churn, Bear Stearns
The failure of auction rate securities is still causing angst for the closed end bond funds. The leveraged funds that issue auction rate preferred shares are in serious trouble.
BlackRock and others in this business are searching for strategic alternatives. Over $300 billion in securities are at risk, and BlackRock has 66 impacted bond funds with a value of $9.8 billion.
Despite proposals for re-financing and put features for these instruments, the probability of a resolution appears bleak. By the end of the auction rate failure crunch, there is an expectation that one or more of these fund families will flounder. Most likely the backing company will be sold for pennies on the dollar.
The news is not any better in the subprime sector, the delinquencies on the mortgages issued between 2005 and 2007 continue to rise according to Standard & Poors. The delinquency rate is rapidly approaching 40% for many of the notes issued in these years; the rate of delinquency is jumping 4 to 10% per month. Wall Street expected a delinquency rate of 15% worse case when it packaged the notes in CDOs; so much for financial modeling.
In other news, you don’t have to feel bad for all those executives at Bear Stearns; many of the top insiders sold large chunks of stock in December in advance of the implosion. It appears that these folks will not have to move out of their multi-million dollar mansions.
In related news that will cheer up Bear Stearns employees, JP Morgan raised its bid to purchase the bank to $10 from $2. The question being if Bear’s chairman James Cayne who is probably off-site at either a bridge tournament or the golf course has heard this news yet.
BlackRock and others in this business are searching for strategic alternatives. Over $300 billion in securities are at risk, and BlackRock has 66 impacted bond funds with a value of $9.8 billion.
Despite proposals for re-financing and put features for these instruments, the probability of a resolution appears bleak. By the end of the auction rate failure crunch, there is an expectation that one or more of these fund families will flounder. Most likely the backing company will be sold for pennies on the dollar.
The news is not any better in the subprime sector, the delinquencies on the mortgages issued between 2005 and 2007 continue to rise according to Standard & Poors. The delinquency rate is rapidly approaching 40% for many of the notes issued in these years; the rate of delinquency is jumping 4 to 10% per month. Wall Street expected a delinquency rate of 15% worse case when it packaged the notes in CDOs; so much for financial modeling.
In other news, you don’t have to feel bad for all those executives at Bear Stearns; many of the top insiders sold large chunks of stock in December in advance of the implosion. It appears that these folks will not have to move out of their multi-million dollar mansions.
In related news that will cheer up Bear Stearns employees, JP Morgan raised its bid to purchase the bank to $10 from $2. The question being if Bear’s chairman James Cayne who is probably off-site at either a bridge tournament or the golf course has heard this news yet.
Tuesday, January 29, 2008
The Redefinition of Risk
Summer 2005 – Wall Street
“All swans are white” shouted the leader of the investment banking crowd.
“and what if a black one shows up,” countered the risk manager.
“Do you know how much money we are making on these CDOs? How can there be any risk. Risk is a thing of the past. This is the new generation of banking, risk is distributed," cried the room in chorus.
“The black swam is stalking you, and it is just a matter of time till it makes its appearance,” shouted the risk manager over the din.
“The quants have modeled this stuff over the last ten years. They assure me there is no risk and we are going to make a ton of money in fees. Don’t rock our rice bowl,” stated the lead derivative banker as the crowd rose to leave the room, “Let’s go make some bonus money!”
The risk manager sadly shook his head while staring directly at the black swan that was obviously sitting on the table.
The risk manager resigned the following week and was quickly replaced by one more pliable to the demands of the derivative structure crowd. The figurine of the three monkeys on the new risk manager’s desk was an evident sign of the impending future.
The combination of greed, poor modeling, and deliberate disregard of proper diligence practices has come home to roost in one of the largest catastrophes ever experienced by Wall Street. The events of the last six months are an outline of a history lesson that will be taught in business school classrooms a hundred years from today. The trail of wreckage is widespread and unprecedented. Adding liquidity from the Fed was not able to unwind the credit crisis, and the industry was not able to bail itself out. Many major financial institutions had to turn to foreign sovereign funds to provide cash to avoid being effectively left insolvent from a capital ratio perspective.
Value at risk is dead, a new model is needed that properly accounts for derivative risk on Wall Street. The new representation needs to take into account the expectation of six-sigma events and disregard the pressure from bankers focused on greed over common sense. The concept that firms can solely account for risk by defining the dollar amount at risk on any given day with 95% confidence is a failed relic of the past. The quantitative models from Wall Street wizards that cherry-pick ten year nonvolatile timeframes as evidence that no significant losses can ever occur for derivatives has been debunked. The fantasy in the brave new world of banking that risk can be distributed in the derivatives market and nobody will ever be left holding the bag has obviously crumbled into dust.
A recent article (Death of VaR Evoked as Risk-Taking Vim Meets Taleb's Black Swan) outlines these concerns with this opening:
"The risk-taking model that emboldened Wall Street to trade with impunity is broken and everyone from Merrill Lynch & Co. Chief Executive Officer John Thain to Morgan Stanley Chief Financial Officer Colm Kelleher is coming to the realization that no algorithm or triple-A rating can substitute for old-fashioned due diligence.
Value at risk, the measure banks use to calculate the maximum their trades can lose each day, failed to detect the scope of the U.S. subprime mortgage market's collapse as it triggered more than $130 billion of losses since June for the biggest securities firms led by Citigroup Inc., Merrill, Morgan Stanley and UBS AG."
A number of earlier articles at HingeFire talk about the Wall Street derivatives debacle:
Does the Securitization Model actually work?
The Derivative House of Cards: The “Shadow Banking” System falters
Will Someone tell the Financial Whiz Kids that their House is Built of Cards
“All swans are white” shouted the leader of the investment banking crowd.
“and what if a black one shows up,” countered the risk manager.
“Do you know how much money we are making on these CDOs? How can there be any risk. Risk is a thing of the past. This is the new generation of banking, risk is distributed," cried the room in chorus.
“The black swam is stalking you, and it is just a matter of time till it makes its appearance,” shouted the risk manager over the din.
“The quants have modeled this stuff over the last ten years. They assure me there is no risk and we are going to make a ton of money in fees. Don’t rock our rice bowl,” stated the lead derivative banker as the crowd rose to leave the room, “Let’s go make some bonus money!”
The risk manager sadly shook his head while staring directly at the black swan that was obviously sitting on the table.
The risk manager resigned the following week and was quickly replaced by one more pliable to the demands of the derivative structure crowd. The figurine of the three monkeys on the new risk manager’s desk was an evident sign of the impending future.
The combination of greed, poor modeling, and deliberate disregard of proper diligence practices has come home to roost in one of the largest catastrophes ever experienced by Wall Street. The events of the last six months are an outline of a history lesson that will be taught in business school classrooms a hundred years from today. The trail of wreckage is widespread and unprecedented. Adding liquidity from the Fed was not able to unwind the credit crisis, and the industry was not able to bail itself out. Many major financial institutions had to turn to foreign sovereign funds to provide cash to avoid being effectively left insolvent from a capital ratio perspective.
Value at risk is dead, a new model is needed that properly accounts for derivative risk on Wall Street. The new representation needs to take into account the expectation of six-sigma events and disregard the pressure from bankers focused on greed over common sense. The concept that firms can solely account for risk by defining the dollar amount at risk on any given day with 95% confidence is a failed relic of the past. The quantitative models from Wall Street wizards that cherry-pick ten year nonvolatile timeframes as evidence that no significant losses can ever occur for derivatives has been debunked. The fantasy in the brave new world of banking that risk can be distributed in the derivatives market and nobody will ever be left holding the bag has obviously crumbled into dust.
A recent article (Death of VaR Evoked as Risk-Taking Vim Meets Taleb's Black Swan) outlines these concerns with this opening:
"The risk-taking model that emboldened Wall Street to trade with impunity is broken and everyone from Merrill Lynch & Co. Chief Executive Officer John Thain to Morgan Stanley Chief Financial Officer Colm Kelleher is coming to the realization that no algorithm or triple-A rating can substitute for old-fashioned due diligence.
Value at risk, the measure banks use to calculate the maximum their trades can lose each day, failed to detect the scope of the U.S. subprime mortgage market's collapse as it triggered more than $130 billion of losses since June for the biggest securities firms led by Citigroup Inc., Merrill, Morgan Stanley and UBS AG."
A number of earlier articles at HingeFire talk about the Wall Street derivatives debacle:
Does the Securitization Model actually work?
The Derivative House of Cards: The “Shadow Banking” System falters
Will Someone tell the Financial Whiz Kids that their House is Built of Cards
Friday, January 25, 2008
Wrap Up: A Wild Week
An astounding week on Wall Street with a wild roller-coaster ride in the market. The market started deeply down on Tuesday following significant drops in world markets on Monday, which was the MLK holiday in the U.S. By the end of the week, the markets have recovered most of their losses while rising in significant counter-trend rallies on Tuesday and Wednesday.
The business news flow this week was no less shocking; starting with the story about the lack of risk control at Societe Generale. This French bank revealed that a low level trader was able to cost the firm $7.2 Billion in unauthorized bets on stock markets. More interesting, the trader did not make any money off of his actions.
In the meantime, the 31-year-old employee at the center of the situation, Jerome Kerviel, has magically disappeared according to most press reports. Some reports claim he has fled while others state his lawyers say he will be available for questioning.
The major banks and brokerages have constantly harped on how they have improved risk control over time. Once again this appears to be a fantasy! First the CDO / SIV crisis, and now a situation where a low-level employee has perpetuated the largest financial fraud in history by an individual.
The absurdity of the situation has led many pundits to question if Societe Generale is being truthful about the situation, or if this “news” has just been cooked up to cover their CDO losses. It seems ludicrous that an employee would be able to by-pass even basic risk control systems at this level of magnitude. Especially since the sell-off earlier this week in European markets is now being tagged to the need of Societe Generale to exit these unauthorized positions.
In the meantime, the housing situation in the U.S. does not appear to be improving. Two key reports underlined the dismal condition of real estate. The sales of single family homes dropped by the largest amount in 25 years. The median price of a home fell for the first time in four decades, dropping 1.8% to $217K. The entire country has not experienced a decline in home prices for an entire year since the Great Depression.
The outlook is not pretty; the housing bottom is not likely to be reached for many months. In some reports, prices nationwide will fall by another 5%. This implies that the drop in hot speculative markets will be much greater. Lasting Housing Woes Paint a Grim Economic Picture
Hoping to improve the economy, law makers in Washington implemented a stimulus plan that will provide most tax payers an additional $600 to $1200 in their refund. The hope is that people will spend this money and stimulate the economy rather than simply paying off debt or shoving it into their bank account. The concept seems counter-intuitive, but with a consumption driven economy it is understandable. Some press questions if the American consumer is too strapped to spend.
Offsetting the news from Washington, the unemployment rate continues to increase. The major banks were at the front of the employment press; Citi announcing more cuts, Goldman Sach’s about to axe 1000, Morgan Stanley trimming another 1000, and the expectation that Bank of America & others will add to this trend.
The Bond insurance situation continues to play out with regulators from New York and other states urging that institutions rescue these firms which insure most municipal bonds. Most states are very concerned because their ratings on existing bonds will dive and cost to borrow additionally money will rise immediately when these insurers become insolvent. Wilbur Ross may be stepping up to purchase Ambac (ABK). MBIA Inc (MBI) appears to be treading water hoping for a deal of some type. ACA Capital Holdings (ACAH.PK) has a mere month to live after receiving a forbearance extension to February 19th from its creditors.
The question remains if the market has arrived at the bottom. Stock markets normally approach the bottom in a very volatile manner, with many violent upside counter-rallies over a period of months. Usually the bottom is re-tested multiple times before a new significant uptrend starts. This can be seen by studying the charts of past troughs in the markets. This also implies that the probability is that this week has not been the local bottom for the market; in light of weakening economic conditions there will be a further slide over the upcoming months. Only time will tell how the entire situation plays out.
In the meantime, investors should focus on the long term with their retirement savings and not attempt to trade the market. Maintain a properly diversified portfolio and understand that the stock market moves in cycles… and in due time will bounce back.
The business news flow this week was no less shocking; starting with the story about the lack of risk control at Societe Generale. This French bank revealed that a low level trader was able to cost the firm $7.2 Billion in unauthorized bets on stock markets. More interesting, the trader did not make any money off of his actions.
In the meantime, the 31-year-old employee at the center of the situation, Jerome Kerviel, has magically disappeared according to most press reports. Some reports claim he has fled while others state his lawyers say he will be available for questioning.
The major banks and brokerages have constantly harped on how they have improved risk control over time. Once again this appears to be a fantasy! First the CDO / SIV crisis, and now a situation where a low-level employee has perpetuated the largest financial fraud in history by an individual.
The absurdity of the situation has led many pundits to question if Societe Generale is being truthful about the situation, or if this “news” has just been cooked up to cover their CDO losses. It seems ludicrous that an employee would be able to by-pass even basic risk control systems at this level of magnitude. Especially since the sell-off earlier this week in European markets is now being tagged to the need of Societe Generale to exit these unauthorized positions.
In the meantime, the housing situation in the U.S. does not appear to be improving. Two key reports underlined the dismal condition of real estate. The sales of single family homes dropped by the largest amount in 25 years. The median price of a home fell for the first time in four decades, dropping 1.8% to $217K. The entire country has not experienced a decline in home prices for an entire year since the Great Depression.
The outlook is not pretty; the housing bottom is not likely to be reached for many months. In some reports, prices nationwide will fall by another 5%. This implies that the drop in hot speculative markets will be much greater. Lasting Housing Woes Paint a Grim Economic Picture
Hoping to improve the economy, law makers in Washington implemented a stimulus plan that will provide most tax payers an additional $600 to $1200 in their refund. The hope is that people will spend this money and stimulate the economy rather than simply paying off debt or shoving it into their bank account. The concept seems counter-intuitive, but with a consumption driven economy it is understandable. Some press questions if the American consumer is too strapped to spend.
Offsetting the news from Washington, the unemployment rate continues to increase. The major banks were at the front of the employment press; Citi announcing more cuts, Goldman Sach’s about to axe 1000, Morgan Stanley trimming another 1000, and the expectation that Bank of America & others will add to this trend.
The Bond insurance situation continues to play out with regulators from New York and other states urging that institutions rescue these firms which insure most municipal bonds. Most states are very concerned because their ratings on existing bonds will dive and cost to borrow additionally money will rise immediately when these insurers become insolvent. Wilbur Ross may be stepping up to purchase Ambac (ABK). MBIA Inc (MBI) appears to be treading water hoping for a deal of some type. ACA Capital Holdings (ACAH.PK) has a mere month to live after receiving a forbearance extension to February 19th from its creditors.
The question remains if the market has arrived at the bottom. Stock markets normally approach the bottom in a very volatile manner, with many violent upside counter-rallies over a period of months. Usually the bottom is re-tested multiple times before a new significant uptrend starts. This can be seen by studying the charts of past troughs in the markets. This also implies that the probability is that this week has not been the local bottom for the market; in light of weakening economic conditions there will be a further slide over the upcoming months. Only time will tell how the entire situation plays out.
In the meantime, investors should focus on the long term with their retirement savings and not attempt to trade the market. Maintain a properly diversified portfolio and understand that the stock market moves in cycles… and in due time will bounce back.
Wednesday, January 16, 2008
No Place to Hide
It is only Wednesday, but enough activity has already occurred this week to summarize it. This week has been all about the banks and probability that the churn seen in this sector will drive the economy into recession. The choke hold of tightening credit, inflationary prices for necessities, housing issues, increasing unemployment, and flagging confidence will shortly squeeze the consumer out of the game. The fallout from the wobbling bank sector will only add to the downside economic momentum.
The staggering Citigroup loss announced Tuesday raised the anxiety over the economy while clearly underlining the unresolved crisis in the financial sector. Stocks sold off sharply in reaction to the expected-but-disturbing Citi news. The only time in the past where the financial sector was seen moving from good profits to negative profits in a short period of time was the Great Depression.
The credit card sector is also rapidly diving. Capital One (COF) and American Express (AXP) recently issued profit warnings tied to rising consumer delinquencies. A recent Motley Fool article included Capital One as a Deathbed stock.
Commentary from the Fed chairman and governors was even less promising. Economists stated that the probability of recession has increased to 50-50 from 1/3, while the Ben Bernanke glumly agreed the economy is obviously slowing. The San Francisco Federal Reserve Bank came out and directly stated that 2008 growth will be at near recession levels in the “FedViews” newsletter. All the economic leading figures including the reduction in manufacturing over-time hours – point to a recession.
Some banks are taking proactive steps to exit risky business segments. Bank of America should be applauded this week for moving to re-focus on its core banking business. The firm took steps this week to exit the stock brokerage, investment banking, CDOs, and other risky segments. This demonstrates some common sense amid the carnage in the sector.
The easing of the Glass-Steagall Banking Act of 1933 over the last decade has allowed commercial banks to enter investing banking and other risky business segments. Clearly it is time to roll-back the inappropriate Gramm-Leach-Bliley Act enacted in 1999 to “open up competition”. Legislation must be put back in place to require commercial banks to strictly focus on standard banking activities for the safety of depositors. The Great Depression taught significant lessons on why commercial and investment banking activities should be separated, and the bank lobby should have never been allowed to roll-back these earlier protections. The risk of a complete financial meltdown due to the banks’ derivative speculation with a focus on fees remains high. Only the continued Federal lending at mechanisms such as the discount window and foreign capital investment are keeping many of the banks liquid.
This leads to the question – Is there any place to hide during a complete market meltdown? Even cash in the bank may be at risk – several money market funds with CDO exposure had to be propped up over the past months. Even investments normally considered safe have risks in an environment where existing credit ratings have no real meaning. Your money market fund backed by “AAA” fixed income investments may be downgraded to “C” junk overnight … with the probability of default within two weeks.
Unstable market environments offer plenty of risks, but can provide significant rewards for investors willing to effectively sell short. The question remains if the downside action is near a trough or should investors start to bottom pick. The most immediate sector of interest will be the financial industry once the fourth quarter earning cycle is completed.
The staggering Citigroup loss announced Tuesday raised the anxiety over the economy while clearly underlining the unresolved crisis in the financial sector. Stocks sold off sharply in reaction to the expected-but-disturbing Citi news. The only time in the past where the financial sector was seen moving from good profits to negative profits in a short period of time was the Great Depression.
The credit card sector is also rapidly diving. Capital One (COF) and American Express (AXP) recently issued profit warnings tied to rising consumer delinquencies. A recent Motley Fool article included Capital One as a Deathbed stock.
Commentary from the Fed chairman and governors was even less promising. Economists stated that the probability of recession has increased to 50-50 from 1/3, while the Ben Bernanke glumly agreed the economy is obviously slowing. The San Francisco Federal Reserve Bank came out and directly stated that 2008 growth will be at near recession levels in the “FedViews” newsletter. All the economic leading figures including the reduction in manufacturing over-time hours – point to a recession.
Some banks are taking proactive steps to exit risky business segments. Bank of America should be applauded this week for moving to re-focus on its core banking business. The firm took steps this week to exit the stock brokerage, investment banking, CDOs, and other risky segments. This demonstrates some common sense amid the carnage in the sector.
The easing of the Glass-Steagall Banking Act of 1933 over the last decade has allowed commercial banks to enter investing banking and other risky business segments. Clearly it is time to roll-back the inappropriate Gramm-Leach-Bliley Act enacted in 1999 to “open up competition”. Legislation must be put back in place to require commercial banks to strictly focus on standard banking activities for the safety of depositors. The Great Depression taught significant lessons on why commercial and investment banking activities should be separated, and the bank lobby should have never been allowed to roll-back these earlier protections. The risk of a complete financial meltdown due to the banks’ derivative speculation with a focus on fees remains high. Only the continued Federal lending at mechanisms such as the discount window and foreign capital investment are keeping many of the banks liquid.
This leads to the question – Is there any place to hide during a complete market meltdown? Even cash in the bank may be at risk – several money market funds with CDO exposure had to be propped up over the past months. Even investments normally considered safe have risks in an environment where existing credit ratings have no real meaning. Your money market fund backed by “AAA” fixed income investments may be downgraded to “C” junk overnight … with the probability of default within two weeks.
Unstable market environments offer plenty of risks, but can provide significant rewards for investors willing to effectively sell short. The question remains if the downside action is near a trough or should investors start to bottom pick. The most immediate sector of interest will be the financial industry once the fourth quarter earning cycle is completed.
Tuesday, January 15, 2008
The Race to Downgrade
Earlier summaries at HingeFire outlined the “race to downgrade” as one of the risk factors adversely impacting the economy. The continually downgrade cycle has become so prevalent that the financial press has now derived a name for it - the “Friday CDO downgrade bonanza”. It appears that Standard & Poors each Friday cuts the credit rating of another large group of CDO tranches.
In the most recent week, Standard & Poors lowered its rating on 149 tranches worth $8.7 billion, and put another 54 on credit watch. The total is now 1,290 tranches from 402 CDOs worth over $83.5 billion in just a few weeks with 726 tranches on credit watch.
Amazingly enough, most of these tranches have been downgraded to junk, many with a low “C” rating. Just a few weeks back most were ‘AAA” rated. The CDOs covered by credit rating agencies only represent a fraction of the total outstanding. The other rating agencies such as Moody’s are also in a rush to downgrade the CDO instruments they cover.
The mad rush to downgrade formerly pristine CDO instruments to junk over the course of the past few months should make people wonder if the entire credit rating industry was asleep at the wheel, or even worse - complicit in unsound risk practices.
In the most recent week, Standard & Poors lowered its rating on 149 tranches worth $8.7 billion, and put another 54 on credit watch. The total is now 1,290 tranches from 402 CDOs worth over $83.5 billion in just a few weeks with 726 tranches on credit watch.
Amazingly enough, most of these tranches have been downgraded to junk, many with a low “C” rating. Just a few weeks back most were ‘AAA” rated. The CDOs covered by credit rating agencies only represent a fraction of the total outstanding. The other rating agencies such as Moody’s are also in a rush to downgrade the CDO instruments they cover.
The mad rush to downgrade formerly pristine CDO instruments to junk over the course of the past few months should make people wonder if the entire credit rating industry was asleep at the wheel, or even worse - complicit in unsound risk practices.
Saturday, December 29, 2007
Citi: Some quick math
Analysts warned this week that Citi may need to right off another $18.7 billion in the fourth quarter, exceeding earlier estimates of $8 to $11 billion. The actual total may be even greater than this based on some simple math. Citi holds some $43 billion in CDOs with subprime mortgages underlying them. At this point, these derivatives are trading best case for 43 cents on the dollar; many are down near 22 cents on the dollar. A simple calculation of 57% of $43B shows that $24.5 billion of bad CDO investments will still need to be written down. Not all of this will occur in the fourth quarter, but to properly mark the books to market the greater part of it must.
The totals may even be worse, Citi has an additional exposure of $12 billion to subprime that is non-CDO. Additionally the bank will be fortunate to hit a peak salvage value of 43 cents per dollar on these investments; many will go for below 30 cents in the current crunch.
This makes it likely that Citi will need to significantly cut its dividend and seek additional outside investment from sovereign funds to bulk up its capital ratio to regulatory minimums.
The banks are still running red, and the impending credit card meltdown is not included in the tally yet. A number of notable Hedge Fund managers were quoted this week saying that Citi was a buy at $5 per share, a mere 83% tumble from the current share price.
Citi May Write Down $18.7B, Analysts Say
The totals may even be worse, Citi has an additional exposure of $12 billion to subprime that is non-CDO. Additionally the bank will be fortunate to hit a peak salvage value of 43 cents per dollar on these investments; many will go for below 30 cents in the current crunch.
This makes it likely that Citi will need to significantly cut its dividend and seek additional outside investment from sovereign funds to bulk up its capital ratio to regulatory minimums.
The banks are still running red, and the impending credit card meltdown is not included in the tally yet. A number of notable Hedge Fund managers were quoted this week saying that Citi was a buy at $5 per share, a mere 83% tumble from the current share price.
Citi May Write Down $18.7B, Analysts Say
Thursday, December 20, 2007
The CDO Downdraft
Yesterday the “Muni Bond Dilemma” was discussed; today the other shoe fell. A good number of Muni Bonds are insured by MBIA. Today Fitch downgraded all the bonds insured by MBIA (172,860 municipal, 162 non-muni) to Rating Watch Negative due to its CDO exposure
In a shocking revelation the world’s largest bond insurer, MBIA, disclosed that it guaranteed $8.1 billion of collateralized debt obligations that have significant probability of losses. The analyst community was disturbed that this information has been withheld until now. Especially in view that MBIA may not have adequate capital to cover widespread losses. Other insurers are also being given a critical re-evaluation by rating agencies. Several are stumbling and one in particular, ACA Capital Holdings (ACAH.PK), is on verge of bankruptcy unless a rescue occurs.
MBIA fell 26% to $19.95 today in reaction to the news. A more severe response was given by Fitch with the downgrade of all the Muni-debt backed by MBIA. The instability caused by the CDO exposure of the insurer effectively is hitting the entire Muni Bond market.
There is an increasing probability that one or more of the bond insurers will quickly dive into bankruptcy. The majority of Muni-Bonds enjoy high ratings due to the insurance backing. Failure, due to unrelated CDO guarantees, of the insurance firms that also back the municipal bonds is likely to cause many these government issued bonds to be cut from high ratings to near junk.
Fitch Places 173,022 MBIA-Insured Issues on Rating Watch Negative
http://www.businesswire.com/portal/site/home/index.jsp?epi-content=GENERIC&newsId=20071220006121&ndmHsc=v2*A1198155600000*B1198219069000*DgroupByDate*J1*N1000837&newsLang=en&beanID=202776713&viewID=news_view
MBIA Tumbles on $8.1 Billion of CDOs, Fitch Warning
http://www.bloomberg.com/apps/news?pid=20601087&sid=aF5n2mMwD_VE&refer=home
Ambac, MBIA and rivals may lose AAA ratings: S&P
FGIC's rating also imperiled; ACA Capital ratings slashed to CCC
http://www.marketwatch.com/news/story/sp-warns-may-cut-aaa/story.aspx?guid=%7B13D7F179%2D88E0%2D4995%2DA566%2DB41CC5BBEC5D%7D&siteid=yhoof
In a shocking revelation the world’s largest bond insurer, MBIA, disclosed that it guaranteed $8.1 billion of collateralized debt obligations that have significant probability of losses. The analyst community was disturbed that this information has been withheld until now. Especially in view that MBIA may not have adequate capital to cover widespread losses. Other insurers are also being given a critical re-evaluation by rating agencies. Several are stumbling and one in particular, ACA Capital Holdings (ACAH.PK), is on verge of bankruptcy unless a rescue occurs.
MBIA fell 26% to $19.95 today in reaction to the news. A more severe response was given by Fitch with the downgrade of all the Muni-debt backed by MBIA. The instability caused by the CDO exposure of the insurer effectively is hitting the entire Muni Bond market.
There is an increasing probability that one or more of the bond insurers will quickly dive into bankruptcy. The majority of Muni-Bonds enjoy high ratings due to the insurance backing. Failure, due to unrelated CDO guarantees, of the insurance firms that also back the municipal bonds is likely to cause many these government issued bonds to be cut from high ratings to near junk.
Fitch Places 173,022 MBIA-Insured Issues on Rating Watch Negative
http://www.businesswire.com/portal/site/home/index.jsp?epi-content=GENERIC&newsId=20071220006121&ndmHsc=v2*A1198155600000*B1198219069000*DgroupByDate*J1*N1000837&newsLang=en&beanID=202776713&viewID=news_view
MBIA Tumbles on $8.1 Billion of CDOs, Fitch Warning
http://www.bloomberg.com/apps/news?pid=20601087&sid=aF5n2mMwD_VE&refer=home
Ambac, MBIA and rivals may lose AAA ratings: S&P
FGIC's rating also imperiled; ACA Capital ratings slashed to CCC
http://www.marketwatch.com/news/story/sp-warns-may-cut-aaa/story.aspx?guid=%7B13D7F179%2D88E0%2D4995%2DA566%2DB41CC5BBEC5D%7D&siteid=yhoof
Quick Takes: BW labels mortgage CDOs a pyramid scheme
Business Week provides a detailed look at the Bear Stearns’ Hedge Funds which collapsed and outlines their similarities to a pyramid scheme. A good read…
The Bear Flu: How It Spread
A novel financing scheme used by Bear Stearns' hedge funds became a template for subprime disaster.
http://www.businessweek.com/magazine/content/07_53/b4065000402886.htm
“The global markets are dealing with the consequences: The tab from the mortgage mess could run up to $500 billion, and central bankers are struggling to stave off recession. As investigators sort through the wreckage, the records of Bear Stearns' doomed hedge funds are turning out to be some of the most revealing in an era of financial folly.”
The Bear Flu: How It Spread
A novel financing scheme used by Bear Stearns' hedge funds became a template for subprime disaster.
http://www.businessweek.com/magazine/content/07_53/b4065000402886.htm
“The global markets are dealing with the consequences: The tab from the mortgage mess could run up to $500 billion, and central bankers are struggling to stave off recession. As investigators sort through the wreckage, the records of Bear Stearns' doomed hedge funds are turning out to be some of the most revealing in an era of financial folly.”
Tuesday, December 18, 2007
The Derivative House of Cards: The “Shadow Banking” System falters
Traditionally banking was collecting cash, making loans, and selling low-risk bonds. The old-world apparently was run over by the freight train of modern derivative banking. The brave new world of banking is focused on derivative structures, generating fees, and passing risk down the chain. However the recent credit crisis has proven that eventually someone will be left holding the bag as the house of cards crumbles.
The new modern banking system has operated in “the shadows” according to many. The recent credit crisis has exposed the monstrosity as a multi-headed dreaded hydra. Is it time to properly apply regulatory structure to tame this beast?
A recent article in the Financial Times discusses the system of opaque institutions, non-existent regulation, and derivative vehicles which has led to the credit market turmoil.
Out of the shadows: How banking's secret system broke down
http://biz.yahoo.com/ft/071216/fto121620071354448683.html?.v=1
"What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending [that is] so hard to understand," Bill Gross, head of Pimco asset management group recently wrote. "Colleagues call it the 'shadow banking system' because it has lain hidden for years, untouched by regulation yet free to magically and mystically create and then package subprime loans in [ways] that only Wall Street wizards could explain."
The new modern banking system has operated in “the shadows” according to many. The recent credit crisis has exposed the monstrosity as a multi-headed dreaded hydra. Is it time to properly apply regulatory structure to tame this beast?
A recent article in the Financial Times discusses the system of opaque institutions, non-existent regulation, and derivative vehicles which has led to the credit market turmoil.
Out of the shadows: How banking's secret system broke down
http://biz.yahoo.com/ft/071216/fto121620071354448683.html?.v=1
"What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending [that is] so hard to understand," Bill Gross, head of Pimco asset management group recently wrote. "Colleagues call it the 'shadow banking system' because it has lain hidden for years, untouched by regulation yet free to magically and mystically create and then package subprime loans in [ways] that only Wall Street wizards could explain."
Saturday, November 17, 2007
“We have not seen a nationwide decline in housing like this since the Great Depression"
The maze of weekend reading has produced some gems this week. The first was the quote above from Wells Fargo Chief Executive John Stumpf. Once in a while a banking industry insider hits on the exact correct perspective and provides a real zinger of a quip that puts the state of affairs in context.
Wells Fargo: All's Not Well
http://www.forbes.com/home/markets/2007/11/15/wells-fargo-closer-markets-equity-cx_er_ml_1115markets37.html
Earlier this week, Fortune provided commentary questioning the soundness of Wall Streets practices. The banking firms continual implement repetitive cycles of destructive behavior, never learning from previous lessons while always chasing higher fees.
In the past I have commented on the cycle of greed trumping common sense and adequate risk control in the banking sector.
Banks: The Worse is Ahead
http://hingefire.blogspot.com/2007/11/banks-worse-is-ahead.html
Fortune declares “In pure destructive power, the subprime mess has become Wall Street's version of Hurricane Katrina.” From any perspective, the investment banks have finally stepped in a bog where there is no easy way to pull their foot out. The size of the carnage triggered by the credit meltdown is dazzling. A couple further quotes from the article provide additional perspective:
“Predictable because whether it's junk bonds or tech stocks or emerging-market debt, Wall Street always rides a wave until it crashes. As the fees roll in, one firm after another abandons itself to the lure of easy money, then hands back, in a sudden, unforeseen spasm, a big chunk of the profits it booked in good times.”
"The fee engine becomes so huge that these products take on a life of their own," says Tiger Williams, CEO of Williams Trading, a leading financial services firm for hedge funds. "Everyone rationalizes that it's safe because they're making so much money. But it's far from safe."
The Fortune article is a worthwhile read; the bulk of the article outlines how Merrill Lynch created mortgage backed CDO packages while failing to follow sound risk control practices.
Wall Street's money machine breaks down
How Merrill Lynch broke down in the subprime mess
The subprime mortgage crisis keeps getting worse-and claiming more victims. A Fortune special report.
http://money.cnn.com/magazines/fortune/fortune_archive/2007/11/26/101232838/
Wells Fargo: All's Not Well
http://www.forbes.com/home/markets/2007/11/15/wells-fargo-closer-markets-equity-cx_er_ml_1115markets37.html
Earlier this week, Fortune provided commentary questioning the soundness of Wall Streets practices. The banking firms continual implement repetitive cycles of destructive behavior, never learning from previous lessons while always chasing higher fees.
In the past I have commented on the cycle of greed trumping common sense and adequate risk control in the banking sector.
Banks: The Worse is Ahead
http://hingefire.blogspot.com/2007/11/banks-worse-is-ahead.html
Fortune declares “In pure destructive power, the subprime mess has become Wall Street's version of Hurricane Katrina.” From any perspective, the investment banks have finally stepped in a bog where there is no easy way to pull their foot out. The size of the carnage triggered by the credit meltdown is dazzling. A couple further quotes from the article provide additional perspective:
“Predictable because whether it's junk bonds or tech stocks or emerging-market debt, Wall Street always rides a wave until it crashes. As the fees roll in, one firm after another abandons itself to the lure of easy money, then hands back, in a sudden, unforeseen spasm, a big chunk of the profits it booked in good times.”
"The fee engine becomes so huge that these products take on a life of their own," says Tiger Williams, CEO of Williams Trading, a leading financial services firm for hedge funds. "Everyone rationalizes that it's safe because they're making so much money. But it's far from safe."
The Fortune article is a worthwhile read; the bulk of the article outlines how Merrill Lynch created mortgage backed CDO packages while failing to follow sound risk control practices.
Wall Street's money machine breaks down
How Merrill Lynch broke down in the subprime mess
The subprime mortgage crisis keeps getting worse-and claiming more victims. A Fortune special report.
http://money.cnn.com/magazines/fortune/fortune_archive/2007/11/26/101232838/
Wednesday, November 7, 2007
Banks: The Worse is Ahead
Speculation is buzzing about size of the upcoming write-downs at investment banks. At this point it is nearly impossible to continue to hide a pile of unmarketable derivatives whose value is at best 40 cents on the dollar. Many firms such as Goldman’s will have to come clean with their balance sheets and mark their level 3 items to market.
A slew of revelations indicate that the worse lies ahead for the investment banks. The write-downs for mortgage CDO losses is just at the leading edge; and the pile of troubled credit card and commercial paper derivatives have not even be looked at yet. Ignoring the issues is no longer an option; regulators, shareholders, and the press are demanding proper disclosure.
The credit crunch at these banks also has left many wondering if the structured financial wizards have any type of sound reasoning behind their creation of CDOs, or if the entire market is entirely based on greed. The quick tumble of these derivatives demonstrates a total lack of adequate risk control. Unfortunately the pain is not simply endured by the fixed income departments of investment banks, but will impact the entire New York economy due to reduced bonuses and impending financial sector job losses.
The most startling point in the recent press was the sacking of all the risk management executives in these firms who objected to the derivative practices. At Merrill, O'Neal sacked a senior fixed-income executive who had rung alarm bells last year. There are multiple examples of firms where CEOs sent risk management executives packing nearly a full year before the credit meltdown simply for doing their jobs of raising the alarm. This is likely to become relevant fodder of upcoming shareholder suits.
Certainly the bonuses on the street are not going to look good this year. Predictions early in 2007 stated that they would be 20% over the record levels of 2006. Now that reality has set in, the most optimistic projections call for a 10% drop in 2007 bonus payouts across the industry. Many are likely to be simply rewarded with a pink slip for the holiday season.
Loss leaders
Nov 1st 2007
From The Economist print edition
The costs of the credit crunch mount. There may be more pain to come
http://www.economist.com/finance/displaystory.cfm?story_id=10064677
“Mr O'Neal fell in a falling market, but perhaps nearer the top than the bottom.”
Banks are braced for months of pressure
http://www.ft.com/cms/s/0/4cd5c262-8bd6-11dc-af4d-0000779fd2ac.html?nclick_check=1
Big Mack Attack
Morgan may be next CDO Write-Down victim
http://www.nypost.com/seven/11072007/business/big_mack_attack_23276.htm
Teflon Traders
Street eyes Goldman’s lack of subprime woes
http://www.nypost.com/seven/11062007/business/teflon_traders_248972.htm
Wall Street's bonus anxiety
With Citigroup warning of $11 billion more in losses, the bonus outlook for many on Wall Street is getting dimmer as the year comes to a close.
http://money.cnn.com/2007/11/05/news/companies/bonuses/index.htm
A slew of revelations indicate that the worse lies ahead for the investment banks. The write-downs for mortgage CDO losses is just at the leading edge; and the pile of troubled credit card and commercial paper derivatives have not even be looked at yet. Ignoring the issues is no longer an option; regulators, shareholders, and the press are demanding proper disclosure.
The credit crunch at these banks also has left many wondering if the structured financial wizards have any type of sound reasoning behind their creation of CDOs, or if the entire market is entirely based on greed. The quick tumble of these derivatives demonstrates a total lack of adequate risk control. Unfortunately the pain is not simply endured by the fixed income departments of investment banks, but will impact the entire New York economy due to reduced bonuses and impending financial sector job losses.
The most startling point in the recent press was the sacking of all the risk management executives in these firms who objected to the derivative practices. At Merrill, O'Neal sacked a senior fixed-income executive who had rung alarm bells last year. There are multiple examples of firms where CEOs sent risk management executives packing nearly a full year before the credit meltdown simply for doing their jobs of raising the alarm. This is likely to become relevant fodder of upcoming shareholder suits.
Certainly the bonuses on the street are not going to look good this year. Predictions early in 2007 stated that they would be 20% over the record levels of 2006. Now that reality has set in, the most optimistic projections call for a 10% drop in 2007 bonus payouts across the industry. Many are likely to be simply rewarded with a pink slip for the holiday season.
Loss leaders
Nov 1st 2007
From The Economist print edition
The costs of the credit crunch mount. There may be more pain to come
http://www.economist.com/finance/displaystory.cfm?story_id=10064677
“Mr O'Neal fell in a falling market, but perhaps nearer the top than the bottom.”
Banks are braced for months of pressure
http://www.ft.com/cms/s/0/4cd5c262-8bd6-11dc-af4d-0000779fd2ac.html?nclick_check=1
Big Mack Attack
Morgan may be next CDO Write-Down victim
http://www.nypost.com/seven/11072007/business/big_mack_attack_23276.htm
Teflon Traders
Street eyes Goldman’s lack of subprime woes
http://www.nypost.com/seven/11062007/business/teflon_traders_248972.htm
Wall Street's bonus anxiety
With Citigroup warning of $11 billion more in losses, the bonus outlook for many on Wall Street is getting dimmer as the year comes to a close.
http://money.cnn.com/2007/11/05/news/companies/bonuses/index.htm
Monday, November 5, 2007
Why the focus on Investment Banks?
There is an old expression, “As goes the banks, so goes Wall Street”, probably first uttered by an investment banker. However to some extent the phrase holds historically true. Spill-over from major issues impacting all investment banks eventually pervade all aspects of the economy. This is why there is such significant focus on the plight faced by these large firms recently. The broad structured finance market issues are likely to spill over into your personal finances. The issues from mortgage backed CDOs already have contaminated the consumer market; it is more difficult to get a mortgage and several “supposedly safe” money market funds have taken hits.
Even though the issues at big firms in New York seem remote from your corner of America, the impact will shortly be found steering down main street bringing after-shocks to your doorstep. Therefore it is important to pay attention and have an understanding of the situation, and its potential to impact your personal finances.
One good summary of potential upcoming CDO write-downs at some of the leading Wall Street firms was provided in the ft.com blog today. The dilemma is that the waters are still very murky in regards to whom is holding the bag, and just how large the bag is. More worrisome, the sacks holding credit card derivatives and commercial paper structured debt have not even been opened yet. Both are likely to hold a frightening Pandora’s box of further unwelcome revelations.
As clear as alphabet soup: banks’ CDO exposures
http://ftalphaville.ft.com/blog/2007/11/05/8626/as-clear-as-alphabet-soup-banks-cdo-exposures/
Another article from Forbes reveals that 12 to 15% of the CDO-related assets held by many of the investment banking firms are basically not priceable, and will probably have to be written further down in value.
“Goldman Sachs classified $72 billion of assets, 15.6% of its trading inventory, as "level 3" in the third quarter, which means it couldn't come up with any way to price them using market data. Morgan Stanley has 15% of its trading assets in the level 3 category, Bear Stearns 12.6% and Lehman 12.3%, according to research by Sanford Bernstein.”
Forbes: Credit Crunch – More to come
http://www.forbes.com/wallstreet/2007/11/01/citigroup-banking-credit-biz-wall-cx_lm_1102citi.html
Even though the issues at big firms in New York seem remote from your corner of America, the impact will shortly be found steering down main street bringing after-shocks to your doorstep. Therefore it is important to pay attention and have an understanding of the situation, and its potential to impact your personal finances.
One good summary of potential upcoming CDO write-downs at some of the leading Wall Street firms was provided in the ft.com blog today. The dilemma is that the waters are still very murky in regards to whom is holding the bag, and just how large the bag is. More worrisome, the sacks holding credit card derivatives and commercial paper structured debt have not even been opened yet. Both are likely to hold a frightening Pandora’s box of further unwelcome revelations.
As clear as alphabet soup: banks’ CDO exposures
http://ftalphaville.ft.com/blog/2007/11/05/8626/as-clear-as-alphabet-soup-banks-cdo-exposures/
Another article from Forbes reveals that 12 to 15% of the CDO-related assets held by many of the investment banking firms are basically not priceable, and will probably have to be written further down in value.
“Goldman Sachs classified $72 billion of assets, 15.6% of its trading inventory, as "level 3" in the third quarter, which means it couldn't come up with any way to price them using market data. Morgan Stanley has 15% of its trading assets in the level 3 category, Bear Stearns 12.6% and Lehman 12.3%, according to research by Sanford Bernstein.”
Forbes: Credit Crunch – More to come
http://www.forbes.com/wallstreet/2007/11/01/citigroup-banking-credit-biz-wall-cx_lm_1102citi.html
Sunday, November 4, 2007
Subprime: The hits keep coming
The stunning magnitude of the subprime losses at investment banks is just beginning to be revealed, and the write-offs are nowhere near complete. The contagion to the troubled $925B credit card market has just begun. Many of these institutions will have to take an additional write-down of $10B each to come clean and properly align their books with the actual market value of troubled sub-prime investments. The infection of the other derivative markets such as credit cards and commercial paper could leave these banks with additional destabilizing losses which comparatively would make subprime appear to be a minor headache.
“Merrill Lynch analysts, for example, calculate that mid-quality ABX debt is on average now trading at 40 cents in the dollar. But these analysts say that Merrill Lynch itself has only written this type of debt down to 63 cents in the dollar - and UBS is still assuming this debt is worth 90 cents. "Simple math would imply that UBS needs an additional $8bn write-down [on its $15.4bn holdings] if the ABX pricing is correct," Merrill says.”
What's the damage? Why banks are only starting to uncover their subprime losses
http://biz.yahoo.com/ft/071104/fto110420071335381700.html?.v=1
An earlier post discussed the unsettled credit card debt derivative market:
Quick Takes: The Next Subprime
http://hingefire.blogspot.com/2007/10/quick-takes-next-subprime.html
In additional news today…
Citigroup CEO Resigns; Interim Named
Citi to take an additional $8 billion to $11 billion in writedowns.
http://biz.yahoo.com/ap/071104/citigroup_ceo.html
“Merrill Lynch analysts, for example, calculate that mid-quality ABX debt is on average now trading at 40 cents in the dollar. But these analysts say that Merrill Lynch itself has only written this type of debt down to 63 cents in the dollar - and UBS is still assuming this debt is worth 90 cents. "Simple math would imply that UBS needs an additional $8bn write-down [on its $15.4bn holdings] if the ABX pricing is correct," Merrill says.”
What's the damage? Why banks are only starting to uncover their subprime losses
http://biz.yahoo.com/ft/071104/fto110420071335381700.html?.v=1
An earlier post discussed the unsettled credit card debt derivative market:
Quick Takes: The Next Subprime
http://hingefire.blogspot.com/2007/10/quick-takes-next-subprime.html
In additional news today…
Citigroup CEO Resigns; Interim Named
Citi to take an additional $8 billion to $11 billion in writedowns.
http://biz.yahoo.com/ap/071104/citigroup_ceo.html
Off with their heads!
The financial press mob has formed and appears to be rolling out the virtual guillotine while howling for the heads of nearly every top investment bank over the past few weeks. The crescendo has risen as further deep losses have been revealed by many of these institutions.
The recent decapitation of O'Neal from Merrill leaves Citigroup Inc's Charles Prince, Bear Stearns Cos Inc's James Cayne and Countrywide Financial Corp's Angelo Mozilo at the top of the list of prominent U.S. chief executives hunkered down in the their corner offices trying to deflect blame. Recent news indicates that the Citigroup saga will end today with the resignation of Prince; although this will not likely appease the media rabble but rather serve to further feed the frenzy. The press horde was not apparently pacified by the recent changes at ABN AMRO where Rijkman Groenink has recently left, or at UBS where Peter Wuffli was forced to walk the plank a few weeks back. Each day new articles are shouting for more heads to roll.
Will this spill over into an increasing list of investment banks; even Goldman’s where Mr Blankfein has been recently upheld as an example of active and able management. Will Ken Lewis over at Bank of America survive as risk management practices and investment banking services have come under scrutiny? The list created by the press continues to get larger as well as the increasing angry buzz of the articles. Has someone started a pool on which corner offices will be vacant by the end of the year?
Other CEOs under microscope as Merrill chief exits
http://uk.news.yahoo.com/rtrs/20071030/tbs-uk-merrill-ceo-fallout-7318940.html
Report: Citigroup CEO May Resign
Citigroup CEO Will Offer to Resign Sunday; Board Expected to Hold Emergency Meeting
http://biz.yahoo.com/ap/071103/citigroup_board_meeting.html
The recent decapitation of O'Neal from Merrill leaves Citigroup Inc's Charles Prince, Bear Stearns Cos Inc's James Cayne and Countrywide Financial Corp's Angelo Mozilo at the top of the list of prominent U.S. chief executives hunkered down in the their corner offices trying to deflect blame. Recent news indicates that the Citigroup saga will end today with the resignation of Prince; although this will not likely appease the media rabble but rather serve to further feed the frenzy. The press horde was not apparently pacified by the recent changes at ABN AMRO where Rijkman Groenink has recently left, or at UBS where Peter Wuffli was forced to walk the plank a few weeks back. Each day new articles are shouting for more heads to roll.
Will this spill over into an increasing list of investment banks; even Goldman’s where Mr Blankfein has been recently upheld as an example of active and able management. Will Ken Lewis over at Bank of America survive as risk management practices and investment banking services have come under scrutiny? The list created by the press continues to get larger as well as the increasing angry buzz of the articles. Has someone started a pool on which corner offices will be vacant by the end of the year?
Other CEOs under microscope as Merrill chief exits
http://uk.news.yahoo.com/rtrs/20071030/tbs-uk-merrill-ceo-fallout-7318940.html
Report: Citigroup CEO May Resign
Citigroup CEO Will Offer to Resign Sunday; Board Expected to Hold Emergency Meeting
http://biz.yahoo.com/ap/071103/citigroup_board_meeting.html
Saturday, November 3, 2007
Is Your Investment Bank Executive a Doper
Was your senior investment bank executive lost in a haze of purple smoke while your CDO investments went down the flusher recently. Would you expect this press from the National Enquirer or the Wall Street Journal? A furor erupted this week over an article in one of these publications and it is probably not the one you are thinking.
The November 1st front page Wall Street Journal article profiling Bear Stearns’ James Cayne outlines a none too flattering portrayal of his work (or lack of work)… and drug habits. Being exposed as a pothead on the first page of the world’s most prestigious financial newspaper can not really be considered upside press. However it is the outline of his failure to focus on work related issues while the firm was in crisis and losing $3.8B with two failed Hedge Funds that will justifiably place Cayne in the hot seat.
Bear CEO's Handling Of Crisis Raises Issues
http://online.wsj.com/article/SB119387369474078336.html?mod=hpp_us_whats_news
Financial Times provided additional commentary in context of the heads rolling at other investment banks recently.
Bridge, golf and herbal refreshment for Bear’s Cayne
http://ftalphaville.ft.com/blog/2007/11/01/8542/bridge-golf-and-herbal-refreshment-for-bears-cayne/
As expected, Cayne came out vehemently denying the allegations in material that was sent to many financial media outlets. Despite this, his longevity at Bear Stearns is still very much in doubt.
Bear Stearns CEO Denies WSJ Allegations
Bear Stearns CEO James Cayne Denies Drug Allegations in Wall Street Journal Article
http://biz.yahoo.com/ap/071101/bear_stearns_personnel.html?.v=1
The Bear Stearns Memo: Cayne Speaks
http://dealbook.blogs.nytimes.com/2007/11/02/the-bear-stearns-memo-cayne-speaks/
The November 1st front page Wall Street Journal article profiling Bear Stearns’ James Cayne outlines a none too flattering portrayal of his work (or lack of work)… and drug habits. Being exposed as a pothead on the first page of the world’s most prestigious financial newspaper can not really be considered upside press. However it is the outline of his failure to focus on work related issues while the firm was in crisis and losing $3.8B with two failed Hedge Funds that will justifiably place Cayne in the hot seat.
Bear CEO's Handling Of Crisis Raises Issues
http://online.wsj.com/article/SB119387369474078336.html?mod=hpp_us_whats_news
Financial Times provided additional commentary in context of the heads rolling at other investment banks recently.
Bridge, golf and herbal refreshment for Bear’s Cayne
http://ftalphaville.ft.com/blog/2007/11/01/8542/bridge-golf-and-herbal-refreshment-for-bears-cayne/
As expected, Cayne came out vehemently denying the allegations in material that was sent to many financial media outlets. Despite this, his longevity at Bear Stearns is still very much in doubt.
Bear Stearns CEO Denies WSJ Allegations
Bear Stearns CEO James Cayne Denies Drug Allegations in Wall Street Journal Article
http://biz.yahoo.com/ap/071101/bear_stearns_personnel.html?.v=1
The Bear Stearns Memo: Cayne Speaks
http://dealbook.blogs.nytimes.com/2007/11/02/the-bear-stearns-memo-cayne-speaks/
Wednesday, October 31, 2007
Should Citi Pay for its Mistakes
There is one point of view that deems that the creation of the M-LEC to bail-out Citi and other banks from their SIV crisis is a concept that interferes with the free market. The other side of the argument promotes the need for stability in the market place to avoid a string of cascading failures underlines the need for the creation of the SIV Superfund.
From a risk tolerance perspective, why should banks such as Citi be bailed out for their own mistakes? Shouldn’t the shareholders and the company pay the price in a free market economy? Isn’t the SIV bailout effectively a form of capital-based socialism; where firms avoid the consequences of their decisions? Certainly, the financial market would not offer group bailouts for individual who can not meet their financial obligations; why should it be any different for a large bank.
Allan Sloan of Fortune takes Citi to the task in his recent article:
Citigroup: 'Gimme shelter'
http://money.cnn.com/2007/10/26/magazines/fortune/citishelter.fortune/index.htm?postversion=2007102914
From a risk tolerance perspective, why should banks such as Citi be bailed out for their own mistakes? Shouldn’t the shareholders and the company pay the price in a free market economy? Isn’t the SIV bailout effectively a form of capital-based socialism; where firms avoid the consequences of their decisions? Certainly, the financial market would not offer group bailouts for individual who can not meet their financial obligations; why should it be any different for a large bank.
Allan Sloan of Fortune takes Citi to the task in his recent article:
Citigroup: 'Gimme shelter'
http://money.cnn.com/2007/10/26/magazines/fortune/citishelter.fortune/index.htm?postversion=2007102914
Monday, October 29, 2007
Grandma’s Money Market Fund feels the SIV pinch
The SIV panic did not really set in among regulators until “supposedly-safe” money market mutual funds started to take losses. The federal regulators are now calling foul.
‘Securities regulations state that money market funds can only buy short-term, very safe securities. In particular, rule 2a-7, part of the Investment Company Act of 1940, says that money market funds can only hold securities that have "minimal credit risks."’
Impacted money market funds include offerings from industrial giants such as Bank of America, who watched $640M of customer funds get flushed down the tubes when Cheyne Finance went under, to smaller brokerages. The list of firms, whose money market funds are holding SIV paper, includes major players such as JP Morgan, Fidelity and Federated.
It is now obvious that SIVs never merited AAA ratings, which would imply these securitized products had the strength to weather any storm. The defense made by some funds that the debt was “ultra-safe” because it was highly rated, does not really hold up when performing any type of basic risk analysis of these instruments.
Money market funds are supposed to be the safest investment; something that a retired grandmother can feel safe in. The financial manipulations of Wall Street in building derivatives have now destroyed this trust. Money market funds offered by most brokerages are not covered under FDIC protection so retail customers will take the hit. No wonder steam is rising from the brows of regulators. The question remains will they implement the necessary reforms to eliminate future occurrences, or stand frozen like a deer in the headlights.
A recent article in Fortune discusses SIV impact on money market funds in more detail.
Risky money market fund bets may be illegal
Money market funds may have broken a law dictating a conservative investment profile by investing in SIVs, reports Fortune's Peter Eavis.
http://money.cnn.com/2007/10/25/magazines/fortune/funds_sivs.fortune/index.htm?postversion=2007102605
‘Securities regulations state that money market funds can only buy short-term, very safe securities. In particular, rule 2a-7, part of the Investment Company Act of 1940, says that money market funds can only hold securities that have "minimal credit risks."’
Impacted money market funds include offerings from industrial giants such as Bank of America, who watched $640M of customer funds get flushed down the tubes when Cheyne Finance went under, to smaller brokerages. The list of firms, whose money market funds are holding SIV paper, includes major players such as JP Morgan, Fidelity and Federated.
It is now obvious that SIVs never merited AAA ratings, which would imply these securitized products had the strength to weather any storm. The defense made by some funds that the debt was “ultra-safe” because it was highly rated, does not really hold up when performing any type of basic risk analysis of these instruments.
Money market funds are supposed to be the safest investment; something that a retired grandmother can feel safe in. The financial manipulations of Wall Street in building derivatives have now destroyed this trust. Money market funds offered by most brokerages are not covered under FDIC protection so retail customers will take the hit. No wonder steam is rising from the brows of regulators. The question remains will they implement the necessary reforms to eliminate future occurrences, or stand frozen like a deer in the headlights.
A recent article in Fortune discusses SIV impact on money market funds in more detail.
Risky money market fund bets may be illegal
Money market funds may have broken a law dictating a conservative investment profile by investing in SIVs, reports Fortune's Peter Eavis.
http://money.cnn.com/2007/10/25/magazines/fortune/funds_sivs.fortune/index.htm?postversion=2007102605
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