William K. Black is Assoc. Professor, Univ. of Missouri, Kansas City;
He was a Senior regulator during S&L debacle
His article "The Two Documents Everyone Should Read to Better Understand the Crisis" dated 23.4.2009 is an interesting read.
He began his article with the statement "As a white-collar criminologist and former financial regulator much of my research studies what causes financial markets to become profoundly dysfunctional."
The two documents that he is referring to are
http://oversight.house.gov/story.asp?ID=2250
and
http://big.assets.huffingtonpost.com/FraudReport8Nov07Fitch.pdf
Both these documents talk of possible risks and problems in mortgage investing.
http://www.huffingtonpost.com/william-k-black/the-two-documents-everyon_b_169813.html
Showing posts with label Crisis. Show all posts
Showing posts with label Crisis. Show all posts
Thursday, April 23, 2009
Sunday, February 8, 2009
Layoffs by Goldman Sachs - 2009
7 February 2009
According to an insider, Goldman partners are drawing up plans for the next round of cuts, but added that a decision on specific numbers has yet to be taken. The percentage could be around 10%.
Around 6,000 of Goldman's 30,067 staff are employed in the UK.
http://layofftracker.blogspot.com/2009/02/goldman-sachs-to-cut-10-of-workforce.html
2 December 2008
Goldman Sachs Group Inc. has cut its Dubai-based work force, a bank official told the Gulf Times.
http://www.thedeal.com/dealscape/2008/12/bank_layoffs.php
According to an insider, Goldman partners are drawing up plans for the next round of cuts, but added that a decision on specific numbers has yet to be taken. The percentage could be around 10%.
Around 6,000 of Goldman's 30,067 staff are employed in the UK.
http://layofftracker.blogspot.com/2009/02/goldman-sachs-to-cut-10-of-workforce.html
2 December 2008
Goldman Sachs Group Inc. has cut its Dubai-based work force, a bank official told the Gulf Times.
http://www.thedeal.com/dealscape/2008/12/bank_layoffs.php
Friday, January 23, 2009
2008 Financial and Economic Crisis - CEOs Affected
John Thain
Joined Merrill Lynch as CEO after the major crisis. Merged the company with Bank of America.
But agreed to leave Merrill after Merrill had a unexpectedly large $15.4 billion fourther quarter loss.
Joined Merrill Lynch as CEO after the major crisis. Merged the company with Bank of America.
But agreed to leave Merrill after Merrill had a unexpectedly large $15.4 billion fourther quarter loss.
Wednesday, December 10, 2008
Goldman Sachs Laid Off Thousands in 1st week of November 2008
Goldman Sachs notified roughly 3,200 employees this week that they have been laid off. It was part of previously announced and reported plans to slash 10 percent of the firm’s global work force.
Goldman has quietly and slowly cut jobs all year. The bank laid off hundreds of M&A support staff and junior bankers in June due to slowing markets, following a round of leveraged lending and mortgage securities cuts in April.
Early this year, Goldman cut 1,500 people, or 5 percent of its staff, following 2007 performance reviews.
A typical commnet by a GS employee
As someone who was let go from GS on Wednesday, I can tell you that the process was not very pleasant. They came in the morning, took us out, processed our paperwork and that was it. No goodbyes, no thanks for your contribution, no ability to go back to get our belongings. To make matters worse, no bonus will be given (assuming one is given to those still working there) even though we accrued the bonus for 11 of the 12 months. Makes me think that they wanted to keep the bonus pool high for existing employees, so they get rid of those who would be getting a bonus in 3 weeks - that is what truly sucks.
— Posted by Jessop
For more comments by GS employees
Visit
http://dealbook.blogs.nytimes.com/2008/11/06/goldman-sachs-laid-off-thousands-this-week-report-says/
Goldman has quietly and slowly cut jobs all year. The bank laid off hundreds of M&A support staff and junior bankers in June due to slowing markets, following a round of leveraged lending and mortgage securities cuts in April.
Early this year, Goldman cut 1,500 people, or 5 percent of its staff, following 2007 performance reviews.
A typical commnet by a GS employee
As someone who was let go from GS on Wednesday, I can tell you that the process was not very pleasant. They came in the morning, took us out, processed our paperwork and that was it. No goodbyes, no thanks for your contribution, no ability to go back to get our belongings. To make matters worse, no bonus will be given (assuming one is given to those still working there) even though we accrued the bonus for 11 of the 12 months. Makes me think that they wanted to keep the bonus pool high for existing employees, so they get rid of those who would be getting a bonus in 3 weeks - that is what truly sucks.
— Posted by Jessop
For more comments by GS employees
Visit
http://dealbook.blogs.nytimes.com/2008/11/06/goldman-sachs-laid-off-thousands-this-week-report-says/
Friday, October 31, 2008
Lehman - Managing Bankruptcy
On October 24, 2008, Lehman stated that its workforce was comprised of about 140 employees and a team of about 125 from restructuring firm Alvarez & Marsal. One of the firm's (Alvarez & Marsal) founders, Bryan Marsal, is serving as chief restructuring officer of Lehman.
Barclays PLC, which bought the company's core US assets last month, has continued the employment of more than 9,000 Lehman workers. Barclays and Lehman have a transition services agreement whereby former employees of the investment bank will help it wind down its business.
But Lehman said in court documents on Thursday that those employees are unable to devote the time and resources necessary to help Lehman wind-down its businesses. Lehman wants permission from the court to hire additional workers quickly to avoid the risk of losing information that would help it unwind thousands of complex derivative transactions. Lehman said it was seeking to hire former Lehman workers because the tasks to unwind the business require specialized knowledge.
Lehman's lead bankruptcy attorney Harvey Miller informed the court that it may request higher payment schemes for these employees than bankruptcy courts are used to. The "transactions involved necessitate the employment of individuals with very specific skill sets, and preferably, former Lehman employees who possess the expertise and experience necessary to efficiently administer and wind-down the Debtors' businesses and the subject transactions,"
The estimate for the total base salary for 620 employees, including an additional 480,is $96 million. The employees would be eligible to earn a bonus. Lehman said the total amount of bonuses to be issued would not exceed $110 million.
Lehman also asked for approval to set aside severance benefits of $22.5 million for employees that are involuntarily let go. It said employment contracts would have initial commitment periods ranging from three to 24 months.
References
http://economictimes.indiatimes.com/articleshow/3656684.cms
Barclays PLC, which bought the company's core US assets last month, has continued the employment of more than 9,000 Lehman workers. Barclays and Lehman have a transition services agreement whereby former employees of the investment bank will help it wind down its business.
But Lehman said in court documents on Thursday that those employees are unable to devote the time and resources necessary to help Lehman wind-down its businesses. Lehman wants permission from the court to hire additional workers quickly to avoid the risk of losing information that would help it unwind thousands of complex derivative transactions. Lehman said it was seeking to hire former Lehman workers because the tasks to unwind the business require specialized knowledge.
Lehman's lead bankruptcy attorney Harvey Miller informed the court that it may request higher payment schemes for these employees than bankruptcy courts are used to. The "transactions involved necessitate the employment of individuals with very specific skill sets, and preferably, former Lehman employees who possess the expertise and experience necessary to efficiently administer and wind-down the Debtors' businesses and the subject transactions,"
The estimate for the total base salary for 620 employees, including an additional 480,is $96 million. The employees would be eligible to earn a bonus. Lehman said the total amount of bonuses to be issued would not exceed $110 million.
Lehman also asked for approval to set aside severance benefits of $22.5 million for employees that are involuntarily let go. It said employment contracts would have initial commitment periods ranging from three to 24 months.
References
http://economictimes.indiatimes.com/articleshow/3656684.cms
Monday, September 29, 2008
Subprime crisis related litigation
According to Navigant Consulting’s most recent report on this topic, of the 607 subprime-related cases filed in federal courts over the 18 monthe ended June 30, 2008, 310 were filed in just the first six months of 2008 — more than the 297 filed during all of2007.
Jeff Nielsen leads Navigant Consulting’s Financial Services Disputes & Investigations group and is actively advising clients in a number of subprime-related matters. He comments “We are now more than a year into the credit crisis, and the litigation continues to pile up.”
http://www.shopfloor.org/tag/goldman-sachs/
Jeff Nielsen leads Navigant Consulting’s Financial Services Disputes & Investigations group and is actively advising clients in a number of subprime-related matters. He comments “We are now more than a year into the credit crisis, and the litigation continues to pile up.”
http://www.shopfloor.org/tag/goldman-sachs/
Financial system rescue plan in America (USA)
Every man, woman and child have to commit $2,300 to rescue the financial system.
$700 billion is a lot of money.
http://www.shopfloor.org/tag/goldman-sachs/
$700 billion is a lot of money.
http://www.shopfloor.org/tag/goldman-sachs/
Sunday, September 28, 2008
The History of the Global Financial Meltdown
The history of the financial meltdown
Simon Evans charts the long chain of events that led to last week's turmoil
Sunday, 21 September 2008
http://www.independent.co.uk/news/business/analysis-and-features/the-history-of-the-financial-meltdown-936671.html
Simon Evans charts the long chain of events that led to last week's turmoil
Sunday, 21 September 2008
http://www.independent.co.uk/news/business/analysis-and-features/the-history-of-the-financial-meltdown-936671.html
Saturday, September 27, 2008
Hedge Fund Failures
March 6, 2008
Carlyle Capital, a publicly-traded mortgage bond fund, said it received a notice of default after failing to meet margin calls from banks, stoking fears of a wave of hedge fund liquidations and fire sales of assets.
On Tuesday Focus Capital, a $1bn fund in New York, said it was forced to liquidate its portfolio after missing margin calls. Friday saw the implosion of Peloton Partners, a $2bn London-based fund.
http://ftalphaville.ft.com/blog/2008/03/06/11410/cds-report-hedge-fund-failures-spook-the-market/
August 1, 2008
Expect to see more hedge fails fail this year than are originated, says Philip Duff of Duff Capital Advisors in a CNBC interview. Duff predicts that 2008 will be the first year that will see more hedge funds go out of business than start up.
Duff is the former COO of Tiger Management and former CFO of Morgan Stanley
http://moneynews.newsmax.com/streettalk/hedge_funds/2008/08/01/118150.html
September 21, 2008
The commercial real estate market in New York is feeling the pain of Wall Street's demise.
With the breakdown of Bear Stearns last spring and the shuttering of scores of hedge funds throughout the year, vacancy rates have edged up to 7.3 percent as of Aug. 31 from a record low of 5.8 percent the year before.
http://www.nypost.com/seven/09212008/business/vacancy_rates_rise_on_hedge_fund_closure_130108.htm
Top Four Causes of Hedge Fund Collapses
1. Improbable Market Events
2. Leverage
3. Investor Redemptions
4. Forced Liquidation or Portfolio Sale
http://www.sharpeinvesting.com/2008/08/top-four-causes-of-hedge-fund-collapses.html
March 9, 2006
Kirk S. Wright and his firm, International Management Associates, appear to have lost the hedge fund's all of the $115 million that they invested.
The failure of Wright's fund adds to a long and growing list of hedge fund meltdowns, large and small. Usually only the larger failures make the news, such as Bailey Coates Cromwell Fund ($1.3 billion), Marin Capital ($1.7 billion), Aman Capital (est. $1 billion), Tiger Funds ($6 billion), and Long-Term Capital Management ($1 billion).
A March study by Capco, a financial-services consultancy and technology provider, f investigated 100 hedge fund failures over the last 20 years and found that half of them failed because of operational issues rather than lousy investment decisions. These include misrepresentations and inaccurate valuations, fraud, unauthorized trading, technology failures, bad data and so on.
"Systemic risk is commonly used to describe the possibility of a series of correlated defaults among financial institutions---typically banks---that occur over a short period of time, often caused by a single major event.
http://www.itulip.com/hedgefundsindark.htm
March 28, 2008
Forty-nine hedge funds shutdown in 2007, representing $18.8 billion at their higher valuation, compared with 83 hedge funds that shuttered themselves--worth $35 billion--the year before, as calculated by Absolute Return.
http://www.fiercefinance.com/story/more-hedge-fund-failures-this-year/2008-03-28
----------------------------------
Aug 22, 2008
Earlier this month, former CNBC anchor Ron Insana folded Insana Capital Partners, the hedge fund he launched in 2006, while superstar investor Dan Benton announced that he's shuttering his $2 billion hedge fund Andor Capital Management in October.
http://finance.yahoo.com/tech-ticker/article/49567/Ron-Insana's-Hedge-Fund-Closure-a-Cautionary-Tale?tickers=%5EGSPC
------------------------------------
Bloomberg story, September 2008
"Ospraie Management LLC, the investment firm run by Dwight Anderson, will close its biggest hedge fund after slumping 38.6 percent this year because of bad bets on commodity stocks.
The New York-based Ospraie Fund fell 26.7 percent in August after a ``substantial sell-off'' in energy, mining and resource equity investments, Anderson said in a letter to investors yesterday."
http://financetrends.blogspot.com/2008/09/more-on-ospraie-fund-closure.html
-------------------------------
Hedge funds may be next
'We're going to see five fail for every bank'
September 18, 2008
"We're going to see five hedge funds fail for every bank, maybe more," says Christopher Whalen, senior vice-president and managing partner at Torrance, Calif.-based Institutional Risk Analytics.
The CDS market has ballooned to about US$62-trillion, with hedge funds making up much of the trading before the credit crisis began.
A moment of reckoning for many hedge funds may come at the end of this month, when their exposure to credit default swaps must be "marked to market" to reflect the increased obligations at the end of the third quarter.
It may be a very quiet exercise, however, as most hedge funds are private and report only to their investors. Operating largely outside public markets and regulatory scrutiny, the failures, too, may take place largely behind the scenes and may already have begun.
http://www.financialpost.com/story.html?id=798163
Carlyle Capital, a publicly-traded mortgage bond fund, said it received a notice of default after failing to meet margin calls from banks, stoking fears of a wave of hedge fund liquidations and fire sales of assets.
On Tuesday Focus Capital, a $1bn fund in New York, said it was forced to liquidate its portfolio after missing margin calls. Friday saw the implosion of Peloton Partners, a $2bn London-based fund.
http://ftalphaville.ft.com/blog/2008/03/06/11410/cds-report-hedge-fund-failures-spook-the-market/
August 1, 2008
Expect to see more hedge fails fail this year than are originated, says Philip Duff of Duff Capital Advisors in a CNBC interview. Duff predicts that 2008 will be the first year that will see more hedge funds go out of business than start up.
Duff is the former COO of Tiger Management and former CFO of Morgan Stanley
http://moneynews.newsmax.com/streettalk/hedge_funds/2008/08/01/118150.html
September 21, 2008
The commercial real estate market in New York is feeling the pain of Wall Street's demise.
With the breakdown of Bear Stearns last spring and the shuttering of scores of hedge funds throughout the year, vacancy rates have edged up to 7.3 percent as of Aug. 31 from a record low of 5.8 percent the year before.
http://www.nypost.com/seven/09212008/business/vacancy_rates_rise_on_hedge_fund_closure_130108.htm
Top Four Causes of Hedge Fund Collapses
1. Improbable Market Events
2. Leverage
3. Investor Redemptions
4. Forced Liquidation or Portfolio Sale
http://www.sharpeinvesting.com/2008/08/top-four-causes-of-hedge-fund-collapses.html
March 9, 2006
Kirk S. Wright and his firm, International Management Associates, appear to have lost the hedge fund's all of the $115 million that they invested.
The failure of Wright's fund adds to a long and growing list of hedge fund meltdowns, large and small. Usually only the larger failures make the news, such as Bailey Coates Cromwell Fund ($1.3 billion), Marin Capital ($1.7 billion), Aman Capital (est. $1 billion), Tiger Funds ($6 billion), and Long-Term Capital Management ($1 billion).
A March study by Capco, a financial-services consultancy and technology provider, f investigated 100 hedge fund failures over the last 20 years and found that half of them failed because of operational issues rather than lousy investment decisions. These include misrepresentations and inaccurate valuations, fraud, unauthorized trading, technology failures, bad data and so on.
"Systemic risk is commonly used to describe the possibility of a series of correlated defaults among financial institutions---typically banks---that occur over a short period of time, often caused by a single major event.
http://www.itulip.com/hedgefundsindark.htm
March 28, 2008
Forty-nine hedge funds shutdown in 2007, representing $18.8 billion at their higher valuation, compared with 83 hedge funds that shuttered themselves--worth $35 billion--the year before, as calculated by Absolute Return.
http://www.fiercefinance.com/story/more-hedge-fund-failures-this-year/2008-03-28
----------------------------------
Aug 22, 2008
Earlier this month, former CNBC anchor Ron Insana folded Insana Capital Partners, the hedge fund he launched in 2006, while superstar investor Dan Benton announced that he's shuttering his $2 billion hedge fund Andor Capital Management in October.
http://finance.yahoo.com/tech-ticker/article/49567/Ron-Insana's-Hedge-Fund-Closure-a-Cautionary-Tale?tickers=%5EGSPC
------------------------------------
Bloomberg story, September 2008
"Ospraie Management LLC, the investment firm run by Dwight Anderson, will close its biggest hedge fund after slumping 38.6 percent this year because of bad bets on commodity stocks.
The New York-based Ospraie Fund fell 26.7 percent in August after a ``substantial sell-off'' in energy, mining and resource equity investments, Anderson said in a letter to investors yesterday."
http://financetrends.blogspot.com/2008/09/more-on-ospraie-fund-closure.html
-------------------------------
Hedge funds may be next
'We're going to see five fail for every bank'
September 18, 2008
"We're going to see five hedge funds fail for every bank, maybe more," says Christopher Whalen, senior vice-president and managing partner at Torrance, Calif.-based Institutional Risk Analytics.
The CDS market has ballooned to about US$62-trillion, with hedge funds making up much of the trading before the credit crisis began.
A moment of reckoning for many hedge funds may come at the end of this month, when their exposure to credit default swaps must be "marked to market" to reflect the increased obligations at the end of the third quarter.
It may be a very quiet exercise, however, as most hedge funds are private and report only to their investors. Operating largely outside public markets and regulatory scrutiny, the failures, too, may take place largely behind the scenes and may already have begun.
http://www.financialpost.com/story.html?id=798163
Friday, September 19, 2008
Still there is still plenty of worry in the Global Financial Market
Wharton Professors Franklin Allen thinks there is still plenty of worry -- to go around. The real risk now is overseas, particularly in Europe," according to him. He foresees potentially enormous problems with "big banks in small countries," such as Belgium and the Netherlands. "Fortis [Bank] will come under scrutiny in the next few weeks," he noted, referring to a Belgian-Dutch bank which saw profits for the first half of 2008 fall by 41% compared to the same period of 2007, according to a recent report from the BBC. The performance was blamed on the crashing global credit markets and the bank's own bad loans.
That might turn out to be a blip if things turn sour for Switzerland's two big banks, UBS and Credit Suisse, he suggested, adding that the value of the assets held by those banks is six times the gross domestic product of their home country. "If they have a big problem, the Swiss government cannot bail them out." And If Swiss banks -- traditionally conservative safe havens for international finance -- hemorrhage, a cascade effect across the global markets could have implications that are impossible to assess. Said Allen: "Hopefully it won't happen. But that's the worrying thing."
View expressed by Prof Allen in a panel discussion
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2050
That might turn out to be a blip if things turn sour for Switzerland's two big banks, UBS and Credit Suisse, he suggested, adding that the value of the assets held by those banks is six times the gross domestic product of their home country. "If they have a big problem, the Swiss government cannot bail them out." And If Swiss banks -- traditionally conservative safe havens for international finance -- hemorrhage, a cascade effect across the global markets could have implications that are impossible to assess. Said Allen: "Hopefully it won't happen. But that's the worrying thing."
View expressed by Prof Allen in a panel discussion
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2050
Wednesday, September 17, 2008
Investment Banking 2.0 - Pattern to emerge after the Present Crisis
Investment Banking 2.0 will be the re-emergence of the boutique, the focused, nimble, high-touch firm that was the bedrock of capital formation in the early years of the stock market boom.
The mega-firms, universal banks being created at the urging of the Treasury are not sustainable. They'll live just long enough for investment banking losses to be absorbed by the commercial bank's larger capital base, after which the best talent will flee for greener pastures.
http://seekingalpha.com/article/95633-investment-banking-2-0-think-small
The mega-firms, universal banks being created at the urging of the Treasury are not sustainable. They'll live just long enough for investment banking losses to be absorbed by the commercial bank's larger capital base, after which the best talent will flee for greener pastures.
http://seekingalpha.com/article/95633-investment-banking-2-0-think-small
Tuesday, August 26, 2008
Cost Reduction Measures – Investment Banks – 2008
Globally financial firms have reduced head count by 1,01,250 since beginning of credit crunch.
Citibank
Citigroup has cut about 14,000 jobs in the first half of 2008.
Citigroup is scaling down external training.
Purchases of computer hardware and software needs to be preapproved.
Blackberry buying requires preapproval.
All nonclient travel requires preapproval.
Off site meetings of employees cutback.
Colour copying limited to client presentations
Efficiency in spending is priority.
(According to contents of an internal memo published in the UK’s Daily Telegraph.)
Deutsche Bank
Business meas must not exceed 50 pounds per person ($92).
Dealmakers to get approval for taxi journeys in advance from their manager.
(According to Independent news paper)
UBS
UBS has made cost reduction program as a part of its new organization change initiative
(http://www.efinancialnews.com/homepage/index/content/2451589688)
Operating expenses
2nd Quater 08 vs 2nd Quarter 07:
Total operating expenses declined by 36%, falling to CHF 2,931 million from CHF 4,565 million.
A 56% decline in personnel expenses, to CHF 1,494 million, reflects lower accruals for performance-related compensation and an adjustment relating to changes to the forfeiture provisions of future equity ownership plan (EOP) awards. Salary costs also declined as personnel were reduced by 2,662 full-time equivalents.
General and administrative expense decreased by 17% to CHF 784 million, with reductions in a number of expense lines. The most notable reductions were in travel and entertainment, and IT and outsourcing, and are largely attributable to the ongoing cost reduction program.
(http://www.ubs.com/1/e/investors/08q2/0014/0016.html)
Merrill Lynch
1st quarter 2008
Compensation Expenses
Compensation and benefits expenses were $4.2 billion for the first quarter of 2008, down 14 percent from $4.9 billion in the first quarter of 2007, due to a decline in compensation expense accruals reflecting lower net revenues.
The firm intends to reduce its headcount from year-end levels by approximately 4,000 employees, or 10 percent, excluding FAs and investment associates. Headcount reductions will be targeted in GMI and support areas, and will not impact the firm's financial advisor or investment associate population. Cost savings from this reduction are expected to be approximately $800 million on an annualized basis, including approximately $600 million for the remainder of 2008. As a result, the firm expects to record a restructuring charge of approximately $350 million in the 2008 second quarter.
(http://www.ml.com/index.asp?id=7695_7696_8149_88278_95339_96026)
Citibank
Citigroup has cut about 14,000 jobs in the first half of 2008.
Citigroup is scaling down external training.
Purchases of computer hardware and software needs to be preapproved.
Blackberry buying requires preapproval.
All nonclient travel requires preapproval.
Off site meetings of employees cutback.
Colour copying limited to client presentations
Efficiency in spending is priority.
(According to contents of an internal memo published in the UK’s Daily Telegraph.)
Deutsche Bank
Business meas must not exceed 50 pounds per person ($92).
Dealmakers to get approval for taxi journeys in advance from their manager.
(According to Independent news paper)
UBS
UBS has made cost reduction program as a part of its new organization change initiative
(http://www.efinancialnews.com/homepage/index/content/2451589688)
Operating expenses
2nd Quater 08 vs 2nd Quarter 07:
Total operating expenses declined by 36%, falling to CHF 2,931 million from CHF 4,565 million.
A 56% decline in personnel expenses, to CHF 1,494 million, reflects lower accruals for performance-related compensation and an adjustment relating to changes to the forfeiture provisions of future equity ownership plan (EOP) awards. Salary costs also declined as personnel were reduced by 2,662 full-time equivalents.
General and administrative expense decreased by 17% to CHF 784 million, with reductions in a number of expense lines. The most notable reductions were in travel and entertainment, and IT and outsourcing, and are largely attributable to the ongoing cost reduction program.
(http://www.ubs.com/1/e/investors/08q2/0014/0016.html)
Merrill Lynch
1st quarter 2008
Compensation Expenses
Compensation and benefits expenses were $4.2 billion for the first quarter of 2008, down 14 percent from $4.9 billion in the first quarter of 2007, due to a decline in compensation expense accruals reflecting lower net revenues.
The firm intends to reduce its headcount from year-end levels by approximately 4,000 employees, or 10 percent, excluding FAs and investment associates. Headcount reductions will be targeted in GMI and support areas, and will not impact the firm's financial advisor or investment associate population. Cost savings from this reduction are expected to be approximately $800 million on an annualized basis, including approximately $600 million for the remainder of 2008. As a result, the firm expects to record a restructuring charge of approximately $350 million in the 2008 second quarter.
(http://www.ml.com/index.asp?id=7695_7696_8149_88278_95339_96026)
Criticism of Federal Reserve - Becoming Strident
Willem Buiter, Ex-Chief Economist at the European Bank for Reconstruction and Development criticized Fed in a paper "Central Banks and Financial Crises" presented at Jackson Hole economics symposium.
He charged the US Fed with messing up its response to the credit crisis and being close to and captured by interests on Wall street.
He argues that rate cuts the Fed has announced so far are due to Fed's desire to stop the slide in share prices, a desire that reflected too close proximity to Wall street.
He charged the US Fed with messing up its response to the credit crisis and being close to and captured by interests on Wall street.
He argues that rate cuts the Fed has announced so far are due to Fed's desire to stop the slide in share prices, a desire that reflected too close proximity to Wall street.
Sunday, August 17, 2008
Auction Rate Securities - The Instrument
Auction rate securities is a financial innovation or a security market innovation that seems to be failed one at the moment. We need to understand how it was developed and made to be a sufficiently big market. Then we need to understand what factors led to its failure. The security market intermediaries gained some money from the instrument. But now they are losing some money from it.
We need to understand the security first
What is an Auction Rate Security?
Auction Rate Securities (ARS) are securities with long-term maturities that are structured with the possibility of short-term holding periods, this is attempted by use of a Dutch Auction. A Dutch Auction takes place at the beginning of each holding period, which determines the coupon/dividend. At the end of each holding period, a new Dutch Auction is held, determining the coupon/dividend for the next holding period. Investors can sell, buy (if available) or continue to hold their Auction Rate Security at each auction. The length of each holding period is determined at the time of the security’s original issuance. Typical holding periods are 7, 28 and 35 days.
Overview of Morgan Keegan’s Auction Rate Program
Morgan Keegan’s Auction Rate Program will use long- dated bonds that provide short-term interest rates and liquidity determined through the Dutch Auction process. Morgan Keegan will be using either a 7, 28 or 35-day auction rate period. The coupon/dividend is paid to the ARS holder the day after the 7, 28 or 35-day holding period. The majority of ARS bonds that Morgan Keegan offers have an investment grade underlying rating. An investor looking for competitive tax-free returns may want to consider ARS. Major features of Municipal Auction Rate Securities include:
• Investment grade rating (most, but not all)
• Dividends paid after 7, 28 or 35 days
• Rates reset every 7, 28 or 35 days
There are important distinctions between ARS and short term investments. ARS provide (but do not guarantee) liquidity at par through 7, 28 and 35-day auctions. By contrast, tax-exempt money market funds provide daily liquidity at net asset value. Commercial paper is an unsecured promissory note, and does not offer guaranteed liquidity. Treasury bills are backed by the full faith and credit of the U.S. government and provide ready liquidity.
Objectives of Auction Rate Securities
• Competitive yields versus traditional money market instruments
• Liquidity based on Auction
• Preservation of principal
• No fees or expenses
Principal and Dividend Safety
Bond Insurance
Bond Insurance will guarantee the regularly scheduled payment of interest on the insured bonds on the scheduled interest payment dates and principal at the stated maturity.
If the auction is not successful (failed auction) the issuer is still responsible for paying the bond holder interest. The bond insurer is only responsible for paying interest and principal in case if issuer default. However, not all auction rate securities offered by Morgan Keegan carry insurance and not all insurers are rated the same. Principal will be paid to the investor immediately following the first successful auction, as a secondary market develops, or at the stated maturity.
Auction and Market Liquidity
ARS holders may instruct their advisors to offer their shares for sale at the next 7, 28 or 35-day auction. If there is a lack of buyers for all available shares, then the auction will be postponed (failed auction). All holders will be awarded a tax-free dividend based on current taxable market rates or in cases of a failed rate, until the next successful auction date. The $25,000 share price remains constant, providing a “$1 in, $1 out” feature that means the principal received upon sale will always equal the amount invested, but could change with market demand.
Money Fund Eligibility
ARS are not eligible for sale to Money Market funds subject to rule 2(a)7 governing money fund investment guidelines.
Purchase Facts
Minimum Purchase:
One share minimum, $25,000 per share.
No Load:
There is no load to shares of ARS purchased or sold at auction.
To Purchase at Auction
To buy ARS at auction, advisors and investors should first discuss the lowest acceptable yield level and the possibility of a failed auction. All buy orders must specify:
• The number of shares desired ($25,000 per share)
• The desired yield
Purchases are submitted through Morgan Keegan’s Retail Fixed Income Trading Desk. If the desired rate is accepted at auction, investors will receive either that rate or a higher rate. Settlement is the next business day. If the desired rate is higher than the rate derived through the auction process, the order will not be filled.
Subsequent Auctions
At subsequent auctions, shareholders may submit one of two orders:
• Sell shares
• Hold shares, accepting the new rate established by the auction.
For additional information, please contact your financial advisor for a copy of the Morgan Keegan Auction Rate Securities Practices and Procedures.
Auction Rate Risks
Investors should be aware that investing in auction rate securities involves certain risks that differentiate such securities from money market investment instruments.
• Liquidity Risk — The ability of an investor to dispose of a share of an auction rate security may be largely dependent on the success of the auction.
There is no assurance that any particular auction will be successful, and neither the issuer nor any broker dealer is obligated to take any action to ensure that an auction will be successful. In the absence of successful auctions, there is no assurance that a secondary market for the auction will develop, or if such a market does develop, that shares will trade at or close to par.
• Purchase or sale through Dutch Auction process — A Dutch Auction is a competitive bidding process designed to determine a rate for the next term, such that all sellers sell at par and all buyers buy at par. A Dutch Auction is designed to set the “equilibrium” rate at which supply equals demand.
• The dealer may bid in the auction and the issuer may purchase in the auction.
Taxation
In general, dividends on shares of municipal auction rate securities are exempt from regular federal income tax, but may be subject to the application of the federal alternative minimum tax.
Tax-Exemption
Municipal bonds used in Morgan Keegan’s Auction Rate Program will provide federal tax exemption on the coupon/dividend payment and can provide state tax exemption. This formula:
Coupon
1.00 – Federal Tax Rate
will provide an approximate taxable equivalent yield and allows investors to compare tax-exempt yields to taxable yields.
The Tax-Free Advantage
Investors would have to earn considerably more from a taxable investment to achieve the same after-tax income as from tax-free ARS.
The securities and other investment products described herein are: 1) Not insured by the FDIC, 2) Subject to investment risks, including possible loss of principal amount invested, 3) Not deposits or other obligations of, nor guaranteed by Morgan Keegan & Company, Inc., Regions Financial Corporation or any other affiliates.
Copyright © 2008 Morgan Keegan & Co., Inc. All rights reserved. Last posted on Aug 15, 2008
http://www.morgankeegan.com/MK/Investing/IProducts/FixedIncome/auction.htm
accessed on 17th August 2008
read
http://www.sifma.org/capital_markets/auction-rate-securities.shtml
We need to understand the security first
What is an Auction Rate Security?
Auction Rate Securities (ARS) are securities with long-term maturities that are structured with the possibility of short-term holding periods, this is attempted by use of a Dutch Auction. A Dutch Auction takes place at the beginning of each holding period, which determines the coupon/dividend. At the end of each holding period, a new Dutch Auction is held, determining the coupon/dividend for the next holding period. Investors can sell, buy (if available) or continue to hold their Auction Rate Security at each auction. The length of each holding period is determined at the time of the security’s original issuance. Typical holding periods are 7, 28 and 35 days.
Overview of Morgan Keegan’s Auction Rate Program
Morgan Keegan’s Auction Rate Program will use long- dated bonds that provide short-term interest rates and liquidity determined through the Dutch Auction process. Morgan Keegan will be using either a 7, 28 or 35-day auction rate period. The coupon/dividend is paid to the ARS holder the day after the 7, 28 or 35-day holding period. The majority of ARS bonds that Morgan Keegan offers have an investment grade underlying rating. An investor looking for competitive tax-free returns may want to consider ARS. Major features of Municipal Auction Rate Securities include:
• Investment grade rating (most, but not all)
• Dividends paid after 7, 28 or 35 days
• Rates reset every 7, 28 or 35 days
There are important distinctions between ARS and short term investments. ARS provide (but do not guarantee) liquidity at par through 7, 28 and 35-day auctions. By contrast, tax-exempt money market funds provide daily liquidity at net asset value. Commercial paper is an unsecured promissory note, and does not offer guaranteed liquidity. Treasury bills are backed by the full faith and credit of the U.S. government and provide ready liquidity.
Objectives of Auction Rate Securities
• Competitive yields versus traditional money market instruments
• Liquidity based on Auction
• Preservation of principal
• No fees or expenses
Principal and Dividend Safety
Bond Insurance
Bond Insurance will guarantee the regularly scheduled payment of interest on the insured bonds on the scheduled interest payment dates and principal at the stated maturity.
If the auction is not successful (failed auction) the issuer is still responsible for paying the bond holder interest. The bond insurer is only responsible for paying interest and principal in case if issuer default. However, not all auction rate securities offered by Morgan Keegan carry insurance and not all insurers are rated the same. Principal will be paid to the investor immediately following the first successful auction, as a secondary market develops, or at the stated maturity.
Auction and Market Liquidity
ARS holders may instruct their advisors to offer their shares for sale at the next 7, 28 or 35-day auction. If there is a lack of buyers for all available shares, then the auction will be postponed (failed auction). All holders will be awarded a tax-free dividend based on current taxable market rates or in cases of a failed rate, until the next successful auction date. The $25,000 share price remains constant, providing a “$1 in, $1 out” feature that means the principal received upon sale will always equal the amount invested, but could change with market demand.
Money Fund Eligibility
ARS are not eligible for sale to Money Market funds subject to rule 2(a)7 governing money fund investment guidelines.
Purchase Facts
Minimum Purchase:
One share minimum, $25,000 per share.
No Load:
There is no load to shares of ARS purchased or sold at auction.
To Purchase at Auction
To buy ARS at auction, advisors and investors should first discuss the lowest acceptable yield level and the possibility of a failed auction. All buy orders must specify:
• The number of shares desired ($25,000 per share)
• The desired yield
Purchases are submitted through Morgan Keegan’s Retail Fixed Income Trading Desk. If the desired rate is accepted at auction, investors will receive either that rate or a higher rate. Settlement is the next business day. If the desired rate is higher than the rate derived through the auction process, the order will not be filled.
Subsequent Auctions
At subsequent auctions, shareholders may submit one of two orders:
• Sell shares
• Hold shares, accepting the new rate established by the auction.
For additional information, please contact your financial advisor for a copy of the Morgan Keegan Auction Rate Securities Practices and Procedures.
Auction Rate Risks
Investors should be aware that investing in auction rate securities involves certain risks that differentiate such securities from money market investment instruments.
• Liquidity Risk — The ability of an investor to dispose of a share of an auction rate security may be largely dependent on the success of the auction.
There is no assurance that any particular auction will be successful, and neither the issuer nor any broker dealer is obligated to take any action to ensure that an auction will be successful. In the absence of successful auctions, there is no assurance that a secondary market for the auction will develop, or if such a market does develop, that shares will trade at or close to par.
• Purchase or sale through Dutch Auction process — A Dutch Auction is a competitive bidding process designed to determine a rate for the next term, such that all sellers sell at par and all buyers buy at par. A Dutch Auction is designed to set the “equilibrium” rate at which supply equals demand.
• The dealer may bid in the auction and the issuer may purchase in the auction.
Taxation
In general, dividends on shares of municipal auction rate securities are exempt from regular federal income tax, but may be subject to the application of the federal alternative minimum tax.
Tax-Exemption
Municipal bonds used in Morgan Keegan’s Auction Rate Program will provide federal tax exemption on the coupon/dividend payment and can provide state tax exemption. This formula:
Coupon
1.00 – Federal Tax Rate
will provide an approximate taxable equivalent yield and allows investors to compare tax-exempt yields to taxable yields.
The Tax-Free Advantage
Investors would have to earn considerably more from a taxable investment to achieve the same after-tax income as from tax-free ARS.
The securities and other investment products described herein are: 1) Not insured by the FDIC, 2) Subject to investment risks, including possible loss of principal amount invested, 3) Not deposits or other obligations of, nor guaranteed by Morgan Keegan & Company, Inc., Regions Financial Corporation or any other affiliates.
Copyright © 2008 Morgan Keegan & Co., Inc. All rights reserved. Last posted on Aug 15, 2008
http://www.morgankeegan.com/MK/Investing/IProducts/FixedIncome/auction.htm
accessed on 17th August 2008
read
http://www.sifma.org/capital_markets/auction-rate-securities.shtml
Thursday, July 31, 2008
Citi Group - Management of Sub Prime Fallout 2007-08
Citi to Cut 17,000 Jobs in Broad Overhaul
April 11, 2007,
The company announced plans to lay off more than 17,000 workers, with the first pink slips coming this week. About 9,500 jobs will be moved to locations overseas or around the United States where the cost of doing business is lower, from more expensive locations like London, Hong Kong, and New York, where the company’s headquarters are based.
Roughly 8 percent of Citigroup’s 327,000 workers, from entry-level consumer bankers to senior executives in the investment bank, will be affected by the restructuring. All five of its major business divisions will face cuts.
About 1,600 jobs will be eliminated in New York City, where Citigroup currently has about 27,000 employees.
November 26, 2007,
Citi May Start New Round of Layoffs
CNBC reported Monday morning citing unnamed sources, that no exact number was set, though some jobs were already being cut. CNBC’s Charles Gasparino said the layoffs could be between 17,000 and 45,000.
Any cuts would be on top of the 17,000 Citi announced earlier this year, which amounted to about 5 percent of the bank’s workforce.
(http://dealbook.blogs.nytimes.com/2007/11/26/citi-may-start-new-round-of-layoffs/)
July 2008
Citygroup may have to write down the value of collateralized debt obligations by $8 billion in Q3 based on Merrill Lynch deal.
Merrill sold its holding for 22 cents on the dollar, while Citi currently values the securities at 53 cents.
Citigroup Deal Ends Its SIV Saga
November 19, 2008,
Citigroup said Wednesday that it would buy about $17.4 billion in assets from structured investment vehicles, or SIVs, that were affiliated with Citi.
Citi was a pioneer in the business of SIVs, which once made lots of money by issuing short-term notes to invest in longer-term securities with higher yields. They traditionally resided off the balance sheets of the banks that created and advised them.
(http://dealbook.blogs.nytimes.com/2008/11/19/citigroup-deal-ends-its-siv-saga/)
Citigroup to Liquidate Hedge Fund, Report Says
November 19, 2008,
Citigroup is liquidating its Corporate Special Opportunities hedge fund after it lost 53 percent of its value last month, The Financial Times reported.
The C.S.O. fund managed almost $4.2 billion at its peak and has a net asset value of about $58 million and debt of about $880 million, the report said, citing investors.
http://dealbook.blogs.nytimes.com/2008/11/19/citigroup-to-liquidate-hedge-fund-report-says/
April 11, 2007,
The company announced plans to lay off more than 17,000 workers, with the first pink slips coming this week. About 9,500 jobs will be moved to locations overseas or around the United States where the cost of doing business is lower, from more expensive locations like London, Hong Kong, and New York, where the company’s headquarters are based.
Roughly 8 percent of Citigroup’s 327,000 workers, from entry-level consumer bankers to senior executives in the investment bank, will be affected by the restructuring. All five of its major business divisions will face cuts.
About 1,600 jobs will be eliminated in New York City, where Citigroup currently has about 27,000 employees.
November 26, 2007,
Citi May Start New Round of Layoffs
CNBC reported Monday morning citing unnamed sources, that no exact number was set, though some jobs were already being cut. CNBC’s Charles Gasparino said the layoffs could be between 17,000 and 45,000.
Any cuts would be on top of the 17,000 Citi announced earlier this year, which amounted to about 5 percent of the bank’s workforce.
(http://dealbook.blogs.nytimes.com/2007/11/26/citi-may-start-new-round-of-layoffs/)
July 2008
Citygroup may have to write down the value of collateralized debt obligations by $8 billion in Q3 based on Merrill Lynch deal.
Merrill sold its holding for 22 cents on the dollar, while Citi currently values the securities at 53 cents.
Citigroup Deal Ends Its SIV Saga
November 19, 2008,
Citigroup said Wednesday that it would buy about $17.4 billion in assets from structured investment vehicles, or SIVs, that were affiliated with Citi.
Citi was a pioneer in the business of SIVs, which once made lots of money by issuing short-term notes to invest in longer-term securities with higher yields. They traditionally resided off the balance sheets of the banks that created and advised them.
(http://dealbook.blogs.nytimes.com/2008/11/19/citigroup-deal-ends-its-siv-saga/)
Citigroup to Liquidate Hedge Fund, Report Says
November 19, 2008,
Citigroup is liquidating its Corporate Special Opportunities hedge fund after it lost 53 percent of its value last month, The Financial Times reported.
The C.S.O. fund managed almost $4.2 billion at its peak and has a net asset value of about $58 million and debt of about $880 million, the report said, citing investors.
http://dealbook.blogs.nytimes.com/2008/11/19/citigroup-to-liquidate-hedge-fund-report-says/
Friday, November 16, 2007
Subprime Mortagage Crisis - Management Issues
Subprime crisis has brought management issues banks, investment banks and broking companies into the fore. CEOs of Citibank and Merrill Lynch, both top tier companies in commercial banking and investment banking makes evident the importance of management failures. Merrill CEO was criticized for not undertaking proper risk management measures.
11 December 2007
Remarks by Daniel H. Mudd
Fannie Mae President and Chief Executive Officer
Having declined 27 percent so far, housing starts are likely to fall another 14 percent in '08. Home sales are down 14 percent this year, and we expect will fall another 12 percent next year. We expect home prices to fall 3 percent this year⎯they were growing a little bit at the beginning of the year, and are at an exit rate that will produce about a 3 percent fall this year. 4 to 5 percent decrease in home prices next year, with a peak-to-trough decline of 10 to 12 percent on average nationally, through 2009. We expect to see some growth at the end of 2009 at the earliest.
Full transcript
http://www.fanniemae.com/media/speeches/Goldman_conference_transcript.pdf
--------------------------
October 2007
The U.S. subprime housing crisis will not peak until 2009
The U.S. subprime housing crisis will not peak until 2009, rating agency Standard and Poor's said on Tuesday, adding it had underestimated the extent of fraud in the industry.
S&P expected the world economy to grow 3.6 percent in 2007 and 3.5 percent in 2008, with emerging market economies driving growth. The U.S. economy would lag at 2 percent in both years, down from 2.9 percent in 2006.
The subprime crisis -- which roiled global markets in late July and August -- was far from over, although its shock value was wearing off, David Wyss, S&P's chief economist, said in Mumbai.
"We underestimated the extent to which fraud was occurring in the industry," he said.
"It looks, based on some surveys that had been done, the extent of frauds increased sharply in 2006."
S&P said the U.S. Federal Reserve had estimated that subprime losses could reach $150 billion, and Wyss said that would feed through to unemployment and remain a brake on growth.
"We think in the United States the housing market is not going to bottom until winter. We think the losses in these sectors won't really hit their peak until 2009," Wyss said.
"We are not halfway through with this crisis yet."
Emerging markets were far less vulnerable to credit market turmoil than during previous crises because of the capital flows attracted by high economic growth coupled with improved corporate governance standards, S&P said.
"The fact that the U.S. slowdown is concentrated in housing, which has relatively low import content, helps," it said.
High commodity prices were also helping many emerging market economies, such as Latin American and African countries that are major exporters.
S&P estimated that, on a purchasing-power parity basis, the United States would contribute only 9 percent of world growth in 2007, compared with China's 33 percent and India's 12 percent.
http://www.reuters.com/article/ousiv/idUSBOM9740920071009?pageNumber=2
-------------------------
Subprime crisis - Entities responsible
This mess is a collective creation of the world's central banks, lenders, credit rating agencies and underwriters, speculators and investors.
The economy was at risk of a deep recession after the dotcom bubble burst in early 2000; this situation was compounded by the September 11 terrorist attacks that followed in 2001. In response, central banks around the world tried to stimulate the economy. They created capital liquidity through a reduction in interest rates.
Biggest Culprit: The Lenders
Most of the blame should be pointed at the mortgage originators (lenders) for creating these problems. It was the lenders who ultimately lent funds to people with poor credit and a high risk of default.
When the central banks flooded the markets with capital liquidity, it not only lowered interest rates, it also broadly depressed risk premiums as investors sought riskier opportunities to bolster their investment returns. At the same time, lenders found themselves with ample capital to lend and, like investors, an increased willingness to undertake additional risk to increase their investment returns.
In defense of the lenders, there was an increased demand for mortgages, and housing prices were increasing because interest rates had dropped substantially. At the time, lenders probably saw subprime mortgages as less of a risk than they really were: rates were low, the economy was healthy and people were making their payments.
Subprime mortgage originations grew from $173 billion in 2001 to a record level of $665 billion in 2005, which represented an increase of nearly 300%. There is a clear relationship between the liquidity following September 11, 2001, and subprime loan originations; lenders were clearly willing and able to provide borrowers with the necessary funds to purchase a home.
Investment Banks Worsen the Situation
The increased use of the secondary mortgage market by lenders added to the number of subprime loans lenders could originate. Instead of holding the originated mortgages on their books, lenders were able to simply sell off the mortgages in the secondary market and collect the originating fees. This freed up more capital for even more lending, which increased liquidity even more. The snowball began to build momentum. (For a crash course on the secondary mortgage market, check out Behind The Scenes Of Your Mortgage.)
A lot of the demand for these mortgages came from the creation of assets that pooled mortgages together into a security, such as a collateralized debt obligation (CDO). In this process, investment banks would buy the mortgages from lenders and securitize these mortgages into bonds, which were sold to investors through CDOs.
Rating Agencies: Possible Conflict of Interest
A lot of criticism has been directed at the rating agencies and underwriters of the CDOs and other mortgage-backed securities that included subprime loans in their mortgage pools. Some argue that the rating agencies should have foreseen the high default rates for subprime borrowers, and they should have given these CDOs much lower ratings than the 'AAA' rating given to the higher quality tranches. If the ratings had been more accurate, fewer investors would have bought into these securities, and the losses may not have been as bad. (To learn more on the ratings system, see What Is A Corporate Credit Rating?)
Moreover, some have pointed to the conflict of interest between rating agencies, which receive fees from a security's creator, and their ability to give an unbiased assessment of risk. The argument is that rating agencies were enticed to give better ratings in order to continue receiving service fees, or they run the risk of the underwriter going to a different rating agency (or the security not getting rated at all). However, on the flip side, it's hard to sell a security if it is not rated.
Regardless of the criticism surrounding the relationship between underwriters and rating agencies, the fact of the matter is that they were simply bringing bonds to market based on market demand.
Fuel to the Fire: Investor Behavior
Just as the homeowners are to blame for their purchases gone wrong, much of the blame also must be placed on those who invested in CDOs. Investors were the ones willing to purchase these CDOs at ridiculously low premiums over Treasury bonds. These enticingly low rates are what ultimately led to such huge demand for subprime loans.
Much of the blame here lies with investors because it is up to individuals to perform due diligence on their investments and make appropriate expectations. Investors failed in this by taking the 'AAA' CDO ratings at face value.
Final Culprit: Hedge Funds
Another party that added to the mess was the hedge fund industry. It aggravated the problem not only by pushing rates lower, but also by fueling the market volatility that caused investor losses. The failures of a few investment managers also contributed to the problem. (To learn more. check out Taking A Look Behind Hedge Funds.)
To illustrate, there is a type of hedge fund strategy that can be best described as "credit arbitrage". It involves purchasing subprime bonds on credit and hedging these positions with credit default swaps. This amplified demand for CDOs; by using leverage, a fund could purchase a lot more CDOs and bonds than it could with existing capital alone, pushing subprime interest rates lower and further fueling the problem. Moreover, because leverage was involved, this set the stage for a spike in volatility, which is exactly what happened as soon as investors realized the true, lesser quality of subprime CDOs.
Because hedge funds use a significant amount of leverage, losses were amplified and many hedge funds shut down operations as they ran out of money in the face of margin calls.
http://www.investopedia.com/articles/07/subprime-blame.asp
-------------------------------
October 15, 2007
The Securities and Exchange Commission has launched at least a dozen investigations around the subprime crisis, and filed suit against one fund manager, Sentinel Management Group Inc., which is accused of lying to its clients about its investments. Investors have filed lawsuits against the companies that have collapsed in the wake of the subprime crisis, including the Bear Stearns hedge funds and mortgage lenders. Even credit rating agencies may get swept up in the litigation, according to Columbia University Law School professor John Coffee, an expert in securities regulation and litigation. Outfits like Standard & Poor's and Moody's Investors Service certified many of the bonds at issue as investment grade, even though they had a default rate that was 10 times higher than that of comparable corporate bonds.
http://www.law.com/jsp/article.jsp?id=1192179802376
-------------------------
11 December 2007
Remarks by Daniel H. Mudd
Fannie Mae President and Chief Executive Officer
Having declined 27 percent so far, housing starts are likely to fall another 14 percent in '08. Home sales are down 14 percent this year, and we expect will fall another 12 percent next year. We expect home prices to fall 3 percent this year⎯they were growing a little bit at the beginning of the year, and are at an exit rate that will produce about a 3 percent fall this year. 4 to 5 percent decrease in home prices next year, with a peak-to-trough decline of 10 to 12 percent on average nationally, through 2009. We expect to see some growth at the end of 2009 at the earliest.
Full transcript
http://www.fanniemae.com/media/speeches/Goldman_conference_transcript.pdf
--------------------------
October 2007
The U.S. subprime housing crisis will not peak until 2009
The U.S. subprime housing crisis will not peak until 2009, rating agency Standard and Poor's said on Tuesday, adding it had underestimated the extent of fraud in the industry.
S&P expected the world economy to grow 3.6 percent in 2007 and 3.5 percent in 2008, with emerging market economies driving growth. The U.S. economy would lag at 2 percent in both years, down from 2.9 percent in 2006.
The subprime crisis -- which roiled global markets in late July and August -- was far from over, although its shock value was wearing off, David Wyss, S&P's chief economist, said in Mumbai.
"We underestimated the extent to which fraud was occurring in the industry," he said.
"It looks, based on some surveys that had been done, the extent of frauds increased sharply in 2006."
S&P said the U.S. Federal Reserve had estimated that subprime losses could reach $150 billion, and Wyss said that would feed through to unemployment and remain a brake on growth.
"We think in the United States the housing market is not going to bottom until winter. We think the losses in these sectors won't really hit their peak until 2009," Wyss said.
"We are not halfway through with this crisis yet."
Emerging markets were far less vulnerable to credit market turmoil than during previous crises because of the capital flows attracted by high economic growth coupled with improved corporate governance standards, S&P said.
"The fact that the U.S. slowdown is concentrated in housing, which has relatively low import content, helps," it said.
High commodity prices were also helping many emerging market economies, such as Latin American and African countries that are major exporters.
S&P estimated that, on a purchasing-power parity basis, the United States would contribute only 9 percent of world growth in 2007, compared with China's 33 percent and India's 12 percent.
http://www.reuters.com/article/ousiv/idUSBOM9740920071009?pageNumber=2
-------------------------
Subprime crisis - Entities responsible
This mess is a collective creation of the world's central banks, lenders, credit rating agencies and underwriters, speculators and investors.
The economy was at risk of a deep recession after the dotcom bubble burst in early 2000; this situation was compounded by the September 11 terrorist attacks that followed in 2001. In response, central banks around the world tried to stimulate the economy. They created capital liquidity through a reduction in interest rates.
Biggest Culprit: The Lenders
Most of the blame should be pointed at the mortgage originators (lenders) for creating these problems. It was the lenders who ultimately lent funds to people with poor credit and a high risk of default.
When the central banks flooded the markets with capital liquidity, it not only lowered interest rates, it also broadly depressed risk premiums as investors sought riskier opportunities to bolster their investment returns. At the same time, lenders found themselves with ample capital to lend and, like investors, an increased willingness to undertake additional risk to increase their investment returns.
In defense of the lenders, there was an increased demand for mortgages, and housing prices were increasing because interest rates had dropped substantially. At the time, lenders probably saw subprime mortgages as less of a risk than they really were: rates were low, the economy was healthy and people were making their payments.
Subprime mortgage originations grew from $173 billion in 2001 to a record level of $665 billion in 2005, which represented an increase of nearly 300%. There is a clear relationship between the liquidity following September 11, 2001, and subprime loan originations; lenders were clearly willing and able to provide borrowers with the necessary funds to purchase a home.
Investment Banks Worsen the Situation
The increased use of the secondary mortgage market by lenders added to the number of subprime loans lenders could originate. Instead of holding the originated mortgages on their books, lenders were able to simply sell off the mortgages in the secondary market and collect the originating fees. This freed up more capital for even more lending, which increased liquidity even more. The snowball began to build momentum. (For a crash course on the secondary mortgage market, check out Behind The Scenes Of Your Mortgage.)
A lot of the demand for these mortgages came from the creation of assets that pooled mortgages together into a security, such as a collateralized debt obligation (CDO). In this process, investment banks would buy the mortgages from lenders and securitize these mortgages into bonds, which were sold to investors through CDOs.
Rating Agencies: Possible Conflict of Interest
A lot of criticism has been directed at the rating agencies and underwriters of the CDOs and other mortgage-backed securities that included subprime loans in their mortgage pools. Some argue that the rating agencies should have foreseen the high default rates for subprime borrowers, and they should have given these CDOs much lower ratings than the 'AAA' rating given to the higher quality tranches. If the ratings had been more accurate, fewer investors would have bought into these securities, and the losses may not have been as bad. (To learn more on the ratings system, see What Is A Corporate Credit Rating?)
Moreover, some have pointed to the conflict of interest between rating agencies, which receive fees from a security's creator, and their ability to give an unbiased assessment of risk. The argument is that rating agencies were enticed to give better ratings in order to continue receiving service fees, or they run the risk of the underwriter going to a different rating agency (or the security not getting rated at all). However, on the flip side, it's hard to sell a security if it is not rated.
Regardless of the criticism surrounding the relationship between underwriters and rating agencies, the fact of the matter is that they were simply bringing bonds to market based on market demand.
Fuel to the Fire: Investor Behavior
Just as the homeowners are to blame for their purchases gone wrong, much of the blame also must be placed on those who invested in CDOs. Investors were the ones willing to purchase these CDOs at ridiculously low premiums over Treasury bonds. These enticingly low rates are what ultimately led to such huge demand for subprime loans.
Much of the blame here lies with investors because it is up to individuals to perform due diligence on their investments and make appropriate expectations. Investors failed in this by taking the 'AAA' CDO ratings at face value.
Final Culprit: Hedge Funds
Another party that added to the mess was the hedge fund industry. It aggravated the problem not only by pushing rates lower, but also by fueling the market volatility that caused investor losses. The failures of a few investment managers also contributed to the problem. (To learn more. check out Taking A Look Behind Hedge Funds.)
To illustrate, there is a type of hedge fund strategy that can be best described as "credit arbitrage". It involves purchasing subprime bonds on credit and hedging these positions with credit default swaps. This amplified demand for CDOs; by using leverage, a fund could purchase a lot more CDOs and bonds than it could with existing capital alone, pushing subprime interest rates lower and further fueling the problem. Moreover, because leverage was involved, this set the stage for a spike in volatility, which is exactly what happened as soon as investors realized the true, lesser quality of subprime CDOs.
Because hedge funds use a significant amount of leverage, losses were amplified and many hedge funds shut down operations as they ran out of money in the face of margin calls.
http://www.investopedia.com/articles/07/subprime-blame.asp
-------------------------------
October 15, 2007
The Securities and Exchange Commission has launched at least a dozen investigations around the subprime crisis, and filed suit against one fund manager, Sentinel Management Group Inc., which is accused of lying to its clients about its investments. Investors have filed lawsuits against the companies that have collapsed in the wake of the subprime crisis, including the Bear Stearns hedge funds and mortgage lenders. Even credit rating agencies may get swept up in the litigation, according to Columbia University Law School professor John Coffee, an expert in securities regulation and litigation. Outfits like Standard & Poor's and Moody's Investors Service certified many of the bonds at issue as investment grade, even though they had a default rate that was 10 times higher than that of comparable corporate bonds.
http://www.law.com/jsp/article.jsp?id=1192179802376
-------------------------
Subscribe to:
Comments (Atom)
