Does It Pay to Advertise in Print?
9 Ways to Improve Results
By Vanessa Richardson
June 12, 2008
You don't need to run big ads
Tout your achievements
Your pay-off may take a while
For the full article
http://www.financial-planning.com/asset/article/606811/does-pay-advertise-print.html?pg=
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Showing posts with label Management-issues. Show all posts
Showing posts with label Management-issues. Show all posts
Sunday, August 31, 2008
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)
Thursday, July 31, 2008
Bank of America - Sub Prime Fall out Management
Bank of America reported second quarter 2008 results that excluded $2.3B in losses and $3.7B in credit-related write-downs stemming from its merger with CountryWide. The bank reported that its net income fell 41 percent to $3.41B, down from $5.76B a year ago. Write-downs also fell substantially:
The corporate and investment bank earned $1.75 billion, a 3.2 percent increase from a year earlier. Writedowns on securities fell to $645 million from $1.47 billion in the first quarter.
So the bank is reporting second quarter write-downs of $645M due to CDOs and $575M to investment banking, totaling $1.2B in write-downs sans CounrtyWide for the quarter.
Second quarter 2007
Bank of America is the second largest bank in the United States, with a market capitalization of $217 billion. Citigroup is the largest, with a market cap of $252 billion (figures in July 2007).
In the second quarter 2007 the company's provision for credit losses ballooned 79.2%, to $1.8 billion from $1.0 billion. For comparison, the provision in the first quarter was $1.2 billion, indicating that the subprime sector's woes still pack a mighty punch. Bank of America said its total managed losses were $2.8 billion in the second quarter, a slight tick up from $2.6 billion in the year-ago period.
3rd quarter 2007 - October 2007
The investment banking division was hurt badly by the turmoil in credit markets, as the weak performance in virtually all of its fixed-income activities caused profit to plummet 93 percent to $100 million, compared with $1.43 billion a year earlier.
Bank of America's small investment banking unit was hit particularly hard, weathering trading losses the same size as those of its larger peers. Profit fell 93 percent to $100 million from $1.43 billion a year ago. The decline stemmed from nearly all of its fixed-income operations, contributing to a $717 million loss. It also absorbed a $607 million loss from bad trading bets.
The bank's large consumer banking business absorbed heavy losses as it reinforced its reserves by $865 million, or 52 percent, in anticipation of higher losses across all businesses. While the division's revenues grew slightly to nearly $12 billion, profit fell 16 percent to $2.45 billion. About half of the reserves increase was expected to cover anticipated losses in its small business loan portfolio, and about 30 percent of the increase was linked to the deterioration of home equity loans.
Bank of America's wealth management division increased 17 percent from a year ago, to $599 million. However, about 10 percent of that increase was related to its acquisition of U.S. Trust, which was completed in July.
Net income for the entire company in the third quarter was $3.7 billion, or 82 cents a share, compared with $5.42 billion, or $1.18 a share, a year ago. Revenue declined 12 percent to $16.3 billion.
The results caught Wall Street off-guard and suggested the extent to which the bank was under stress from the downturn in the housing market and a slowdown in the economy. The heavy trading losses also raised questions about its risk management practices.
The earnings drop came after several months during which Bank of America had been doing deals. In July, it took a $2 billion stake in Countrywide Financial, giving it an immediate paper profit and an option to buy the troubled mortgage giant if it was ever put up for sale. More recently, it took over LaSalle Bank to expand its presence in Chicago, outmaneuvering rivals in an intense bidding war. Still, it has struggled to find ways to grow.
Bank of America announced that it is cutting roughly 3,000 jobs and launching a strategic review of its investment banking business after recent poor performance from the unit.
Gene Taylor, head of Global Corporate and Investment Banking, will retire at the end of this year and be replaced by Brian Moynihan, who currently runs the company's Global Wealth and Investment Management business.
Bank of America is mainly a large retail bank and commercial lender. But it has expanded into investment banking in recent years. CEO Lewis said the company wasn't pulling back completely from capital markets and investment banking.
Bank of America remains "committed to providing our commercial, corporate and institutional clients with the financial products and services they need to run their organizations effectively," he said in a statement.
Keith Banks, president of Columbia Management, Bank of America's asset management business, will replace Moynihan as president of Global Wealth and Investment Management, the company said.
January 2008
Net income at the Charlotte-based bank dropped to $268 million, or 5 cents per share, in the three months ended Dec. 31, 2007 from $5.26 billion, or $1.16 per share, a year ago.
The bank's revenue fell 32 percent to $12.67 billion from $18.49 billion last year.
Analysts expected earnings of 18 cents per share on revenue of $13.24 billion, according to a poll by Thomson Financial.
The quarter included results from LaSalle Bank, which Bank of America purchased on Oct. 1.
Results reflected $5.44 billion of trading losses, compared with profits of $460 million a year earlier. This reflected a $5.28 billion write-down related to collateralized debt obligations, which the bank said reduced trading profit by $4.5 billion and other income by about $750 million. Bank of America said it also set aside $3.31 billion for possible future credit losses.
For the year, Bank of America reported earnings of $14.98 billion, or $3.30 per share, compared with $21.13 billion, or $4.59 cents per share, in 2006. Revenue fell to $66.32 billion from $72.58 billion a year earlier.
Bank of America announced scaling back its investment banking operations, shedding an additional 650 jobs after suffering heavy trading losses from bad mortgage investments.
Those layoffs are on top of 500 jobs that were eliminated in mid-October, when Bank of America executives signaled plans of a retreat in investment banking. Together, they represent about 19 percent of the investment bank’s 5,900 employees.
They plan to pare back coverage of certain investment banking customers and narrow the services it provides to corporate clients overseas. They are also ratcheting down their trading activities, scaling back their presence in packaging mortgages and other complex securities that have been hit hardest by the credit crisis.
The Bank of America also plans to sell its prime brokerage unit, which faced steep competition and massive investment requirements.
The retreat or retrenchment was reacting to the realities of the market as of today was the explanation of Kenneth D. Lewis, Bank of America’s chairman and chief executive at a new conference.
The investment banking follows a strategic assessment that began in October after Brian Moynihan, a longtime Bank of America executive, became the head of the corporate and investment bank. Lewis expressed full confidence in Mr. Moynihan, who had never managed a trading business before, to put the investment bank back on track. “I trust him. I know he is bright and detail-oriented,” Mr. Lewis said, noting Mr. Moynihan’s knowledge of markets and dedication to the bank.
http://www.forbes.com/2007/07/19/bank-america-update-markets-equity-cx_er_ra_0719markets16.html
http://www.iht.com/articles/2007/10/18/business/bank.php
http://www.marketwatch.com/news/story/bank-america-cut-3000-jobs/story.aspx?guid=%7BE98B67D4-535D-42E1-852A-41CC18174676%7D
http://www.tylerpaper.com/article/20080122/NEWS11/904758130/0/www.javascripts.com
http://dealbook.blogs.nytimes.com/2008/01/15/bank-of-america-to-cut-investment-banking-jobs/
http://bankimplode.com/blog/2008/07/21/bank-of-america/
The corporate and investment bank earned $1.75 billion, a 3.2 percent increase from a year earlier. Writedowns on securities fell to $645 million from $1.47 billion in the first quarter.
So the bank is reporting second quarter write-downs of $645M due to CDOs and $575M to investment banking, totaling $1.2B in write-downs sans CounrtyWide for the quarter.
Second quarter 2007
Bank of America is the second largest bank in the United States, with a market capitalization of $217 billion. Citigroup is the largest, with a market cap of $252 billion (figures in July 2007).
In the second quarter 2007 the company's provision for credit losses ballooned 79.2%, to $1.8 billion from $1.0 billion. For comparison, the provision in the first quarter was $1.2 billion, indicating that the subprime sector's woes still pack a mighty punch. Bank of America said its total managed losses were $2.8 billion in the second quarter, a slight tick up from $2.6 billion in the year-ago period.
3rd quarter 2007 - October 2007
The investment banking division was hurt badly by the turmoil in credit markets, as the weak performance in virtually all of its fixed-income activities caused profit to plummet 93 percent to $100 million, compared with $1.43 billion a year earlier.
Bank of America's small investment banking unit was hit particularly hard, weathering trading losses the same size as those of its larger peers. Profit fell 93 percent to $100 million from $1.43 billion a year ago. The decline stemmed from nearly all of its fixed-income operations, contributing to a $717 million loss. It also absorbed a $607 million loss from bad trading bets.
The bank's large consumer banking business absorbed heavy losses as it reinforced its reserves by $865 million, or 52 percent, in anticipation of higher losses across all businesses. While the division's revenues grew slightly to nearly $12 billion, profit fell 16 percent to $2.45 billion. About half of the reserves increase was expected to cover anticipated losses in its small business loan portfolio, and about 30 percent of the increase was linked to the deterioration of home equity loans.
Bank of America's wealth management division increased 17 percent from a year ago, to $599 million. However, about 10 percent of that increase was related to its acquisition of U.S. Trust, which was completed in July.
Net income for the entire company in the third quarter was $3.7 billion, or 82 cents a share, compared with $5.42 billion, or $1.18 a share, a year ago. Revenue declined 12 percent to $16.3 billion.
The results caught Wall Street off-guard and suggested the extent to which the bank was under stress from the downturn in the housing market and a slowdown in the economy. The heavy trading losses also raised questions about its risk management practices.
The earnings drop came after several months during which Bank of America had been doing deals. In July, it took a $2 billion stake in Countrywide Financial, giving it an immediate paper profit and an option to buy the troubled mortgage giant if it was ever put up for sale. More recently, it took over LaSalle Bank to expand its presence in Chicago, outmaneuvering rivals in an intense bidding war. Still, it has struggled to find ways to grow.
Bank of America announced that it is cutting roughly 3,000 jobs and launching a strategic review of its investment banking business after recent poor performance from the unit.
Gene Taylor, head of Global Corporate and Investment Banking, will retire at the end of this year and be replaced by Brian Moynihan, who currently runs the company's Global Wealth and Investment Management business.
Bank of America is mainly a large retail bank and commercial lender. But it has expanded into investment banking in recent years. CEO Lewis said the company wasn't pulling back completely from capital markets and investment banking.
Bank of America remains "committed to providing our commercial, corporate and institutional clients with the financial products and services they need to run their organizations effectively," he said in a statement.
Keith Banks, president of Columbia Management, Bank of America's asset management business, will replace Moynihan as president of Global Wealth and Investment Management, the company said.
January 2008
Net income at the Charlotte-based bank dropped to $268 million, or 5 cents per share, in the three months ended Dec. 31, 2007 from $5.26 billion, or $1.16 per share, a year ago.
The bank's revenue fell 32 percent to $12.67 billion from $18.49 billion last year.
Analysts expected earnings of 18 cents per share on revenue of $13.24 billion, according to a poll by Thomson Financial.
The quarter included results from LaSalle Bank, which Bank of America purchased on Oct. 1.
Results reflected $5.44 billion of trading losses, compared with profits of $460 million a year earlier. This reflected a $5.28 billion write-down related to collateralized debt obligations, which the bank said reduced trading profit by $4.5 billion and other income by about $750 million. Bank of America said it also set aside $3.31 billion for possible future credit losses.
For the year, Bank of America reported earnings of $14.98 billion, or $3.30 per share, compared with $21.13 billion, or $4.59 cents per share, in 2006. Revenue fell to $66.32 billion from $72.58 billion a year earlier.
Bank of America announced scaling back its investment banking operations, shedding an additional 650 jobs after suffering heavy trading losses from bad mortgage investments.
Those layoffs are on top of 500 jobs that were eliminated in mid-October, when Bank of America executives signaled plans of a retreat in investment banking. Together, they represent about 19 percent of the investment bank’s 5,900 employees.
They plan to pare back coverage of certain investment banking customers and narrow the services it provides to corporate clients overseas. They are also ratcheting down their trading activities, scaling back their presence in packaging mortgages and other complex securities that have been hit hardest by the credit crisis.
The Bank of America also plans to sell its prime brokerage unit, which faced steep competition and massive investment requirements.
The retreat or retrenchment was reacting to the realities of the market as of today was the explanation of Kenneth D. Lewis, Bank of America’s chairman and chief executive at a new conference.
The investment banking follows a strategic assessment that began in October after Brian Moynihan, a longtime Bank of America executive, became the head of the corporate and investment bank. Lewis expressed full confidence in Mr. Moynihan, who had never managed a trading business before, to put the investment bank back on track. “I trust him. I know he is bright and detail-oriented,” Mr. Lewis said, noting Mr. Moynihan’s knowledge of markets and dedication to the bank.
http://www.forbes.com/2007/07/19/bank-america-update-markets-equity-cx_er_ra_0719markets16.html
http://www.iht.com/articles/2007/10/18/business/bank.php
http://www.marketwatch.com/news/story/bank-america-cut-3000-jobs/story.aspx?guid=%7BE98B67D4-535D-42E1-852A-41CC18174676%7D
http://www.tylerpaper.com/article/20080122/NEWS11/904758130/0/www.javascripts.com
http://dealbook.blogs.nytimes.com/2008/01/15/bank-of-america-to-cut-investment-banking-jobs/
http://bankimplode.com/blog/2008/07/21/bank-of-america/
Bear Stearns - Collapse from Sub Prime Crisis 2007-08
At Bear, trading and handling money for clients has always been the main game. The firm made a steady profit as Wall Street's back office. For a long time that was enough. Particularly under the leadership of the legendary Alan "Ace" Greenberg, Bear's disciplined trading culture made it the "Sparta of Wall Street," in the words of Bernstein analyst Brad Hintz.
Bear grew jealous of the hugely profitable hedge funds run by the likes of Goldman Sachs When Bear decided to get into this riskier action, it did so by channeling other people's money into the funds, and only a little of its own. Due to this, instead of being highly risk-conscious and attentive to detail, the funds missed warning signs in the subprime mortgage market, and top management seemed disengaged.
The hedge funds' troubles started in April 2007, worsened in May, and by mid-June had become a full-blown crisis. Bear's injection of $1.6 billion couldn't save them. By mid-July both were next to worthless. Less than three weeks later, the stock was way down and Bear was selling more than $2 billion in debt, both to shore up its balance sheet and to demonstrate that its assets were still valued.
A former Bear executive summed up the irony: "The culture of being conservative and not betting the house's money -- all that got undermined."
Hedge Fund Story
The first fund, the Bear Stearns High-Grade Structured Credit Fund was started in 2004 and had done well, posting 41 months of positive returns of about 1 percent to 1.5 percent a month.
In August 2006, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund — the second fund that eventually had huge losses — was started with $600 million in investments, mostly from wealthy individual clients of Bear Stearns, and at least $6 billion in money borrowed from banks and brokerage firms. Bear Stearns and a handful of its top executives invested a mere $40 million in both funds.
The timing could not have been worse.
The Bear Stearns funds, like so many others, had invested in collateralized debt obligations, or CDOs, which invest in bonds backed by hundreds of loans and other financial instruments. Wall Street sells CDOs in slices to investors. Some of those pieces have low yields but they are easily traded and carry less risk; others are more susceptible to defaults and trade infrequently, which makes them difficult to value.
As the sub prime problems surface, at first, the Bear Stearns hedge funds appeared to weather the storm. But in March, the older fund registered its first loss.
By April, the older fund was down by 5 percent for the year, and the newer fund had fallen 10 percent.
Managers tried to protect the fund by hedging potential losses in lower-rated securities they held, but did not do so for higher-rated bonds, which also fell in value.
There was a sharp restatement in April of the second fund. The firm revalued some securities and told investors that the fund was down 23 percent, not 10 percent as it had said earlier.
Shocked investors began contacting Bear Stearns, demanding to pull their money out.
In May, however, more significant problems began to emerge. The Swiss investment bank UBS shut its hedge fund arm, Dillon Read Capital Management, after bad subprime bets led to a $124 million loss.
In May, Bear Stearns froze all redemption requests. This month, at least three Wall Street firms — JPMorgan Chase, Citigroup and Merrill Lynch — began demanding more cash as collateral for the loans they had made.
Fighting to save the funds, Bear Stearns sold $3.6 billion in high-grade securities. Meanwhile, its adviser, Blackstone, scrambled to line up a deal in which Bear Stearns would put up $1.5 billion in new loans and a consortium of banks led by Citigroup and Barclays would put in $500 million.
In return, the lenders would have their exposure to the funds reduced but could not make further margin calls for 12 months.
Some lenders, including Merrill Lynch and Deutsche Bank, balked and moved to sell assets. At one point Wednesday, nearly $2 billion in securities were listed for sale, although some banks, including JPMorgan, eventually canceled scheduled auctions.
By the end of the day, out of the $850 million in securities that Merrill had put up for sale, only a small portion actually sold.
In the wake of the weak auctions, several other lenders, including JPMorgan, Citigroup, Goldman Sachs and Bank of America, reached deals with Bear Stearns. At least some of the deals involved the lenders selling the securities back to Bear Stearns for cash, although the prices were not disclosed.
Ralph R. Cioffi As the market for subprime mortgages was crumbling, the 51-year-old manager of two Bear Stearns (BSC) hedge funds, Ralph R. Cioffi, offered nothing but reassurances to investors. "We're going to make money on this," he promised his wealthy patrons in February 2007. "We don't believe what the markets are saying."
Serious doubts are expressed now on the funds' supposedly strong performance before their July 2007 bankruptcies. More than 60% of their net worth was tied up in exotic securities whose reported value was estimated by Cioffi's own team—something the funds' auditor, Deloitte & Touche, warned investors of in its 2006 report, released in May, 2007.
The Bear funds carried the imprimatur of one of the Street's oldest and most storied firms. The funds marketed themselves with the implicit backing of Bear Stearns and played up the fact that they were run by its experts in mortgage-backed securities. Now investors are left with a troubling question: If they can't count on big, well-established firms to operate hedge funds properly, whom can they count on?
The quick collapse of the inelegantly named Bear Stearns High-Grade Structured Credit Strategies fund and High-Grade Structured Credit Strategies Enhanced Leverage fund conjures memories of Long-Term Capital Management, the multibillion-dollar fund that blew up in 1998. In both cases, the damage helped ignite a worldwide credit crunch that prompted intervention by central bankers.
At the height in 2006, Cioffi was a central character in the booming mortgage CDO market, holding nearly $30 billion worth of securities. "Everybody wanted to do business with him because he was The Buyer," says a portfolio manager who was not authorized by his firm to speak for attribution. Cioffi's easygoing manner made him popular with investors, the bankers who lent his funds money, and the charities he supported.
The funds' voracious buying of lightly traded bonds drove down their yields, meaning Cioffi's team had to buy more and more of them to boost returns. That meant more borrowing. Banks such as Merrill Lynch (MER), Goldman Sachs (GS), Bank of America (BAC), and JPMorgan Chase (JPM) lent the funds at least $14 billion all told. Cioffi also used a type of short-term debt to borrow billions more; in some cases he managed to buy $60 worth of securities for every $1 of investors' money. But he made a critical trade-off: For lower interest rates, he gave lenders the right to demand immediate repayment.
For a while the strategy worked, and the fund became a hit. Cioffi started dabbling in fashionable hedge fund manager accoutrements, weighing a partnership stake in a Gulfstream jet and even getting into the movie business. In 2006, he was executive producer of the indie film Just Like My Son, starring Rosie Perez.
The final blow for the Enhanced fund (one of the hedge funds) came when Barclays told Bear it wanted out, according to the bankruptcy filings. The timing of the redemption notice isn't clear. Barclays declined to comment on the relationship, except to say its losses were minimal.
End game
In March 2008, Bear Stearns, the nation’s fifth largest investment banking firm,
was battered by what its officials described as a sudden liquidity squeeze related to
its large exposure to devalued mortgage-backed securities.
On March 14, the Federal Reserve System announced that it would provide Bear Stearns with an unprecedented short-term loan.
On March 16, a major commercial bank, JP Morgan Chase, agreed to buy Bear Stearns in an exchange of stock shares for about 1.5% of its share price of a year earlier, a price that translated to $2/share. To help facilitate the deal, the Federal Reserve agreed to provide special financing in connection with the transaction for up to $30 billion of Bear Stearns’s less liquid assets.
Bear Stearns and JP Morgan renegotiated the terms of the deal: JP Morgan will purchase 95 million newly issued shares of Bear’s common stock at $10/share in a stock exchange. In response to the changed deal conditions, the Fed altered the terms of its financial involvement: it got JP Morgan to agree to absorb the first $1 billion in losses if the collateral provided by Bear for a loan proves to be worth less than Bear Stearn’s original claims. Instead of its original agreement to absorb up $30 billion, the Fed will now be responsible for up to $29 billion.
References
http://money.cnn.com/2007/08/20/magazines/fortune/bear_stearns.fortune/index.htm
http://www.businessweek.com/bwdaily/dnflash/content/oct2007/db20071011_175964.htm
$3.2 Billion Move by Bear Stearns to Rescue Fund, 23 June 2007,New York Times,
http://www.nytimes.com/2007/06/23/business/23bond.html
Report to US Congress - Bear Stearns: Crisis and “Rescue” for a Major Provider
of Mortgage-Related Products. Download from
http://assets.opencrs.com/rpts/RL34420_20080326.pdf
Bear grew jealous of the hugely profitable hedge funds run by the likes of Goldman Sachs When Bear decided to get into this riskier action, it did so by channeling other people's money into the funds, and only a little of its own. Due to this, instead of being highly risk-conscious and attentive to detail, the funds missed warning signs in the subprime mortgage market, and top management seemed disengaged.
The hedge funds' troubles started in April 2007, worsened in May, and by mid-June had become a full-blown crisis. Bear's injection of $1.6 billion couldn't save them. By mid-July both were next to worthless. Less than three weeks later, the stock was way down and Bear was selling more than $2 billion in debt, both to shore up its balance sheet and to demonstrate that its assets were still valued.
A former Bear executive summed up the irony: "The culture of being conservative and not betting the house's money -- all that got undermined."
Hedge Fund Story
The first fund, the Bear Stearns High-Grade Structured Credit Fund was started in 2004 and had done well, posting 41 months of positive returns of about 1 percent to 1.5 percent a month.
In August 2006, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund — the second fund that eventually had huge losses — was started with $600 million in investments, mostly from wealthy individual clients of Bear Stearns, and at least $6 billion in money borrowed from banks and brokerage firms. Bear Stearns and a handful of its top executives invested a mere $40 million in both funds.
The timing could not have been worse.
The Bear Stearns funds, like so many others, had invested in collateralized debt obligations, or CDOs, which invest in bonds backed by hundreds of loans and other financial instruments. Wall Street sells CDOs in slices to investors. Some of those pieces have low yields but they are easily traded and carry less risk; others are more susceptible to defaults and trade infrequently, which makes them difficult to value.
As the sub prime problems surface, at first, the Bear Stearns hedge funds appeared to weather the storm. But in March, the older fund registered its first loss.
By April, the older fund was down by 5 percent for the year, and the newer fund had fallen 10 percent.
Managers tried to protect the fund by hedging potential losses in lower-rated securities they held, but did not do so for higher-rated bonds, which also fell in value.
There was a sharp restatement in April of the second fund. The firm revalued some securities and told investors that the fund was down 23 percent, not 10 percent as it had said earlier.
Shocked investors began contacting Bear Stearns, demanding to pull their money out.
In May, however, more significant problems began to emerge. The Swiss investment bank UBS shut its hedge fund arm, Dillon Read Capital Management, after bad subprime bets led to a $124 million loss.
In May, Bear Stearns froze all redemption requests. This month, at least three Wall Street firms — JPMorgan Chase, Citigroup and Merrill Lynch — began demanding more cash as collateral for the loans they had made.
Fighting to save the funds, Bear Stearns sold $3.6 billion in high-grade securities. Meanwhile, its adviser, Blackstone, scrambled to line up a deal in which Bear Stearns would put up $1.5 billion in new loans and a consortium of banks led by Citigroup and Barclays would put in $500 million.
In return, the lenders would have their exposure to the funds reduced but could not make further margin calls for 12 months.
Some lenders, including Merrill Lynch and Deutsche Bank, balked and moved to sell assets. At one point Wednesday, nearly $2 billion in securities were listed for sale, although some banks, including JPMorgan, eventually canceled scheduled auctions.
By the end of the day, out of the $850 million in securities that Merrill had put up for sale, only a small portion actually sold.
In the wake of the weak auctions, several other lenders, including JPMorgan, Citigroup, Goldman Sachs and Bank of America, reached deals with Bear Stearns. At least some of the deals involved the lenders selling the securities back to Bear Stearns for cash, although the prices were not disclosed.
Ralph R. Cioffi As the market for subprime mortgages was crumbling, the 51-year-old manager of two Bear Stearns (BSC) hedge funds, Ralph R. Cioffi, offered nothing but reassurances to investors. "We're going to make money on this," he promised his wealthy patrons in February 2007. "We don't believe what the markets are saying."
Serious doubts are expressed now on the funds' supposedly strong performance before their July 2007 bankruptcies. More than 60% of their net worth was tied up in exotic securities whose reported value was estimated by Cioffi's own team—something the funds' auditor, Deloitte & Touche, warned investors of in its 2006 report, released in May, 2007.
The Bear funds carried the imprimatur of one of the Street's oldest and most storied firms. The funds marketed themselves with the implicit backing of Bear Stearns and played up the fact that they were run by its experts in mortgage-backed securities. Now investors are left with a troubling question: If they can't count on big, well-established firms to operate hedge funds properly, whom can they count on?
The quick collapse of the inelegantly named Bear Stearns High-Grade Structured Credit Strategies fund and High-Grade Structured Credit Strategies Enhanced Leverage fund conjures memories of Long-Term Capital Management, the multibillion-dollar fund that blew up in 1998. In both cases, the damage helped ignite a worldwide credit crunch that prompted intervention by central bankers.
At the height in 2006, Cioffi was a central character in the booming mortgage CDO market, holding nearly $30 billion worth of securities. "Everybody wanted to do business with him because he was The Buyer," says a portfolio manager who was not authorized by his firm to speak for attribution. Cioffi's easygoing manner made him popular with investors, the bankers who lent his funds money, and the charities he supported.
The funds' voracious buying of lightly traded bonds drove down their yields, meaning Cioffi's team had to buy more and more of them to boost returns. That meant more borrowing. Banks such as Merrill Lynch (MER), Goldman Sachs (GS), Bank of America (BAC), and JPMorgan Chase (JPM) lent the funds at least $14 billion all told. Cioffi also used a type of short-term debt to borrow billions more; in some cases he managed to buy $60 worth of securities for every $1 of investors' money. But he made a critical trade-off: For lower interest rates, he gave lenders the right to demand immediate repayment.
For a while the strategy worked, and the fund became a hit. Cioffi started dabbling in fashionable hedge fund manager accoutrements, weighing a partnership stake in a Gulfstream jet and even getting into the movie business. In 2006, he was executive producer of the indie film Just Like My Son, starring Rosie Perez.
The final blow for the Enhanced fund (one of the hedge funds) came when Barclays told Bear it wanted out, according to the bankruptcy filings. The timing of the redemption notice isn't clear. Barclays declined to comment on the relationship, except to say its losses were minimal.
End game
In March 2008, Bear Stearns, the nation’s fifth largest investment banking firm,
was battered by what its officials described as a sudden liquidity squeeze related to
its large exposure to devalued mortgage-backed securities.
On March 14, the Federal Reserve System announced that it would provide Bear Stearns with an unprecedented short-term loan.
On March 16, a major commercial bank, JP Morgan Chase, agreed to buy Bear Stearns in an exchange of stock shares for about 1.5% of its share price of a year earlier, a price that translated to $2/share. To help facilitate the deal, the Federal Reserve agreed to provide special financing in connection with the transaction for up to $30 billion of Bear Stearns’s less liquid assets.
Bear Stearns and JP Morgan renegotiated the terms of the deal: JP Morgan will purchase 95 million newly issued shares of Bear’s common stock at $10/share in a stock exchange. In response to the changed deal conditions, the Fed altered the terms of its financial involvement: it got JP Morgan to agree to absorb the first $1 billion in losses if the collateral provided by Bear for a loan proves to be worth less than Bear Stearn’s original claims. Instead of its original agreement to absorb up $30 billion, the Fed will now be responsible for up to $29 billion.
References
http://money.cnn.com/2007/08/20/magazines/fortune/bear_stearns.fortune/index.htm
http://www.businessweek.com/bwdaily/dnflash/content/oct2007/db20071011_175964.htm
$3.2 Billion Move by Bear Stearns to Rescue Fund, 23 June 2007,New York Times,
http://www.nytimes.com/2007/06/23/business/23bond.html
Report to US Congress - Bear Stearns: Crisis and “Rescue” for a Major Provider
of Mortgage-Related Products. Download from
http://assets.opencrs.com/rpts/RL34420_20080326.pdf
Deutsche Bank - Management of Sub Prime Fallout
July 2008
Deutsche bank announced $3.6 billion of fresh writedowns on 31st July 2008, taking its bill from the financial crisis beyond $11 billion and putting among the top ten global casualities of the turmoil.
The Economic Times, Mumbai, 1st August 2008
Deutsche bank announced $3.6 billion of fresh writedowns on 31st July 2008, taking its bill from the financial crisis beyond $11 billion and putting among the top ten global casualities of the turmoil.
The Economic Times, Mumbai, 1st August 2008
Goldman Sachs - Lucky to Survive the Sub Prime Crisis
Goldman Sachs had its problems with hedgefunds. But as a corporate it survived the subprime crisis without reporting any overloss so far.
Its trades on short side helped it to make profits.
Its trades on short side helped it to make profits.
Merrill Lynch - Management of Sub Prime Fallout
July 2008
Merrill agreed to sell $30.66 billion of collateralized debt obligations for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas based investment manager.
Merrill will provide financing for about 75% of the purchase price. The financing is secured only by the assets being sold, meaning Merrill would absorb any losses over the CDOs beyond $1.68 billion.
This article will be developed gradually.
Merrill agreed to sell $30.66 billion of collateralized debt obligations for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas based investment manager.
Merrill will provide financing for about 75% of the purchase price. The financing is secured only by the assets being sold, meaning Merrill would absorb any losses over the CDOs beyond $1.68 billion.
This article will be developed gradually.
Monday, July 7, 2008
Funds are Shifting Prime Brokers in ‘Flight to Quality’
Goldman Sachs, Morgan Stanley and Deutsche Bank appear to have benefited as hedge funds shift their prime-brokerage business in a “flight to quality.”
Goldman’s Securities Services business generated record net revenue of $985 million during its fiscal second quarter. That figure represented a 36 percent increase from a year earlier.
Goldman’s Securities Services business generated record net revenue of $985 million during its fiscal second quarter. That figure represented a 36 percent increase from a year earlier.
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
-------------------------
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