Under the radar:

Continue reading Under the Radar: Fed in No Hurry to Sell Mortgage-Backed Assets

Under the Radar: Fed in No Hurry to Sell Mortgage-Backed Assets originally appeared on BloggingStocks on Wed, 19 May 2010 17:00:00 EST. Please see our terms for use of feeds.

Investment-grade commercial real estate prices gained 4.4% in the third quarter of this year. But, it's hard to tell if -- like brief blips of hope we've seen in consumer spending, unemployment and even luxury meals in London -- this is a change in the market or just a tease.

This increase in the MIT Center for Real Estate's transaction-based index (TBI) is the first up-tick in more than a year and the biggest gain since the middle of 2007. One quarter doesn't make a trend, cautions David Geltner, director of research at the MIT Center for Real Estate, but he says, "this is the strongest sign of a bottom that we've had in two years." The TBI reached 36.5% below its 2007 peak last quarter, up from 39% from the high-water mark in mid-2007.

Continue reading Commercial real estate comeback

Commercial real estate comeback originally appeared on BloggingStocks on Tue, 03 Nov 2009 15:40:00 EST. Please see our terms for use of feeds.

It would be nice if we could just wave a magic wand and evaporate the $13 trillion worth of toxic waste that's dragging down the global financial system. But we'll have to dispose of it somehow in order to reboot the financial system. A colleague of mine came up with a brilliant idea: the government could guarantee the failed mortgages buried inside that toxic waste -- meaning that the owner of a bundle would not incur any loss from a failed mortgage for the next 3 years.

After all, those mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) are just bundles of mortgages. If 15% of those mortgages fail and the government agrees to guarantee those over the next three years, then the MBSs and CDOs -- e.g., the toxic waste -- would suddenly increase in value because the losses to the entire bundle of the 15% of the failed mortgages would be limited.

Continue reading A great plan to dispose of financial toxic waste

A great plan to dispose of financial toxic waste originally appeared on BloggingStocks on Fri, 30 Jan 2009 18:00:00 EST. Please see our terms for use of feeds.

Fed Chair Ben Bernanke always likes to remind us that he is a scholar of the Great Depression. But I am not sure he has drawn the right lessons from it based on his actions. As Mark Twain said, history doesn't repeat itself but sometimes it rhymes. There are certain rhymes between the Great Depression and the current circumstance. Income inequality and negative savings rates leading up to the current circumstance are the same as they were in 1929. In both situations, high levels of borrowing and lack of transparency were key contributors.

But things are also different now. For example, securitization is at the core of the current catastrophe and so is the globally-interconnected nature of the financial system. There are $13 trillion worth of mortgage backed securities (MBS) and collateralized debt obligations (CDOs) alone and there is perhaps $340 billion worth of capital on the books of leading financial institutions (FIs).

And due to the global interconnections, banks in Germany were wiped out since they bought too much of this financial toxic waste. And this does not even take into account the $54 trillion credit default swap market - which did not exist in 1929.

Continue reading Have we learned the right lessons from the Great Depression?

Have we learned the right lessons from the Great Depression? originally appeared on BloggingStocks on Fri, 17 Oct 2008 12:45:00 EST. Please see our terms for use of feeds.

While intoning somberly about how the global financial markets would collapse absent its wipe out of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) common and preferred shareholders, the Treasury has gotten a very slim payoff from its latest weekend bailout plan. To be sure, mortgage rates have fallen almost four-tenths of a percent and the value of mortgage-backed securities (MBS) may rise.

But is it worth all the pain? Investors in their 1.6 billion common shares have lost tens of billions of dollars in shareholder wealth ($139 billion off their peak prices), preferred shareholders will take $30 billion worth of write-offs, and the taxpayer will be on the hook for somewhere between $200 billion and $800 billion. BusinessWeek reports that "the banking industry [is expected] to collectively write down $25 billion to $30 billion on their balance sheets for losses on the preferred shares they are holding."

These banks will experience a decline in their capital ratios which could put some in peril. "There are 12 banks and thrifts that would lose 5% or more of tangible capital were they to take a 100% aftertax, mark-to-market adjustment on their GSE preferreds," writes BusinessWeek. It reports that three banks in particular will fall below minimum "well capitalized" levels -- Gateway Financial Holdings (NASDAQ: GBTS), Midwest Banc Holdings (NASDAQ: MBHI), and Cascade Financial (NASDAQ: CASB).

Continue reading Fannie/Freddie bailout puts three banks in capital danger zone

Fannie/Freddie bailout puts three banks in capital danger zone originally appeared on BloggingStocks on Wed, 10 Sep 2008 10:15:00 EST. Please see our terms for use of feeds.

Thornburg Mortgage (TMA) posts $3 billion quarterly loss originally appeared on BloggingStocks on Wed, 02 Jul 2008 12:18:00 EST. Please see our terms for use of feeds.

Bloomberg News reports that HSBC Holdings Plc (NYSE: HBC), Europe's largest bank, has decided to rescue its own $45 billion worth of Structured Investment Vehicles (SIVs). HSBC's plan lowers the odds that Hank Paulson's Super SIV plan to rescue the $320 billion SIV industry -- whose values Fitch reports have declined to 70% of their stated worth -- will succeed. The implications for Citigroup Inc.'s (NYSE: C) $80 billion worth of SIVs are also potentially scary.

Specifically, HSBC will sell bonds to finance the purchase of two SIVs -- Cullinan Finance Ltd. and Asscher Finance Ltd -- taking on their $45 billion worth of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs). By August 2008, HSBC expects to provide the new company that buys the SIVs' assets with $35 billion worth of funding and loan facilities, thus removing the risk of a forced sale of the SIVs' assets because of declines in the net asset values. HSBC says, however, that investors will still bear the losses stemming from defaults in the underlying assets.

It seems to me that HSBC's move could have an impact on the Super SIV intended to bail out Citigroup. By encouraging the prompt sale of the SIVs, CDOs and MBSs, HSBC could provide a model that others may follow. If successful, HSBC's approach could supersede the Super SIV plan. I'd prefer to see the banks bail themselves out, rather than relying on the government.

Continue reading HSBC not waiting for Paulson's Super SIV

HSBC not waiting for Paulson's Super SIV originally appeared on BloggingStocks on Mon, 26 Nov 2007 10:00:00 EST. Please see our terms for use of feeds.

MarketWatch reports that General Electric Co.'s (NYSE: GE) General Electric Asset Management (GEAM) Trust Enhanced Cash Fund will offer investors the option to redeem holdings at 96 cents on the dollar. I wonder whether this will look like a relatively good deal when we look back on the problems that money market funds are likely to experience due to their exposure to asset-backed securities (ABSs).

The GEAM fund sustained losses due to mortgage-backed securities (MBS) investments and has already let institutional investors exit the fund. No word on the terms these investors received, but if they had other business dealings with GE, I would be very surprised if they got out below 96 cents on the dollar. Meanwhile, GE plans to withdraw $250 million of its own money from the fund.

As I posted yesterday, GEAM is far from the only money market fund in trouble due to investing in MBSs. One thing's clear -- those who get out first will be better off than the small fry that wait until the end to try to redeem their money from these uninsured funds.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns GE stock.

GE bond fund to offer 96 cents on the dollar signaling more money market woes originally appeared on BloggingStocks on Thu, 15 Nov 2007 10:10:00 EST. Please see our terms for use of feeds.

In August I posted on the danger that subprime mortgages pose to people who invest in money market funds. Today, the New York Times reports that several such funds have invested in commercial paper (CP) issued by Structured Investment Vehicles (SIVs) backed by subprime mortgage-backed securities (MBSs). I think all money market funds should start a public information campaign to let people know if they have the SIV virus and if so, what they're doing to protect their customers from it.

Earlier, I posted on all the new vocabulary words I've learned in the last year thanks to the subprime mortgage meltdown. This $1.3 trillion market consists of mortgages to people who can't afford to repay in many cases. Forty seven percent of the loans were made without documentation of the borrower's income -- these are known as liar loans. The subprime mortgages were packaged as MBSs and among the buyers were SIVs -- off-balance sheet entities that use a bank's good credit rating to issue CP to invest in MBSs.

Thanks to the subprime mortgage meltdown, the CP is not worth as much as before so the money market funds that bought it are now forced to break the $1 per share constant value or put money into the fund to make up for the lost value. So far, analysts say that most SIV securities are trading at 97 to 98 cents on the dollar. But if more SIVs are forced to unwind, the resulting fire sale would put pressure on prices.

Continue reading Thought your money market fund was safe? Think again

Thought your money market fund was safe? Think again originally appeared on BloggingStocks on Wed, 14 Nov 2007 10:25:00 EST. Please see our terms for use of feeds.

Hank Paulson and Ben Bernanke are finally getting around to admitting that the subprime problem is not "contained." Regrettably, their grudging admission of reality also comes with a price -- they are unwilling to offer a solution to a problem whose magnitude they cannot even count.

This is the scariest part. According to the New York Times, at a speech in New York last night Bernanke said, "I'd like to know what those damn things are worth. Until investors are confident in their evaluations, they are not going to be willing to fund these vehicles."

This spring, Paulson and Bernanke were singing the same hymn: "subprime is contained." The reasons? The administration's trademark combination of religion -- the desire to avoid a "moral hazard" -- coupled with incompetence -- a lack of awareness of the magnitude of the problem or how to solve it. Moral hazard is a concept I happen to agree with -- investors should get the benefits and pay the costs of their risky bets rather than asking the government to bail them out of their mistakes.

Continue reading Paulson and Bernanke: Subprime is (not) contained

Paulson and Bernanke: Subprime is (not) contained originally appeared on BloggingStocks on Tue, 16 Oct 2007 10:09:00 EST. Please see our terms for use of feeds.

This morning UBS AG (NYSE: UBS) said it expects a loss of up to $690 million while Citigroup (NYSE: C) said it expects a 60% decline in profit -- but still managed to expect a profit. The difference? European banks like UBS were only marginally brighter than the poor U.S. subprime mortgage borrowers because they actually fell for the line that packages of subprime mortgages were safe, high yielding investments.

It's worth remembering that the mortgage industry value network is complex. No longer does a mortgage bank issue a mortgage and keep it on its books. What happens now is that a mortgage broker convinces a borrower to sign a mortgage contract. The originating mortgage bank then turns around and sells that mortgage to a Wall Street investment bank that packages the mortgage into a mortgage-backed security (MBS) which it quickly gets off its books -- and onto those of European and Asian investors, like UBS, which are now paying the price for their gullibility.

How big of a price? UBS is taking a $690 million loss and firing 1,500 workers due to the $3.4 billion writedown of the value of its MBSs -- but I think it's curious that it still has $19 billion of MBSs with which it is "comfortable." Meanwhile Citigroup's problems are more complex -- it will take $1.4 billion in pretax write-downs on leveraged buyouts it is helping to finance, $1.3 billion in pretax losses on subprime MBSs and $600 million in pretax losses on fixed-income trading.

Citigroup looks like a better diversified sucker. While Citigroup took pain from its MBSs, it also suffered from LBO loan writedowns. Nevertheless, Citigroup looks like it will stay in profitable territory.

But with its shares down 16% in 2007, its performance is nothing to cheer about.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares and has no financial interest in UBS.

Why UBS's (UBS) pain exceeds Citigroup's (C) originally appeared on BloggingStocks on Mon, 01 Oct 2007 09:00:00 EST. Please see our terms for use of feeds.