The New York Times reports that people are again losing money on their money market funds. That's because the $65 billion Primary Fund has dropped its price per share from $1 to $0.97. The reason? Its management decided that its $785 million in Lehman Brothers Holdings Inc. (NYSE: LEH) debt is worthless.
This is not the first time in the last year that money market funds have gotten into trouble. As I posted 13 months ago, several money market funds "broke the buck" due to their exposure to Structured Investment Vehicles (SIVs) paper that proved to be worthless. Now, it is likely that the Primary Fund will be joined by other money market funds in dropping the value of their funds to reflect lousy investments.
What should you do? Call the company that manages your money market fund and ask it whether your fund still trades at $1 a share. Or you can follow the steps I outlined last year. (And when you check the fund prospectus, also see if it lists securities from Lehman and other troubled institutions.) Most money market funds will not "break the buck" because they know that the loss of investor confidence will cause their investors to flee. So even if they make bad investments, they will add capital to the fund to keep it trading at $1 a share. But if your money market fund has broken the buck and the firm will not make you whole, then it's time to withdraw your money before the fund's value drops even further.
The Wall Street Journal reported that after years of rapid grows, many hedge funds are shutting their doors or merging with others, as expansion has dramatically slowed. As a result, the industry is being dominated mostly by big firms, such as Och-Ziff Capital Management Group LLC (NYSE: OZM), D.E. Shaw & Co., and Paulson and Co.
Shares of Ctrip.com International Ltd (NASDAQ: CTRP), China's major Internet travel booker with about 58% of the country's online travel business, have dropped about 30% in the last six weeks alone creating a possible buying opportunity, according to the Wall Street Journal's "Heard in Asia". Travel in China is expected to grow solidly in the long-term and Ctrip.com said it expects revenue to grow 30% for the three months ending June 30 from a year earlier.
In a move that could potentially usher in a new phase in the credit crunch, the Financial Times reported that The Goldman Sachs Group Inc (NYSE: GS) is said to be close to finalizing a plan to restructure a $7B investment vehicle formerly run by Cheyne Capital, a London-based hedge fund.
Alan Greenspan said it was a bad idea. So did Warren Buffett. And, the bank "Super Fund" created to save troubled SIVs died before it saw the light of day.
According toMarketWatch, "the master liquidity enhancement conduit, or M-LEC, originally envisaged as an $80 billion to $100 billion fund, won't be rolled out because the so-called structured investment vehicles it was meant to bailout out either aren't interested in the plan or have tackled their problems in other ways."
The company with the biggest need for short-term loans from the fund was Citigroup (NYSE: C). When it took a number of its SIVs onto its own balance sheet much of the motivation behind the program was gone.
And, it is a good thing. The "Super Fund" would have made loans that could have disguised the real current value of the mortgage-related securities in the SIVs instead of letting their market value be determined by what they could be sold for in an open market.
Th Treasury Department backed the plan and several banks spent a great deal of time on it. Those are countless lost hours spent on something which may have been doomed from the start.
Douglas A. McIntyre is an editor at 247wallst.com.
With the first Bush Administration bailout attempt likely dead after Citigroup (NYSE: C) decided to put its troubled SIV assets onto its books killing the need for the Super SIV, you may be wondering what else the Bush Administration and Congress have up their sleeves to try to fix this mortgage mess. If Alan Greenspan has anything to say about it, it would be nothing. In an opinion piece for the Wall Street Journal he wrote, "The financial erosion will come to an end when the prices of homes and equity in homes stabilize, probably not before." Many conservatives and libertarians agree with that view and think the best move would be to do nothing, so that we don't delay the point at which house prices reach bottom.
Surprisingly, the American Enterprise Institute (AEI), a conservative, market-oriented think tank, believes we may want to revisit the work of the bailout federal agency, Home Owners' Loan Corp., which was created to help get us out of the depression in 1933 when thousands of banks failed and millions couldn't pay their mortgages, according to a story in the weekend Journal. This federal agency bought distressed mortgages from banks at a discount and refinanced them on easier terms.
Banks aren't failing yet, but there are millions on the brink of not being able to pay their mortgages. While we've talked openly about $2 million with ARM resets ready to go over the deep end, some believe we haven't seen anything yet, and credit card debt may send many more millions into trouble as the credit crunch continues to unfold.
Today's announcement that Citigroup (NYSE: C) will take $49 billion worth of Structured Investment Vehicles (SIVs) onto its balance sheet suggests to me that its new CEO is following a path I wrote about earlier this week -- the first step of which is to take a big bath write-down fast. I think Citi stock will fall further before hitting bottom -- say $15.
Why is Pandit doing this? First, investors give a new CEO a chance to put all his predecessor's mistakes in the past through a write-down -- which generally includes closing businesses and firing staff. Second, Pandit probably realized that the alternative -- a fire sale of securitized assets (the average net asset values of SIVs tumbled to 55% from 71% a month ago and 102% in June) -- would be the lesser of two evils.
Nevertheless -- Pandit's move came with pain attached. Bloomberg News reports that two hours after Citi's announcement, Moody's Corp. (NYSE: MCO) lowered its credit ratings to Aa3, the fourth-highest level, from Aa2, saying "capital ratios will remain low." Citi's capital ratio is likely to tumble far below its target -- causing it to take further capital preservation moves. Specifically, its Tier I capital ratio is likely to hit 6.8% by the end of this year from 7.32% on September 30 -- far short of its 7.5% target.
Expect more unpleasantness -- like a cash dividend cut -- as Citi stock continues to tumble. But I think if it hits $15, it may be worth considering an investment.
Citigroup (NYSE: C) did what it probably had to do by bringing $49 billion in SIV assets onto its balance sheet. The "Super Fund" set up to help the structured vehicles was not getting much interest from potential investors. Several other big banks like HSBC (NYSE: HBC) had moved their SIVs in-house.
Whether the move contributed to it or not, Moody's downgraded Citi's debt one notch to Aa3. "The bank will probably "take sizable writedowns'' for securities backed by home mortgages and collateralized debt obligations," Moody's Senior Vice President Sean Jones said in a statement picked up by Bloomberg. Moody's is concerned that the bank's weak capital ratios may keep it from getting out of harm's way anytime soon.
That leaves the markets to ponder what will happen to Citi over the next year or two. The bank is probably still too big to be bought by another large money center bank, unless its stock falls further. It has already lost almost half of its value this year and now trades around $30 on a good day.
Citi is almost certainly faced with more write-downs, leaving it with very few options. It could go to a sovereign fund again. Those in the Middle East and Singapore have shown a taste for risk. Or, the Fed may have to step in with special loans, if things get bad enough.
The conventional wisdom is that Citi is "too big to fail." But wisdom cannot see the future.
Looks like Citigroup (NYSE: C) may have to look elsewhere for a bailout if it doesn't want to take its SIVs back onto its own books. The Super SIV, which would have raised funds to aid banks with SIVs in trouble, just doesn't seem to be getting many takers.
According to the Wall Street Journal today, even banks that had expressed interest are now shying away from it including Wachovia (NYSE: WB) and two Japanese banks, Sumitomo Mitsui Financial Gorup and Mitsushishi UFJ Financial Group. Even banks that it was envisioned would benefit from the Super SIV, have begged off. HSBC decided to bail its SIVs out by taking $45 billion in assets back on the books. French bank Societe Generale, Standard Chartered PLC and Netherlands-based Rabobank Group took similar actions according to the Journal. Gordian Knot, which has one of the largest SIVs, also let the Super SIV promoters know that it's not interested in the bail out.
What it gets down to is that Citigroup wants the money and Bank of America (NYSE: BAC) and J.P. Morgan Chase (NYSE: JPM), the other two champions of the Super SIV, probably want the fees they could make. But they may be the only key players. Black Rock, which is the money management firm serving as the fund's adviser, told the Journal that if the fund doesn't succeed, "it's probably going to be more of an expense" than an income source.
The Fed's move yesterday working with other central banks will probably do more to help the credit crisis than what's left of the Super SIV bailout.
Lita Epstein has written more than 20 books including the "Complete Idiot's Guide to the Federal Reserve."
The Financial Times' dealReporter said that Armstrong World Industries Inc (NYSE: AWI) is "leaning towards" selling assets in order to fund a buyback. The dealReporter is citing a buyside source and a source familiar with the situation.
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According to Bloomberg, close to twenty percent of the funds held by Orange County, California are SIVs that may face credit-rating cuts. These funds are similar to the ones that bankrupted the county in 1994.
New York Times op-editorialist and Princeton Professor Paul Krugman has a point when he talks about how financial innovation created the current credit crisis. (Credit is derived from credere -- the Latin word for belief -- and the absence of belief in the ability of lenders to pay back their loans is the result of this crisis). As he argues, lack of transparency in the pricing of complex financial instruments is partially to blame. But Krugman does not address the most important source of the problem -- how the players get paid.
The financial innovation that Krugman blames for the credit crisis is called securitization, a complex system of connected industries:
Originators make loans mostly to consumers who want to buy houses, cars, or charge things to a credit card;
Investment banks buy bundles of mortgages and other asset-backed securities (ABSs) from the originators;
Rating agenciescompete to get fees from investment banks in exchange for the highest rating; and
Institutional investors such as hedge funds, pension funds, money market funds and insurance companies buy the ABSs to goose their returns at what they thought was low risk.
Wall Street has to wonder why so many structured investment vehicles are being downgraded now? Are they really worth so much less than they were a month or two months ago? Since many of their assets do not trade due to a lack of market liquidity, there may never be an answer.
According to The Wall Street Journal (subscription required), "Debt-rating agency Moody's Investors Service, signaling a new turn for the worse for some bank-affiliated funds, said it downgraded or put on review debt totaling $119 billion that was issued by structured investment vehicles that have been paralyzed by lack of investor appetite." The value of many of the SIV assets linked to mortgages dropped by 22% between October 19 and November 21.
Citigroup (NYSE: C) has a continuing problem here. The financial paper adds, "the drop in the market values and the inability to finance the SIV debt is expected to put new pressure on banks such as Citigroup to support the billions of dollars in debt that SIVs face having to pay in coming months."
All of this raises the question of whether the $7.5 billion stake that Citi sold to an investment arm of the Abu Dhabi government will be enough to support the bank's need to improve its balance sheet, or whether it will have to raise additional funds. It begs the question of who would want the job of being Citi CEO, or whether chairman Robert Rubin will have to step into the spot in an attempt to get back some market confidence for the bank.
One thing is virtually certain. Some of the SIVs are near failure. HSBC (NYSE: HBC) took $45 billion in SIVs onto its balance sheet. The bank would not have done this unless an extreme measure was required. The same decision may have to be made at Citi. At $33, down from a 52-week high of $57, many investors think the bank's stock has bottomed.
That would be a mistake.
Douglas A. McIntyre is an editor at 247wallst.com.
Bankrate.com reports that money market funds' exposure to subprime mortgages is creating the riskiest climate for these supposedly safe investments since the 1994 derivative crisis. Peter Crane, a money market fund expert, ranked the 1994 crisis as a 10 on a scale of one to 10, and ranks today's situation an 8.
Since August, I've posted about this topic myself here, here and here. Bankrate.com has some useful tips:
Not a bank account. Recognize that money market funds are not FDIC insured so you can lose money if they fail.
Know what type of money market fund you have. A Treasury or government agency fund would not have any commercial paper that could be linked to Structured Investment Vehicles (SIVs), which may be backed by subprime mortgage-backed securities. But a prime, or a general purpose type fund, could have commercial paper, although not all do. Typically, the makeup of 200 such funds that can buy commercial paper, is 40% or 50% paper and the rest in repossession, Treasury, agencies, bank paper and other money market investments. These are the riskier ones.
Read the prospectus. As I pointed out in this post, if you look at the prospectus, you can see how exposed your fund is to SIVs.
I would add an obvious point -- if you have money in a fund that's exposed to subprime mortgages, consider finding one that has no commercial paper and shift your money to that.
HSBC decided not to wait for the Super SIV fund and is bailing out its SIVs [subscription required] by shutting them down and taking $45 billion in mortgage-back securities and other assets back onto its books, according to the Wall Street Journal this morning. Since HSBC has $2.15 trillion in assets this move will have little impact on the bank's Tier 1 capital ratio of 9.3% as of June 30, one of the highest in the industry. After taking the SIV assets back onto its books its capital ratio will drop to 9%, still a very strong position.
S&P's rating agency told the Journal that its AA- rating on HSBC will be unaffected by the move because it "has sufficient resources to absorb these additional obligations.' Pierre Goad, an HSBC spokesman, told the Journal the bank "reached a fairly firm conclusion that the funding problems. . . in the broad SIV sector were not going away in the near term." The two rescued SIVs are Cullinan Finance Ltd. and Asscher Finance Ltd., which will ease some pain at money market funds that hold these SIVs.
The biggest advantage for HSBC is that now the assets held by the SIV will not be forced into a fire sale. HSBC can hold the assets on its books for a longer time period and sell them when the time is right. Without this move HSBC could be forced to sell the higher-quality assets in the SIV that it didn't want to sell in order to keep the SIV afloat.
Citigroup (NYSE: C) ultimately may be forced into the same type of move and possibly with the infusion of cash it received yesterday from Abu Dhabi it can afford to do that without losing its Tier 1 status.
Lita Epstein has authored more than 20 books including the Complete Idiot's Guide to the Federal Reserve.
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.
With the three largest U.S. banks reaching agreement on a new $80 billion fund aimed at reviving the market for short-term debt, criticism appears to be mounting that the new fund itself may be flawed or may create more problems than it solves.
Citigroup (NYSE: C), the Bank of America (NYSE: BAC). and JPMorgan Chase (NYSE: JPM), the three largest U.S. banks, have reached an agreement on the structure of an $80 billion fund to help revive the market for short-term debt, a person familiar with the talks said, Bloomberg News reported.
The banks want to establish the fund, called the "Super SIV" or master liquidity enhancement conduit ("M-LEC"), as a way to obtain short-term credit to finance high risk / high-yield investments in subprime mortgage loans. The fund would buy some of the $320 billion in assets held in structured investment vehicles, or SIVs. SIVs typically borrowed money to invest in longer-term investments, like subprime mortgages.
Fortune has added a new phrase to my vocabulary: liquidity puts. In an interview with Citigroup Inc. (NYSE: C) Chairman Robert Rubin, liquidity puts are defined as the right of Collateralized Debt Obligation (CDO) holders to sell back the CDO to its issuer at the original price. The liquidity put is responsible for the $25 billion worth of CDOs on Citi's balance sheet.
Before getting into how this all works, it is amazing to me how many new words I've learned as a result of the collapse of the real estate market which began in the fall of 2006 -- when I first began posting on the topic. Since then, I've been introduced to all sorts of new terms -- subprime mortgages, CDOs, Structured Investment Vehicles (SIVs), the Yen Carry Trade, and Level 3 assets -- to name just a few.
When Citi set up its $80 billion worth of SIVs, it thought that they would stay off its balance sheet. This summer, though, financial markets lost interest in financing CDOs so the holders of the liquidity-put CDOs began to return them to Citi -- the $25 billion of them represent more than half of Citi's $55 billion of subprime-related securities. The super-senior status -- meaning that they got first claim on cash flows -- of the put-laden CDOs did not protect their value because the ratings agencies decided to downgrade them, creating a panic to exercise the put and sell the CDOs back to Citi, thus locking in huge losses for the bank.
As an investor, I am hoping that Robert Rubin's vanity -- I think his once sterling reputation has been tarnished -- will engage him in fixing Citi. But I wonder whether Citi's problems could be too big for him to fix.
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