Continue reading Congress, SEC and Goldman Sachs Failures

Congress, SEC and Goldman Sachs Failures originally appeared on BloggingStocks on Wed, 12 May 2010 14:00:00 EST. Please see our terms for use of feeds.

What a way to go into the holiday weekend, eh? On Thursday, seven banks were shut down by authorities, which pushed the total of failed banks for 2009 to 52 -- which more than doubles the number of bank failures in 2008. Six of the seven banks seized were located in Illinois and the other was in Texas, according to the Federal Deposit Insurance Corporation (FDIC).

According to the federal group, the Illinois failures are interlinked, as all six banks were controlled by one family and used a similar business model. The FDIC noted that this model "created concentrated exposure in each institution." This model left the banks heavily exposed to collateralized debt obligations and other loan losses. The six banks brings the total of failed banks in Illinois to 12.

As for the Texas bank failure, it was the first in the state this year.

Continue reading Seven banks go up in smoke ahead of the holiday weekend

Seven banks go up in smoke ahead of the holiday weekend originally appeared on BloggingStocks on Fri, 03 Jul 2009 10:00:00 EST. Please see our terms for use of feeds.

Will derivatives be eventually regulated? At the moment, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are drafting legal language to submit to Congress on the details of regulating the derivatives markets. Just which agency will take the lead in overseeing these markets is not clear at this writing. The SEC is the older of the two agencies.

There had been some talk about merging the two agencies, but political pressure has all but ruled this out. It now looks like they will share the oversight responsibilities.

Continue reading Will the derivatives markets ever be regulated?

Will the derivatives markets ever be regulated? originally appeared on BloggingStocks on Thu, 11 Jun 2009 15:10:00 EST. Please see our terms for use of feeds.

I was sitting in my statistics class and the professor walked in and said, "Today we are going to learn about correlations." He explained that correlation is very simple. It is a single number that describes the degree of relationship between two variables, and that there was a formula in our book we could use. "But right now," he said " it's more important that you learn the concept that a correlation is a single number that describes the degree of relationship between two variables," he repeated, as professors often do. "Your answer will therefore always range between -1 and +1."

Continue reading Were the mathematicians of Wall Street a blessing or a curse?

Were the mathematicians of Wall Street a blessing or a curse? originally appeared on BloggingStocks on Fri, 06 Mar 2009 17:00:00 EST. Please see our terms for use of feeds.

Citigroup (NYSE:C) is now back in the limelight. Like AIG, Citigroup has a portfolio of CDO's (collateralized debt obligations) that are being held "off the books." These transactions are hidden from investors and the public. The US Treasury Department met on Friday and came up with a new wrinkle. It would give Citigroup $20 billion dollars and set up a new insurance program. It would guarantee up to $5 billion dollars for the purpose of assuming a "loss protection" on certain assets. Again there is no definition of which assets would be covered nor is the amount of loss protection specified. It leaves the details to the discretion of the Treasury Department. We can't even find out what happened to first $350 billion dollars. Here we go again with another cloak and dagger operation. I don't know why we, ordinary Americans, can't get answers from the banks as to how the money was spent.

Treasury says the program would strengthen the economy, protect American jobs, savings and retirement security. What a grand scenario.

Can you figure out how to get answers from the banks about how the first $350 billion dollars was spent?

So you thought the bailout solved the banking crisis. Forget about it. originally appeared on BloggingStocks on Mon, 05 Jan 2009 15:01:00 EST. Please see our terms for use of feeds.

The government takeover of American International Group (NYSE: AIG) is going swimmingly -- for AIG's top brass. They got an $85 billion bridge loan in exchange for an 80% equity stake last month. AIG has already spent $61 billion of that $85 billion and will now get another $37.8 billion.

But wait -- there's more. AIG executives spent $440,000 for a spa vacation at the St. Regis resort in Monarch Beach, CA after they got our $85 billion. If you clicked on the link to the St. Regis, you know that AIG goes in style. That's why it came as no surprise that it was planning another ritzy affair for its insurance brokers. That event, at the Ritz Carlton in California's Half Moon Bay, was going to "motivate and educate" 150 independent agents who sell AIG coverage. (Update: They planned a big sales conference at the Ritz-Carlton in Half Moon Bay, but just cancelled it after public complaints). See how well reverse-Robin-Hood economics works?

Is there any business reason for AIG to be burning through so much of our cash? It claims that it needs the money because of its securities lending business, which lent securities to hedge funds and got the value of the securities and a fee in exchange. AIG then used the cash to buy mortgage-backed securities (MBS).

Continue reading AIG takes $122.8 billion of taxpayer money, enjoys luxury resorts

AIG takes $122.8 billion of taxpayer money, enjoys luxury resorts originally appeared on BloggingStocks on Thu, 09 Oct 2008 10:05:00 EST. Please see our terms for use of feeds.

Bloomberg reports on the career struggles of former structured finance professionals who have now found themselves unceremoniously dumped on the street as the products they built wreak havoc on the global economy. According to Bloomberg, the investment world has shed 76,670 in the past year.

One former vice president in credit strategy at Bear Stearns is setting up her own company to provide birthday parties and cupcake cooking lessons for children. A Bank of New York asset backed securities trader has left the world of high finance to open a discount hair salon with his wife. Others are becoming teachers.

I'm not sure how I feel about this. Can't these washed up masters of the universe just collect unemployment and live off their investments, and leave the world alone? They've already crashed the housing market and led to hundreds of billions in write downs. Now they're going to go mess with cupcakes? Is nothing sacred?

We can take some comfort in the fact that they're taking a pay cut. Wall Street salaries averaged $399,360 in 2007. That's a lot of cupcakes and $12 haircuts.

Laid off structured finance pros look for new work originally appeared on BloggingStocks on Sun, 17 Aug 2008 09:40:00 EST. Please see our terms for use of feeds.

Continue reading Lone Star loves toxic mortgages

Lone Star loves toxic mortgages originally appeared on BloggingStocks on Wed, 30 Jul 2008 10:10:00 EST. Please see our terms for use of feeds.

Continue reading Cramer on BloggingStocks: Merrill starts process of CDO dumping

Cramer on BloggingStocks: Merrill starts process of CDO dumping originally appeared on BloggingStocks on Wed, 30 Jul 2008 09:09:00 EST. Please see our terms for use of feeds.

Reuters reports that Merrill Lynch (NYSE: MER) reported worse than expected results for the second quarter. Merrill lost $4.9 billion and is selling $8 billion in fresh assets to raise capital.

Merrill's news is the latest of the asset write-down capital raising dances that have taken place in the last year. This dance pairs the write-down of mortgage-backed securities that nobody wants to buy with a desperate effort to raise capital to keep its capital ratios from collapsing. To that end, Merrill took $9.4 billion of write-downs of repackaged debt, including CDOs, as well as exposure to bond insurers. And it raised $4.425 billion from selling its 20% stake in Bloomberg. Merrill may also sell a controlling interest in Financial Data Services for $3.5 billion.

Its loss of $4.42 a share was more than twice the $1.94 loss that analysts had expected. There is not likely to be an end to this asset write-down capital raising dance until people are willing to trade CDOs. And that's the optimistic scenario. If CDOs remain illiquid, it will be ever more difficult to raise capital. And in that case, the prospect of bankruptcy or government bailout loom large. Meanwhile, Merill's stock lost 7.3% in after-hours trading.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Merrill gets gored originally appeared on BloggingStocks on Thu, 17 Jul 2008 18:33:00 EST. Please see our terms for use of feeds.

Fortune -- which shares parent Time Warner (NYSE: TWX) with BloggingStocks -- provides a clue about how big of a write-down Lehman Brothers Holdings (NYSE: LEH) needs to take in order to account accurately for its Collateralized Debt Obligation (CDO) portfolio. By my estimate, that write-down could total roughly $4 billion -- wiping out 20% of Lehman's $20 billion in capital.

How so? I calculated $4.07 billion worth of write-downs -- $1.63 billion of the write-off is from worthless BB and below rated CDOs and another $2.44 billion is from the remaining CDOs that are worth about half their stated value. This is based on Fortune's report that Lehman has $6.5 billion worth of CDOs. The 25% that are rated BB or below it believes are worthless. The remaining 75% it figures are worth 50 cents on the dollar.

But wait, there's more. Lehman has $39 billion worth of Commercial Mortgage Backed Securities (CMBSs) which have lost value. A key index has declined in the last quarter -- but I don't know how much. Assuming the decline was 25%, Lehman would need to write down an additional $9.8 billion. If Lehman needed to take the $9.8 billion write-down plus the $4 billion for the CDOs, its capital would decline 75%.

When I think about how Lehman is not the only one to hold these dodgy securities, it becomes clear that our financial system is resting on a very shaky foundation.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

When will Lehman take $4 billion in CDO write-downs? originally appeared on BloggingStocks on Thu, 05 Jun 2008 09:48:00 EST. Please see our terms for use of feeds.

Some fairly simple math indicates that it wouldn't take much to wipe out the capital of the banks and hedge funds. And this simple math helps explain why the popular delusion that 'liquidity' = 'capital' is so dangerous. That mental equation works just as easily to create the illusion of prosperity as it does to eliminate the capital that is supposed to stand as bulwark against bad lending decisions.

That's because investment banks and hedge funds combined have borrowed $10.9 trillion on a sushi-thin slice of equity of $340 billion. Newsweek reports that on average, the ratio of borrowed money to underlying capital for investment banks and hedge funds is about 32-1. It reports that in 2006, investment banks had an estimated $280 billion in capital. At 32-1, the investment banks are borrowing $8.96 trillion. Meanwhile, hedge funds manage $1.9 trillion worth of assets - which would represent $60 billion in equity and $1.94 trillion worth of debt.

What would it take to gobble up that little piece of sushi? Well, collateralized debt obligations (CDO) represented a $6.1 trillion market. I say 'were' because I am guessing that this figure refers to the value of the CDOs when they were issued. And CDOs seem to be worth some amount below that now. I have seen estimates that they are worth 20 cents to 40 cents on the dollar of their original value.

But if investment banks and hedge funds had used all their money to buy these CDOs, then it would take a mere 6% decline in their value to wipe out that $340 billion in capital. Obviously investment banks and hedge funds have invested in other things besides CDOs. But when you borrow $32 for every dollar in capital, there's not much room for error.

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

Is this the Greatest Depression? originally appeared on BloggingStocks on Tue, 18 Mar 2008 08:45:00 EST. Please see our terms for use of feeds.

As we read of writedowns, impending bankruptcies, and the faltering U.S. consumer, it's interesting to get a glimpse at the players behind this whole snafu.

The Wall Street Journal published an article today about Magnetar Capital, a fund started by a star trader from Citadel Investment Group. Magnetar was a key player in the structuring of CDOs, or collateralized debt obligations. Magnetar acted as a "lynch-pin investor" in over $30 billion of these syndicated bundles of subprime mortgages and derivatives, according to the article.

In spite of the losses being racked up on Wall Street, the fund, with about $9 billion in assets, made about 25% returns last year.

According to the article, "Magnetar swooped in on securities that it believed could become troubled but were paying big returns. CDOs are sliced based on risk, with the riskiest pieces having the highest yield but the greatest chance of losing value." Magnetar concentrated its trading on these riskiest pieces.

Continue reading Hedge funds profit from subprime mess

Hedge funds profit from subprime mess originally appeared on BloggingStocks on Mon, 14 Jan 2008 14:06:00 EST. Please see our terms for use of feeds.

The research arm of Goldman Sachs (NYSE: GS) is predicting that Citigroup (NYSE: C) will have to cut its dividend by 40% due to CDO write-offs of $18.7 billion. Goldman believes that Citi will need the cut to raise $6.2 billion in additional capital.

According to Bloomberg, the Goldman report said "It will be a couple of quarters before the current credit crisis is fully digested by the markets."

Keeping the dividend high makes little sense. The yield on Citi's stock is now over 7%. But, very few investors would put money into such risky shares to get a long-term high yield. An announcement of more significant trouble at the big bank could certainly drop the shares another 10% or 20%, making gains from the dividend appear modest.

Citi is no longer a stock that investors look to for a pay-out. It is a volatile investment which could gain a stockholder 30% over a quarter if the company sold a large division or had better-than-expected earnings.

Cut the dividend to get some dry powder.

Douglas A. McIntyre is an editor at 247wallst.com.

How deeply will Citigroup cut its dividend? originally appeared on BloggingStocks on Thu, 27 Dec 2007 08:45:00 EST. Please see our terms for use of feeds.

But the bigger fear is the repercussions of a serious ratings downgrade of MBIA. Fitch has threatened to cut its top-notch AAA-rating on fears that its capital base was not sufficient to cover its liabilities. That's because $2 trillion worth of insured securities held by mainstream investors, such as pension funds and local governments are at risk if MBIA and its peers lose their top tier credit ratings.

Once again, as I posted yesterday, the future of global capital markets rests in the hands of ratings agencies. In fact, Fitch's warning of a ratings downgrade seems to be a bit conservative. If MBIA had to pay out $31 billion to cover the guarantees on those CDOs, its $6.5 billion worth of capital could be wiped out. Meanwhile, any mainstream investor -- who owns MBIA insured CDOs -- will need to write them down and or sell them if MBIA loses its AAA rating.

The result could be a rise in interest rates paid by city and state governments and a cut in services or increase in taxes to balance those city and state budgets.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in MBIA securities.

Will MBIA's $31 billion CDO bust raise your taxes? originally appeared on BloggingStocks on Fri, 21 Dec 2007 11:18:00 EST. Please see our terms for use of feeds.

BusinessWeek reports that The Bear Stearns Companies (NYSE: BSC), which reported earnings today, is behind $10 billion worth of Collateralized Debt Obligations (CDOs) at Citigroup Inc. (NYSE: C) and Bank of America (NYSE: BAC). It all comes down to yet another new word to add to your financial vocabulary -- Klio Funding -- a brand of CDO that enabled Bear to sell to the $2 trillion money market fund industry.

What is Klio Funding and how did it cause all this damage? Klio Funding is "an entity" that sells Commercial Paper (CP) -- short-term loans -- and uses it to buy higher-yielding long term investments. Since Citigroup had agreed to refund investors' initial stakes plus interest -- through liquidity puts -- money market funds that bought Klios thought they would get higher yields at low risk.

Meanwhile, Ralph Cioffi -- who headed up three Bear hedge funds which eventually folded -- used money raised from the Klios to buy CDOs and to lock in year-long financing for his hedge funds. This is significant because hedge funds typically can only borrow money for weeks at a time due to their risk. Cioffi's CDOs were popular, raising $100 billion.

Continue reading Bear Stearns and Klio Funding

Bear Stearns and Klio Funding originally appeared on BloggingStocks on Thu, 20 Dec 2007 10:05:00 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.

In the latest string of write-downs caused by the mortgage mess, the Wall Street Journal reports that UBS (NYSE: UBS) may take a $7.11 billion write-down in the fourth quarter and that analysts expect that Citigroup (NYSE: C) has not yet finished announcing its write-downs. The big problem all the banks and brokerage houses are facing is that no one really knows how to value these CDOs because not all CDOs are the same. The underlying assets may or may not be at risk of default.

Merrill Lynch (NYSE: MER) took a more conservative view and wrote down its losses on these assets more significantly than Citigroup because it put lower values on some of its CDOs. Analysts expect that Citigroup, UBS and others may have to follow Merrill Lynch's lead by the end of the year as the underlying values of the mortgage securities they are holding comes to light.

In reality, no one can be sure of the value a CDO until they can actually sell it. There are no set rules on how to value these instruments. Until the mortgage mess started most of these holdings were considered safe investments and rated AAA. Obviously, the ratings agencies need to get their act together and come up with a standard. But the only thing any of us can know for certain is that the values will continue to drop until the mortgage crisis eases and we see a slow down in foreclosures.

Lita Epstein has written more than 20 books including the "Reading Financial Reports for Dummies."

UBS may write down more than $7 billion originally appeared on BloggingStocks on Thu, 15 Nov 2007 08:40:00 EST. Please see our terms for use of feeds.

Bear Stearns'

Wall Street appeared to be relieved that Bear's announcement wasn't larger, sending BSC's shares up in both pre-market and mid-morning trading. Many analysts and economists had expected Bear Stearns to take a $3-$3.5 billion Q4 charge for the subprime-related assets.

While indicating that the past few months had been "very challenging," Bear Stearns CFO Sam Molinaro, speaking at a Merrill Lynch banking conference, said the company has reduced its holdings of collateralized debt obligations, the securities most impacted by the collapse of the subprime mortgage market, Bloomberg News reported.

Continue reading Street relieved by Bear's $1.2 billion subprime write-down

Street relieved by Bear's $1.2 billion subprime write-down originally appeared on BloggingStocks on Wed, 14 Nov 2007 11:49:00 EST. Please see our terms for use of feeds.

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.

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.

Why $25 billion worth of CDO liquidity puts could sink Citi originally appeared on BloggingStocks on Mon, 12 Nov 2007 10:40:00 EST. Please see our terms for use of feeds.