cdo

Is the CDS risk passing?

Jim Kim — Tue, 04 Nov 2008 16:56:53 -0500

Is the risk stemming from credit default swaps (CDSs) passing? Business Week weighs in with an article noting data from the International Swaps & Derivatives Assn. that says $25 trillion in notional value has been taken out of the CDS market since the beginning of the year. That amounts to a 25 percent decline from the $62.2 trillion peak. At the same time, progress is being made on a CDS central clearinghouse, something we've been discussing at length.

All of this bodes well, but the real worry right now centers on so-called synthetic CDOs, which invest in credit default swaps, not asset-backed securities. We've noted as of late there is real worry that a wave of corporate defaults could trigger the same reaction we've just suffered through in cash CDOs. The high-yield market is ailing, to say the least. Still, any progress on derivatives exposure is welcome. We're hardly out of the derivatives woods, but we're not completely stuck in the mud.

For more:
- here's the article

New credit ratings schemes likely to emerge

Wed, 06 Feb 2008 06:59:54 -0500

The top credit ratings agencies, buffeted by severe criticism of their failed models, are tinkering with new schemes. At a minimum, they have to at least appear to be changing at a time like this. Moody's says it is pondering a raft of new options. Moody's has offered five proposals for public comment. It will accept opinions until February 29. An analysis will be issued within two to three months, according to the Financial Times. One idea is to have a more uniform rating scale--one might use numbers instead of letters (from AAA to C)--with the idea being that the ranking holds for all assets. There would still be 21 credit ratings. The same numerical rating would imply the same level of creditworthiness for a CDO as a corporate bond. Another option would be to keep the same letter system but add something that would identify bond asset classes.

For more:
- here's the article

Citigroup's consumer unit ailing too

Thu, 17 Jan 2008 06:59:56 -0500

Somewhat lost amid the news about the Citigroup's huge loss, its sovereign wealth injection, and CDO/SIV woes was the news about its consumer unit. Once the citadel of a mighty Citigroup--it accounted for up to 40 percent of earnings recently--the consumer unit is now feeling the heat from the credit market meltdown. The bank will set aside $5.1 billion to cover loan losses and possible higher delinquencies on credit cards and auto loans, MarketWatch notes. People once said that the consumer business gave Citigroup a valuable source of stable earnings, allowing it to attack other markets. So this is really tough news. Bad news on top of bad news. It is certainly taking aggressive steps to limit its consumer credit exposure. We'll see if this is too little too late.

For more:
- here's a MarketWatch article

S&P adjusts CDO risk model, ouch!

Thu, 17 Jan 2008 06:59:55 -0500

In a technical adjustment, Standard & Poor's has announced that it has revised its expected losses for 2006 vintage subprime collateral to 19 percent from 14 percent, due to rising delinquencies. The Financial Times notes that this will likely result in even more downgrades of CDOs of the 2005 to 2007 vintage. So we can expect another round of CDO defaults that require liquidation. All will be hit, even the super seniors. Basically, we're looking at more writedowns and pain for sponsors. So it would be a mistake to think that the CDO and SIV markets have put the worst behind them. We still cannot see a bottom.

For more:
- here's the Financial Times item

SPOTLIGHT: Friday CDO Downgrades

Tue, 15 Jan 2008 06:59:52 -0500

"This happens every week--the Friday CDO downgrade bonanza"--so dubs the Financial Times. This past week was no exception. S&P made another massive downgrade move. Article

ALSO NOTED: Ex-Goldman Sachs analyst gets prison in insider case; Och-Ziff assets up 10 percent; and much more...

Fri, 04 Jan 2008 06:59:50 -0500

Company News:
> SunTrust buys stake in hedge fund. Article
> Temasek owns 9.4 percent of Merrill Lynch. Article
> Wachovia's CDO exposure light. Article
> Wachovia pares jobs in San Antonio. Article
> Och-Ziff assets up 10 percent. Article

Industry News:
> Mortgage app volume dips. Article
> More on actively managed ETFs. Article
> Oil soars over $100. Article

Regulatory News:
> Ex-Goldman Sachs analyst gets prison in insider case. Article
> SEC looking at foreign exchange access. Article

And Finally... When buffets do not work for the house. Article

Next big thing will elude credit markets

Fri, 21 Dec 2007 06:59:54 -0500

Way back in the 1990s, a group of so-called specialty finance companies cropped up. They basically made home equity loans to people with poor credit ratings. The loans were then securitized and sold a bonds. Soon enugh, delinquencies mounted to the point that the machinery stopped working. Warehouse credit lines from investment banks were cut. Bond buyers balked. And these companies went out of business. But they set the stage in some respects for the bigger subprime boom that would follow in the 2000s. But now that is fizzling out. And as of right now, it is unclear what, if anything, is the next big product, and I doubt it will materialize next year. Synthetic CDOs that invest in a portfolio of total retrun swaps? I'm sort of kidding. It looks like 2008 will be a dig-out year at all levels (credit rating agencies are in particulary deep hole). The massive CDO machinery may never be the same.

Related articles:
- CDOs still causing anxiety
- One way to play the credit crunch

Shadow banking system any clearer?

Tue, 18 Dec 2007 06:59:55 -0500

There's been some big-picture talk as of late about the so-called shadow banking system. The banking world of old was all about gathering assets, making loans and selling bonds. That world hasn't existed in many years. But the credit crisis has certainly made clear that the new system has made the old obsolete. Some call it "vehicular finance," which refers to the practice of passing on risk at every turn by all sorts of new financial vehicles. Swaps and CDO are but two examples. But at the end of the gravy train is someone or some company that has to make a payment. And that's the bottom line. One could argue for a new updated regulatory structure but as long as those end debtors keep paying the system keeps working. Which brings me to that question I still can't answer. What's next?

For more:
- here's some Financial Times commentary

CDO Watch: Adams Square I

Fri, 07 Dec 2007 06:59:56 -0500

Standard & Poor's announcement on a CDO called Adams Square I is drawing lots of attention. According to the Financial Times, Adams Square I was apparently liquidated at 25 percent of par. Ouch. The ripple effects are interesting to say the least. The more senior, including the super-senior, tranches that the Adams Square I was "protecting" got hit hard too. Also, the credit default swaps that the issue included (it was a hybrid) were apparently terminated. This was pushed forward by the senior investors, who have the right to do so in the event of a default. We're likely going to see more of this.

For more:
- here's the item

One way to play the credit crunch

Fri, 30 Nov 2007 06:59:56 -0500

Good Wall Streeters are always hunting for opportunities. Brian James, 35, and Joe Messineo, 34--former managing directors and co-heads of fixed income at Cohen & Co., that CDO powerhouse--have formed a recruiting firm, Link Global Solutions that will securitization specialists. There is a certain irony in CDO guys launching a firm aimed at finding work for employee victims of the CDO-led credit bloodbath. But there are a lot of laid-off specialists out there who will likely line up. They think that hedge funds will be a prime source of business. At the same time, new products will emerge in the wake of the CDO meltdown. Seems like a timely launch.

For more:
- here's the Investment Dealers' Digest article

Related articles:
- CDOs in for more stress?
- CDO systemic risk debate rages
- CDOs still causing anxiety

Read more on: CDOs