subprime

Credit rating agencies again lagging events?

Jim Kim — Tue, 16 Sep 2008 10:08:27 -0400

Credit rating agencies have been beaten up pretty thoroughly in the credit crunch. Many would say they have been discredited. If only they hadn't rated all those subprime-backed CDOs AAA! In the wake of the Lehman Brothers bankruptcy, Advisor Perspectives notes that on Friday, just before the pyrotechnics began, Standard & Poor's had Lehman's operating groups rated A+. At an event, Standard & Poor's analyst Scott Sprinzen said that "we don't expect Lehman to fail." And: "The underlying business at Lehman is doing pretty well." And: Its "basic business franchise is not impaired." It also had Merrill Lynch rated similarly high, just a notch below Morgan Stanley, and two notches below Goldman Sachs. They did not anticipate the possibility of extraordinary events, or "accidents."

For more:
- here's the article

Is the worst now over? John Paulson may think so

Jim Kim — Mon, 08 Sep 2008 07:51:59 -0400

The idea that we need a big failure to get past a financial crisis has long been out there. That's one reason a lot of people assumed that the Bear Stearns implosion signaled the worst was over. Of course they were wrong. Still, now you have to wonder whether the demise of Fannie and Freddie signals a nadir? No less that star hedge fund manager John Paulson is entertaining the idea. The Financial Times reports that he has informed clients that while he is still bearish, he will also consider long positions in various financial companies. Paulson will launch his Recovery fund next month. He will allow clients to switch money from hugely successful Credit Opportunities funds, which rang up gains of 590 and 352 percent last year. Paulson is known as the $1 billion man for his correct bet against subprime and other mortgage assets.

For more:
- here's the article

Freddie auction fares well...So what?

Jim Kim — Mon, 14 Jul 2008 12:59:17 -0400

Freddie Mac's $3 billion auction of short-term securities went well. Of course, it took news of a massive potential government bailout to undergird market confidence. This is decent news, but the issue of what to do with Fannie and Freddie remains. We all seem to agree that they are too big to fail. The two GSEs were hell bent on expansion right up until a few days ago, it seems. That has got to be reined in. It's easy to second guess their push into subprime and Alt-A mortgages, but some of that move was brought about by lawmakers who wanted to make home ownership easier. Any defense of the two giants is complicated. Accounting scandals got the headlines, but the inattention to capital, at the entities and in Washington, now seem just as debilitating. There is not a lot of goodwill built up.

For more:
- here's an AP article about the auction

Cautionary tale of a Citigroup trader sent to prison

Jim Kim — Thu, 05 Jun 2008 08:22:09 -0400

In May 2007, an ex-Citigroup energy derivative trader named Craig Gile was sentenced to a year and a day in jail after pleading guilty to one count of conspiracy. Fortune has his thought-provoking story. The magazine paints a picture of a good man, trying to please his boss in a tricky area. As the entire subprime fiasco makes clear, valuing derivatives is more art than science. Gile was charged with making changes to a computer model that resulted in artificially high valuations of some options. Some might think this is an example of out of control prosecutors. Some might disagree. But it points to the need, not so much for more regulation, but for some sort of standards that bring more clarity to derivatives valuations. It may be that prosecutors have given up on the idea. We've seen nothing of this sort regarding the subprime fiasco.

For more:
- here's the profile

Related Articles:
Rogue trader gets light sentence
Another rogue trader

Credit ratings agencies unmasked?

Thu, 24 Apr 2008 06:59:55 -0400

Just when you thought the credit rating agencies could not be more demonized comes a New York Times magazine piece that wraps it all up in one lengthy article--with a focus on Moody's. And I do mean lengthy. Much of the substance was known. And there is no need to rehash the litany of reasons why the credit ratings agencies were so willing to assign AAA ratings to all those subprime-related CDOs. No need to get into default risk vs. investment risk and all that.

But the article finds a big think sort of concept: "Thus the agencies became the de facto watchdog over the mortgage industry. ... Effectively, they did the job that was expected of banks and government regulators." The issue is what to do about the agencies. And for all the controversy, no one has come up with an alternative model, except maybe pay for ratings.

For more:
- here's the article

Subprime delinquencies still rising

Mon, 24 Mar 2008 07:59:57 -0400

Don't think it's almost over. Delinquencies for subprimes extended in 2005 to 2007 are still rising, according to Standard & Poor's. For 2005 and 2006, the increases have been boosted to the 35 percent level. For subprimes issued in 2007, the increase has been higher, to about 25 percent. You can bet that those numbers will rise. What does this mean? Well, most of these loans have already been packaged into mortgage-backed securities. It's unclear if these securities and the CDOs that bought them have already been downgraded. Presumably, they have. The issue is, to what level? There's certainly no let up in store for anything built on subprime loans. Alt-A loan-based securities could be facing similar pressure.

For more:
- here's the AP article

Related Articles:
S&P adjusts CDO risk model, ouch! Article
Wow! Plan would freeze subprime rates. Article
A model of disclosure of subprime risks. Article
Subprime woes for smaller, regional banks? Article

The paradox of a mortgage fund collapse

Tue, 11 Mar 2008 07:59:57 -0400

You would think that the Tequesta Mortgage fund would be seen as one of the more safe hedge funds. After it all, it specialized in prime loans of a certain heft. These jumbo loans--and I note the jumbo threshold has just been raised--were far from subprime and Alt-A. But they declined in value as the crisis clamped credit markets in general. Banks had to dump these bonds to get liquid, further slamming the market. The result: Even a conservative, low-margin hedge fund faced a series of margin calls from prime brokers--in this case Bears Stearns, Citigroup and others. The fund recently collapsed, no longer able to meet margin calls.

For more:
- here's the Fortune article

Related Articles:
Just how will banks reduce mortgage exposures? Article
Banks to take massive writeoffs. Article
What to make of Citigroup's big loss? Article
Crisis takes toll on Lehman and Bear Stearns. Article

How bad is it in America?

Wed, 27 Feb 2008 06:59:59 -0500

While the effects of the subprime mortgage problem have been--and continue to be--felt all over the country, headlines are dominated by news about the top institutions--the Citigroups and Bank of Americas. But how are the banks of America really faring? Well, the crisis is starting to take a toll. The pain is being felt. And it is possible, according to this New York Times article, that we'll see a few outright failures. They will merit attention only in local papers, but you can sense the nervousness.
- Jim

ALSO NOTED: Singapore SWF to invest in TPG; MBIA says bailout not needed; and much more...

Fri, 15 Feb 2008 06:59:50 -0500

Company News:
> MBIA says bailout not needed. Article
> RBC to buy Ferris, Baker, Watts. Article
> Lampert buys AutoNation shares. Article
> Schwab's client assets grow. Article
> Singapore SWF to invest in TPG. Article
> More on subprime losses and UBS. Article
> Lehman patents stock picking method. Article

Industry News:
> U.S. ETF assets dip. Article
> Car loans showing signs of wear. Article

Regulatory News:
> Anti-SWF legislation coming? Article

And Finally... Signs you're a lousy boss. Article

ALSO NOTED: S&P: Merrill Lynch most at risk of downgrade; More on Moody's structured products revenue drop; and much more...

Mon, 11 Feb 2008 06:59:50 -0500

Company News:
> More on Moody's structured products revenue drop. Article
> S&P: Merrill Lynch most at risk of downgrade. Article
> German Bank gets $7.2 billion buyout. Article
> HSBC to sell 400 banks. Article

Industry News:
> Big losses coming from mortgage insurers. Article
> Big picture look at leveraged loan freeze. Article
> Rogue trader ordered jailed. Article
> Second French trader being questioned. Article

Regulatory News:
> Congress looking at China investments. Article
> Justice Dept. looking at Merrill's subprime operations. Article

And Finally... How to boost your personal productivity. Article