mortgages

Citigroup loses battle to buy Wachovia

Jim Kim — Thu, 09 Oct 2008 21:01:14 -0400

In the end, Citigroup decided to give up on Wachovia entirely, even though there were signs that the Fed wanted to somehow divvy up the bank. The parties apparently could not agree on how to divide the Wachovia's most troublesome assets, including its risky mortgage-related debts. Citigroup apparently was not willing to take on more than the $42 billion in losses to which it had originally agreed, the AP reports. Wells Fargo, however, expects to take a $74 billion loss on Wachovia's $500 billion loan portfolio. The majority of losses will be charged over the next two years. You have to wonder if Citigroup could have ended up with something. Did it have to be all or nothing? In return for absorbing $42 billion in losses, it seems it could have won a portion, however small, of the retail base. Citigroup seems like the big loser, but then again, there is no guarantee that Wells Fargo can make this work. The losses might be higher than expected. Citigroup intends to "vigorously pursue" legal claims against Wachovia and Wells Fargo for interfering with its original deal.

For more:
- here's the AP article

Why the bailout has not lifted confidence

Jim Kim — Thu, 09 Oct 2008 14:27:14 -0400

We've seen some amazing government moves in the last few days: the bailout plan; the decision to directly buy short-term commercial paper from companies; the decision to provide yet more liquidity to prop up AIG's securities lending business. And yet, where is the shot of confidence that regulators and others were hoping for? William Isaac, former FDIC chairman, weighs in with a column in TheDeal.com. He argues that the FDIC has the authority to declare an emergency if the Treasury requests it. "If an emergency is declared, the FDIC could announce that until the crisis abates, all depositors and other general creditors will be protected if an FDIC-insured bank fails." Europe has moved in this direction. He would also suspend fair-value accounting and aid homeowners struggling mortgages. Would any of this help?

For more:
- here's the column

Twist: Wells Fargo to buy Wachovia

Jim Kim — Fri, 03 Oct 2008 08:07:50 -0400

Wow! The world thought Citigroup had a government-assisted deal to buy Wachovia's banking operations for $1 a share. But that deal seems to have been scuttled for a better deal (for shareholders) with Wells Fargo, which had been itching to buy a bank. Wells Fargo, a safe-haven institution right now, is offering about $7 a share. It touted that the deal requires no government assistance and said it will raise up to $20 billion by issuing new shares. This creates a juggernaut of a retail bank, one that will rival Citigroup, and will keep Wachovia intact. The big issue of course is Wachovia's portfolio of toxic mortgages, much of which stems from its ill-advised purchased of Golden West. Wells said it would mark the assets to fair value, presumably at a big loss that will be offset by the capital raise.

For more:
- here's the New York Times article
- view the press release

Related Article:
Citigroup to buy Wachovia

Bill Gross to save the economy?

Jim Kim — Wed, 24 Sep 2008 18:47:11 -0400

One of the biggest winners in the credit mess has been Bill Gross, the co-chief investment officer at PIMCO. He famously went long on agency bonds and scored a $1.7 billion gain on the day the two GSEs were bailed out. But he has even bigger ambitions now. He wants to manage the $700 billion government bailout--for free, according to the New York Times. Gross certainly has the staff and some big ideas about how a bailout ought to be run. For one thing, he's skeptical about giving the government equity in banks seeking aid. He says the bonds themselves, if valued prudently at purchase, should deliver gains over time in the 12 to 13 percent range. And that's what the government really wants: lower costs. He would advise paying something like 60 to 65 cents on the dollar for most mortgages. He does favor more aggressive relief for homeowners.

For more:
- here's the New York Times article

Related Article:
Bill Gross: Writedowns to hit $1 trillion

Once again, people wonder if the worst is finally over?

Jim Kim — Sat, 20 Sep 2008 21:20:47 -0400

The scale of the government bailout is unprecedented, but there's a big question hanging over it: Will it work? If so, at what cost? It will buy up lots of debt, most likely at a severe discount to par. But will it ever be able to sell it all? Will it be forced to eventually write it down to nothing? For some, the result may smack of Japan not so long ago, when it's bubble burst, ushering in a decade of weak economic growth. The keys, in some ways, are the root mortgages. If they can be saved, there might be a trickle up effect. But the bottom line is that no one knows just how effective the bailout will be.

For more:
- here's a New York Times article

Report from Lehman's building

Jim Kim — Mon, 15 Sep 2008 09:46:32 -0400

You've got to feel for the thousands of Lehman Brothers employees, who are being dumped on one of the worst Wall Street job markets in years. As they filed out of their Times Square building, a cop had to tell the crowd: "Go home. There is no one famous coming out. You are looking at a whole bunch of people who just lost their jobs," Fortune reports. They filed out clutching mementos of an era that ended with a thud. Some bore chotchkes. Two hauled out orchids. Many have seen their personal stock holdings staggered at the worst possible time. They sad reality is that they will likely have to reinvent themselves. It will be painful for many, especially those with children and mortgages and tuition to pay. But it will happen. Five years from now, the creative and entrepreneurial ones will see that they are better off. The worst thing you can do now is sulk.

For more:
- here's the Fortune report

Alt-A loans, the coming convulsion?

Jim Kim — Fri, 15 Aug 2008 13:28:58 -0400

There is a subtle undercurrent of fear on Wall Street about Alt-A loans. JPMorgan has about $19.5 billion worth of exposure to Alt-A mortgages, and it likely is not alone. I would be surprised if banks have written off much against these assets. CalculatedRISK notes that "subprime delinquencies appear to have peaked in December of 2007, and subprime foreclosure starts may have peaked in January of 2008," according to research firm Clayton. "Unfortunately, Alt-A seems nowhere near its peak yet." Delinquencies and foreclosures seem to be on an upsloping curve. This may be the start of another wave of writedowns.

For more:
- here's the CalculatedRISK item

Can hedge funds save the economy?

Jim Kim — Sun, 03 Aug 2008 10:23:54 -0400

Lone Star is not alone in buying up super discounted mortgage assets right now. Business Week Online notes a host of hedge funds and private equity firms are busy buying up thousands of mortgages at huge discounts. Many are not looking to flip immediately. (Unless the price is right, of course). Instead, they want to do what banks have proven pretty awful at: work with mortgage holders. Lone Star has made a specialty out of this. They paid very little for the loan, which makes the effort worthwhile. Sure, they'll end up with a lot of foreclosed-on property, but the steep price drops may have bottomed. They just might be entering a bouncing market. It's unclear if this will have a meaningful impact on the residential housing economy. But if it can keep more homeowners from defaulting, and the market turns up, they just might make a tidy profit.

For more:
- here's the article

Anatomy of a good deal

Jim Kim — Wed, 30 Jul 2008 07:52:58 -0400

Lone Star Fund's John Grayken is no stranger to troubled assets, notes the New York Times. He made a fortune buying troubled mortgages from the Resolution Trust Corporation in the early 1990s. In many ways, he's the ultimate vulture. He's in the news again because he just bought Merrill Lynch's most toxic collateralized debt obligations for about 22 cents on the dollar (about $6.7 billion). Merrill Lynch of course is financing about 75 percent of the deal. The consensus seems to be that he got a good deal. Lone Star's Hudson Advisors affiliate, with 800 employees, works out individual loans and mortgages. Lone Star's investors have been very happy with Grayken over time, and the company just raised two more funds. The Times suggests that more banks will be seeking out Grayken to offload more CDOs. This could turn out very well for him.

For more:
- here's the article

More on Ken Lewis's big bet

Jim Kim — Wed, 16 Jul 2008 12:27:28 -0400

Ken Lewis, CEO of Bank of America, really bet his career on Countrywide. We've made that point repeatedly. For all the savvy deals he's pulled off--MBNA and FleetBoston--this is the one that will matter most. Many have suggested that the deal will blow up for him--and painfully so. But maybe not. Portfolio notes that he has been quite savvy about the mortgage market, and has built a conservative mortgage business at Bank of America that wisely stayed out of the subprime mess, despite the obvious appeal before the crisis. You can imagine the internal debate. He's a sophisticated thinker when it comes to mortgages and how they can drive the complete customer relationship. Obviously, he's betting he can take Countrywide and integrate the best of it while discarding the worst. The jury is out. But he may surprise his critics yet.

For more:
- here's the Portfolio article