CDOs

Bob Rubin role pondered

Jim Kim — Mon, 24 Nov 2008 13:34:37 -0500

The one constant over the years of turmoil at Citi has been Bob Rubin, who was first recruited to the Citi board in in 1999 by Sandy Weill. Some are troubled by his role in supporting Citi's disastrous push into CDOs, but this happened at every bank. It wasn't the board executing the strategy, though it no doubt supported it. There's plenty of people to share the blame. Item

Citigroup to offer mortgage aid

Jim Kim — Tue, 11 Nov 2008 08:29:41 -0500

How far are we from the bottom? Well, there are plenty of signs that we're not there yet; Fannie Mae's big loss is one indication. So it certainly can't hurt that more banks--IndyMac seems to have been the precursor--are willing to ease terms of mortgages for their customers. Citigroup has become the latest to join that group. It says about 130,000 mortgage customers will likely qualify for the new terms, covering $20 billion of loans. This will keep loans performing, but it will have limited effects. They only will be extended to loans that Citigroup owns, not the loans that were packaged into mortgage-backed securities, which were used to create all those CDOs, reports the New York Times.

For more:
- here's the article

Case study: How cities and states ended up being hedge funds

Jim Kim — Sun, 02 Nov 2008 09:04:50 -0500

The New York Times offers an interesting story of how cities and state entities ended up ensnared in the global credit crisis. We've noted that many of them face some severe financing hardships, even with the crisis abating a bit. The worst hit are those that invested in certain CDOs. The Times looks at a school district in Wisconsin that ended up borrowing $165 million from a free-wheeling bank in Ireland named Depfa, and using $35 million of its own money to invest in synthetic CDOs issued by the Royal Bank of Canada. In doing so, they were following the advice of a banker who had all of two hours of training on CDOs. I'm sure the commission was huge. Lots of other government entities are in the same boat. Much of this will end up in court.

For more:
- here's the article

Synthetic CDSs starting to creak?

Jim Kim — Thu, 23 Oct 2008 13:08:06 -0400

People aren't sure what to make of the synthetic credit default swaps market. The media has been rife with stories suggesting that the market is creaking and may be the next leg down in the credit crunch. Some think it is inevitable that the same pain felt in CDOs that invested in subprimes will be felt by their counterparts that invested in CDSs.

No doubt, some banks have been really hurt. Susquehanna Bancshares has written off $17.5 million for such CDOs. This is not a market-breaking loss, but the issue is whether larger losses are to come. National Australia Bank has purchased some hedges to the tune of $60 million a year in cash. Do we need to fear another massive meltdown? There's a lot of nervousness as people anticipate credit rating downgrades, but when you stop and think about it, only seven entities have gone into default. Granted, Lehman CDSs were widely traded, but the majority of financial firms, which underlie the most CDSs, are safe from insolvency now. But at a time like this, that doesn't count for as much as we'd like.

For more:
- here's an article

Korean bank to buy Lehman Brothers?

Jim Kim — Sun, 24 Aug 2008 09:53:39 -0400

Just when you thought Lehman Brothers' play to attract capital from overseas was dead, along comes Korea Development Bank. A spokesman says Seoul-based KDB is looking at a variety of options with Lehman, including an outright purchase, reports Fortune. No details about the talks have emerged. The issue will likely be price, again. At what price do all those still-troubled CDOs, Alt-A assets and commercial real-estate backed assets make sense? If the deal is for an equity stake, you have to wonder how large it would have to be to alleviate concerns by the markets. This may be Richard Fuld's last stand. This really needs to be a definitive deal. A big third-quarter loss, which is assumed, coupled with no hard plans to raise capital just might spell disaster. The watch continues.

For more:
--here's the Fortune article
--here's an AP article

More certainty on toxic credit valuations?

Jim Kim — Sat, 09 Aug 2008 08:54:14 -0400

The truth hurts; at least it can when it comes to valuations of structured credit products. We're seeing a host of activity these days that seems to be placing a more realistic valuation on certain mortgage-related securities, notes the Financial Times. The sale of various residential mortgage-related CDOs by Merrill Lynch to Lone Star set 22 cents to the dollar as a benchmark of sorts. Of course, the composition of the portfolio is the key issue, but 22 cents offers a signpost at least. Meanwhile, Goldman Sachs and Deloitte are conducting a series of structured investment vehicle auctions that many are looking to for clues as to the fair value of such assets. The early indications are that bidding for the most troubled assets are in line with the Merrill-Lone Star transaction. Some assets are faring better. Commercial mortgage-backed securities were sold in the low 80s; real estate CDOs were sold in the high 60s, the FT reports.

For more:
- here's the FT article

Related Article:
Can Goldman Sachs save the SIV market?

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

Does John Thain have a credibility problem?

Jim Kim — Tue, 29 Jul 2008 21:44:16 -0400

In a way, it's unfair to tar Merrill Lynch CEO John Thain with the "not credible" label. But that description has been voiced a lot this year--fairly or not. MarketWatch notes that in January, Thain said Merrill was well-capitalized and confident of its capital base. In April, Thain said Merrill wouldn't need to return to the equity markets. And earlier this month, Thain reiterated that the firm's capital position was sound and its exposure to CDOs manageable. Of course, it has raised about $18 billion since January, leading to a lot of grumbling. Obviously, in a deteriorating market, circumstances change. What once seemed manageable may no longer appear as such. But his PR and IR people should have been all over him about his choice of words. He no doubt wanted to make definitive statements to be a stand up guy. It may have been wiser to hedge.

For more:
- here's the MarketWatch article

Another Merrill Lynch shocker: $5.7 billion more in write-downs

Jim Kim — Mon, 28 Jul 2008 21:45:44 -0400

Fresh off a massive loss, Merrill Lynch announced it will write down another of $5.7 billion for the third quarter. Most of that stems from a move to finally get rid of its portfolio of super senior mortgage-backed CDOs, which were once valued at $30.6 billion, the New York Times reports. Merrill Lynch sold them for $6.7 billion to an affiliate of Lone Star Funds. That's 22 cents on the dollar. Ouch. In addition, Merrill plans to raise $8.5 billion in capital from common shareholders, $3.4 billion of which will come from Singapore's Temasek Holdings, already Merrill's largest shareholder. The Times figures the new shares, plus a conversion of preferred securities, will dilute the value of common stock by about 40 percent. This is good news in a sense that the CDOs had long been an albatross. But the capital raise was somewhat surprising in that most people were expecting a deal of some sort involving its 49 percent stake in BlackRock. Current shareholders have every right to be angry.

For more:
- here's the Times article

Goldman Sachs turns bearish on Citi

Jim Kim — Thu, 26 Jun 2008 14:34:45 -0400

There has been a lot of talk recently that the worst of the credit crisis is over. When it comes to Citigroup, some would beg to differ. William Tanona, respected financial services analyst at Goldman Sachs, has lowered his call on many banks to neutral, but designated Citigroup as an outright sell. The Financial Times jokes that Goldman has it in for its competitors. But there is a strong case to be made for what the analyst calls "multiple headwinds in both its retail banking and investment banking businesses over the next couple of quarters." He estimates Citigroup will take an additional $8.9 billion in net writedowns for the second quarter, mainly due to CDOs and hedges via bond insurers. Most of the $12.5 billion in capital that it has raised will be taken up by dividends, leaving its capital position even worse off than before.

For more:
- here's the Financial Times item