Post by Catdaddy on Nov 7, 2007 9:11:20 GMT -5
This is a long but interesting article. Enjoy,
Catdaddy
HEDGE FUND NEWS
@ Wed 07 November 2007 : GMT
fintag.com/archive/2007/11/07/
FINTAG COMMENT
The land of the free.
And it certainly feels like it. Today I fly EOS (it only has 48 seats so if you are on the plane then I'll be easy to spot - I am the one who suffers from inverted shoulder syndrome caused by Blackberry overuse. Given Goldman uses EOS as its corporate jet, I will surely pick up lots of gossip as to why Goldman is trembling at the boots of the SEC for its mark-to-goldman-pricing issues) to JFK. The USD is so low that on the US Immigration form where it asks are you bringing in USD10,000, I had to laugh. This is about the hourly wage of the GBP paid EOS pilot.
Citi goes from crisis to crisis but in the end has to turn to Hedgie experts to sort it all out.
No longer are we on the outside; we are running the show. Investment Banking is the equivalent of Teletext. Useful but outdated.
Welcome to FiNTAG. Welcome to the world of Hedge Funds; run by smart, clever, and good looking people who make money off the back of other's misfortunes (UBS, DB, Citi, Merrill, BarCap, Stanley, WestLB, ...)
THE BOSSES WHO GAMBLED AND LOST
independent
Loathing and fear continued to grip Wall Street yesterday as investors and financial sector employees struggled to understand how allegedly iron-clad institutions, including Citigroup and Merrill Lynch, fell so dramatically foul of the sub-prime mortgage fiasco announcing multi-billion-dollar write-downs.
"Wall Street wants heads," said analyst David Dreman, whose firm Dreman Value management is based in Aspen, Colorado. Shaken investors have seen two very large ones roll from top perches already - first Stan O'Neal of Merrill Lynch and on Sunday, Charles "Chuck" Prince of Citigroup - but the spectacle of their respective humiliations has been scarcely satisfying.
Healthy though it may be that even the most senior-ranking universe-masters are willing to fall on their swords, it doesn't answer how their respective banks bungled so badly in the first place, exposing themselves to such gargantuan risk with deeply complicated financial products that perhaps even their own specialists didn't understand, all built on a sub-prime lending bonanza that so quickly went sour.
Nor can anyone truly pretend that the departure of these two men will solve a great deal while so many questions still abound. How come these and other banks struggling to cope with assets turned rotten, like UBS and Bear Stearns, did not see what was coming sooner? Did they, in fact, hoodwink investors and even themselves in pretending the problems would go away? And what shoes are still to drop? UBS, Europe's fifth-largest bank that until recently was widely respected for managing the wealth of the rich, has already sent its chief executive, Peter Wuffli, packing after his steering of the bank into the mortgage-related securities business resulted in depressed results and a 21 per cent plunge in its stock price.
Still in his job is Bear Stearns CEO James Cayne, but hardly comfortably. Last week, he was stacking sand-bags around his suite at the bank's headquarters after a scathing profile in the Wall Street Journal accused him of smoking pot and goofing off at critical moments to play golf and bridge. Blaming is a game few can resist when Wall Street hits rocks with so dramatic a jolt. Not escaping either is Hank Paulson, the US Treasury Secretary, whose job it is to reassure markets when not a few analysts are recalling his tenure as head of Goldman Sachs at a time when that bank also was accumulating some $37bn of bonds backed by sub-prime loans or second mortgages....
In the line of fire
STAN O'NEAL
The head of Merrill Lynch was forced out after the investment bank ran up huge losses on its investments.
CHUCK PRINCE
The biggest casualty of the credit crisis to date, Mr Prince's long-awaited resignation was announced on Sunday.
PETER WUFFLI
A drastic fall in UBS's share price precipitated the sudden departure of the Swiss bank's chief executive.
JAMES CAYNE
The beleaguered boss of Bear Stearns has so far clung on to his job but he has become a figure of ridicule.
Fintag says
Stan the man who fired all the best people so he wouldn't look stupid.
Jimmy "Camberwell Carrot" Cayne, the man who can sleep walk walk around the world's best golf courses but needs sat-nav to find his office.
Chuckle Brother Prince, the man who wondered everyday why he had been given the top job and thought a liability was a poor choice of spouse.
And finally Peter "Useless" Wuffli who was more interested in his nice suits than his clients being sold products that were not fit for purpose.
And there are more ...
OIL RACES TO FRESH HIGH ABOVE $97
bbc
Oil prices have risen to a record high above $97 a barrel, amid concerns over tight fuel stocks and a weak US dollar.
US crude oil rose $3 to a high of $97.10 before closing at $96.70, while the price of London Brent crude climbed to a record level of $93.26 a barrel.
The price of gold also surged to a record peak of $826.40 an ounce on the weak dollar and fears of inflation spurred by the record high oil prices.
Gold is seen as a haven for investors in times of stock market uncertainty.
Gold prices later eased slightly to close at $823.40.
Fintag says
My fortune teller tells me it will be USD103 by the end of November with lots of profit taking at 100.
REDEMPTIONS HIT HEDGE FUND LOSERS
financial news
Investors removed $3.5bn (€2.4bn) from equity market neutral hedge funds in September after some of them made losses of more than 30% during the previous month, even though they are intended to move independently of the stock markets, but the overall flow of capital into the industry is set to continue.
The outflow, which is uncommon, took the capital invested in equity market neutral funds from $63.7bn to $60.2bn, according to data provider Barclayhedge.
Investors had expressed disappointment with August's performance of quantitative equity market neutral hedge funds, which rely on computers to construct their portfolios. These funds recorded heavy losses for the month to August 10, with US hedge fund manager Tykhe Capital saying one of its funds had dropped 31% in that period.
Goldman Sachs Asset Management subsequently told investors in its quantitative equity market neutral fund that, with the benefit of hindsight, it was clear managers were trying to invest too much capital using this strategy.
Fintag says
Really? And how much went in? Hello!
HEDGE FUNDS 'SHORT' MORTGAGE INDEX
financial times
An index tracking derivatives linked to US commercial mortgages suggests a grim outlook for the country's commercial property sector.
The risk premiums, or spreads, on the CMBX index have jumped as a number of macro hedge funds made large bets that the $850bn US commercial mortgage market would see problems.
They do so by shorting the CMBX index, or buying protection against default on bonds that they do not own, with the view that the commercial real estate market could face problems similar to those of the residential market.
The CMBX index references the 25 most traded commercial mortgage-backed bonds.
The value of the index, which is quoted in spread rather than price, reflects how likely investors expect the underlying deals to pay principal and interest.
One investor, Andrew Lahde, of Lahde Capital, insists defaults are going to rise significantly, driven in part by looser underwriting standards.
"If God comes down and miraculously fixes everything that is going to drive us into a deep recession, we probably still would not lose money on the CMBX trades," Mr Lahde said at the launch of a fund called Commercial Real Estate Hedge.
Fintag says
You didn't think we'd be long did you? Perhaps in a couple of years time.
CITIGROUP CALLS IN FIX-IT STUCKEY
telegraph
Citigroup has called on the man who helped the bank resolve the 1998 Long-Term Capital Management crisis to run its troubled $43bn sub-prime mortgage portfolio.
The bank, which is set to write down a further $8bn-$11bn (£3.8-£5.3bn) on the value of that portfolio in the fourth quarter,
on top of $5.9bn of writedowns and losses in the third quarter, has asked Richard Stuckey to sort out its sub-prime problems.
Mr Stuckey will head Citi's Sub-Prime Portfolio Group, a new unit wholly independent of the rest of the bank and reporting directly to acting chief executive Sir Win Bischoff.
His team, with help from Citi's head of special situations Mark Tsesarsky, will manage the bank's asset-backed securities (ABS), collateralised debt obligations (CDOs), unsold primary ABS inventory and ABS super senior exposures. He will also be able to draw on help from the bank's structured credit, securitised markets and independent risk management teams.
Mr Stuckey was the man Citi selected to represent it in the rescue of hedge fund LTCM after it collapsed in 1998 suffering from $4.6bn of losses.
He was part of a 14-man team that represented the banks that took over the fund so its liquidation wouldn't further knock the world's markets by shedding its $90bn of assets.
He was a perfect man for the job, having worked at Salomon Brothers with LTCM founder John Meriwether and partner Myron Scholes earlier in his career.
Fintag says
As a youngster, I had the task of taking on a number of distressed LTCM trades and thankfully they were realtively liquid and the risk was duly passed on without much pain.
Citi is a completely different kettle of fish. Subprime is illiquid because the packages are full of toxic waste and nobody has the time or inclination to take the risk on.
Thanks a bunch to our best buddies, the ratings agencies - who have gone very quiet recently, apart from a few downgrades, these assets are too costly to unwind.
However, it is good to see real experts running Citi now
. Hedge Fund people. Nimble, Decisive, Quick and Good Looking with 6 packs and white teeth.
times says "Ben Bernanke must step over media tripwires"
GOLD RISES TO 27-YEAR HIGH ON OIL; SILVER GAINS TO 26-YEAR PEAK
bloomberg
Gold reached a 27-year high as record oil prices and a slumping dollar deepened concern that inflation will accelerate. Silver also gained to a 26-year high.
The dollar extended its slide to $1.4666, the lowest ever against the euro, boosting the appeal of precious metals as an inflation hedge or an alternative investment.
Prices of bullion, used in jewellery and as a safe haven investment when geopolitical tensions increase and inflation rises, have gained 31 percent this year, heading for the seventh straight yearly gain. The rise has helped boost shares of mining companies, including Newmont Mining Corp. and Barrick Gold Corp.
``We may see gold prices breaching the $850 level, at earliest tonight,'' said Kazuhiko Saito, strategist at Interes Capital Management Co. in Tokyo. ``It's like people are pushing gold prices toward the record.''
Fintag says
Today my solid gold Rolex Daytona rose in value. The older it gets, the more it is worth. And as for my mother's gold teeth, she has to walk around with body guards.
AFTER DEUTSCHE'S RATS, THERE'S THE UBS MICE
hereisthecity
We reported earlier this week that Deutsche Bank has a bit of a rat problem on the equities floor at its main London Wall building. We also alluded to the fact that, a few years back, UBS had a mice issue at 100 Liverpool St. Well, it seems that the UBS mice are alive and kicking, as the bank still has vermin on the premises.
Fintag says
Hello! OK!
U.S. HEDGE FUND GROUP OFFERS "SOUND PRACTICES"
reuters
A U.S. hedge fund industry group on Monday recommended ways to strengthen the $1.8 trillion (860 billion pound) industry, including guidance for funds to manage potential conflicts of interest and a list of potential questions investors can ask funds before investing.
The Managed Funds Association (MFA) developed the voluntary "sound practices" in response to the President's Working Group on Financial Markets.
In February, the inter-agency group headed by U.S. Treasury Secretary Henry Paulson called for improved market discipline and enhanced vigilance in the hedge fund industry.
The MFA list of recommendations includes a due diligence questionnaire to help investors identify the questions they should ask before investing in a hedge fund.
Hedge fund managers should establish policies relating to gifts and entertainment or any other payments that may create the appearance of impropriety to investors, the MFA said.
It also urged managers to disclose use of "soft dollar" arrangements -- where money managers pay inflated commissions to get favors such as free stock research from brokerages.
The MFA also recommended funds offer investors guidance on determining net asset value, as well as how to monitor, measure and manage risk.
Fintag says
Hedgies at it again. No longer are we the cowboys, we are now the Sheriffs.
BANK CHIEF: 'I WARNED PM ON BANK COLLAPSE'
thisismoney
Gordon Brown was dragged into the Northern Rock row today after the Bank of England revealed it had lobbied for legislation which could have prevented the crisis.
The Bank's Governor Mervyn King said he had pressed 'pretty hard' for new laws to protect investors in the event of a banking collapse and stressed the Government needed to act with 'some urgency'.
His comments raise questions about whether Mr Brown should shoulder some of the responsibility for this summer's run on Northern Rock.
It is understood the Bank of England had called for legislation when Mr Brown was still Chancellor and long before the Northern Rock disaster this September.
Mr King implied that if the Government had acted it could have prevented the first run on a bank in Britain for 150 years.
The Governor also shone the spotlight on present Chancellor Alistair Darling's role in the crisis, revealing he had made the decision not to grant a rescue bid by Lloyds TSB.
Fintag says
Growl. 2 is a marriage, 3 is a crowd. It was doomed to fail - the FSA, Treasury and Bank of England all bucking their responsibilities.
When does Mervyn get married? Is it this weekend? Will he be in Hello!?
THE MYSTERIOUS ASSAULT ON FORTRESS
dealbook
Fortress Investment Group appears to have a hole in its castle walls. At least, that is the sense you get from its tumbling stock price.
Fortress got a lot of attention (and minted a few billionaires) in February when it became the first American hedge-fund firm to go public. But since Nov. 1, its publicly traded units have fallen almost 17 percent, a bigger drop than even Citigroup's stock has experienced over the same time period. Perhaps more perturbing is that no one seems to know why, though Reuters' DealZone blog tries to answer that question.
In general, financial stocks have declined in recent weeks amid fears that the credit markets will remain volatile and investment banks may be forced to make more write-downs.
But Fortress's drop, which has been particularly sharp, is a bit harder to explain. Reuters' Michael Flaherty notes that Fortress has made no public statements or filings lately, and no analyst has downgraded the company, which manages hedge funds and private equity funds.
Part of Fortress's sell-off may be related to concerns that private equity activity will remain sluggish. Similar worries have wiped out some market value from the Blackstone Group, another large, publicly traded buyout firm — but Blackstone, Stephen A. Schwarzman's shop, hasn't swooned as nearly as much as Fortress has.
Fintag says
IPO fever has died and now the analysts realise that the emperor has no clothes. Welcome to the world of Private Equity - opaque, made up valuations and suffering from a case of having bought companies too expensively.
A FINANCIAL CRISIS THAT BEGAN IN THE US IS COMING TO A HOME NEAR YOU
independent
No one knows where the bodies are buried. Indeed, no one is quite sure exactly how many bodies there are. But they are out there, and there are plenty of them: underperforming loans, worthless securities and overvalued assets, all safely buried well away from the banks' balance sheets. Buried - but not quite dead.
Increasingly they are surfacing, and these financial zombies are every bit as frightening as any you'll encounter in a horror flick. No less terrifying are the other ghouls haunting the global economy: oil at $97 (£46)a barrel; the price of commodities from copper to wheat at historic highs and a White House seemingly intent on scaring everyone witless with the prospect of a fresh conflagration in the Middle East.
The Governor of the Bank of England has been spooked already, telling us yesterday that: "I think most people expect that we have several more months to get through before the banks reveal all the losses that have occurred... There is always, in a period like this, the possibility that a shock from outside the UK, one from the world economy, might create further fragilities". The "fragilities" have been exposed in some of the world's biggest banks. Their bosses have been the biggest casualties, comforted only by compensation packages running into hundreds of millions of dollars - remarkable even by the standards of Wall Street.
Fintag says
No way! Us Brits are immune to all this global stuff. Long live the queen ....
Property firms warn of falling prices (independent)
COMMERCIAL PAPER FREEZE FORCED CITI TO DOUBLE SUBPRIME CDO EXPOSURE
ftalphaville
Over the worst months of the credit squall Citi was obligated to nearly double its exposure to subprime CDOs. “Agreements” meant the bank bought an extra $25bn of subprime CDO paper, at a time when the market for CDO debt was crashing.
In Citi's 10-Q filing on Monday, which you can view here, the bank repeated its weekend disclosure of $43bn in CDO super senior debt “backed primarily by subprime collateral.” The crucial point being that most of that was made up of:
...approximately $25 billion in commercial paper principally secured by super senior tranches of high grade ABS CDOs.
Commercial paper (CP) is short term debt; carrying a typical maturity of 90 days. Citi declined to comment on the issuers of the debt, but did say said the debt was taken on “over the summer”.
Commercial paper might be more familiar to most as the Achilles heel of that other credit crunch protagonist, the SIV. But forget Citi's SIVs. Trouble in the commercial paper market for CDOs is causing much more pain for Citi. Not only are CDOs loaded with subprime - unlike Citi's SIVs - but the bank also has far more significant funding commitments to them.
FT Alphaville understands that Citi has numerous agreements in place with CDOs that force the bank, as arranger, to buy CDO commercial paper if they cannot place it. That unplaceable debt has totalled $25bn so far - but there could be more.
Deep down on page 73 of Citi's 10-Q filing with the SEC on Monday, it says:
[Citi] may, along with other financial institutions, provide liquidity facilities, such as commercial paper backstop lines of credit to the VIEs. [Variable interest entities - off balance sheet vehicles Citi has an interest in].
The Company may be a party to derivative contracts with VIEs, may provide loss enhancement in the form of letters of credit and other guarantees to VIEs, may be the investment manager, and may also have an ownership interest in certain VIEs.
Most CDOs, of course, don't normally issue CP. Traditionally, CDOs issue straight tranches of rated bonds. But Citi made CDOs issuing CP good business pre-crunch. You might say that commercial paper CDOs are a scion of the SIV world - using CP issuance to supplement their normal debt issues and create a more dynamic, flexible portfolio, benefiting from low yielding CP.
But also just like SIVs, CDOs need to keep refinancing that CP to pay off upcoming redemptions. But where they differ is that CP issuing CDOs mitigate that rollover risks by using their arranging banks' as underwriters on all new CP issues. Whatever CP they can't sell, agreements are in place as backup that ensure banks will buy.
And just like with SIV CP investors, over the summer, CDO CP buyers have dried up.
Money market funds - formerly among the biggest players in the CP markets - are loathe to touch anything containing MBS.
So Citi - unable to place CP on subprime CDOs it arranged as far back as 2005, - is having to buy it instead. Right when it can least afford to do so.
Crucially we should make clear that Citi isn't necessarily being “forced” into buying that debt: not in the most literal sense of the word. The backstop “agreements” it has in place are not set in stone. It could have said no. But had it done so it may have seen CDOs default, or else a rush to sell assets to meet amortizing CP. In the event, that was evidently too ugly an option to countenance.
And Citi may only now be ruing that decision. Commercial paper is classed as “super senior” debt in CDOs, and had until October, held out as a secure tranche. But the contagion has spread right up the tree, and the rating agencies have shown now mercy for even the highest grades of debt. Super senior debt is far from secure.
Citi declined to comment.
Fintag says
I love that last sentence. So its true. What a mess.
Is it possible...that the higher-ups at Bear Stearns are smarter (and the employees dumber) than we thought, and the James Cayne all-employee memo re: smoking weed was just an elaborate plan to get people to break IT rules so Bear could fire them without coughing up the money for severance? From the text line:
Bear Stearns fired several people last week for forwarding Jimmy Cayne's memo outside the firm. The email system normally blocks messages that say internal use only in the text. These 2 dozen or so idiots thought they could just erase those words and it would go through without getting caught. This lets Bear cut more people but this time without paying severance.
Fintag says
Thank goodness these sorts of memos can be pasted into the comments section of blogs.
When are the banks going to ban the internet and get back to ticker tape and faxes?
Catdaddy
HEDGE FUND NEWS
@ Wed 07 November 2007 : GMT
fintag.com/archive/2007/11/07/
FINTAG COMMENT
The land of the free.
And it certainly feels like it. Today I fly EOS (it only has 48 seats so if you are on the plane then I'll be easy to spot - I am the one who suffers from inverted shoulder syndrome caused by Blackberry overuse. Given Goldman uses EOS as its corporate jet, I will surely pick up lots of gossip as to why Goldman is trembling at the boots of the SEC for its mark-to-goldman-pricing issues) to JFK. The USD is so low that on the US Immigration form where it asks are you bringing in USD10,000, I had to laugh. This is about the hourly wage of the GBP paid EOS pilot.
Citi goes from crisis to crisis but in the end has to turn to Hedgie experts to sort it all out.
No longer are we on the outside; we are running the show. Investment Banking is the equivalent of Teletext. Useful but outdated.
Welcome to FiNTAG. Welcome to the world of Hedge Funds; run by smart, clever, and good looking people who make money off the back of other's misfortunes (UBS, DB, Citi, Merrill, BarCap, Stanley, WestLB, ...)
THE BOSSES WHO GAMBLED AND LOST
independent
Loathing and fear continued to grip Wall Street yesterday as investors and financial sector employees struggled to understand how allegedly iron-clad institutions, including Citigroup and Merrill Lynch, fell so dramatically foul of the sub-prime mortgage fiasco announcing multi-billion-dollar write-downs.
"Wall Street wants heads," said analyst David Dreman, whose firm Dreman Value management is based in Aspen, Colorado. Shaken investors have seen two very large ones roll from top perches already - first Stan O'Neal of Merrill Lynch and on Sunday, Charles "Chuck" Prince of Citigroup - but the spectacle of their respective humiliations has been scarcely satisfying.
Healthy though it may be that even the most senior-ranking universe-masters are willing to fall on their swords, it doesn't answer how their respective banks bungled so badly in the first place, exposing themselves to such gargantuan risk with deeply complicated financial products that perhaps even their own specialists didn't understand, all built on a sub-prime lending bonanza that so quickly went sour.
Nor can anyone truly pretend that the departure of these two men will solve a great deal while so many questions still abound. How come these and other banks struggling to cope with assets turned rotten, like UBS and Bear Stearns, did not see what was coming sooner? Did they, in fact, hoodwink investors and even themselves in pretending the problems would go away? And what shoes are still to drop? UBS, Europe's fifth-largest bank that until recently was widely respected for managing the wealth of the rich, has already sent its chief executive, Peter Wuffli, packing after his steering of the bank into the mortgage-related securities business resulted in depressed results and a 21 per cent plunge in its stock price.
Still in his job is Bear Stearns CEO James Cayne, but hardly comfortably. Last week, he was stacking sand-bags around his suite at the bank's headquarters after a scathing profile in the Wall Street Journal accused him of smoking pot and goofing off at critical moments to play golf and bridge. Blaming is a game few can resist when Wall Street hits rocks with so dramatic a jolt. Not escaping either is Hank Paulson, the US Treasury Secretary, whose job it is to reassure markets when not a few analysts are recalling his tenure as head of Goldman Sachs at a time when that bank also was accumulating some $37bn of bonds backed by sub-prime loans or second mortgages....
In the line of fire
STAN O'NEAL
The head of Merrill Lynch was forced out after the investment bank ran up huge losses on its investments.
CHUCK PRINCE
The biggest casualty of the credit crisis to date, Mr Prince's long-awaited resignation was announced on Sunday.
PETER WUFFLI
A drastic fall in UBS's share price precipitated the sudden departure of the Swiss bank's chief executive.
JAMES CAYNE
The beleaguered boss of Bear Stearns has so far clung on to his job but he has become a figure of ridicule.
Fintag says
Stan the man who fired all the best people so he wouldn't look stupid.
Jimmy "Camberwell Carrot" Cayne, the man who can sleep walk walk around the world's best golf courses but needs sat-nav to find his office.
Chuckle Brother Prince, the man who wondered everyday why he had been given the top job and thought a liability was a poor choice of spouse.
And finally Peter "Useless" Wuffli who was more interested in his nice suits than his clients being sold products that were not fit for purpose.
And there are more ...
OIL RACES TO FRESH HIGH ABOVE $97
bbc
Oil prices have risen to a record high above $97 a barrel, amid concerns over tight fuel stocks and a weak US dollar.
US crude oil rose $3 to a high of $97.10 before closing at $96.70, while the price of London Brent crude climbed to a record level of $93.26 a barrel.
The price of gold also surged to a record peak of $826.40 an ounce on the weak dollar and fears of inflation spurred by the record high oil prices.
Gold is seen as a haven for investors in times of stock market uncertainty.
Gold prices later eased slightly to close at $823.40.
Fintag says
My fortune teller tells me it will be USD103 by the end of November with lots of profit taking at 100.
REDEMPTIONS HIT HEDGE FUND LOSERS
financial news
Investors removed $3.5bn (€2.4bn) from equity market neutral hedge funds in September after some of them made losses of more than 30% during the previous month, even though they are intended to move independently of the stock markets, but the overall flow of capital into the industry is set to continue.
The outflow, which is uncommon, took the capital invested in equity market neutral funds from $63.7bn to $60.2bn, according to data provider Barclayhedge.
Investors had expressed disappointment with August's performance of quantitative equity market neutral hedge funds, which rely on computers to construct their portfolios. These funds recorded heavy losses for the month to August 10, with US hedge fund manager Tykhe Capital saying one of its funds had dropped 31% in that period.
Goldman Sachs Asset Management subsequently told investors in its quantitative equity market neutral fund that, with the benefit of hindsight, it was clear managers were trying to invest too much capital using this strategy.
Fintag says
Really? And how much went in? Hello!
HEDGE FUNDS 'SHORT' MORTGAGE INDEX
financial times
An index tracking derivatives linked to US commercial mortgages suggests a grim outlook for the country's commercial property sector.
The risk premiums, or spreads, on the CMBX index have jumped as a number of macro hedge funds made large bets that the $850bn US commercial mortgage market would see problems.
They do so by shorting the CMBX index, or buying protection against default on bonds that they do not own, with the view that the commercial real estate market could face problems similar to those of the residential market.
The CMBX index references the 25 most traded commercial mortgage-backed bonds.
The value of the index, which is quoted in spread rather than price, reflects how likely investors expect the underlying deals to pay principal and interest.
One investor, Andrew Lahde, of Lahde Capital, insists defaults are going to rise significantly, driven in part by looser underwriting standards.
"If God comes down and miraculously fixes everything that is going to drive us into a deep recession, we probably still would not lose money on the CMBX trades," Mr Lahde said at the launch of a fund called Commercial Real Estate Hedge.
Fintag says
You didn't think we'd be long did you? Perhaps in a couple of years time.
CITIGROUP CALLS IN FIX-IT STUCKEY
telegraph
Citigroup has called on the man who helped the bank resolve the 1998 Long-Term Capital Management crisis to run its troubled $43bn sub-prime mortgage portfolio.
The bank, which is set to write down a further $8bn-$11bn (£3.8-£5.3bn) on the value of that portfolio in the fourth quarter,
on top of $5.9bn of writedowns and losses in the third quarter, has asked Richard Stuckey to sort out its sub-prime problems.
Mr Stuckey will head Citi's Sub-Prime Portfolio Group, a new unit wholly independent of the rest of the bank and reporting directly to acting chief executive Sir Win Bischoff.
His team, with help from Citi's head of special situations Mark Tsesarsky, will manage the bank's asset-backed securities (ABS), collateralised debt obligations (CDOs), unsold primary ABS inventory and ABS super senior exposures. He will also be able to draw on help from the bank's structured credit, securitised markets and independent risk management teams.
Mr Stuckey was the man Citi selected to represent it in the rescue of hedge fund LTCM after it collapsed in 1998 suffering from $4.6bn of losses.
He was part of a 14-man team that represented the banks that took over the fund so its liquidation wouldn't further knock the world's markets by shedding its $90bn of assets.
He was a perfect man for the job, having worked at Salomon Brothers with LTCM founder John Meriwether and partner Myron Scholes earlier in his career.
Fintag says
As a youngster, I had the task of taking on a number of distressed LTCM trades and thankfully they were realtively liquid and the risk was duly passed on without much pain.
Citi is a completely different kettle of fish. Subprime is illiquid because the packages are full of toxic waste and nobody has the time or inclination to take the risk on.
Thanks a bunch to our best buddies, the ratings agencies - who have gone very quiet recently, apart from a few downgrades, these assets are too costly to unwind.
However, it is good to see real experts running Citi now
. Hedge Fund people. Nimble, Decisive, Quick and Good Looking with 6 packs and white teeth.times says "Ben Bernanke must step over media tripwires"
GOLD RISES TO 27-YEAR HIGH ON OIL; SILVER GAINS TO 26-YEAR PEAK
bloomberg
Gold reached a 27-year high as record oil prices and a slumping dollar deepened concern that inflation will accelerate. Silver also gained to a 26-year high.
The dollar extended its slide to $1.4666, the lowest ever against the euro, boosting the appeal of precious metals as an inflation hedge or an alternative investment.
Prices of bullion, used in jewellery and as a safe haven investment when geopolitical tensions increase and inflation rises, have gained 31 percent this year, heading for the seventh straight yearly gain. The rise has helped boost shares of mining companies, including Newmont Mining Corp. and Barrick Gold Corp.
``We may see gold prices breaching the $850 level, at earliest tonight,'' said Kazuhiko Saito, strategist at Interes Capital Management Co. in Tokyo. ``It's like people are pushing gold prices toward the record.''
Fintag says
Today my solid gold Rolex Daytona rose in value. The older it gets, the more it is worth. And as for my mother's gold teeth, she has to walk around with body guards.
AFTER DEUTSCHE'S RATS, THERE'S THE UBS MICE
hereisthecity
We reported earlier this week that Deutsche Bank has a bit of a rat problem on the equities floor at its main London Wall building. We also alluded to the fact that, a few years back, UBS had a mice issue at 100 Liverpool St. Well, it seems that the UBS mice are alive and kicking, as the bank still has vermin on the premises.
Fintag says
Hello! OK!
U.S. HEDGE FUND GROUP OFFERS "SOUND PRACTICES"
reuters
A U.S. hedge fund industry group on Monday recommended ways to strengthen the $1.8 trillion (860 billion pound) industry, including guidance for funds to manage potential conflicts of interest and a list of potential questions investors can ask funds before investing.
The Managed Funds Association (MFA) developed the voluntary "sound practices" in response to the President's Working Group on Financial Markets.
In February, the inter-agency group headed by U.S. Treasury Secretary Henry Paulson called for improved market discipline and enhanced vigilance in the hedge fund industry.
The MFA list of recommendations includes a due diligence questionnaire to help investors identify the questions they should ask before investing in a hedge fund.
Hedge fund managers should establish policies relating to gifts and entertainment or any other payments that may create the appearance of impropriety to investors, the MFA said.
It also urged managers to disclose use of "soft dollar" arrangements -- where money managers pay inflated commissions to get favors such as free stock research from brokerages.
The MFA also recommended funds offer investors guidance on determining net asset value, as well as how to monitor, measure and manage risk.
Fintag says
Hedgies at it again. No longer are we the cowboys, we are now the Sheriffs.
BANK CHIEF: 'I WARNED PM ON BANK COLLAPSE'
thisismoney
Gordon Brown was dragged into the Northern Rock row today after the Bank of England revealed it had lobbied for legislation which could have prevented the crisis.
The Bank's Governor Mervyn King said he had pressed 'pretty hard' for new laws to protect investors in the event of a banking collapse and stressed the Government needed to act with 'some urgency'.
His comments raise questions about whether Mr Brown should shoulder some of the responsibility for this summer's run on Northern Rock.
It is understood the Bank of England had called for legislation when Mr Brown was still Chancellor and long before the Northern Rock disaster this September.
Mr King implied that if the Government had acted it could have prevented the first run on a bank in Britain for 150 years.
The Governor also shone the spotlight on present Chancellor Alistair Darling's role in the crisis, revealing he had made the decision not to grant a rescue bid by Lloyds TSB.
Fintag says
Growl. 2 is a marriage, 3 is a crowd. It was doomed to fail - the FSA, Treasury and Bank of England all bucking their responsibilities.
When does Mervyn get married? Is it this weekend? Will he be in Hello!?
THE MYSTERIOUS ASSAULT ON FORTRESS
dealbook
Fortress Investment Group appears to have a hole in its castle walls. At least, that is the sense you get from its tumbling stock price.
Fortress got a lot of attention (and minted a few billionaires) in February when it became the first American hedge-fund firm to go public. But since Nov. 1, its publicly traded units have fallen almost 17 percent, a bigger drop than even Citigroup's stock has experienced over the same time period. Perhaps more perturbing is that no one seems to know why, though Reuters' DealZone blog tries to answer that question.
In general, financial stocks have declined in recent weeks amid fears that the credit markets will remain volatile and investment banks may be forced to make more write-downs.
But Fortress's drop, which has been particularly sharp, is a bit harder to explain. Reuters' Michael Flaherty notes that Fortress has made no public statements or filings lately, and no analyst has downgraded the company, which manages hedge funds and private equity funds.
Part of Fortress's sell-off may be related to concerns that private equity activity will remain sluggish. Similar worries have wiped out some market value from the Blackstone Group, another large, publicly traded buyout firm — but Blackstone, Stephen A. Schwarzman's shop, hasn't swooned as nearly as much as Fortress has.
Fintag says
IPO fever has died and now the analysts realise that the emperor has no clothes. Welcome to the world of Private Equity - opaque, made up valuations and suffering from a case of having bought companies too expensively.
A FINANCIAL CRISIS THAT BEGAN IN THE US IS COMING TO A HOME NEAR YOU
independent
No one knows where the bodies are buried. Indeed, no one is quite sure exactly how many bodies there are. But they are out there, and there are plenty of them: underperforming loans, worthless securities and overvalued assets, all safely buried well away from the banks' balance sheets. Buried - but not quite dead.
Increasingly they are surfacing, and these financial zombies are every bit as frightening as any you'll encounter in a horror flick. No less terrifying are the other ghouls haunting the global economy: oil at $97 (£46)a barrel; the price of commodities from copper to wheat at historic highs and a White House seemingly intent on scaring everyone witless with the prospect of a fresh conflagration in the Middle East.
The Governor of the Bank of England has been spooked already, telling us yesterday that: "I think most people expect that we have several more months to get through before the banks reveal all the losses that have occurred... There is always, in a period like this, the possibility that a shock from outside the UK, one from the world economy, might create further fragilities". The "fragilities" have been exposed in some of the world's biggest banks. Their bosses have been the biggest casualties, comforted only by compensation packages running into hundreds of millions of dollars - remarkable even by the standards of Wall Street.
Fintag says
No way! Us Brits are immune to all this global stuff. Long live the queen ....
Property firms warn of falling prices (independent)
COMMERCIAL PAPER FREEZE FORCED CITI TO DOUBLE SUBPRIME CDO EXPOSURE
ftalphaville
Over the worst months of the credit squall Citi was obligated to nearly double its exposure to subprime CDOs. “Agreements” meant the bank bought an extra $25bn of subprime CDO paper, at a time when the market for CDO debt was crashing.
In Citi's 10-Q filing on Monday, which you can view here, the bank repeated its weekend disclosure of $43bn in CDO super senior debt “backed primarily by subprime collateral.” The crucial point being that most of that was made up of:
...approximately $25 billion in commercial paper principally secured by super senior tranches of high grade ABS CDOs.
Commercial paper (CP) is short term debt; carrying a typical maturity of 90 days. Citi declined to comment on the issuers of the debt, but did say said the debt was taken on “over the summer”.
Commercial paper might be more familiar to most as the Achilles heel of that other credit crunch protagonist, the SIV. But forget Citi's SIVs. Trouble in the commercial paper market for CDOs is causing much more pain for Citi. Not only are CDOs loaded with subprime - unlike Citi's SIVs - but the bank also has far more significant funding commitments to them.
FT Alphaville understands that Citi has numerous agreements in place with CDOs that force the bank, as arranger, to buy CDO commercial paper if they cannot place it. That unplaceable debt has totalled $25bn so far - but there could be more.
Deep down on page 73 of Citi's 10-Q filing with the SEC on Monday, it says:
[Citi] may, along with other financial institutions, provide liquidity facilities, such as commercial paper backstop lines of credit to the VIEs. [Variable interest entities - off balance sheet vehicles Citi has an interest in].
The Company may be a party to derivative contracts with VIEs, may provide loss enhancement in the form of letters of credit and other guarantees to VIEs, may be the investment manager, and may also have an ownership interest in certain VIEs.
Most CDOs, of course, don't normally issue CP. Traditionally, CDOs issue straight tranches of rated bonds. But Citi made CDOs issuing CP good business pre-crunch. You might say that commercial paper CDOs are a scion of the SIV world - using CP issuance to supplement their normal debt issues and create a more dynamic, flexible portfolio, benefiting from low yielding CP.
But also just like SIVs, CDOs need to keep refinancing that CP to pay off upcoming redemptions. But where they differ is that CP issuing CDOs mitigate that rollover risks by using their arranging banks' as underwriters on all new CP issues. Whatever CP they can't sell, agreements are in place as backup that ensure banks will buy.
And just like with SIV CP investors, over the summer, CDO CP buyers have dried up.
Money market funds - formerly among the biggest players in the CP markets - are loathe to touch anything containing MBS.
So Citi - unable to place CP on subprime CDOs it arranged as far back as 2005, - is having to buy it instead. Right when it can least afford to do so.
Crucially we should make clear that Citi isn't necessarily being “forced” into buying that debt: not in the most literal sense of the word. The backstop “agreements” it has in place are not set in stone. It could have said no. But had it done so it may have seen CDOs default, or else a rush to sell assets to meet amortizing CP. In the event, that was evidently too ugly an option to countenance.
And Citi may only now be ruing that decision. Commercial paper is classed as “super senior” debt in CDOs, and had until October, held out as a secure tranche. But the contagion has spread right up the tree, and the rating agencies have shown now mercy for even the highest grades of debt. Super senior debt is far from secure.
Citi declined to comment.
Fintag says
I love that last sentence. So its true. What a mess.
Is it possible...that the higher-ups at Bear Stearns are smarter (and the employees dumber) than we thought, and the James Cayne all-employee memo re: smoking weed was just an elaborate plan to get people to break IT rules so Bear could fire them without coughing up the money for severance? From the text line:
Bear Stearns fired several people last week for forwarding Jimmy Cayne's memo outside the firm. The email system normally blocks messages that say internal use only in the text. These 2 dozen or so idiots thought they could just erase those words and it would go through without getting caught. This lets Bear cut more people but this time without paying severance.
Fintag says
Thank goodness these sorts of memos can be pasted into the comments section of blogs.
When are the banks going to ban the internet and get back to ticker tape and faxes?
