Financial Industry 01 (Jul 08 - Aug 09)

[iam802]

A fairly long article on the risk of defaults of collateralized assets. Moody has been busy downgrading lots of things recently.

We are still 'at the tip' of the ice berg. If such assets are downgraded to such a low rating, it will be almost impossible to refinance them. And that means more defaults.

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KKR Losses Show Failure to Close Gap Raising Defaults

http://www.bloomberg.com/apps/news?pid= ... XjReT2YryA

March 13 (Bloomberg) -- Investment funds that purchased a majority of the lowest-rated loans during the credit boom have stopped buying, threatening to undermine President Obama’s plan to pull the economy out of the worst recession since 1982.

The funds, known on Wall Street as collateralized loan obligations, provided cash to movie-rental chain Blockbuster Inc., which is now exploring a bankruptcy filing, according to a person familiar with the situation. They also helped finance the $33 billion buyout of Nashville, Tennessee-based hospital operator HCA Inc.

Now, as an economic slowdown drags into the 16th month, borrowers unable to pay their debts are causing record losses for CLOs. Moody’s Investors Service put 760 of the funds, holding about $440 billion of assets, on review for downgrades on March 4. Unless policymakers decide to earmark some of the $11.6 trillion of government programs created to combat the seizure in credit markets to support high-yield loans, defaults may soar through 2012, according to investors.

“The game is over,” said Ross Heller, managing director at New York-based NewOak Capital LLC, an investment and advisory firm. “There isn’t going to be money available for refinancing. Companies will have to be put into bankruptcy and the debt restructured.”

As credit losses have climbed, issuance of so-called leveraged loans in the U.S. plummeted to $11.7 billion in January and February from $66.3 billion in the first two months of 2008 and $158.7 billion for the same period in 2007, according to data compiled by Bloomberg.

Below Investment Grade

The Federal Reserve said March 3 it may include CLOs in its bailout programs, though none of the commitments for stimulus and lending is designed to deal with loans to the neediest companies.

(802: Fed is not stupid, right? Will they really save all these or just selected quality ones?)

CLOs, a type of collateralized debt obligation, pool below investment-grade loans and slice them into securities of varying risk and return. The leveraged loans are rated below BBB- by Standard & Poor’s and less than Baa3 at Moody’s and are defaulting at a 4.5 percent rate, the fastest since November 2002, according to data from S&P’s LCD.

The S&P/LSTA U.S. Leveraged Loan 100 Index has fallen to 62.1 cents on the dollar from 100.3 cents in June 2007. The decline contributed to the $1.2 trillion of losses and writedowns by global financial institutions since the start of 2007.

Blackstone Group LP wrote down to zero the value of billions of dollars of loans it bought last year from Deutsche Bank AG, according to a person familiar with the decision.

Biggest Buyouts

Henry Kravis’s KKR Financial Holdings LLC, a publicly traded finance company whose shares have fallen 97 percent in the past year, reported a $1.2 billion loss on March 2. That included charges for loans held in its CLOs to bankrupt Chicago-based newspaper owner Tribune Co.

Kravis, his cousin George Roberts and Jerome Kohlberg started Kohlberg Kravis Roberts & Co. in 1976 and were pioneers in leveraged buyouts, where investors acquire companies mostly with borrowed money. KKR participated in the largest deals, ranging from the $31.4 billion acquisition of RJR Nabisco Inc. in 1989 to the $43 billion purchase of Dallas-based electricity producer TXU Corp. in 2007.

In 2004, Kravis and Roberts started KKR Financial to buy mortgage securities and high-yield debt, giving them the opportunity to invest in financings for new deals as the buyout boom crested in 2006 and 2007 when LBO firms made $1.4 trillion of acquisitions, according to Bloomberg data.

Market Unravels

The market began to unravel in July 2007, just as bankers tried to find investors for credit they provided in KKR’s 11.1- billion-pound ($15.6 billion) purchase of Alliance Boots Holdings Ltd., the owner of Britain’s biggest drugstore chain. Deutsche Bank AG, JPMorgan Chase & Co. and other banks were forced to delay selling 8 billion pounds of loans for the takeover, becoming the first deal frozen when credit markets started to seize up.

Lower loan prices and companies reneging on their debt agreements are causing losses on the CLO securities held by banks, insurance companies and hedge funds.

“Corporate default rates are likely to greatly exceed their historical long-term averages and reflect the heightened interdependence of credit markets in the current global economic contraction,” Moody’s analysts said in a March 4 report. The New York-based ratings company said it may downgrade 3,600 portions of 760 CLOs. The action affects $100 billion of such securities and excludes only the top-ranked portions of the funds.

While the Fed said its Term Asset Backed Securities Loan Facility, or TALF, may be expanded to CLOs, the program will first buy $200 billion of auto loans, credit cards, student loans and loans guaranteed by the Small Business Administration.

‘Next Focus’

“CLOs should be the next focus for the TALF,” said Randy Schwimmer, a senior managing director of Churchill Financial LLC in New York, a lender that also manages more than $3 billion of the debt pools. “Commercial lending needs to be supported.”

Without demand from CLOs, companies are paying higher rates for loans, Schwimmer said.

When Sirius XM Radio Inc., the New York-based satellite broadcaster, extended the maturity of $350 million of loans due in May by one year, it agreed to pay lenders a 15 percent rate, according to a regulatory filing March 6. Sirius’s $250 million revolving credit had a maximum interest cost of 5.25 percent, and the $100 million term loan paid 5.56 percent as of Sept. 30, according to a Nov. 12 filing.

Higher Returns

Investors bought CLOs because they had higher returns than similarly rated securities. The $58 million AA ranked portion of KKR Financial CLO Ltd. sold in March 2005 offered investors interest of 45 basis points more than benchmark bank rates. That compared with a spread of as little as 36 basis points for companies of the same grade, according to Merrill Lynch & Co. indexes. A basis point is 0.01 percentage point.

As cash flowed into CLOs, the funds bought almost two-thirds of the debt that financed the record $616 billion of leveraged buyouts in the first half of 2007, S&P LCD data show. Between 2002 and 2007, they accounted for 60 percent of term loan purchases, according to S&P LCD.

Until the credit markets seized up in late 2007, private equity firms, including Blackstone and Carlyle Group, formed teams to manage CLOs. They earn revenue by charging fees and buying stakes in funds they oversee.

“They opened up the buyer base and enabled leveraged finance debt to be purchased by the far-larger investment-grade universe,” said Chris Taggert, an analyst at debt research firm CreditSights Inc. in New York.

HCA Loan Sale

Demand from CLOs and other credit funds helped Georgia- Pacific LLC, a unit of Koch Industries Inc., raise a $5.25 billion term loan in January 2006. The loan is the sixth most- widely held in CLOs, JPMorgan data show.

The following November, Bank of America Corp., Merrill Lynch, JPMorgan and Citigroup Inc. sold an $8.8 billion term loan, the largest at the time, and the third-most included in CLOs, to back the HCA buyout. The hospital operator was sold to KKR, Bain Capital LLC, Merrill Lynch and Thomas Frist Jr., co- founder of the company.

CLO sales fell to $17 billion in 2008 from $100 billion in 2006, Moody’s data show, as investors refused to buy securitized debt.

A record low in loan prepayments also means that managers are getting less cash back to reinvest in new debt. Prepayments fell to 8.8 percent last year, less than a quarter of the rate a year earlier and a fifth of the average since 1997, when S&P starting tracking the data.

“The absence of new CLOs magnifies the chance companies won’t be able to refinance debt,” said Kevin Cassidy, vice president and senior credit officer at Moody’s.

Blockbuster

Blockbuster, which has a $350 million bank line maturing in August and a $352.1 million term loan due two years later, may need to file for bankruptcy, according to the person familiar with the situation. The Dallas-based company has hired law firm Kirkland & Ellis LLP for refinancing and capital-raising initiatives and doesn’t intend to file, spokeswoman Karen Raskopf said.

R.H. Donnelley Corp., a yellow-pages publisher, has “large debt maturities beginning in early 2010,” Steve Blondy, chief financial officer, said on a call with investors March 12. The Cary, North Carolina-based company planned to refinance the debt, “which may not be possible in the current capital markets,” he said.

The publisher has $2.2 billion of loans and bonds maturing through 2011, Bloomberg data show. It plans “to initiate discussions with our banks and bondholders about amending, refinancing or restructuring our debt obligations,” Blondy said.

Coming Due

About $26 billion of bank loans and bonds come due in 2009, with a further $44 billion in 2010 and $120 billion in 2011, according to Moody’s.

“The good news” is companies took advantage of cheap rates between 2004 and 2007, and that debt doesn’t need to be refinanced immediately, said Vivek Tawadey, head of credit strategy at BNP Paribas SA in London. Those risks will grow beginning in 2011, when the largest buyouts in history need to start rolling over debt, Taggert said.

Georgia-Pacific has $3.1 billion of loans maturing by 2011. HCA, which has $12 billion of bank lines maturing in 2012 and 2013, may struggle to refinance in the weakened loan market, according to Lauren Coste, an analyst at Fitch Ratings in Chicago.

James Malone, a spokesman for Atlanta-based Georgia-Pacific, declined to comment. HCA spokesman Ed Fishbough didn’t return calls.

Lost Value

A return of the CLO market is unlikely because the existing securities have lost so much value, said NewOak’s Heller, who doesn’t agree that the government should support the high-yield debt.

“CLOs created the problem of too much debt at these companies,” he said. “You need to get through it, not keep the patient on life support.”

The CLO bonds rated AA are trading at an average of 25 cents of face value, according to a March 2 report from JPMorgan.

The riskiest bonds are worth less than 10 cents on the dollar as the amount of borrowers with the lowest credit grades has increased to a record 10.8 percent from 5.7 percent at the end of the year, according to S&P.

That’s because CLOs can typically hold no more than 7.5 percent of assets rated below CCC+. After crossing that threshold, the fund has to value the assets at market prices.

Breaching Terms

With the average CCC ranked loan quoted at 36.5 cents on the dollar, 147 of 557 CLOs monitored by Wachovia Corp. are violating terms requiring a minimum amount of collateral.

Breaking these rules may force managers to shut payments off to the riskiest portions of the fund and divert cash to repay the safest bonds, Heller said.

Four of KKR’s CLOs holding about $7 billion of loans are breaching this test and paying down senior notes, according to a regulatory filing by the New York-based firm March 2. KKR spokesman Peter McKillop declined to comment.

If company downgrades to the lowest ranks reach 40 percent, managers will have to dump holdings, further depressing loan prices, according to Kyle Bass, the managing partner of Dallas- based Hayman Advisors, who made $500 million in 2007 betting on losses from subprime mortgages.

“The unintended and dangerous consequence of these defaults would be an evaporation of the CLO bid,” Bass wrote in a letter to investors this month. “Now is not the time to enter this space.”

[LenaHuat]

Warren Buffet said that Citibank would shrink considerably. After reading this very informative interview with Lehman Bro's liquidator, I am even more inclined to think that no bank would be allowed to grow 'big' ever again by regulators :-

http://www.spiegel.de/international/business/0,1518,613196,00.html

Secondly, no senior should ever be again be labelled an "OD" customer (that is old and dumb):
http://www.spiegel.de/international/germany/0,1518,613102,00.html

[millionairemind]

Published March 17, 2009

FASB proposes more leeway on mark-to-market accounting
(WASHINGTON) The Financial Accounting Standards Board (FASB), which sets US accounting rules, proposed yesterday to allow companies to exercise more judgement in determining if a market for an asset is active and if a transaction is 'distressed'.

The FASB put the proposals out for comment, with the hope of having the mark-to-market accounting guidance approved in time for companies to use it when preparing their first quarter financial reports.

Board members said the guidance could help boost fair values, or mark-to-market values, and get investors more interested in US banks.

Some US banks and lawmakers have urged regulators to ease mark-to-market accounting rules that have triggered billions of dollars in writedowns and have been blamed by some for impeding the economic recovery effort.

But investors are concerned that relaxing accounting standards could lead to financial manipulation and less reliable information in company reports.

US lawmakers last week pressured the FASB to deliver new guidance on mark- to-market accounting within three weeks, or face legislation to relax the rules.

FASB chairman Robert Herz said at a board meeting yesterday that he hopes the guidance will empower companies to use more judgement in determining the fair value of an asset.

He said companies are supposed to value the assets as if it were sold in an orderly market, instead of using a fire-sale price.

'We'll see whether this helps or not,' Mr Herz said. 'In the end, part of the problem here is we have a kind of messed-up situation underlying this.'

He said there is currently a presumption that if a company cannot prove that a market is distressed, it has to use the price from a recent transaction, which - more often than not - has been depressed.

The guidance would flip that presumption, and let companies value an asset by using more information than just the price at which a similar asset was sold in a distressed or forced transaction.

FASB board members said they are simply clarifying the latitude that already exists in fair value accounting standards. But they said current market conditions have forced the board to consider public policy when issuing guidance.

'What we're voting on right now is hopefully elevating those fair values to a reasonable point so investors are more interested in investing in the banking system,' one board member said.

The proposed guidance will have a 15-day comment period with the hope of issuing the guidance in the first week of April. -- Reuters

[iam802]

Meredith Whitney: Credit Crunch & Financials

Video here:
http://www.cnbc.com/id/15840232?video=1063364117&play=1

Key points:
1. Relaxing MTM rules not going to help

2. Bank Problems. This year will be worse than last.

[LenaHuat]

Now we know why the US cannot nationalize AIG or Citigroup
They ain't got the legislations. Now they are drafting them at both ends of Pennsylvania Avenue.
Read this http://www.cnbc.com/id/29386561

[winston]

Banks Still Pricing Toxic Assets Ridiculously High (C) by Joe Weisenthal

You'd think that quarter after quarter of writedowns, bank balance sheets would begin to resemble some kind of reality. Alas, no.

Despite what you hear about mark-to-market forcing the banks to write down assets to ridiculous, nuclear winter levels, the reality is anything but.

A recent report from Goldman Sachs, obtained by Zero Hedge, indicates that the majority of bank holdings are still priced between $.90-$.95 on the dollar.

Citigroup (C) is a particularly egregious offender, notes the Goldman report, though by and large they're all in lala land. It's more evidence, as Henry Blodget just noted, that when all is said and done, this new bailout scheme will bankrupt the banks. On the other hand, as John Hempton has argued: This is okay, because at least we'll now be using an orderly, objective manner to determine bank solvency, rather than an arbitrary one.

http://www.businessinsider.com/banks-st ... igh-2009-3

[winston]

Citigroup Says Buy Bank Puts Because Rally Will Fade (Update1) By Jeff Kearns

March 31 (Bloomberg) -- Investors should buy put options on financial companies because derivatives-market trading suggests the industry will retreat after a 43 percent surge since March 6, Citigroup Inc. said.

“Despite the rally, credit and option markets are pricing in increased downside risk,” New York-based Citigroup strategist Alvin Wang wrote in a note sent to clients today.

He recommended puts giving the right to sell the Financial Select Sector SPDR Fund, an exchange-traded fund that tracks a basket of bank stocks, for $8 before May 15. The XLF, as the ETF is known, added 5.5 percent to $8.81 in New York, bringing its gain since March 6 to 43 percent. The May $8 puts fell 25 percent to 70 cents today.

The difference between prices for bullish and bearish options, known to options traders as “skew,” and prices for credit-default swaps, which are used to protect against a default on a company’s debt, both show that investors expect the XLF to reverse gains, the strategist wrote.

Put prices rose 35 percent relative to call prices this month, even as the XLF added almost 10 percent before today, the strategist said. That means investors are paying more to use options as protection against a decline at the same time as the ETF’s share price is rising.

“This is an interesting reversal,” Wang wrote. “The higher the spread is, the more premium investors are placing on downside protection.”

The XLF hasn’t closed below $8 since March 11. The basket of shares is still down 30 percent this year.

Options are derivatives that give the right to buy or sell a security at a set price and date. Puts give the right to sell and calls convey the right to buy. Credit-default swaps, used to hedge against losses or to speculate on a company’s ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.

[iam802]

Lenders Struggle to Find Cash to Quench Growing Demand for Refinancing

http://www.washingtonpost.com/wp-dyn/co ... id=topnews

Now that mortgage refinancing is popular again, one big concern is that there won't be enough money to keep up with the demand.

Mortgage bankers say the money they borrow to finance home loans -- called warehouse lines of credit -- has dried up and that borrowers may pay the price in artificially inflated interest rates and maddening delays in loan closings.

Interest rates are at record lows. The average on a 30-year, fixed-rate mortgage fell to 4.61 percent for the week ended March 27, according to a survey released yesterday by the Mortgage Bankers Association. But many capital-starved bankers said rates could be 0.25 to 0.75 percentage points lower if they had better access to warehouse lines.

These credit lines provide bankers who are not licensed to take deposits with the money they need to close a mortgage. The bankers then pay down the credit line after the mortgage is sold to Fannie Mae, Freddie Mac or other investors.

But the amount of available credit has plummeted to about $25 billion from $200 billion a year ago, according to the mortgage bankers group. Many of the large financial institutions that extend credit to the bankers have left the business, imposed tough restrictions or capped existing lines as they try to shore up their own capital. In the past few weeks, National City Bank, J.P. Morgan Chase and Guaranty Bank have announced plans to end warehouse lending.

Mortgage bankers say the supply of money available to them is shrinking just as demand for loans is taking off, blunting the Obama administration's efforts to loosen consumer lending. Last week, loan applications were up 3 percent from the previous week and almost 69 percent compared with the previous year, the mortgage bankers' survey found.

"When demand outstrips supply, lenders manage that by raising rates" or slowing the pace of lending, said John Courson, chief executive of the mortgage bankers group. "The end result is that borrowers are not enjoying the full benefit of these lower rates."

Mahesh Swaminathan, an analyst at Credit Suisse, said he agrees that lending volume might be higher and loans might be processed more quickly if there were no credit-line problems. "But at the same time, it is not the case that activity is stalling because of that," Swaminathan said.

The new mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae totaled $172 billion in March and could reach nearly $200 billion by June, he said. That's more than the monthly high of $190 billion in 2003, suggesting that lending activity is robust, driven mostly by refinancing.

Still, some borrowers are watching their mortgage deals fall apart at the last minute. For instance, Greystone Financial's sole warehouse line was pulled in February. The Las Vegas company has shut down its operations in the District and 17 states, including Maryland and Virginia.

"We had 500 loans in the pipeline, and we had 30 loans that were signed and ready to go, but we could not fund them," said Michael Sweeney, Greystone's chief executive. "It caused a tremendous amount of headaches for the buyers, and we're not sure how much longer we can continue doing business this way."

The Warehouse Lending Project, a coalition of independent mortgage bankers, and the mortgage bankers association are working with the regulator that oversees Fannie Mae and Freddie Mac to devise a plan to bolster warehouse lending.

That regulator, the Federal Housing Finance Agency, said in a statement that it is aware of the effects of the decline in warehouse lending and that it has met with industry and administration officials to "try to develop solutions."

The warehouse-lending coalition estimates that non-depository banks supply roughly 40 percent of loans and contends that the mortgage market would suffer if they went out of business.

"Think about it: If all of a sudden there was a big demand for gasoline and 40 percent of the gas stations went out of business, you'd have chaos and disruption and higher prices. That's the situation we're drifting toward in the lending arena," said Glen Corso, a principal at the Warehouse Lending Project.

[blid2def]

Bill Moyers Journal - Interview with Bill Black (William K. Black)

Bill Moyers interviews Bill Black, the former Director of the Institute for Fraud Prevention. He now teaches Economics and Law at the University of Missouri, Kansas City. He's the author of the book: "The Best Way to Rob a Bank Is to Own One."

Erm... watch it just to get an alternative opinion, especially if you mainly rely on the mainstream media for news, information and facts.

Transcript and video here:
- http://www.pbs.org/moyers/journal/04032009/watch.html

[winston]

Mayo Gives Banks ‘Underweight’ Rating on Loan Losses By Michael J. Moore

April 6 (Bloomberg) -- CLSA analyst Mike Mayo assigned an “underweight” rating to U.S. banks, saying loan losses may exceed Great Depression levels and the government may be forced to take over large lenders.

Financial shares and major U.S. stock indexes dropped after Mayo advised clients to sell banks including Winston-Salem, North Carolina-based BB&T Corp. and Cincinnati’s Fifth Third Bancorp. Mayo said in a report today that he assigned “underperform” ratings to Bank of America Corp. and JPMorgan Chase & Co., the two biggest U.S. banks by assets.

“While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class,” said Mayo, who joined CLSA from Deutsche Bank AG last month. “New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.”

The 46-year-old Mayo gained recognition in 1999 at Credit Suisse AG for correctly taking a bearish stance on bank stocks when other analysts remained bullish. After being fired from Credit Suisse, he joined Prudential Equity Group in 2001, where he earned a reputation for criticizing investors and companies who tried to curb objective analysis. At Deutsche, Mayo had “sell” or “hold” ratings on all 18 companies he covered, according to data compiled by Bloomberg.

Shares Decline

Bank of America, based in Charlotte, North Carolina, fell 12 cents, or 1.6 percent, to $7.48 at 4:06 p.m. in New York Stock Exchange composite trading. New York-based JPMorgan dropped $1.08, or 3.7 percent, to $28.20. The KBW Bank Index lost 3.8 percent, the first decline in five days.

Nationalization of banks remains a possibility because government policy remains unclear, Mayo said on a conference call after releasing his report.

Existing government efforts aimed at boosting bank capital don’t “preclude regulators from taking harsher action,” Mayo said. “I don’t want to be a partner with the government in investing in bank stocks.”

Mayo said he expects loan losses to increase to 3.5 percent, and as high as 5.5 percent in a stress scenario, by the end of 2010. The highest level of loan losses in the Great Depression was 3.4 percent in 1934, according to the report. Mayo’s estimate matches the prediction he made on March 10 for Frankfurt-based Deutsche Bank.

Mortgage Losses

Mortgage-related losses are about halfway to their peak, while credit-card and consumer losses are only a third of the way to their expected highest levels, according to Mayo, who declined to comment beyond the report. CLSA is an affiliate of New York-based Calyon Securities.

The nation’s largest banks may be transitioning from a financial crisis marked by writedowns of capital to an economic crisis featuring large loan losses, Mayo wrote. The U.S. government cannot provide much relief because its actions will lead to either banks having to raise new capital or toxic assets remaining on banks’ balance sheets, Mayo wrote.

Mayo said solutions to the banking crisis will take time, as the increase in risk happened over a decade or more.

CLSA’s underperform rating reflects the expectation that the stock will underperform the local market by 0 to 10 percent, while a sell rating expects it to fare worse by more than 10 percent, according to the report.

Seven Deadly Sins

Mayo said banks engaged in “seven deadly sins”: greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators. Mayo’s “underweight” rating applies to the entire sector.

Meredith Whitney, who left Oppenheimer & Co. in February to found Meredith Whitney Advisory Group LLC, said in a Forbes interview that banks will continue to write down their mortgage assets as home prices decline further than lenders expected. Home prices are not done falling and will ultimately drop 50 percent from their peak, Whitney said today in a CNBC interview.

The unemployment rate also has exceeded banks’ projections and could lead to further loan losses, Whitney told Forbes. Banks “by and large” will show profits in the first quarter before provisions for loan losses, Whitney said on CNBC.