US - Subprime

[Chiron]

My current portfolio only consists of some shorts in US market. Like you, Lena, I am also waiting patiently (not easy to be doing nothing though, still learning) for Mr Market to give me the clear signal.

cheers

[Chiron]

Lena,

Some major shorts going on.... NYSE short interest ratio at 15.35.... all time 5 year high... At the start of the January bloodletting, it was only around 10....

Somebody or some groups with massive financial muscles knows something I don't and shorting the hell out of NYSE... and that scares a small fry like me

Cheers,
mm

Hi MM, based on historical data of the short interest to NYSE movement, does it means that there is a high probability that NYSE will drop significantly in the coming days, weeks?

Thanxs

Hi MM, pls ignore my request. Have found the answer to it in your reply in another thread.

thanxs

[LenaHuat]

Looks like our anticipations are coming true
Read in CNA a msg to this effect : This is a MAD DOW.
Maybe I shld go back to enjoying TV on my new HD set.

[millionairemind]

And the Rabbit hole goes deeper..

MBIA's GIC Exposure Could Trigger a Liquidity Crisis
by: Whitney Tilson posted on: June 28, 2008 | about stocks: MBI

MBIA was down 26% this week -- and I'm surprised it wasn't more, given the news last Thursday and Friday.

In Bill Ackman's presentation last Wednesday (which is posted at www.valueinvestingcongress.com), he revealed an area of exposure for many of the bond insurers that I hadn't previously been aware of: Guaranteed Investment Contracts (GICs). I knew MBIA had an investment management division that sold GICs, but didn't fully understand their structure and how toxic this business can be in the event of a downgrade. It's really quite ironic that everyone (myself included) has been so focused on the company's structured finance exposure, but something out of left field like GICs might be what triggers a liquidity crisis that takes the company under.

Allow me to explain what a GIC is. Let's say a municipality like Wichita does a $100 million bond offering to build some schools (or bridges or whatever). Immediately after the offering, it has $100 million in the bank, but it doesn't need all of the money up front. Instead, as the schools are built, it pays the costs over time -- let's say $25 million per year.

MBIA (and many other bond insurers) of course have relationships with countless municipalities, so they set up investment management divisions to tap these relationships and help municipalities invest the money they raised so they could earn some extra return. (In many cases, the bond insurer offers a package deal in which it wraps the bonds and also invests the proceeds -- possible illegal tying, but that's another story.) The produce the bond insurers sold to the munitipalities was a guaranteed investment contract, which was of course marketed as 100% safe, secure, liquid, triple-A, blah, blah, blah (you see where this story's going, don't you? Think auction rate securities...).

A GIC would typically be structured to pay out over time -- in the case of the example above, Wichita would give MBIA the $100 million it had just raised and in return MBIA Asset Management would give Wichita a GIC that promised to pay out $25 million per year plus interest a tiny bit higher than what Wichita could have earned by putting it in Treasuries. MBIA Asset Management (part of the publicly traded holding company) would, in turn, have MBIA's insurance sub provide 100% financing, taking advantage of its AAA rating (and taking all of the risk; more non-arm's-length dealings...), and the MBIA holding company would simply pocket the spread. Finally, MBIA would invest the money in various securities, attempting to match their duration with the expected payout timetables of the GICs.

A nice feature of this set-up for MBIA was that it sold a steadily increasing amount of GICs, so it could pay off maturing GICs with incoming cash from new GICs -- not a Ponzi scheme, because there are assets backing it up, but the liquidity characteristics of the GIC business allowed MBIA, if it wanted (or if it got sloppy or greedy), to invest the GIC assets in illiquid and/or long-dated securities.

This was a wonderful business for everyone as long as markets were tranquil, assets were liquid and held their value, MBIA's customers continued to buy new GICs and, critically, MBIA maintained its AAA rating. None of these things are true today, however.

In particular, many GICs have a clause that says if MBIA is downgraded, it had to immediately repay or post "eligible collateral" on most or all of the GIC. Sure enough, MBIA was downgraded five notches by Moody's last Thursday and, as a result, on Friday after the close, MBIA released the following statement:

As a result of the downgrade to A2, MBIA expects that it will require $2.9 billion to satisfy potential termination payments under Guaranteed Investment Contracts (GICs). In addition, MBIA expects to be required to post approximately $4.5 billion in eligible collateral to satisfy potential collateral posting requirements under GIC's as a result of the downgrade. MBIA Inc. has total assets of $25 billion related to its ALM business, of which $15.2 billion is available to satisfy these requirements including approximately $4.0 billion in cash and liquid short-term investments; $1.0 billion of unpledged eligible collateral on hand; and approximately $10.2 billion of other unpledged diversified securities with an average rating of Double-A. In addition, MBIA Inc. also has available another $1.4 billion in cash, including the proceeds of its recent equity offering.

Translation: "Contrary to everything we've ever said about no accelerating liabilities in any part of our business, we now have to immediately come up with $7.4 billion of cash and eligible collateral (U.S Treasury or agency securities, with appropriate haircuts -- roughly 5%). But don't worry, we have $25 billion of assets..."

$25 billion of assets to cover $7.4 billion of liabilities sounds reassuring -- perhaps that's why the stock was up on the open Monday (giving us the opportunity to short more) -- but in reality MBIA is in big trouble because it never expected to have to come up with huge amounts of cash on short notice. Here's why:

When MBIA says that it has "$15.2 billion is available to satisfy these requirements", it means that $9.8 billion of its ALM (Asset/Liability Management) business assets are already collateralized. And there's not really $15.2 billion left to meet the collateral call -- that's based on MBIA's cost, but according to MBIA's own filings, this was impaired by $1.4 billion as of 3/31 -- and the actual impairment today is surely much greater, for two reasons: 1) prices of these securities have declined this quarter and 2) the estimated values are based on an orderly sale, not a rushed sale to meet a collateral call (speaking of which, I spoke with a senior fixed income trader today who said there are lots of sellers but absolutely no buyers for fixed income securities, as financial firms are looking to reduce their holdings going into the close of the quarter).

In reality, as MBIA admits in its press release, it has only $5 billion in cash or cash equivalents in its ALM business, plus the $1.4 billion recently raised by the holding company (no wonder it didn't downstream the $900 million!), so it needs to come up with another $1 billion from the "approximately $10.2 billion of other unpledged diversified securities with an average rating of Double-A" -- not an easy thing to do in this ghastly market.

Can MBIA come up with the $7.4 billion it needs to pay off a lucky subset of its creditors? Sure, but only by pledging all of its cash and selling its best, most liquid securities, which is exactly what it's doing right now according to the article below that just came out on the WSJ web site. But what about all of its other creditors -- the holders of GICs and medium term notes that come due next month (and the month after that and the month after that) -- which are secured by increasingly low-quality, illiquid assets?

This is the kind of liquidity crunch that has led many financial companies to file for bankruptcy. If MBIA were to do so, it would obviously wipe out the equity, but it would at least treat all creditors fairly rather than early ones getting paid in full and later ones left holding the bag (this is the same issue that exists for policyholders at MBIA's insurance sub as well, by the way).

When MBIA finally sinks beneath the waves, its management, board, analysts and defenders will surely cry that no-one could have predicted this perfect storm, yada, yada, yada, but in fact Bill Ackman spelled it all out five and a half years ago in 66 pages of excruciating detail in his original presentation on MBIA, Is MBIA Triple A? (attached), in which he concluded:

A two-notch downgrade could have catastrophic consequences for the company. It would likely create problems for the renewal of MBIA’s SPV commercial paper. It might also cause a reduction in the value of all of MBIA’s wrapped obligations including all of Triple-A One’s assets. The decline in values of these assets, in turn, could trigger covenant defaults in the SPV’s liquidity facilities, further exacerbating its immediate liquidity crisis.

Additionally, Moody’s reports that MBIA’s ISDA documentation contains increasing collateral requirements in the event of a downgrade of the company. The company’s municipal GIC portfolio also has rating downgrade triggers. Perhaps most significantly, a downgrade could shut off a material percentage of the company’s cash flow, for MBIA may be unable to write new premium without a AAA rating.

A Barclays Capital research report which is available on MBIA’s website explains:

Spiraling down…down…and down?

In the event of a financial guarantor being downgraded, will a vicious circle lead to rapid rating deterioration and potential bankruptcy? This is a much-debated question in that a financial guarantor who relies on its credit ratings for its business franchise could face a rapid decline in new business in the event of a downgrade, which could precipitate further downgrades.

It appears to us that an actual or perceived downgrade of MBIA would have draconian consequences to the company and create substantial drains on the company’s liquidity. The self-reinforcing and circular nature of the company’s exposures makes it, we believe, a poor candidate for a AAA rating.

In light of MBIA’s enormous leverage, the company’s credit quality, underwriting, transparency, accounting, and track record must be beyond reproach. The company can simply not afford any significant risk of loss in its nearly $500 billion of net par exposure, for a mere 20 to 35 basis points loss would equate to levels sufficient to cause a rating agency downgrade of the company. In addition, and as importantly, the company must have minimal liquidity risk. Based on our research, we conclude that MBIA fails to meet these standards.

The irony is that if MBIA had listened to him -- even as recently as two years ago! -- the company would probably be doing fine right now. Instead, it chose to ignore and attack him (and, full disclosure, me as well, to a much lesser extent), so forgive me for feeling a bit of Schadenfreude.

Disclosure: Author manages funds that are short MBIA

[millionairemind]

This Wee guy is good. When he talks, I listen

Sub-prime will take 1-2 years to sort out: Wee
UOB head calls it the worst crisis he has seen in 48 years

By JOYCE HOOI

FOR those caught up in the sub-prime crisis, the light at the end of the tunnel is going to take one to two years to emerge, according to United Overseas Bank (UOB) chairman Wee Cho Yaw.

Mr Wee: Received an Honorary Doctor of Letters degree from NUS yesterday for his accomplishments

Mr Wee spoke at the start of the National University of Singapore (NUS) Commencement 2008 yesterday, during which he received an Honorary Doctor of Letters degree from the university.

The honorary title was conferred in recognition of his accomplishments in the banking, education and community leadership areas.

Mr Wee had strong words about the current financial crisis and the myopic nature of the players in the financial industry.

'During these past 48 years, I have seen many economic crises, but I believe that this current financial crisis is the worst I have encountered.

'As I see it, the crux of the problem lies in the transformation of the financial industry and a corporate culture that encourages financial players to focus on short-term gain.

'I am very concerned about the current situation. I hope I am wrong, but my view is that this crisis will take one to two years to stabilise,' he said.

Mr Wee also pointed out the ambiguous extent of the fallout from exotic lending instruments.

'According to media reports, financial institutions have written down close to US$400 billion so far. But this is what frightens me most - no one can tell me how much more will be written off because no one really knows the size of the collaterised debt obligations (CDO) market before its collapse,' he said.

According to him, a tighter rein is needed to ensure recovery.

'The liquidity crunch can only be resolved by concerted efforts of the world's major central banks.

'Regulators around the world will also need to take steps to ensure close supervision of financial institutions and the exotic trades that have sprung up over the past decade,' he said.

Yesterday was the first of a series of commencement ceremonies being held for NUS's graduating class of 2008, which will continue until July 15.

It was presided over by the university's chancellor, President S R Nathan, and the commencement address was given by Professor Shih Choon Fong, the president of NUS.

Also present was Dr Ng Eng Hen, Minister for Education.

[winston]

<<< UOB head calls it the worst crisis he has seen in 48 years >>>

Much worst than the Asian Financial Crisis ??

Maybe we can compare how the price of UOB plunged during the AFC versus now and then we can say which is worse.

[millionairemind]

W,

Maybe it has been 10years since the AFC so the recency effect has taken place?

Or perhaps there is more than meets the eye? A subtle warning?

mm

[millionairemind]

Since nobdoy here trades Freddie Mac and Fannie Mae, I tot I post this under the Subprime thread.

Freddie Mac, Fannie Mae Plunge on Capital Concerns (Update4)

July 7 (Bloomberg) -- Freddie Mac and Fannie Mae fell to the lowest in 13 years in New York Stock Exchange composite trading as concerns grew the two largest U.S. mortgage-finance companies may need to raise more capital to overcome writedowns and satisfy new accounting rules.

Freddie Mac fell 18 percent and Fannie Mae dropped 16 percent after Lehman Brothers Holdings Inc. analysts said in a report today that an accounting change may force them to raise a combined $75 billion. Speculation that the companies may take further writedowns also weighed on the stock, said John Tierney, a credit strategist at Deutsche Bank AG in New York.

``There's a lot of apprehension about writedowns,'' Tierney said. ``If they have writedowns, they have to raise capital. How much do they raise and how easily can they do that? Those are the questions that everybody is asking.''

Fannie Mae and Freddie Mac have declined more than 60 percent this year, with declines accelerating in the past two weeks, on concern the companies' capital raisings since December may not be enough to overcome writedowns. Washington-based Fannie Mae so far has raised $6 billion in capital to offset writedowns on mortgages it owns or guarantees. Freddie Mac, based in McLean, Virginia, raised $13.5 billion since December and said last week plans to add $5.5 billion probably won't be fulfilled until late next month.

Growing Delinquencies

Freddie Mac fell $2.59 to $11.91 after earlier dropping as low as $10.28. Fannie Mae declined $3.04 to $15.74 and earlier fell to $14.65.

The new FAS 140 rule that seeks to stop companies keeping assets in off-balance sheet entities may force Fannie Mae and Freddie Mac to bring mortgages back onto their books, requiring them to put up capital, Lehman analysts led by Bruce Harting wrote in a note to clients today.

Fannie Mae would need to add $46 billion of capital and Freddie Mac would need about $29 billion, the Lehman analysts wrote.

The companies will probably get an exemption from the rule because it would be ``very difficult'' for them to raise that amount of capital, the analysts said.

Fannie Mae and Freddie Mac, ``have been battered every single trading session,'' said Quincy Krosby, chief investment strategist for The Hartford, which manages $380 billion in Hartford, Connecticut. ``At some point they're going to stabilize.''

`Apprehension'

As mortgage delinquencies grow at a record pace, the companies likely will take further losses, Tierney said. Banks repossessed twice as many homes in May as they did a year ago and foreclosure filings rose 48 percent, according to RealtyTrac Inc., a real estate database in Irvine, California. Home prices in 20 U.S. metropolitan areas fell 15.3 percent in April by the most on record, S&P/Case-Shiller home-price index.

``There's probably an accumulation of events today that has focused investor selling,'' said Christopher Sullivan, who oversees $1.3 billion as chief investment officer at United Nations Federal Credit Union in New York.

Fannie Mae and Freddie Mac were both trading at more than $60 as recently as October as they distanced themselves from accounting frauds that caused more than $11 billion of restatements. Then defaults on subprime mortgages caused the credit markets to seize up and credit losses to rise. The companies, which own or guarantee almost half of the $12 trillion in U.S. residential mortgages, were so integral to boosting the housing market that Congress lifted restrictions on their buying power to help revive the economy.

Agency Spreads
``The provision discussed by Lehman could have an effect on our ability to serve the housing mission,'' Freddie Mac spokeswoman Sharon McHale said. ``We would hope FASB would take into account our mission'' when it writes the final rule, McHale said.

Brian Faith, a Fannie Mae spokesman, declined to comment.

Yields on agency mortgage securities relative to U.S. Treasuries rose to the highest since March 13 on concern that banks may need to sell off the debt.

Bank of America Corp., the second-largest U.S. bank, may sell mortgage assets after buying Countrywide Financial Corp., Kenneth Hackel, the managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in a note to clients.

``Balance sheets are constrained,'' Hackel said, referring to agency mortgage bonds. Bank of America spokesman Scott Silvestri declined to comment.

The difference between yields on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened 7 basis points, to 204 basis points. The spread has climbed 18 basis points since June 18.

Freddie Mac, the second-largest U.S. mortgage-finance company, said it's ``unlikely'' to raise capital until after reporting second-quarter earnings next month.

Capital-Raising Delay

Executives told investors in May that the company would obtain $5.5 billion in additional reserves by ``mid-year,'' after registering its common stock with the Securities and Exchange Commission.

The cost to protect the subordinated debt of Fannie Mae and Freddie Mac rose to the highest since March 17, according to CMA Datavision in London. Credit-default swaps tied to debt of Freddie Mac and Fannie Mae rose 18 basis points to 195 basis points, indicating deteriorating perceptions about the companies' credit quality, CMA data show.

`Catching Up'

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Fannie Mae contracts closed at a record 260 basis points on March 13, according to CMA prices. Freddie Mac contracts reached 263 basis points on the same day.

``The stock market has just recently been catching up with the risk perceptions of the bond market,'' James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York.

[winston]

Or perhaps there is more than meets the eye? A subtle warning?

Yes, I am already looking at which puts to buy on UOB

[millionairemind]

It's alive!!! Reincarnation does exists!

Toxic CDOs Given Up for Dead Coming to Life With Pension Funds

By Jody Shenn

July 8 (Bloomberg) -- CDOs are back.

Collateralized debt obligations that helped drive banks to $400 billion of writedowns and credit losses are finding buyers under a different name: Re-Remics.

Goldman Sachs Group Inc., JPMorgan Chase & Co. and at least six other firms are repackaging unwanted mortgage bonds as sales of CDOs composed of asset-backed securities fall to less than $1 billion this year from $227 billion in 2007 because of the global credit crunch. Re-Remics contain parts that are structured to guard against higher losses on underlying loans than most CDOs, allowing holders to sell or retain other sections at lower prices that can translate to potential yields of more than 20 percent.

``It's just the reincarnation of the CDO,'' said Paul Colonna, who manages more than $100 billion as chief investment officer for fixed income at GE Asset Management in Stamford, Connecticut. ``The mechanics are the same, but you're getting in at a much different level of valuation.''

GE Asset Management has considered buying the debt, Colonna said. The General Electric Co. unit may also have Re-Remics made out of bonds it owns if disposing of the riskier pieces boosts the securities' overall value.

Re-Remic stands for ``resecuritizations of real estate mortgage investment conduits,'' the formal name of mortgage bonds. Sales of the securities may help revive the market for new home-loan debt, according to Bernard Maas, an analyst in New York at credit-rating firm DBRS Ltd.

`Look to Restart'

``The hope is that by moving illiquid bonds to interested parties, the structured-finance community can look to restart,'' he said.

More than $9.3 billion of Re-Remics were created in the first five months of 2008, almost triple a year ago, according to Inside MBS & ABS. The debt represented 47 percent of mortgage bonds issued in the period, excluding those guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

A record $25 billion of Re-Remics were formed in 2007, the newsletter said. Sales in 2008 may exceed that, according to Sharon Greenberg, a Barclays Capital analyst in New York.

Unlike most CDOS, Re-Remics don't own debt or credit-default swaps based on the lowest-ranking subprime mortgage-bond classes. They are composed of AAA rated bonds backed by so-called Alt-A mortgages, issued to borrowers with higher credit scores who don't prove their incomes, seek higher debt ratios or buy investment properties.

Few Bonds

While CDOs are backed by more than a hundred bonds, Re- Remics typically combine fewer than a dozen, allowing holders to more easily analyze the debt.

Holders of mortgage bonds use Re-Remics to separate better- quality from riskier debt. That increases the chance the higher- ranked debt will retain its AAA rating, enhancing its value enough to boost the total worth of the mortgage pool, said Doug Dachille, chief executive officer of New York-based First Principles Capital Management LLC, which oversees $7 billion in fixed-income investments.

Lower-ranked pieces of the Re-Remics would be the first to record losses from defaults on the underlying mortgages, once lower-ranking bonds from the initial deals are wiped out, Dachille said.

A bond trading at 40 cents on the dollar could be split into a piece worth 80 cents and another piece that could then be sold cheaply enough to offer returns as high as 20 percent, Dachille said. Banks advised by First Principles bought lower-yielding senior pieces and some are also considering buying the bonds for their pension funds, he said. The firm is also starting a fund for pension clients that would invest in the debt, Dachille said.

`Credit Support'

``A lot of the stuff they wouldn't buy without the additional credit support,'' he said. ``They're happy with the 7.5 percent return. They just wanted greater certainty that they're going to get that 7.5 percent return.''

Transamerica Life Insurance Co., a unit of the Hague-based Aegon NV, is among holders of Re-Remics created this year by Lehman Brothers Holdings Inc., according to data compiled by Bloomberg. Reliance Standard Life Insurance Co., a unit of Wilmington, Delaware-based Delphi Financial Group Inc., owns a Re-Remic created by Countrywide Financial Corp., the data show. Cindy Nodorft, an Aegon spokeswoman, declined to comment. Bernard Kilkelly, a spokesman at Delphi, didn't return a message.

``It's one of the few cases where re-securitization actually increases, rather than destroys, value,'' said Scott Simon, head of mortgage-backed bonds at Pacific Investment Management Co. He wouldn't disclose whether the Newport Beach, California-based firm, the world's largest fixed-income manager, has bought the debt or used Re-Remics to repackage debt held by its funds.

$370 Billion

Commercial banks and savings-and-loans held more than $370 billion of non-agency mortgage bonds on March 31, according to Federal Deposit Insurance Corp. data. Much of that can only be sold at fire-sale prices after record subprime-mortgage defaults and home-price declines sparked losses on the underlying loans.

``This is an attempt to shake things up,'' said Scott Kirby, who manages about $20 billion of structured-finance securities at Ameriprise Financial Inc.'s RiverSource Investments LLC in Minneapolis. ``There's a lot of paper floating around that's having difficulty finding a home.''

CDOs, once the fastest-growing part of the debt markets, tumbled to zero cents on the dollar and credit ratings on some AAA pieces were cut to junk levels.

Goldman Sachs, based in New York, had about $15 billion of residential-mortgage securities on its books as of May 30, Chief Financial Officer David Viniar said on a conference call last month. New York-based JPMorgan's investment bank had $12.8 billion of prime and Alt-A securities as of March 31, according to an investor presentation in April. Lehman had $15 billion of home-loan assets as of May 30, CFO Ian Lowitt said on a conference call last month.

Restructuring Needed

``There are ample bonds that would fit the description of needing restructuring,'' Greenberg, the Barclays analyst, said.

Banks can increase the total credit quality of their assets by selling off lower-rated pieces and keeping the better part, Matthew Jozoff, an analyst at JPMorgan said. Avoiding downgrades also would prevent the banks from having to hold more capital to protect against losses on the debt.

Goldman spokesman Michael Duvally, JPMorgan spokeswoman Tasha Pelio and Lehman spokesman Mark Lane declined to comment.

Riskier Re-Remic mortgage securities are ``natural fit'' for hedge funds, according to a June 27 report by JPMorgan's Jozoff and John Sim. The debt offers higher potential yields at a time when it's difficult to borrow to boost returns, they wrote.

Re-Remics have repackaged so-called non-agency mortgage securities, which lack explicit or implied government guarantees, for at least 15 years. Re-securitizations of agency mortgage bonds date to the mid-1980s under First Boston's Laurence Fink, now chief executive officer of BlackRock Inc., and Lewis Ranieri of Salomon Brothers, now chairman of Ranieri & Co., Franklin Bank Corp. and Root Markets Inc.

Today's Re-Remics are ``an opportunity for dealers to find liquidity and to move bonds out of their inventory,'' said DBRS's Maas.