US - Subprime

[mojo_]

$1 trillion in losses? Bank on more

Wall Street should not be surprised to see pain in the financial sector linger on for much longer.

By Paul R. La Monica, CNNMoney.com editor at large
Last Updated: August 8, 2008: 11:41 AM EDT

NEW YORK (CNNMoney.com) -- Make no mistake: The worst probably is not over for financial firms. Not by a long shot.

Many bank stocks have bounced sharply from their panic-induced lows of mid-July on hopes that the bleak second-quarter results represented the bottom.

But the bigger-than-expected losses reported by Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM, Fortune 500) this week, accompanied by dismal forecasts for the housing market, are strong indicators that there are likely more credit-related woes to come.

"The banks are still at the mercy of writedowns. I don't think the worst is over for financials yet," said Liz Ann Sonders, chief investment strategist with Charles Schwab & Co.

The International Monetary Fund forecasts that global losses tied to the credit crisis will be $945 billion. It's a widely used number, but Sonders thinks it's "potentially very conservative."

So how high could losses go? Sonders points to the $1.6 trillion forecast from hedge fund firm Bridgewater Associates or even the $2 trillion number from Nouriel Roubini, the highly-respected professor of economics at NYU's Stern School of Business.

And based on the losses already reported, we're not even halfway through the crisis.

But as scary as those predictions sound, it's actually somewhat healthy to see forecasts of bigger losses. Sonders said that at some point, the market will probably even begin to discount the fact that there are more losses ahead. They key is that investors have to expect them in the first place.

The biggest problem that the market has had to grapple with this year is that investors can't believe the numbers that banks are reporting.

We've been fooled a couple of times into thinking that banks finally had gotten the bulk of their most toxic loans off their balance sheets.

So instead of this death by a thousand cuts, we might just need a big bloodletting in the banking system.

As bad as this financial crisis seems right now, only eight banks have failed so far this year. That pales in comparison to the 534 that collapsed in 1989 - the height of the savings and loan debacle.

With that in mind, some think the Federal Reserve is perpetuating the problem in banking by keeping interest rates as low as they are. The Fed held its key benchmark fed funds rate at 2% following its meeting earlier this week.

John Lekas, founder and CEO of Leader Capital Management and portfolio manager of the Leader Short-Term Bond Fund, thinks the Fed should start raising interest rates before the end of the year.

Lekas argues that rate hikes would help to strengthen the dollar and reduce inflation pressures. He said it might also encourage more saving by consumers since rates on money-market accounts are closely tied to the fed funds rate.

And a stronger dollar, reduced inflation and increased savings would be a positive for the economy, even if the consequence was more short-term pain for banks.

"The Fed's current policy is to bail out the weak hands in banking and punish the savers in this country," said Lekas. "But this is a Band-Aid policy that is not addressing the real problem of inflation. The Fed should be trying to save the whole system, not save the overextended and irresponsible."

Nonetheless, as I've argued for some time in this column, the markets and economy don't need the financial sector to be at 100% health in order to hold up. There are plenty of other industries that have been doing well despite all the economic headwinds.

It was encouraging to see that stocks actually rallied early Friday morning despite the bad news from Fannie Mae. The continued decline in oil prices and a resurgent dollar are helping to minimize the pain in the financial sector.

Still, until more banks come truly clean about how much worse their losses will get and until the Fed stops trying to save banks that should be allowed to fail in a free market, expect the financial sector to keep bleeding red ink.

It's all about expectations, isn't it?

luv your creative streaks.

With Google and the internet, creativity is just a "copy and paste" away...

[millionairemind]

U.S. Foreclosures Rise 55%, Bank Seizures Reach High (Update2)

By Dan Levy

Aug. 14 (Bloomberg) -- Banks repossessed almost three times as many U.S. homes in July than a year earlier and the number of properties at risk of foreclosure jumped 55 percent as falling prices made it harder to sell or refinance.

Bank seizures rose 184 percent to 77,295, the steepest increase since reporting began in January 2005, RealtyTrac Inc., an Irvine, California-based seller of foreclosure data, said today in a statement. More than 272,000 properties, or one in 464 U.S. households, got a default notice, were warned of a pending auction or foreclosed on.
Full story
http://www.bloomberg.com/apps/news?pid= ... refer=home

[millionairemind]

U.S. Foreclosures Rise 55%, Bank Seizures Reach High (Update2)

By Dan Levy

Aug. 14 (Bloomberg) -- Banks repossessed almost three times as many U.S. homes in July than a year earlier and the number of properties at risk of foreclosure jumped 55 percent as falling prices made it harder to sell or refinance.

Bank seizures rose 184 percent to 77,295, the steepest increase since reporting began in January 2005, RealtyTrac Inc., an Irvine, California-based seller of foreclosure data, said today in a statement. More than 272,000 properties, or one in 464 U.S. households, got a default notice, were warned of a pending auction or foreclosed on.
Full story
http://www.bloomberg.com/apps/news?pid= ... refer=home

[winston]

John Authers (Financial Times): Credit squeeze to get more painful

“The logic of the credit squeeze is inexorable. The latest data from banks, and prices in the secondary credit market, point to a much slower economy.

“The Federal Reserve’s survey of US banks’ senior lending officers came out with little fanfare this week. In the past it has proved to be an excellent leading indicator. When banks tighten the supply of credit, historically this has led to lower employment, lower investment and lower consumer demand, with a lag of between six months and a year.

“Lending officers said they were continuing to tighten standards, whether on credit cards, prime mortgages, consumer or business loans, even though a strong majority of banks had done this in the second quarter. That implies a squeeze on consumption, and lower investment, as the year goes on.

“A similar exercise by the European Central Bank, polling lenders in the eurozone, seemed a little less gloomy, but only on the surface. There were slight decreases in the proportion of banks planning to tighten standards for corporate and household loans, but the supply of consumer credit was still tightening. Furthermore, lending officers said demand for company loans was decreasing and economic risks were putting pressure on them to tighten.

“The implications are not lost on the credit market. The recovery for credit in the wake of the Bear Stearns crisis petered out in May. Since then, in Europe and the US, the cost of insuring against default for investment-grade companies has risen but stayed well below recent highs, while the default risk for high-yield or lower-quality credits has shot up, almost regaining its highs. Spreads payable on speculative-grade credits are at their highest in four months.

“With banks planning to lend less and charge more for loans, this makes sense; it will be harder for companies to avoid default.”

Source: John Authers, Financial Times, August 14, 2008.

[millionairemind]

Paiseh

Corrected the link above.

http://www.economist.com/finance/displa ... d=11921704

http://www.economist.com/finance/displa ... d=11921871

[LenaHuat]

More vultures buying up distressed assets at 50% discount. From WSJ:

Wachovia Unloads Troubled Loans
LandCap Will Buy
$40 Million of Assets
Via Joint Venture
By MICHAEL CORKERY
August 20, 2008; Page C12

In an early sign that investors are starting to pounce on the billions of dollars of troubled land and construction loans that banks are looking to unload, a venture headed by LandCap Partners is buying $40 million of such assets from Wachovia Corp.

LandCap, a residential-land company headed by real-estate veteran Jeffrey Gault, has created a joint venture that will buy the loans which have a book value of $75 million to $80 million, according to people familiar with the deal.

The loans are to home developers and collateralized by 2,900 house lots -- which are in varying stages of development -- in such states as California, Arizona, Florida and Illinois. Many of the loans are in some form of distress because of delinquent payments or plunging values of the collateral. Charlotte, N.C.-based Wachovia, which declined comment, will be a minority partner in the venture.

The deal allows Wachovia, one of the nation's largest construction lenders, to move the troubled loans off its books and raise capital. LandCap will service the loans and foreclose on the troubled debt if deals can't be worked out with distressed borrowers. The venture plans to sell foreclosed property to other home builders.

[kennynah]

well, that's better than 22cts to a $1, that MER sold their bad papers for..

[ishak]

Credit derivatives: Pressure gauge: Are credit-default swaps living up to the hype?
Aug 21st 2008, From The Economist print edition

IN THE weeks before Bear Stearns, a Wall Street bank, collapsed in March, nervous investors scanned not just its share price for a measure of its health, but the price of its credit-default swaps (CDSs), too. These once-obscure instruments, now widely enough followed that they have even earned a mention on an American TV crime series, clearly indicated that the firm’s days were numbered. The five-year CDS spread had more than doubled to 740 basis points (bps), meaning it cost $740,000 to insure $10m of its debt. The higher the spread, the greater the expectation of default.

Once again, CDS spreads on Wall Street banks are pushing higher, having fallen in March after the Federal Reserve extended emergency lending facilities to them. Reportedly one firm, Morgan Stanley, is monitoring its own CDS spreads to assess the market’s perception of its corporate health; if they rise too high, it intends to cut back its lending. Whether the CDS market is accurately assessing the creditworthiness of Lehman Brothers, trading on August 20th at 376 bps, double the level in early May, will be the next test of its worth.

There are some who doubt whether the CDS market is a reliable barometer of financial health. Though its gross value has ballooned in size from $4 trillion in 2003 to over $62 trillion, many of the contracts written on individual companies are thinly traded, lack transparency, and are prone to wild swings.

Recent spikes in CDS spreads on the three largest Icelandic banks are a case in point. In July spreads on Kaupthing and Glitnir rose to levels 35% higher than those observed for Bear Stearns in the days before it was bought out, according to Fitch Solutions, part of the Fitch rating and risk group. But the panic subsided after they released second-quarter earnings. Insiders say CDSs are increasingly used for speculation as well as hedging, which creates distracting “noise” particularly when the markets are as fearful as they have been recently.

On the other hand, although CDS spreads may overshoot, they do not generally stay wrong for long. Moody’s, another rating agency, says that market-implied ratings, such as those provided by CDS spreads, tally loosely with credit ratings 80% of the time. What is more, CDS spreads frequently anticipate ratings changes. Fitch Solutions reckons that the CDS market has anticipated over half of all observed ratings activities on CDS-traded entities as much as three months in advance. Though the magnitude of the moves may at times be unrealistic, the direction is usually at least as good a distress signal as the stockmarket.

[ishak]

Auction-rate probe expands to nearly 40 brokerages
11:47 AM, August 21, 2008, From Times staff writer Walter Hamilton:

The search for the guilty in the auction-rate securities debacle has become a nationwide manhunt.

Investigators from the Financial Industry Regulatory Authority will begin conducting on-site examinations at nearly 40 brokerages beginning Monday to determine whether they were aware of the problems in the auction-rate market and adequately warned customers about the risks, according to a person familiar with the issue.

The regulatory sweep -- which will focus heavily on brokerages that sold but did not create the securities -- represents a major widening of the auction-rate probe that until now has centered primarily on investment banks that underwrote the debt.

The inspections come amid an intensifying effort by New York Atty. Gen. Andrew Cuomo to force so-called downstream brokerages to buy back auction-rate securities from their clients.

"We're starting with the largest banks, in terms of number of people involved ... and we're working our way down the list," Cuomo said in an interview on CNBC this morning. "We're now focusing on some of the mid-size players in the market."

Auction-rate securities are long-term debt instruments that were designed to trade like short-term securities. They were issued by many municipalities and closed-end mutual funds in recent years, and were pitched by brokers to small investors as safe and easily redeemable.

When the credit crunch worsened early this year, however, the $300-billion auction-rate market froze, leaving investors unable to sell their holdings.

Cuomo has reached settlements with Citgroup Inc., UBS and three other investment banks to repurchase auction-rate instruments sold to individual investors, small businesses and charities.

Cuomo also has sent subpoenas to brokerages such as Fidelity Investments, Charles Schwab Corp., TD Ameritrade Holding Corp., E-Trade Financial Corp. and Oppenheimer & Co. He's also investigating other investment banks such as Goldman Sachs Group, Bank of America Corp. and Deutsche Bank....

A bond-industry trade group representing regional brokerages has argued that the firms have no obligation to repurchase auction-rate securities because they simply facilitated purchases at the request of clients and took no role in the creation of the securities.

However, a top lawyer in Cuomo's office sent a letter to the trade group Wednesday rebutting those claims.

Benjamin Lawsky, a Cuomo special assistant, said Cuomo's probe "has already begun to uncover some disturbing facts that seem to belie the innocent picture of downstream brokerages" and that it seemed "highly unlikely that the firms had no understanding of what was happening in the [auction-rate] market."

For example, Lawsky wrote, "some evidence indicates" that Fidelity pitched auction-rate securities to its wealthiest customers.

Anne Crowley, a Fidelity spokeswoman, disputed that charge.

"We don't actively market auction-rate securities," she said. "There's no incentive for our representatives to sell auction-rate securities or another product."

Cuomo also is stepping up the pressure on Merrill Lynch & Co. The giant brokerage pledged two weeks ago to repurchase $10 billion of the securities at face value from roughly 30,000 investors, but said it wouldn't start the process until January even though some other big firms have agreed to finish their buybacks by November.

Merrill reportedly reached a deal today with regulators in Massachusetts to begin buying back the securities starting in October.

"Today is the last day" to reach a settlement, Cuomo said on CNBC. "If we don't settle today, tomorrow at this time we'll be in court."

[ishak]

Subprime Update: Sovereign Wealth Funds Trying Again? [Housing Tracker]
Subprime Fallout
August 21, 2008, SeekingAlpha

Merrill CEO May Meet Korean Sovereign Fund Chief; Lehman Nearly Got $5 Bln In Funds From Korea. “Merrill Lynch (MER) chief John Thain will have meetings with South Korea's sovereign wealth fund and key government officials during a visit to the country in the third week of September, Korean officials said Wednesday. Korea Investment Corp., the country's sovereign wealth fund, owns a 4.7% stake in Merrill Lynch. Lehman Brothers (LEH) nearly reached a deal to raise almost $5 billion from South Korean wealth funds and institutions, but the pact disintegrated.” (MarketWatch, Aug. 20)

Banks' Returns Come Back To Earth, Maybe For Good. “Boston Consulting Group: In 2006, the top 10 banking ROEs [Return on Equity] ranged from 23.9%-35.5%, with the average ROE at 13.6%... Last year… banks' after-tax profits fell for the first time since 2003 and their average ROE declined to 13%, but that was propped up by exceptional returns at some banks, mostly from emerging markets… Regulators will [now] require banks to set aside more capital than before for risks other than that of default, such as potential losses due to a credit rating agency downgrade or due to a change in the price of an equity instrument.” (Guardian UK, Aug. 20)

How Low Interest Rates Contributed to the Credit Crisis. “A low-interest rate environment reduces the absolute level of returns that are available to investors. This had significant implications for the [coming] wave of baby boomers… [The pension-fund industry] estimated… that baby boomer [retirement] investments need to yield a minimum of 8% per annum… [With] our most recent low-rate period, [and] with U.S. Treasuries yielding 4% and below, achieving 8% became quite a challenge… With a large portion of pension-fund asset allocations directed toward fixed-income investments that were yielding closer to 4%, the pressure to achieve an overall 8% on their portfolios drove investment managers to allocate large pools of capital to the strategies that promised higher returns.” (WSJ, Aug. 18)

Judge Rejects Countrywide Settlement. “Pittsburgh Federal bankruptcy Judge Thomas P. Agresti of the Federal Bankruptcy Court rejected a settlement involving the Countrywide Financial Corporation, saying… it was [un]fair to nearly 300 borrowers who claimed to have been hurt by the company’s abusive practices. The settlement called for Countrywide, acquired by Bank of America (BAC) last month, to pay $325,000 to the Chapter 13 bankruptcy trustee in Pittsburgh, Ronda J. Winnecour, to cover costs and settle litigation in 293 separate cases… Ms. Winnecour said that in dealing with the borrowers, Countrywide had made inaccurate claims, filed unnecessary court papers, demanded improper fees and charges, [and] lost or destroyed more than $500,000 in checks paid by homeowners in foreclosure.” (NY Times, Aug. 15)