US - Subprime

[ishak]

The credit crisis
Ben Bernanke wants regulators to be in charge of crisis prevention
Aug 22nd 2008, Economist

A YEAR after the credit crisis exploded, policymakers are scrabbling for ideas on how to prevent another one. Ben Bernanke, the Federal Reserve chairman, unveiled an ambitious proposal on Friday August 22nd: he wants to expand regulators’ mandate from safeguarding institutions to preventing financial crises. His proposal, still on the drawing board, faces numerous technical and political obstacles. Yet the public and politicians may be ready for radical measures, as this crisis shows no sign of ending.

In his speech to the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, Mr Bernanke noted that bank regulators in America, like the Fed generally, “focus on the financial conditions of individual institutions in isolation”. He wants them also to consider “potential systemic risks and weaknesses.”

How would such supervision differ from current practice? He notes that, at the moment, a policy that reduces risk for a single institution could increase it for the system as a whole. During an economic slowdown, a supervisor worried about a particular firm’s soundness “will tend to push for very conservative lending policies.” In contrast, the “macroprudential supervisor” would recognise that if it applied such policies to everyone, it could cause a recession. Similarly, in the upswing, “risk concentrations that might be acceptable at a single institution…could be dangerous” if a lot of institutions had them.

Mr Bernanke’s proposal is designed in part to address demands that the Fed, having now presided over separate bubbles in stocks and houses in the past decade, take responsibility for preventing them in the future.

The Fed still thinks interest rates are too blunt a tool for the job. Its chairman is suggesting that regulatory policy might be a more surgical approach. But regulators face many of the same problems as monetary policymakers. How would they identify a bubble in advance? Would the tools work or would the reckless lending simply migrate to less regulated institutions? The worst subprime loans were made not by banks but by barely regulated finance companies such as New Century. Most important, would the uncertain benefit of averting a future asset crash outweigh the certain cost of barring economic activity today that could make society better off? Even if the Fed thinks the tradeoff is worth making, the firms, and their political allies, would be likely to fight back.

Mr Bernanke has thought of some of these things. “In warning against excessive concentrations or common exposures across the banking system, regulators need not make a judgment about whether a particular asset class is mispriced”, he says. A new supervisory approach, he says, would have to encompass all financial firms, given that risky activities “have a way of migrating to other financial firms or markets.” He acknowledges that this could be costly and technically demanding, and that in the end it may still not prevent crises: “the expectations of the public…would have to be managed carefully.”

And he leaves an important question unanswered: who would do this job? America’s current patchwork of supervisors is poorly suited to the task: it encompasses five federal bank regulators, 50 state regulators, separate securities and futures regulators and now a new supervisor for quasi-private mortgage companies, Fannie Mae and Freddie Mac. Almost certainly, Mr Bernanke would like it to be the Fed. By contrast, Henry Paulson, the Treasury secretary, has proposed largely stripping the Fed of such powers and giving them to a consolidated prudential regulator, while leaving the Fed broadly responsible for financial stability.

Mr Bernanke also leaves unaddressed the risk that such an expansion of its powers could make it a larger political target and distract it from monetary policy, and damage its reputation if it were to fail.

In a separate but related proposal, Mr Bernanke acknowledges that the Fed may not be the best agency suited to bailing out firms such as Bear Stearns, as it did in March. Others, such as the former chairman of the Fed, Alan Greenspan, have argued that such bailouts compromise the Fed’s balance sheet and monetary policy. Without acknowledging that risk, Mr Bernanke proposes, as Mr Greenspan did, that Congress give someone—“the Treasury seems an appropriate choice”—the authority to intervene when imminent “default by a major nonbank financial institution is judged to carry significant systemic risks.”

In his speech on Friday, Mr Bernanke began with dovish remarks on the inflation outlook. He noted that the Fed has kept interest rates low despite high inflation on the view that once commodity prices flattened or fell, the downward pressure on wages and prices from a weak economy would push inflation back down. “In this regard, the recent decline in commodity prices, as well as the increased stability of the dollar, has been encouraging. If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year.”

At the same time he suggested that the worst “second-round” effects of the financial crisis are about to be felt: “the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment.” Together, his remarks suggest that the Fed is not about to raise interest rates before the end of this year.

[millionairemind]

Another one bites the dust...

US regulators shut Kansas bank
Columbian Bank of Topeka, reported $92 million in delinquent loans in the second quarter.

WASHINGTON (AP) -- -- Federal regulators on Friday shut down Kansas bank Columbian Bank and Trust Company, which was struggling with losses on soured real estate loans.

The Federal Deposit Insurance Corp. was appointed receiver of Columbian Bank of Topeka, Kan., which had $752 million in assets and $622 million in deposits as of June 30.

The FDIC did not give a reason for the closure, but Columbian reported $92 million in delinquent loans in the second quarter, citing a "volatile real estate market." The bank set aside $9.2 million for loan losses in the first quarter, up nearly 30 percent from the $7.1 million it set aside in the first quarter of 2007.

Full story
http://money.cnn.com/2008/08/23/news/co ... 2008082308

[millionairemind]

The vultures are out...

Pimco Seeks as Much as $5 Billion to Buy Distressed Senior Debt
By Sree Vidya Bhaktavatsalam

Aug. 27 (Bloomberg) -- Pacific Investment Management Co., the biggest manager of bond funds, is seeking as much as $5 billion to buy mortgage-backed debt that plunged in value after the subprime market collapsed, according to two investors with knowledge of the matter.

The Distressed Senior Credit Opportunities Fund will invest in ``senior'' and ``super-senior'' securities backed by commercial and residential mortgages, said the people, who asked not to be identified because the fund is private. Senior debt is first to be paid off in a default.

Pimco, based in Newport Beach, California, and money managers such as BlackRock Inc. and TCW Group Inc. have opened funds to buy securities they consider cheap based on the underlying value of the assets or the borrower's ability to repay the debt. Investors have pulled back from all but the safest government-backed debt as the foreclosure rate on U.S. subprime-mortgage loans doubled to a record 10.7 percent in March from a year earlier.

``There's a handful of firms out there, Pimco being one of them, that are well-positioned to deal with this credit crisis and the fire sales going on in mortgage-backed securities,'' Geoff Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island, said in an interview.

Pimco, a unit of Munich-based insurer Allianz SE, oversees $830 billion, including the $129.5 billion Pimco Total Return Fund, the largest bond mutual fund. Last year, it raised almost $3 billion to invest in distressed mortgage assets, the investors said.

Mohamed El-Erian, Pimco's co-chief executive officer, declined to comment. El-Erian shares the position of co-chief investment officer with Bill Gross, while Bill Thompson is the co-CEO.

Boosting Returns

The firm has sought to boost mutual-fund returns in the past year by buying more mortgage-related assets. The investments generally target high-quality mortgage debt, such as those guaranteed by government-chartered agencies Fannie Mae and Freddie Mac.

Gross's Total Return Fund advanced 9.4 percent in the past year to beat 99 percent of competing bond funds, according to data compiled by Morningstar Inc. in Chicago. The fund had 61 percent of its assets in mortgage securities as of June 30, up from 53 percent a year earlier.

The new Pimco fund, dubbed Disco, will focus on commercial loans as well as residential debt that doesn't carry explicit government guarantees or the implied backing of securities issued by companies such as Fannie Mae or Freddie Mac, the investors said. It also will seek investments in securities backed by home-equity, credit-card and auto loans, they said, and can invest in debt secured by collateral outside the U.S.

BlackRock, Highfields

BlackRock, the second-largest U.S. bond manager, with $527 billion in fixed-income assets, has several funds aimed at profiting from the credit drought. It teamed up with Boston- based hedge-fund firm Highfields Capital Management LP to start a company and raise $2 billion to buy delinquent home mortgages. Since the subprime crisis began last year, New York-based BlackRock has raised more than $5 billion to buy mortgages, distressed debt and loans.

Prices of non-agency mortgage securities have tumbled to record lows. AAA fixed-rate prime-jumbo securities typically fetch a record 12 cents per dollar of principal less than similar securities backed by government agencies, according to an Aug. 20 report by Credit Suisse Group analysts. Jumbo loans are those over $417,000.

Delinquency Rates

The commercial-mortgage bond market hasn't faced the same rate of late payments as debt tied to subprime home loans. The percentage of all commercial mortgage loans that were delinquent increased 2 basis points in July to 0.43 percent, according to Fitch Ratings. A basis point is 0.01 percentage point.

Delinquencies for subprime loans in 2006 bonds climbed to 41.7 percent, based on July reports from trustees, from 34.2 percent in February, Standard & Poor's said Aug. 21.

Yields on commercial real-estate securities relative to benchmarks have surged on concern that defaults will increase. For AAA-rated commercial mortgage-backed bonds, yields have widened to 284.43 basis points more than 10-year swap rates as of Aug. 22, up from 55 basis points a year earlier, according to data from Bank of America Corp. The swap rate is what borrowers pay to exchange fixed-rate interest payments for floating ones.

[kennynah]

so, now demand is showing up..but to put things in perspective...this 5bil may represent only a small % of the toxic assets out there..

[millionairemind]

U.S. bank insurance agency warns of worse ahead
By Eric Dash and Geraldine Fabrikant Published: August 27, 2008

WASHINGTON: Sheila Bair anticipated the U.S. mortgage crisis long before most other regulators. But she said she never dreamed it would wreak so much havoc on so many banks.

More than a year after the credit crisis first flared, Bair, the chairwoman of the Federal Deposit Insurance Corp., warned Tuesday that the outlook for the ailing banking industry was bad - and getting worse.
The swelling tide of toxic home loans is proving to be even more worrisome than initially feared, Bair said. She is struggling to clean up the mess and forestall home foreclosures with a plan to ease loan terms for hard-pressed homeowners.

"It is going to be a slog to work though this, but there is no easy way to do it," Bair said about her plan during an interview in her office here. "We haven't seen the trough of the credit cycle yet."

Her downbeat outlook was underscored Tuesday by the insurance agency's latest quarterly assessment of the industry. The agency said the number of bad loans at U.S. banks ballooned to its highest level in 15 years during the second quarter.

Industrywide, U.S. bank earnings plunged 86 percent from April to June, to $4.96 billion, from $36.8 billion a year earlier, the agency said.

The agency, which guarantees American savings and checking deposits, also raised the number of banks on its list of problem lenders to 117, the most since mid-2003.

That is up from 90 at the end of the first quarter. The agency does not disclose which banks are on the list, but it said the troubled lenders had combined assets of about $78 billion.

For all the bad news, American banks are in far better shape than they were in the late 1980s and early '90s, when the savings and loan crisis claimed hundreds of lenders across the nation.

But some worry that the agency has fewer people - and less money - than it needs to cope with the industry's latest travails, particularly if several large institutions were to collapse. Nine lenders, most of them small, have failed so far this year. Analysts expect dozens more to run into trouble.

Bair's agency is stretched. Dozens of staff members who had been through the banking crises of the early 1990s retired in recent years.

Despite her efforts to bring some seasoned examiners back, her small army of examiners is largely untested.

Meanwhile, there are growing questions about the adequacy of the agency's insurance fund, which guarantees repayment on deposit accounts of up to $100,000 when banks collapse. The fund dwindled to $45.2 billion during the second quarter, from $53 billion in the first quarter.

To replenish its fund, the agency will probably have to raise the fees it charges banks by at least 14 cents for every $100 of deposits, according to estimates by analysts. Bair declined to comment on the likely size of any increase but said the agency was proposing to revamp its fees so that institutions engaging in high-risk practices would pay higher rates.

"It only seems fair," Bair, 54, said. Such a move is expected to draw criticism from banks.

How Bair navigates the financial and political land mines ahead will help determine the course of the banking industry and, by extension, the broader economy. It will also determine her legacy.

"If the agency gets through the credit mess, having handled the bank failures that are to come, she is going to be widely seen as the person who prepared the agency for this," said Jaret Seiberg, a financial policy analyst for the Stanford Group, in Washington. "If the cycle is worse than expected - and if the agency insurance fund isn't big enough or they didn't have enough examiners - she will become the fall guy."

The centerpiece of Bair's plan is to modify loans so that people can stay in their houses. "It is something we should put a priority on," said Bair.

[LenaHuat]

Forbes has juz named her (Sheila Bair) the world's second most powerful woman I think Forbes has gotten it all wrong. Israel will soon get her second female PM (after the first, Mrs Golda Meir) in history. She's a former Mossad agent, a lawyer and of impeccable pedigree. I'm sure she's oredi horse trading for that position.

[millionairemind]

Another one bites the dust

Atticus hit hard by credit crunch
ByJames Mackintosh in London

Published: August 31 2008 23:35 | Last updated: August 31 2008 23:35

Atticus Capital, one of New York’s most powerful hedge funds, has lost more than $5bn (€3.4bn) this year, as its record as one of the world’s top performing money managers was damaged by the credit crunch.

The firm’s two flagship funds fell by a quarter and almost a third by the end of August, marking among the biggest losses in dollar terms ever recorded by a hedge fund. This was as a result of its strategy of taking large, concentrated bets and using few “short” positions betting on a fall in prices to lower risk.

Atticus had $14bn under management at the end of July, according to letters to investors, down from a peak of more than $20bn last year.

The losses reflect widespread difficulties for event-driven funds, which aim to buy cheap stocks in the expectation of a catalyst that will boost their value. Atticus, co-chaired by Nathaniel Rothschild, son of Lord Jacob Rothschild, has been closely involved in several of the highest-profile deals of recent years, helping scuttle Deutsche Börse’s bid for the London Stock Exchange and Barclays’ bid for ABN Amro, among other activism.

The event-driven sector – which includes activist investors – was among the most popular with hedge fund investors last year but has seen a race for the exit as investors switch to strategies seen as more likely to prosper during a bear market.

Atticus, though, has seen negligible withdrawals, according to people familiar with the fund, helped by one of the best performance records in the industry and long “lock-ups” – periods which tie investors into funds.

The $7bn Atticus European fund – run by David Slager, an Oxford-educated former Goldman trader – had plunged 32.9 per cent by the end of August, while the slightly smaller Atticus Global, run by Canadian founder Tim Barakett, is down 25 per cent.

The losses follow several bumper years for the funds, with Atticus European recording annual gains of 28, 44 and 63 per cent over the past three years, while Atticus Global has produced an annualised 17.5 per cent for the past five years.

Rob Coburn, head of investor relations at Atticus, said the fund was a long-term investor. “While year-to-date performance has been disappointing it is too short a period of time to measure our investment performance,” he said. “We believe a better measure is our longer-term record of two, three or five years and on this basis we believe we have performed very well for our investors.”

One long-standing Atticus investor said the fund would be expected to do well in bull markets and badly in bear markets. “You know it is going to make you a fortune on the way up and lose you a fortune on the way back down,” he said. “We think the risk-reward is worth it – they made a startling amount of money on the way up.”

[iam802]

Rob Coburn, head of investor relations at Atticus, said the fund was a long-term investor.

First time I heard 'long-term' associated with a hedge fund.

But, who am I to comment? I would also be the first to acknowledge that I know nothing about how they operate.

[kennynah]

Tamil language, very tongue twisting one

[millionairemind]

Fraud charges for ex-Credit Suisse brokers
By Joanna Chung in New York

Published: September 3 2008 19:15 | Last updated: September 4 2008 01:54

Two former Credit Suisse brokers have been indicted on fraud and conspiracy charges related to the sale of auction rate securities in the first known criminal case in­volving the collapsed market.

US prosecutors accused the two brokers of scheming to obtain higher sales commissions by selling ARS backed by mortgages, including subprime loans, to corporate clients who had placed orders to buy ARS backed by generally less risky, government guaranteed student loans.

Julian Tzolov and Eric Butler, who resigned from Credit Suisse last September, were also charged separately in a civil complaint by the US Securities and Exchange Commission, which alleged they made more than $1bn unauthorised purchases of subprime-related ARS. These are long-term debt but interest rates are periodically reset at auctions. The indictment, unsealed on Wednesday, claimed that instead of using auction proceeds to purchase new student loan-backed ARS – represented to clients as low-risk products – the de­fen­d­ants bought other types of ARS, including those backed by subprime mortgages and collaterised debt obligations.

They concealed their scheme, which started around November 2004, by sending clients e-mails in which they falsified the names of the products bought, the indictment claimed. In some cases, the e-mails listed the CDO-ARS products with the term “CDO” removed or included the term “student loan” or “SL” in the name of a CDO-ARS product.

The scheme was discovered in August 2007 when auctions began to fail and clients were unable to get their money back. The SEC complaint alleges that corporate customers were stuck holding at least $817m in securities that they did not want to buy and are now unable to sell.

“This case demonstrates how the recent turmoil in the subprime market has affected even investors who had no intention of buying subprime securities,” said Andrew Calamari, associate director of the SEC’s New York regional office.

Mr Butler pleaded not guilty. His lawyer said Mr Butler would defend the charges, adding: “He believed he was doing the best for his clients, and they agreed, until the ARS market failed, which had nothing to do with him.”

Mr Tzolov was out of the country though not considered a fugitive at this time, people familiar with the situation said. Mr Tzolov’s lawyer declined to comment.

Credit Suisse said: “In September 2007, these former em­ployees resigned after we detected their prohibited activity and promptly suspended them. Credit Suisse informed our regulators and we have continued to assist the authorities.”
Copyright The Financial Times Limited 2008