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Friday, December 21, 2007

Happy Holidays

Regualr posting will resume in the New Year.
Happy Holidays.


Thursday, December 20, 2007

"God I Hope You're Wrong"

Ambac, MBIA Outlook Lowered by S&P, ACA Cut to CCC (Update6): “The ratings outlook for MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers, was lowered to negative by Standard & Poor's, raising the specter of more writedowns for the companies' investment- bank clients.

S&P also cut its A rating on ACA Financial Guaranty Corp. to CCC, suggesting potential default. Toronto-based Canadian Imperial Bank of Commerce said today it may have $2 billion of writedowns on U.S. subprime mortgage securities it insured through ACA.”


To best understand, in plain English, what these downgrades mean read: Requiem For The American Investment Bank from the Market Ticker.

To go from plain English to a little more sophistication read: Financial Day of Reckoning Approaches from Mish’s.

God I hope you’re wrong.” –Chief Risk Officer at a major investment bank after J. Kyle Bass, a hedge fund manager, presented his case for a MASSIVE bet on the occurrence of a housing market meltdown.

(From Calculated Risk) Here is the S&P Report: Detailed Results Of Subprime Stress Test Of Financial Guarantors Some excerpts from the company specific comments:

Ambac Assurance Corp.
We affirmed the 'AAA' financial strength and financial enhancement ratings of Ambac Assurance and the 'AA' debt ratings of Ambac Financial Group, Inc. but the outlooks have been changed to negative. ...

CIFG Financial Guaranty
We have affirmed the 'AAA' financial strength rating of CIFG and the outlook remains negative. ...

Financial Guaranty Insurance Co.
The ratings of FGIC and FGIC Corp. are placed on CreditWatch with negative implications. Our most recent analysis of the company's non-prime RMBS and CDO of ABS exposure indicates a level of losses which would result in its capital position falling below our 'AAA' requirements. ...

MBIA Insurance Corporation
The outlook on MBIA and MBIA Inc.'s financial strength and debt ratings is changed to negative and their ratings affirmed. The outlook change is warranted because of the absolute size of stress scenario losses relative to the adjusted capital cushion of $2.75 billion. ...

XL Capital Assurance Inc./XL Financial Assurance Ltd.
We revised the outlook on XLCA, XLFA, and Security Capital Assurance Ltd.'s financial strength and debt ratings to negative, while affirming the respective ratings. ...

ACA Financial Guaranty Corp.
The financial strength and financial enhancement ratings on ACA are lowered to 'CCC' and placed on CreditWatch Developing. The lower rating reflects the substantial excess-of-modeled stress test losses of nearly $2.2 billion over the company's adjusted capital cushion at Dec. 31, 2007 of approximately $650 million. While ACA has been diligently working to address contingent liquidity concerns, it has not focused significantly on raising additional capital. Lower new business activity during this period of rating uncertainty is a positive from a capital adequacy standpoint but the incremental improvement is not sufficient to close the gap between stress losses and the capital cushion. The magnitude of the gap is large enough to create significant doubt that the company could possibly access sufficient hard capital resources to resolve the problem. CreditWatch Developing acknowledges the possibility that the company may be able to modify its obligations to its counterparties but reflects the real possibility that the counterparties will require the company to post significant collateral going forward.

Remember these names. Ambac, CIFG, FGIC, MBIA, XLCA. They will be in the news again soon… and it will be market moving.

Wednesday, December 19, 2007

Half a Trillion Should Just About Do It...

Moody's Had $174 Billion in CDOs on Downgrade Review (Update1): “More than $174 billion of collateralized debt obligations tied to U.S. mortgages were under review for downgrades by Moody's Investors Service at the start of this month, according to the ratings company, suggesting the subprime crisis may deepen.

Moody's downgraded $50.9 billion of CDOs made up of structured-finance securities in November, or about 9.4 percent of the total, the New York-based company said in a statement today. Standard & Poor's, which today lowered ratings on $6.7 billion of the debt, has so far downgraded or placed under review $57 billion of the debt.

Moody's, S&P and Fitch Ratings issued a record 2,007 downgrades on CDOs last month, mainly because of the surging defaults among U.S. homeowners with poor credit or high debt, according to a report Dec. 9 by Morgan Stanley. CDOs have been the biggest source of losses at the world's largest banks and brokerages as subprime investments have soured.

Moody's, which has broadened its review of CDO ratings to those created before last year, said it expects “more negative rating actions” in coming months. At the end of November, 32 percent of structured-finance CDOs, based on original balances, that Moody's has rated were under review. Bondholders may be forced to sell or write down debt that's been downgraded.”

Well, the good news is they’re finally getting serious about rating this things appropriately. The bad news is they’ve only started looking into 32% of them. Expect more bad news in the new few weeks and months.

Morgan Stanley Reports Worse-Than-Estimated Loss (Update1): “Morgan Stanley, the second-biggest U.S. securities firm, reported a fourth-quarter loss of $3.56 billion, the first in the company's history, after $9.4 billion of writedowns on mortgage-related investments.

Chief Executive Officer John Mack is forgoing a bonus for the year and called the results “deeply disappointing.” Morgan Stanley obtained a $5 billion investment from China Investment Corp., the nation's sovereign wealth fund, the New York-based company said today in a statement.

Mack's strategy of expanding in home loans and making bigger trading bets backfired as the firm's losses from securities linked to home loans more than doubled in November. He ousted Co-President Zoe Cruz, who had overseen the fixed- income unit responsible for the mortgage holdings, last month and promoted James Gorman and Walid Chammah, who previously ran wealth management and the firm's European operations.”

The losses were so big that Morgan Stanley needed $5 billion in additional capital… from none other than China Investment Corp.

“The loss of $3.61 a share in the three months ended Nov. 30 compares with net income of $1.98 billion, or $1.87 a year earlier. Analysts were estimating a loss of 39 cents, according to a survey by Bloomberg.”

To put it in perspective, the losses were so large they’ve wiped out a quite a few quarters of profits in a single swipe.

U.S. MBA's Mortgage Applications Index Fell 20% Last Week: “Mortgage applications in the U.S. fell last week by the most since 2004 as a jump in interest rates caused purchases and refinancing to decline, a private survey showed.

The Mortgage Bankers Association's index decreased 20 percent to 653.8 from 881.8 the prior week. The group's purchase index fell 11 percent and its refinancing gauge plunged 27 percent.

Loan restrictions and a glut of unsold homes on the market are prompting buyers to wait for even bigger price discounts, economists said. Higher borrowing costs and more foreclosures suggest the real-estate slump will continue to hurt economic growth well into 2008.

The refinancing index decreased to 2093.6 from 2879.8 and the group's purchase gauge fell to 422.2 from 472.

The average rate on a 30-year fixed loan rose to 6.18 percent, from 6.07 percent the prior week, the report showed. At that rate, monthly borrowing costs for each $100,000 of a loan would be about $611, compared with $566 when the rate was 5.47 percent in June 2005 as sales approached a record.”

There you have it.

Trichet Signals No Room to Cut Rates; German Confidence Drops: “European Central Bank President Jean- Claude Trichet signaled faster inflation will prevent a cut in borrowing costs as German business confidence fell to the lowest in almost two years.

The Munich-based Ifo research institute's business climate index, based on a survey of 7,000 executives, declined to 103 from 104.2 in November. Economists expected a reading of 103.8, the median of 38 forecasts in a Bloomberg News survey showed.

Waning sentiment underscores the bind facing central bankers as an economic expansion fades. In testimony today to lawmakers in Brussels, Trichet said the euro-area economy faces a “more protracted” period of elevated inflation than previously expected, indicating no imminent plan to reduce interest rates.”

With deep rate cuts off the table, the only real policy tool left is the continued massive injections of liquidity…

Money Market Rates Fall for Second Day on ECB Action (Update2): “Money market rates fell for a second day, adding to evidence that central banks are making headway in their attempts to counter turmoil in money markets.

The three-month euro interbank offered rate, or Euribor, dropped 7 basis points to 4.81 percent, the lowest since Nov. 30, the European Banking Federation said today. The three-month rate for pounds declined 18 basis points to 6.21 percent, the lowest in four months, the British Bankers' Association said.

The European Central Bank, which injected a record $500 billion into the banking system yesterday, “stands ready to act” again, council member Klaus Liebscher said today. The cost of three-month cash remained 81 basis points higher than the main refinancing rate. ECB President Jean-Claude Trichet said the coming weeks may be “challenging” for financial markets.”

Looks like $500 billion dollars is having some effect… and one would hope so. Mish discusses the ECB’s action and its possible consequences in more detail here.

“$500 billion is an enormous amount of money. To put it into perspective, $500 bln is 5% of total US banking system assets. My eyes are on LIBOR. If $500 bln doesn't move the rate...

Furthermore, everyone should remember that the $500 bln is funding just through year end. Come January this will need to be refinanced or rolled over.”

Central Banks the world over are praying right now that ‘half a trillion should do it.’. Cuz if it doesn’t, they’ve got nothing.

Monday, December 17, 2007

Asia Tanks

Stagflation May Return as Price, Credit Risks Meet (Update1): “The world economy is facing the risk of both recession and faster inflation.

Global growth this quarter and next may be the slowest in four years, while inflation might be the fastest in a decade, say economists at JPMorgan Chase & Co.

The worst U.S. housing slump in 16 years, coupled with a tightening of credit by banks, has brought the world's largest economy “close to stall speed,” according to former Federal Reserve Chairman Alan Greenspan. At the same time, rapid growth in China and other emerging markets is driving energy and food prices higher worldwide.

“What lies ahead is a period of stagflation -- slow or no growth combined with rising inflation -- in the advanced economies,” says Joachim Fels, co-chief global economist at Morgan Stanley in London.”

PPI and CPI did surprise to the upside last week… How permanent is this inflation threat as the credit crunch worsens? Nobody knows for sure. It depends entirely on what kind of action the world’s central banks will take in an attempt to ‘kick starts’ the credit markets again.

Emerging Markets Will Be `Truly Tested,' Deutsche Bank Says: “Emerging-market economies will be ``truly tested'' next year amid a slowdown in U.S. growth, declining commodity prices and growing investor risk aversion, Deutsche Bank AG said.

Developing nations will keep facing “near-term financial risk caused by the liquidity and credit crunch,” Deutsche said in a report today. A recession in the U.S., the biggest buyer of emerging-market countries' exports, “cannot be ruled out,” Deutsche said.

Emerging-market nations in recent years have used the windfall from high commodity prices to cut dollar debt and boost foreign reserves, allowing them to weather the global credit market rout this year. Developing-nation debt posted gains even as widening losses from subprime-mortgage investments provoked aversion to higher-yielding assets. Emerging-market bonds denominated in local currencies have returned almost 20 percent this year, according to Deutsche.

“Many observers of emerging markets (ourselves included) have argued for the past several years that EM has changed, that it no longer is the same asset class that suffered multiple crises during the 1980s, 1990s and the early part of this decade,” Deutsche said. “2008 could well be the year in which the perceived resilience of emerging markets is truly tested.””

See my recent post The Global’ Decoupling Theory’ is Garbage.

Wall Street Sees 20% M&A Slump on Scarce LBO Credit (Update1): “Even Goldman Sachs Group Inc., the world's leading takeover adviser since 2001, is prepared for a decline in mergers and acquisitions income next year when a slowing economy reduces the market for leveraged buyouts.

The value of transactions may fall 20 percent from a record $3.9 trillion this year, executives at JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Bank of America Corp. estimate. That may reduce fees on Wall Street and contribute to Goldman's first profit drop since 2002, the last year M&A decreased, according to analysts surveyed by Bloomberg.

LBO firms, responsible for half of this year's 10 biggest purchases, now face financing costs that have more than doubled since June to the highest in four years. The pace of takeovers fell 33 percent since the end of the second quarter as chief executive officers at companies, including Virgin Media Inc. and Cadbury Schweppes Plc, delayed asset sales amid signs economic growth in countries ranging from the U.S. to Britain is ebbing.

“It's the end of an era for a while for the very large LBOs,” said Piero Novelli, 42, the London-based head of global M&A at UBS AG, Switzerland's biggest bank.”

Yup. The LBO premium definitely has to come out of equities. All potential buyout targets are going to massively under perform as the hedgies figure this out and liquidate.