CreditSights’ list of its most frequently downloaded reports so far this year makes interesting reading.
As might be expected, subprime and broader credit-crunch topics dominate, but of note is the number of reports on bond insurance. This probably reflects not only the gyrations of the credit default swaps market and the unraveling of the monoline insurers, but also the complexity of this formerly little known corner of the credit markets, together with CreditSights’ independent expertise.
The top two reports were on credit default swaps and monolines. Most of the popular articles were on broad topics, with only a handful on specific companies and the likely suspects at that: Fannie Mae/Freddie Mac, Bear Stearns/JPMorgan, Bank of America/Countrywide, Merrill Lynch and CIT.
Only one of the top posts was not directly related in some way to the credit crunch: a guide to airline bankruptcy, and even in that case there is a link.
The complete list follows:
1. Credit Default Swaps: Will They Change the Course of Bankruptcy
2. Monoline Contagion Revisited: The Case for a Bail-Out (and Bail-In)
CDS and Monolines - More Exceptions Than Rules
3. The Loan Market Interviews: A Forced Selling Fracas
4. GSEs: Fannie and Freddie Under Fire - Where Do Bondholders Stand?
Fannie/Freddie Follow-up: Weighing Scenarios - Debt Default Unrealistic
5. JPMorgan Buys Bear Stearns: Fed Referees a Systemic Problem - Shareholders Lose, Bondholders/CDS Can Win
Bear Stearns: Liquidity Lifeline from JPMorgan, Bridge to?
6. Deleveraging, Systemic Risk and the Credit Crunch
7. Monoline Monitor: MBIA & Ambac GIC Shtick, FGIC & SCA Spiraling Towards Rehab
8. 2008 U.S. Financials Outlook: Part I - Portfolio Manager Playbook
U.S. Financials 2008 Outlook: Part II - Valuation- Bonds/CDS & Stocks
U.S. Financials 2008 Outlook: Part III - Dirty, Sexy, Money
9. U.S. Financials: Monoline Good Bank, Bad Bank Implications
10. Warm-Up for 2008: The Crises Theme Continues
11. From A Point of UnBearable Strain, Where Do We Go From Here?
12. CIT Group: Sink, Swim, or Sell?
CIT: Second Take - Ticking Takeover or Time Bomb?
13. Volatile Credits We Like In a Market We Don’t
14. Ambac Financial: Situation Critical and Options Limited
15. What’s In Your Covenant Package? The Bounds Of Fair Play
16. 2008 Credit Outlook: Part 1 - Weighting or Waiting?
2008 Credit Outlook Part II: High Grade Banks vs. Industrials
17. BofA/Countrywide Merger: Catching a Falling Tomahawk Missile?
18. The Loan Markets Looming Comeback: The Potential “New Par” And What Rises First
19. Monolines and the Markets - Hints, Allegations, and Things Better Left Unsaid
20. Airline Bankruptcy Guide
21. Defensive Credits We Like In a Market We Don’t
22. Mortgage Mess Stress Test: Prime Pummelling - How Bad?
23. Merrill Lynch: Clearing CDO Cobwebs, Can Investors be Constructive?
24. Monoline Bank Line Review: Don’t Count on Getting Paid
Monoline Monitor: Waiting for the Next Aftershock
25. Credit Default Swaps - Debunking the Myths and Affirming the Truths Around OTC Derivatives
Technorati Tags: (BOA), (BSC), (FGIC), (JPM), (MBI), (MER), (SCA), abk), Airlines, Ambac-Assurance, Bear-Stearns, bond-insurers, credit-default-swaps, credit-risk, Fannie-Mae, Freddie-Mac, monoline-insurers, subprime-mortgage
Moody’s has issued a new Q&A outlining its views on the prospects for bond insurers. Moody’s said it has received many investor calls about recent rating activity in the financial guaranty industry.
For example:
Q. Do recent rating actions indicate that Moody’s believes that Aaa ratings are no longer sustainable in this industry?
A: Moody’s decision to place the ratings of FSA and Assured Guaranty (NYSE: AGO) on review for downgrade reflects company-specific credit issues and is not in itself a statement about the sustainability of triple-A ratings in the industry. These reviews were prompted by a substantial shift in demand for financial guaranty insurance, in addition to the presence of large, complex and concentrated risks within the portfolios of both firms in an environment where business opportunities have been exposed as being extremely sensitive to market confidence. FSA’s review also reflects material credit stress within its insurance and financial products operations.
Other topics addressed include:
- Why is Moody’s considering downgrades of Assured and FSA when they have sufficient resources to meet your Aaa threshold? Has your methodology changed?
- If a decline in industry fundamentals is an important factor leading to the rating actions on FSA and Assured, why was Berkshire Hathaway Assurance (NYSE: BRK.A) not similarly affected?
- How does Moody’s view the recently announced agreement between SCA (NYSE: SCA) and Merrill Lynch (NYSE: MER) regarding credit default swaps on troubled ABS CDO exposures? What are the implications for other guarantors?
Moody’s believes that most guarantors are involved in discussions with bank counterparties for the commutations of credit default swaps on ABS CDOs, although in many cases, there remain significant obstacles to reaching agreements – primarily related to settlement amounts.
- How sensitive are the various financial guarantors to future deterioration in mortgage performance?
- To the extent that the ratings for firms within the industry migrate lower into the Aa range, how do you see that affecting the overall business?
Details are available in Moody’s Financial Guaranty Update: Frequently Asked Questions.
Technorati Tags: (MER), (SCA), bond-insurers, CDO, monoline-insurers
A new report from NERA Economic Consulting takes a look at emerging trends in litigation as a result of the subprime crisis and broader credit crunch.
The article, Subprime Securities Litigation: Key Players, Rising Stakes, and Emerging Trends, is the third in a series on subprime topics, following last June’s Subprime Meltdown Primer and December’s Understanding Accounting-related Allegations.
“Unsurprisingly, litigation has been on the rise,” NERA says. “As of 21 April 2008, there had been 132 securities lawsuits related to subprime and credit issues, of which 56 were filed since January 2008. New York has the most filings, with 48%, while California follows with 14% and Florida wraps up the top three with 7%.”
Almost every market participant in the securitization process—which transforms illiquid assets such as mortgages, auto loans, and student loans into tradable securities—has been named as a defendant.
The majority of the early lawsuits have been against mortgage lenders. As various other market participants reveal the extent of their losses and exposure, they too are being dragged into litigation. The plaintiffs include shareholders, investors, issuers and underwriters of securities, plan participants, and others.
The report covers lawsuits against lenders, issuers, ratings agencies, bond insurers, and asset management companies; and also suits related to asset-backed commercial paper, failed deals, corporate debt losses and auction rate securities.
Most of the lawsuits are still in their initial stages and it is too early to predict the outcomes, NERA says. The first subprime-related class action lawsuit against New Century Financial Corporation was dismissed in January 2008 without prejudice.
Technorati Tags: asset-backed-securities, bond-insurers, litigation, subprime-mortgage
Transparency is the word of the week. The lack of it continues to plague Lehman Bros (NYSE: LEH) as worries persist that the investment bank may not have marked down the value of its assets enough. Granted there is an argument that competitive considerations prevent full transparency, but it is becoming clearer that the market is no longer giving Lehman the benefit of the doubt. It will be interesting to see how wide CEO Dick Fuld opens the kimono on Monday when Lehman has another (last?) chance to restore confidence when it details first quarter numbers. Barring more bad numbers, the consensus is that Lehman will survive, but may not be able to stay independent. The challenge lies in finding a buyer or partner in the current climate. Moody’s warns that some US banks may still be undercapitalized while the BIS says European banks have greater funding needs than US banks.
Transparency is also a large part of the SEC’s prescription for reforming the credit rating agencies.
In addition to addressing conflict of interest issues, the SEC’s proposals would require Moody’s S&P, Fitch and others to make the data on which they base their ratings publicly available so anyone (in theory) can evaluate their rationale and calculations. Sounds like an opportunity for a “rating-the-rating- agencies” rating agency.
The agencies, meanwhile seem to be working to repair some the damage cause by their slow recognition of the size and scope of the credit crisis. A measure of how the spread on ratings actions is tightening can be found in the downgrade of monoline bond insurers Ambac and MBIA. Though the downgrades were clearly deserved, even overdue, the fact that one Wall Street insider thinks Moody’s “jumped the gun” serves as a telling reminder of the disconnect with reality.
“Moody’s jumped the gun,” a Wall Street executive told the Financial Times. “They and other credit ratings agencies have been under pressure to anticipate developments, rather than lag behind the curve, and this looks like an attempt to do just that.”
Under pressure from Congress and regulators, any perceived “grace period” companies may have been given in the past seems certain to evaporate.
With the subprime crisis supposedly in the past, warning signs about credit problems elsewhere indicate that more pain lies ahead. In particular concern continues to grow about Alt-A loan borrowers who are supposed to be just a bit less risky than prime borrowers, but are looking more like “subprimers.” Performance off subprime auto loans continues to deteriorate, notably with more recent loans, an ill omen. And credit card borrowers are finding it increasingly difficlut to get back on track if they get behind in their payments.
Our top post of the week: Moody’s report saying the global junk bond default rate doubled in the first five months of this year and is set to continue into 2009.
Research Recap Quote of the Week
Roughly one quarter of the overall increase in banks’ total international
assets since end-1999 has been booked by banks located in the United
Kingdom. - Bank for International Settlements.
Technorati Tags: auto-loans, banking, banking-system, bond-insurers, credit-cards, investment-banking, Lehman, monoline-insurers, rating-agencies, structured-finance, subprime-mortgage, Zeitgeist
CreditSights is defending its bleak outlook for the monoline industry following criticism from bond insurer Ambac (NYSE: AMB) over its most recent assessment.
In a note to readers, CreditSights said it felt Ambac mischaracterized exactly what the CreditSights analyst said.
In substance, we simply indicated that the worst-case scenarios (if they in fact come to pass) as recently updated by Moody’s would lead to more charges on the direct and indirect impact that would follow. The losses under the more dire scenarios are more likely to materially exceed anything reflected at this point on the books of the monolines.
In its original report, CreditSights wrote that “If losses were to migrate toward the higher end of Moody’s stress test, we think that a downgrade of both companies would become inevitable. Based on Moody’s most stressed case scenario, Ambac could be facing losses of more than $8 billion and MBIA could be facing losses of more than $10 billion. In our opinion, it is likely that both Ambac and MBIA will see continued deterioration in their second lien exposures in the second quarter. While Ambac has since stated that it is unlikely to raise additional capital and MBIA has said that it will not raise additional dilutive equity capital, we think both companies will be forced to raise significant additional capital in the second quarter or face an almost certain downgrade.”
In its response to the original report, Ambac said the CreditSights article “offers little independent analysis, fails to consider the basic structural arrangements of individual transactions (one cannot simply multiply a cumulative loss assumption by net par outstanding to determine ultimate loss) and does not attempt to reconcile to Moody’s previously reported RMBS losses for Ambac.”
CreditSights concludes that “In the end, we stand by our analyst and his right to an opinion (misrepresented by third parties or otherwise) based not only the data presented but also a minor dose of common sense based on what has transpired over the past year.”
The May 21 CreditSights analysis Ambac & MBIA: Sinking on Second Lien Slime is available for purchase.
Ambac’s response and its presentation on its second lien exposures is available here.
CreditSights’ Note to readers is available here.
FT Alphaville offers more details.
Technorati Tags: bond-insurers, monoline-insurers
Investors hang on every word uttered by Warren Buffett, but it was his partner Charlie Munger who offered the most pungent comments on the state of many things economic at Berkshire Hathaway’s annual shareholder meeting last weekend.
According to the Financial Times’ coverage of the event, Buffett said that many financial behemoths had grown “almost too big to manage effectively from a risk standpoint”.
Munger was a bit more direct:
It’s a crazy culture of greed and overreaching and overconfidence in trading algorithms. It’s quite counterproductive for the country. These institutions are too big to fail.
Buffett gave the Federal Reserve credit for its role in brokering the rescue of Bear Stearns. Defending the role of government intervention in times of crisis, Munger jabbed at Alan Greenspan, the former Fed chairman, who he said had “overdosed on Ayn Rand. If it happened on the free market, it had to be all right. The world would work better.”
Buffett did have a couple of zingers of his own, however:
“Capitalism without failure is like Christianity without hell,” (courtesy AP) and:
“Your children will live in a better country than you, even if a few idiots run it in the meantime,” (courtesy Dealbreaker.)
Buffett also praised the early successes of Berkshire’s fledgling bond insurer, which he said generated $400m in premiums during the first quarter, the FT reported. Many of the 278 contracts that the unit wrote were for clients who already had bond insurance from another triple A rated company.
“They’re paying us a [higher] fee to write insurance that will only be paid if the principle and insurer didn’t pay,” Buffett said.
“It tells you something about the meaning of triple A in the bond insurance field.”
And the Sage of Omaha, unlike President George Bush, isn’t waiting for the National Bureau of Economic Research to retroactively tell us we were officially in a recession:
I would say that we’re in a recession clearly.
That may be one reason why Buffett and Munger are looking to Europe for investments, especially Germany, MarketWatch reports.
“We would like more family owners of Germany businesses who, when they feel some need to monetize their business, to think of Berkshire Hathaway,” Buffett said. “If they care about their business we are their best call.”
Another factor is Berkshire’s view that the dollar is likely to continue to decline against European currencies, according to The Wall Street Journal’s Marketbeat blog:
We are happy to invest in businesses that earn their money in the euro, or in companies that derive their earnings in Germany, or from the sterling in the U.K. because I don’t have a feeling that those currencies are going to depreciate in a big way against the dollar.
Photo courtesy Reuters.
Technorati Tags: banking, berkshire-hathaway, bond-insurers, recession, warren-buffett
The continuing fallout of the subprime-induced credit crunch dominated the most-read posts at Research Recap in the first quarter. Indeed, all ten were related in some way to the financial turbulence.
When Research Recap first began posting on hitherto obscure topics such as subprime-backed debt instruments last summer, few outside the financial markets had heard of CDO, SIV and CDS. Now they are featured, if not fully understood, in the general media.
With subprime becoming prime time, our visitors are looking for the next shoe to drop. Judging by the hugely popular chart-topping post Warning Signs Seen in Rising Credit Card Delinquencies, there’s plenty of concern to go around. This post from CreditSights jumped right to the top of the rankings, despite being posted in the last week of the quarter.
It is gratifying to see people turning to Research Recap in increasing numbers in search of education on esoteric topics. The silver and bronze medals go to Research Primers on Credit Default Swaps, from Fitch, and on Structured Investment Vehicles, from Moody’s, both posted in January.
“Monolines” also become front page news and made the #4 spot, thanks to Standard & Poor’s February post, Bond Insurer Downgrades Could Lead to Bank Downgrades.
In fifth place, with a steady level of interest over several weeks, was the December analysis, Role of Hedge Funds in Subprime Crisis Examined, from the International Monetary Fund.
But the “Dark Side of the Moon” award for longest time in the charts goes to the very first Research Primer we posted in June, on Subprime Mortgage Lending from NERA Economic Consulting.
Oxford Analytica weighed in at #7 with its early January contribution Market-led Measures Not Enough to Solve Subprime Fallout. CreditSights featured again at #8 with its March post Write-down Spotlight Shifts to European Banks.
An early-March post from multiple sources, Alternative Proposals to Stem Subprime Foreclosures, took the ninth spot and the mid-March contribution Audit Integrity Questions Citigroup’s Risk Assessment rounded out the top ten.
Technorati Tags: asset-backed-securities, banking-system, bond-insurers, corporate-governance, credit-cards, credit-default-swaps, Hedge-Funds, SIV, structured-finance, subprime-mortgage, Zeitgeist
Monoline bond insurers may have been bumped of the front page by Bear Stearns and the like, but the issues that plague them have not gone away.
Fitch this week downgraded FGIC and SCA’s XL Capital Assurance to junk status, and CreditSights warned that FGIC was on the brink of regulatory intervention; “To sum it up, FGIC is in a materially worse situation that we had previously believed. Barring a bailout or significant capital injection, the company is at material risk of being seized by regulators.”
As the Financial Times reports, the biggest bond insurers, Ambac (NYSE: ABK) and MBIA, (NYSE: MBI) are temporarily off the hook after their crucial triple-A credit ratings were recently confirmed. Yet “the markets are still not certain that even these big fish will be able to hang on to their top ratings.”
Still, in Research Recap’s most popular post of the week, Fitch asserted that the monolines’ problems should not have much negative impact on the assets they are guaranteeing in Europe and Asia.
Speaking of Europe, the next most-read post was the CreditSights outlook for write-downs at European banks, which have taken widely divergent approaches to valuing their risky assets.
And in an environment looking for other shoes to drop, CreditSights also scored with its report noting that credit card delinquencies are rising more rapidly than normal given unemployment trends. An earlier report from Fitch found that unemployment would need to quadruple before affecting highly rated credit-card backed paper.
Visitors to Research recap are also paying atttention to warning signs such as Standard & Poor’s latest ranking of potential “fallen angels” - prominent debt- challenged companies, headed by Sprint Nextel.
And finally, it’s nice to see strong interest in long-range research such as the Federal Government’s priorities for manufacturing R&D: Hydrogen fuel and Nanotechnology.
Technorati Tags: ACE, asset-backed-securities, bond-insurers, credit-cards, credit-risk, monoline-insurers, nanotechnology, Zeitgeist
The ongoing capitalization challenge surrounding monoline bond insurers should not greatly affect the underlying assets in Europe and Asia. Fitch Ratings said today it expects limited impact on European and Middle East (EMEA) and Asia Pacific (APAC) region structured finance (SF) transactions currently outstanding from exposure to monoline financial guarantors.
The comments follow a period of high profile, adverse rating actions by Fitch in relation to the Insurer Financial Strength (IFS) ratings of some monoline financial guarantors. The agency said that there were only a limited number of transactions with such a financial guarantee (wrap) amongst traditional asset classes in these regions. In addition, the existence of indicative “underlying” or “standalone” ratings - based on transaction structure and asset analysis alone without the benefit of the financial guarantee (wrap) - meant many “wrapped” tranches in SF transactions from EMEA and APAC had not seen their ratings lowered to the same degree as the financial guarantor providing the wrap.
Many wrapped tranches are from highly seasoned transactions in these regions As a consequence, many of the underlying standalone ratings absent the wrap have been upgraded over time. When some of the monolines saw their IFS ratings lowered, Fitch found that many of these tranches were not downgraded to the same degree, or even at all, due to this factor.
Further details can be found in Fitch’s useful “FAQ: Monoline Financial Guarantors in EMEA/APAC Structured Finance“, which examines monoline guarantor exposure in these regions.
The report finds that primary financial guarantor exposure in these regions is very limited in more traditional asset classes (like RMBS and CMBS), but features more prominently in whole business asset areas. The vast majority of wraps in both regions are provided by either Ambac or MBIA, both of which have seen adverse rating action in recent months.
Technorati Tags: bond-insurers, monoline-insurers, structured-finance
Visitors to Research Recap this week enjoyed our post on school connections improving the accuracy of analysts’ stock recommendations. Too bad for those hoping for an insider edge: that pesky Regulation FD seems to have eradicated any advantage.
The Economist Intelligence Unit’s latest Country Risk Rankings drew interest. It’s understandable that stolid states such as Norway, Finland and Austria would be considered the safest bets, but who’d have thought that Botswana and Chile would be considered less risky than the US and most of Western Europe?
Our roundup of the Northrop/EADS Air Force Tanker deal was popular. As expected, this issue will not be resolved any time soon, now that losing bidder Boeing has filed a protest and the deal has become a topic of debate in the Presidential race. The GAO has 100 days to respond to the protest, but it is likely to be many months or more before the issue gets resolved.
Another well-read roundup examined MBIA’s request for Fitch to withdraw its rating on the bond insurer. True to our prediction that this is a battle MBIA can’t win, Fitch trumped MBIA by offering to provide ratings free of charge.
And if the ratings agency’s feelings are hurt, CreditSights’ thumbs-up of Fitch’s new structured finance ratings methodology should make them feel better.
Technorati Tags: Aerospace, analyst-conflicts, bond-insurers, country-risk, Defense, regulation-FD, structured-finance, Zeitgeist