As in the previous quarter, the global credit crisis dominated Research Recap’s Top Ten Posts of the third quarter, with only one post not related in some way to the market meltdown. Many of the posts turned out to be prescient, led by Fitch Ratings’ July warning that US Mortgage Insurers’ Troubles May Worsen. This prediction was borne out this month when Moody’s put several of the insurers on watch for possible downgrade.
In the runner-up spot was NERA Economic Consulting’s July report Subprime-Related Litigation on the Rise, which was buttressed by a Stanford Law School analysis showing that subprime lawsuits were running at double last year’s pace.
The bronze medal goes to the lone non-financial post, Ernst & Young’s July report US Oil Production Flat Over Past 4 Years, published near the peak of the recent oil price spike.
The fourth place post based on the International Monetary Fund’s December 2007 report examining the Role of Hedge Funds in Subprime Crisis Examined is approaching Hall-of-Fame status, consistently featuring among our top posts nine months after it was first published. The IMF also featured in the fifth place post in which Oxford Analytica drew on IMF and OECD data in September to conclude that Speculation Does Not Explain Apparent Housing Overvaluation.
The sixth place post based on a June Moody’s report, Global Junk Bond Default Rate Doubled in First Five Months, now seems modest. Standard & Poors now expects the speculative default rate to triple in the next 12 months. Standard & Poor’s served up the seventh most popular post, in which the ratings agency accurately assessed that Lehman Failure’s Impact on European Banks would be significant.
In what now seems like understatement, the eighth place post based on a June report from Audit Integrity was also right on the money: Credit Default Swaps Adding Rather Than Mitigating Risk? Moody’s July Guide To Interpreting Mark-to-Market Losses of Monolines took the ninth spot.
In what may now seem like wishful thinking, rounding out the top ten on a more optimistic note was KPMG’s July report Greentech Expected to Lead Resurgence of IPOs in 2010.
Technorati Tags: (LEH), CDS, credit-default-swaps, european-banks, green-tech, Hedge-Funds, housing, IPO, junk-bonds, Lehman, litigation, monoline-insurers, oil-exploration, oil-refining, private-mortgage-insurers, structured-finance, subprime, Zeitgeist
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
US regional banks were top-of-mind at Research Recap this week. Last week’s popular post from Oxford Analytica, Regional US Banks May Need Rescuing, was the most-read post this week, while S&P “Very Cautious” on US Regional Bank Credit Quality made the top five as well. Standard & Poors also nabbed the second spot with Distressed Finance Sector Junk Bonds at Stratospheric Level while Audit Integrity’s Forensic Analysis Gives Clues to Lehman Problems came in at number three.
Monoline Stock Price Rally Overdone, from CreditSights, was also popular, and has since been followed up wiith MBIA Takes the Best, Leaves FGIC with the Rest. CreditSights sees the reinsurance transaction involving MBIA and FGIC as a positive credit development for MBIA, but says it does little to solve FGIC’s longer term solvency issues.
Outside the credit markets, Forrester Research’s provocative prediction “Serious Gaming” to Take Off in Coming Years was also well read.
Elsewhere, the surprising upward revision in second quarter US GDP growth to 3.3% was a hot topic. Felix Salmon at Portfolio.com laments what he sees as the decline of the quality of government economic statistics. FT Alphaville, goes further calling the number “laughable.” Yves Smith at Naked Capitalism smells “manipulation for political purposes.” There’s no clear evidence of this: there do not appear to have been any cahnges in which the caluclations are made. But you don’t need to agree to wonder about the discrepancy between the implicit priced deflator used to measure inflation in the GDP calculation (1.2%) and the much higher CPI and PPI numbers.
Research Recap Quote of The Week:
In other words, there would be only two persons of working age for every person aged 65 or more in 2060, compared with four persons to one today. – Eurostat – commenting on demographic projections for the 27 European Community nations.
Technorati Tags: aging, credit-risk, demographics, economic-data, forensic-accounting, gaming, junk-bonds, Lehman, monoline-insurers, regional-banks, Zeitgeist
Concerns about the commercial real estate market bubbled to the top of Research Recap this week as visitors looked back to a June report from Standard & Poor’s: CMBX Index Causing Commercial Real Estate Capital to Dry Up.
More recently Moody’s noted this week that US commercial real estate prices fell for the fourth straight month in June, and today the New York Times reports that Some Fear Commercial Property Loans Will Be Next Stage in Downturn.
Also popular was Audit Integrity’s report that Forensic Analysis Gives Clues to Lehman Problems, which noted that Lehman’s travails can be traced back to mid 2006. Rumors continue to swirl around Lehman’s future, most recently with reports of a possible foreign buyer or a hostile takeover.
Fannie Mae and Freddie Mac appear to be inching closer to some sort of potentially hostile takeover by the federal government. Fannie CEO Daniel Mudd told public radio’s Diane Rehm that Fannie had neither requested nor been offered a bailout and he did not anticipate asking for one. Indeed, listening to the podcast you’d think there was not too much amiss at Fannie Mae. Asked about Fannie’s subprime debt Mudd described it as “very tiny, actually it rounds out to about zero percent of our overall book.”
While nobody expects the number of failures that characterized the savings and loan crisis, Regional US Banks May Need Rescuing, according to a well-read post from Oxford Analytica. However, unlike the largest financial firms, regional banks may not be regarded as too big to fail.
Embattled monoline insurers showed signs of life this week after S&P reaffirmed the AA status of Ambac and MBIA, but in another popular post, CreditSights opined that the resulting Monoline Stock Price Rally was Overdone. CreditSights remains skeptical about the monolines’ plans to restructure themselves.
Research Recap Quote of The Week:
The Wall Street consensus is that at least 150 institutions may fail over the next 18 months.- Oxford Analytica.
Technorati Tags: (LEH), banking-system, commercial-real-estate, Fannie-Mae, Freddie-Mac, Lehman, monoline-insurers, subprime-mortgage, Zeitgeist
The recent rally in the stock prices of monoline insurers Ambac (NYSE: ABK) and MBIA (NYSE: MBI) is overdone, in CreditSights view. “While there is no denying there have been several positive developments, we think Ambac and MBIA are still far from back to where they were before the credit meltdown,” CreditSights says in a new Monoline Monitor report.
“In our opinion, the direction of the recent rally in major monoline securities may be justified but the magnitude of the shift seems premature.”
Perhaps the most positive development over the past month was when Ambac and MBIA had the AA financial strength ratings on their primary insurance subsidiaries removed from CreditWatch Negative by Standard & Poors. The rating agency’s outlook on both companies is negative. S&P said that the removal of the negative outlook for both companies will depend on clarification of ultimate potential losses as well as future business prospects, the outcome of strategic business decisions, and potential regulatory developments.
“While the action does help reduce pessimism, the wording in the S&P release indicates that it believes both companies have likely impaired their franchise values, which will be problematic in jumpstarting their new subsidiary strategies.”
Hypothetically, if the regulators approve the recapitalization of Ambac’s and MBIA’s dormant subsidiaries and then if the agencies rate these subsidiaries at the triple-A insurance financial strength level, we just don’t know if there is any demand for their wraps in the first place.
Technorati Tags: (MBI), abk), Ambac-Assurance, MBIA, monoline-insurers
Looks like Richard Syron has a lot of work to do to. On top of reporting a dismal quarter and being downgraded, Freddie Mac’s (NYSE: FRE) chief was pilloried on the front page of The New York Times for allegedly ignoring internal warnings that the GSE was taking on too much risk. He acknowledged hearing the warnings but said his options were limited. The article concluded with the quote: “I’ve had four other jobs as C.E.O., and I came out of them all pretty well,” Mr. Syron said. “What I’m working for right now is to save my reputation.” He’s certainly not alone in having taken on too much risk, but as they say … good luck with that.
Worries about credit card debt being the next credit sector to come under pressure were evident in the popularity of Research Recap’s top post of the week, Fitch Ratings’ Prime Credit Card Chargoff Rate to Exceed 7% by Year-end. However, both this report and the also-popular S&P Upbeat on Outlook for Credit Card-backed Securities found that the sector is in relatively good shape.
Given the confusion over the state and prospects for the struggling monoline insurers, it comes as no surprise that Moody’s Q&A on Financial Guarantors was also well read. This in turn led to renewed interest in Moody’s month-old Guide to Interpreting Mark-to-market Losses of Monolines.
The International Monetary Fund’s Euro-Area Subprime Bank Losses to Hit GDP by 0.2-0.3 points drew strong interest, as did its Loan Technology Causes “Bad Banks” To Take on More Risk, which may have led visitors back to its now classic December report Role of Hedge Funds in Subprime Crisis Examined.
For a change of pace, also polular was Forrester’s report on how Sustainability and Profits go Hand-in-hand, at least for Herman Miller, maker of the iconic Aeron chair.
Research Recap Quote of the Week:
“If I had better foresight, maybe I could have improved things a little bit, but frankly, if I had perfect foresight, I would never have taken this job in the first place.” – Richard F. Syron, CEO Freddie Mac
Technorati Tags: asset-backed-securities, banking-system, credit-cards, Hedge-Funds, monoline-insurers, subprime-mortgage, sustainability, Zeitgeist
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
Maybe the big three US automakers should order a few copies of Oxford Analytica’s report arguing that the automotive business model needs a radical rethink. OxAn’s thesis, which was bolstered by another dismal quarter at General Motors (NYSE: GM), generated the most interest at Research Recap this week. Further misery was heaped on GM by Standard & Poor’s, which downgraded the automaker to BB- from BB. You know you’re in trouble when a rating agency uses the word “dangerously” in assessing your outlook:
The negative outlook reflects our expectation that current liquidity levels could be almost halved by cash losses in 2008 and 2009, sinking to dangerously low levels if management’s cash-saving actions or capital-raising activities fall well short of plan.
And piling on the pain, S&P also cut its rating on GM’s 49%-owned GMAC. GM/GMAC face the triple whammy of weak domestic new car sales, plummeting prices of gas-guzzling vehicles coming off leases and a challenging credit market.
Ford Motor Company (NYSE: F) and its credit unit received similar treatment from S&P.
Merrill Lynch (NYSE: MER) CEO John Thain’s latest round of stable-cleansing was another hot topic this week, led by CreditSights’ analysis that the Merrill’s moves make it a more attractive takeover target for the likes of Goldman Sachs, (NYSE: GS) HSBC (NYSE: HSBC), Bank of America (NYSE: BOA), and JPMorgan Chase (NYSE: JPM).
The question remaining is whether and when other banks will need to remark their shaky structured finance holdings to the levels implied by Merrill’s write downs. For better or worse, Merrill’s move to extricate itself from XL Capital puts a marker (20 cents on the dollar) for unraveling the monoline bond insurance tangle.
Deustche Bank (NYSE: DB) chief Joseph Ackerman also was a man in the news. Deutsche’s latest writedown of $3.6 billion was substantial but less than half the amount that JPMorgan calculated would be needed to reflect the valuations implied by Merrill’s actions. As a result of the writedown S&P cut its rating on the bank and gave it a negative outook:
The downgrade reflects that we no longer consider Deutsche Bank’s performance to be materially stronger than that of the leading peers in the currently difficult environment.
Meanwhile, writing in the Financial Times, Ackermann was editorializing on how banks can win back confidence by adopting the International Institute of Finance’s proposed new code of conduct for banks. This led to some ribbing from FT Alphaville, but Ackermann also drew a flattering profile in the New York Times. As for the IIF’s laundry list of recommendations, it is filled with many sensible-sounding “shoulds” but appears to be lacking in teeth.
European banks are by no means out of the woods. In another top post this week, S&P said it expects more downgrades in the European banking sector into 2009.
It was indeed a good week for OxAn, whose report on efforts to tweak the new Basel II capital requirements for banks was also well read. OxAn’s view: failure to grasp the significance of the risks to the banking system could lead to national authorities taking more stringent unilateral action.
Research Recap Quote of the Week
…managing complex financial institutions requires raising the bar on risk management, underwriting and disclosure if companies are to prosper in the very competitive global marketplace. – Josef Ackermann, CEO, Deutsche Bank
Technorati Tags: (DB), (F), (GM), (MER), automotive, banking-system, Basel-II, european-banks, monoline-insurers, structured-finance, write-downs, Zeitgeist
How quickly things change in the current volatile financial markets. In little more than a week, the discussion over Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) has moved from temporary measures to shore up their capital bases to serious consideration of how to dismantle them.
Long a critic of the GSE’s “deeply flawed” private/public structure, The Economist leads the charge for privatization:
…now that the guarantee is explicit, Mr Paulson should seek to secure the gains for taxpayers and treat Fannie and Freddie like one of their own mortgages, by nationalising them, breaking them up and selling them on.
Former Treasury Secretary Larry Summers told NPR he would not be surprised if the government has to take an equity position in Fannie and/or Freddie at some point. In a new report, Oxford Analytica says “political support will grow for a major overhaul of the GSE system under the next administration.”
The irony of the situation is that arguably the most free-market administration in living memory is once again forced to resort to government intervention to save the day.
It’s also hard to make sense of the varying fortunes of the major financial insitutions, with JPMorgan Chase (NYSE: JPM)and Wells Fargo (NYSE: WFC) outperforming expectations, and Merrill Lynch (NYSE: MER) again disappointing. Citigroup’s $2.5-billion quarterly loss announced today also was better than expected, but another $7 billion in writedowns is nothing to be proud of. The diverging fortunes do drive home the point that while the credit crunch affects virtually all financial institutions, superior management can make the difference in how they navigate the stormy waters.
Still, Merrill chief John Thain was admiraby forthright in summing up the current situation, as the FT reports:
We continue to be in a difficult period. House prices are still falling. You have rising energy prices, rising food prices and rising unemployment. All those are going to drag on the economy and that’s not good for business or for asset prices.
Subrime fallout again topped the Research Recap charts, with NERA Economic Consulting’s analysis of the rise in subprime-related litigation our most popular post by a wide margin. This was the third in a series of reports from NERA, all of which have proved immensely popular with our visitors.
Also highly read was Fitch’s report on the worsening troubles of US mortgage insurers as was an earlier report on the same topic from CreditSights.
The Center for Economic Policy and Research’s calculation that the US housing crash is eliminating 20 years of increases in wealth drew strong interest, as did Moody’s guide to interpreting mark-to-market losses of monoline insurers.
Research Recap Quote of the Week:
Current biofuel support measures alone are estimated to increase average wheat prices by about 5 percent, maize by around 7 percent and vegetable oil by about 19 percent over the next 10 years. – OECD
Technorati Tags: Biofuels, food-prices, housing, monoline-insurers, mortgage-insurance, subprime-mortgage, Zeitgeist
While the federal government wargames potential scenarios for propping up Fannie and Freddie, ripple effects from the housing crisis continue to spread. Default trends among private mortgage insurers, based on a new report from CreditSights, raised alarms in our most widely read post of the past week, with Radian Guaranty seemingly most at risk.
Meanwhile, Moody’s published a useful guide to interpreting mark-to-market losses of the monoline insurers. The ratings firm noted that “while mark-to-market losses may not represent a true indicator of credit deterioration, neither are they merely accounting noise, particularly in the current environment”.
More evidence of the spread of housing related gloom came in a report from Fitch that US title insurers’ capital ratios are at their lowest level since Fitch began monitoring them 10 years ago.
In making its bid for specialty chemicals maker Rohm & Haas, one hopes the Dow Chemical team first read Moody’s Negative Outlook for US Chemicals Companies. The report, which notes Dow’s interest in building their specialty chemicals business, detailed that many such companies, including Rohm & Haas, had large exposure to increased feedstock and energy costs.
Perhaps as a distraction to all the negative news in the market, the Forrester report, How Video Will Take Over The World, remained among the top posts for the third week running.
Technorati Tags: chemicals, housing, M&A, monoline-insurers, PMI, subprime, title-insurers, video, Zeitgeist
