U.S. subprime residential mortgage-backed securities, or RMBS, originally rated “AAA” and issued from mid-2005 through mid-2007, will see much smaller write-downs than the $180 billion projected for the underlying mortgages, said Standard & Poor’s RatingsXpress Credit Research.
As a result, while RMBS investors will see significant losses — an estimated $85 billion – that is far less than the losses generated by the underlying collateral, S&P said, mainly due to they way RMBS are structured.
We expect realized collateral losses in U.S. subprime RMBS transactions to accelerate as the current residential inventory is liquidated. As a result of significant collateral losses, we project that many subprime RMBS certificates will be written down. Depending on where a class is in a transaction’s capital structure, it may be written down by as little as 1% or by as much as 100%.
In S&P’s analysis, the ratings agency forecasts that subprime mortgage delinquencies will continue to climb and that by the end of 2009, home prices will have fallen nearly 30 percent from the July 2006 peak.
Home prices are down about 20 percent over the past two years, according to the S & P Case-Shiller Home Price Index, with declines accelerating over the summer.
For details, see “U.S. Subprime RMBS Losses For Original ‘AAA’ Bonds May Be Significantly Less Than Market Projections.”
Technorati Tags: collateral, credit-crisis, delinquencies, home prices, housing crisis, mortgage delinquencies, residential mortgage-backed securities, RMBS, S&P Case-Shiller Home Price Index, subprime, subprime lending, subprime-mortgage, write-downs
A survey of major bond market firms from mid-July to mid-August found that pessimism remains high in the industry and few participants see an end in sight to the downturn in global bond issuance, with structured debt hit hardest in 2008.
Standard & Poor’s Ratings Services commissioned the survey from Massachusetts-based Business Communication Strategies for 11 categories of bonds and five categories of structured finance.
Industry estimates of 2008 bond issuance remain very pessimistic and vary more widely than they usually do. In addition, bond market professionals seem very unsure about how low issuance is going and when it will turn around.
Among the findings of the survey:
- CDO, or collateralized debt obligation, issuance is expected to plunge 89 percent in 2008 after rising 1.1 percent in 2007.
- RMBS, or residential mortgage-backed securities, are down 90 percent in 2008, with respondents expecting little recovery through the end of the year.
- Corporate bond issuance is forecasted to decline through year-end, paced by an expected 43 percent drop in speculative-grade issuance.
- Credit card-backed securities could drop 6 percent in 2008, after surging 41 percent last year.
For details, see “Bond Market Professionals See Less Global Issuance in 2008.”
Technorati Tags: bond issuance, CDO, collateralized debt obligations, corporate-issuance, credit-crisis, credit-default-swaps, credit-markets, credit-outlook, residential mortgage-backed securities, RMBS, subprime-mortgage
Alex Blumberg and Adam Davidson continue to perform a valuable public service by explaining complex financial market issues in terms that normal people can understand. Their latest radio piece, broadcast on NPR on Friday and now available at NPR’s “Planet Money” blog, explains how the commercial paper market seized up, threatening to bring daily commerce to a halt. A longer version will broadcast on PRI’s This American Life.
An earlier piece by the two, Giant Pool of Money, which was highlighted on Research Recap in May, gets admiring coverage in today’s New York Times. Excerpts:
“Mike Garner, a bartender in Nevada turned mortgage bundler …. said that market appetites for anything that resembled a mortgage pushed loan standards down: ‘No income, no asset. You don’t have to state anything. Just have a credit score and a pulse.’ (Mr. Blumberg pointed out that the pulse thing was optional: 23 dead people in Ohio were also approved.)”
“It was clear even last spring that the people who perpetrated this fraud knew at some level what they were doing.”
“Mr. Davidson said that the idiosyncrasy of the instruments, combined with the overlay of technology, allowed the traders to live in denial. They would sit at terminals and use data — historical data that had been gathered before they started giving out money to people with no ability to pay — and decide that the risks were manageable. All of it was unreal, ineffable, tough to know. Except the way it turned out, as Mr. Davidson notes near the end of the story.”
“It’s as if the global pool of money thought it was putting trillions of dollars in a savings account, but really, half of it was going into a furnace. The money is gone, burned up, never to come back.”
Technorati Tags: Commercial-paper, mortgage-backed-securities, subprime-mortgage
The only certainty about the Paulson-Bernanke plan is its uncertainty. Opinion among economists, bloggers and other observers run the gamut from “necessary evil” to “outrageous and overreaching.” A consensus does seem to be developing that a plan will emerge within a week or so that includes some level of equity participation for taxpayers, greater congressional oversight, some help for strapped homeowners and perhaps some sort of curb on executive paychecks. One flimsy argument against taking equity in the affected financial institutions is that it might deter their participation. A more likely explanation is that it pushes the government even further down the road to socialism. Who would have believed that a Republican administration would find itself “nationalizing” financial institutions?
Here is a selection of some the more interesting and in some cases unconventional comments on the crisis:
Mark Thoma at Economist View offers a devil’s advocate argument in defense of paying a premium to current prices under the plan:
For markets to function according to competitive ideals, full information must be available to all market participants. When information is lacking, or when it is asymmetric, the outcome is inefficient relative to the full information outcome.
Barry Ritholtz at The Big Picture has 14 questions for Bernanke and Paulson:
Bonus comedy question: Are you now, or have you ever been, a Socialist? Do you know, or associate, with other Socialists?
Brad Setser at the Center for Geoeconomic Studies places the plan in the context of investments in the financial sector by Sovereign Wealth Funds.
The US taxpayer is now being asked to invest $700b to help recapitalize the global financial system – a sum that is more than 10 times as much as the world’s sovereign funds put in.
But, at least as I read Paulson’s initial proposal, the US taxpayer would not get any equity in the world’s large financial institutions in exchange for this help.
Naked Capitalism questions the premise that the banking industry must have government help to get back on its feet.
A banking industry expert, Bert Ely, who has a stellar track record in predicting crises and calling false alarms says that the banking industry can handle this mess internally and does not need subsidies.
John Hempton at Bronte Capital looks at the plan in the context of the Japanese and Norwegian bank collapses:
If you think that the Norway experience can be duplicated in any bank bail out – then unfortunately you are sadly mistaken. I doubt the average government can identify the difference between illiquidity and insolvency.
Perhaps, then, they should read Paul Kedrosky at Infectious Greed who explains the difference between lliquidity and insolvency:
So, could you have a bailout in which some toxic paper is bought from some (currently) healthy banks? Of course you could. Get over it already and let’s be adults about this stuff.
Nouriel Roubini at RGE Monitor, who has had a good track record so far during the crisis, thinks hedge funds and private equity wil be the next victims:
The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years.
Roger Ehrenberg at Information Arbitrage looks at the impact of Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) becoming regular banks.
Will Goldman and Morgan Stanley make the jump to behemoth (with a more stable, longer duration capital structure to support such a business) or pull back on focus more intensively on high fee-generating, less capital intensive businesses? I’m guessing they’ll go for being a behemoth but it is not clear that this is ultimately best for shareholders.
Warren Buffet’s bold investment in Goldman has done more to instill some confidence in the markets than all the jawing by Paulson and Bernanke, through as Felix Salmon at MarketMovers points out, news events have had little impact on Goldman’s stock price. Salmon also dissects a letter signed by a number of economists that is critical of the Paulson-Bernanke plan.
Meanwhile, Calculated Risk predicts that Goldman will use their new cash to acquire a commercial bank:
Goldman will buy some commercial banking assets by Friday. This is just a guess because of recent events: Goldman becoming a bank holding company, and Buffett investing in Goldman.
[It can not be good news for many mid-size commercial banks that Goldman and Morgan Stanley will be muscling in on their turf.]
CreditSights is “most interested in how this proposed plan can influence the type and pace of bank consolidations that seems to be part of ultimate resolution of some banks problem assets.”
Bigger troubled banks like WaMu (NYSE: WM) and Wachovia (NYSE: WAC) could benefit from the process once it is enacted and operationalized. But if the details are delayed by the political process and flexibility limited, this could delay some resolutions or lead to more negative outcomes for credit instrument holders.
Noting that major U.S. bank and brokerage firms’ exposure to risky Level 3 assets was at least $632 billion as of midyear 2008, Standard & Poor’s newly formed independent Market, Credit, and Risk Strategies group concludes that “the government bailout plan could end up costing less than the $700 billion headline figure.”
If the Treasury’s bold plan succeeds in stabilizing the credit markets, restoring confidence so that private-sector interests can now step in to bid for distressed Level 3 assets before the Treasury Dept. gets a chance to “cherry-pick” the balance sheets of major financial institutions, then it is plausible that the U.S. Treasury may end up spending a lot less than the $700 billion it is requesting from Congress.
Finally, FT Alphaville offers up a version of the “Nigerian email scam” that is scarily close to the mark:
I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude. I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of US$800 billion. If you would assist me in this transfer, it would be most profitable to you.
Technorati Tags: (BRK.A), (BRK.B), (MS), (WB), (wm), banking-system, berkshire-hathaway, credit-crisis, Goldman-Sachs, GS, morgan-stanley, Paulson-Bernanke Plan, subprime-mortgage, TARP, wachovia, warren-buffett, Washington-Mutual
Recent actions by ratings agencies on financial companies in the news:
Washington Mutual (NYSE: WM)
Moody’s downgrades WaMu financial strength to E; bank deposits remain at Baa3, with review for downgrade (Sep 22)
Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS)
Fitch Weighing Costs and Benefits of Goldman Sachs & Morgan Stanley as FHCs (Sep 22)
HBOS (NYSE:HBOS)
Fitch: Credit Update on HBOS plc (Sep 22)
Previous Ratings Roundup.
Technorati Tags: (HBOS), (MS), (wm), bank ratings, banking-system, credit-risk, Goldman-Sachs, GS, morgan-stanley, subprime-mortgage, Washington-Mutual
Residential mortgages have gotten most of the attention during the current credit crisis, but a heavy concentration of commercial real estate (CRE) loans may be a better metric for gauging which banks are most at risk for failure in the coming months, according to Standard & Poor’s.
Eleven banks failed in the first half of 2008 and not surprisingly, S & P’s RatingsXpress Credit Research is predicting more this year and in 2009, due to continued deterioration in capital ratios, liquidity and in CRE, land development and construction loans.
Since construction loans are bullet loans with interest reserves accruing until a project is completed, we expect that problem construction loans will continue to rise in coming quarters. We also expect that loss severities among defaulted construction loans will be materially higher during this economic downturn compared with earlier downturns given sharp price declines among homes and condominium projects.
The rating agency also said most of the failures would be concentrated in small banks, especially those with a high degree of exposure to commercial real estate.
Among banks that have already failed this year, CRE loans accounted for an average 60 percent of loan portfolios. In contrast, in the three bank failures of 2007 more than 70 percent of the loan portfolios were concentrated in residential loans.
Banks with significant exposure to real estate in California, Nevada, Florida, Arizona, Michigan and Georgia are suffering the biggest downturns in credit quality, and S & P said it expects further home price declines and economic weakness to continue pressuring banks active in those markets.
S&P said while it’s hard to predict the number of bank failures, it does not believe failures will reach the levels seen during the savings and loan crisis of the late 1980s and early 1990s.
For details, see “U.S. Bank Failures Expected to Rise.”
Technorati Tags: Add new tag, Arizona real estate, bank credit, bank failures, bank ratings, banking, banking-system, California real estate, commercial-real-estate, construction loans, CRE, Credit Research, credit-crisis, Florida real estate, Georgia real estate, land development, loan losses, MHP, Michigan real estate, mortgage, Nevada real estate, subprime-mortgage
In this space last week we wrote that a financial hurricane awaited if Lehman Brothers was not bailed out over the weekend. But we had no idea quite what a momentous and tumultuous week lay ahead.
So there are no prizes for identifying the Zeitgeist this week: the most turbulent financial market action in many, many years that elicited rounds of name-calling, emergency actions and waves of real and rumored deals. It saw a rather generic statement by President George W. Bush that bizarrely coincided with the start of the strongest two-day stock market rally in history. The more the financial crisis unfolds, the less we seem to know what’s really going on. As last week, expectations are very high that some sort of government-backed “bad debt collector” will emerge from the huddle of regulators and congress, so again, the market could be in for a fall if they don’t deliver.
Visitors to Research Recap were interested in the ripples from the latest developments, with S&P’s report Lehman Failure’s Impact on European Banks (S&P) topping the list.
They also seemed to like our new “Ratings Roundup” that compiles recent moves by the ratings agencies, which were coming thick and fast this week. The first of these, Ratings Roundup: AIG, WaMu, BoA/Merrill,
was our second most popular.
Further worrying signs were found in the third most popular post, Moody’s US Credit Card Performance Continues on Downward Trend. And CreditSights’ Analysis of Recent Financial Deals was also well read, as was 24/7Wall Street’s Solar Energy Firms Taking Hit from Lehman Failure.
Research Recap Quote of The Week:
In other words, instead of deleveraging, the banks have just shifted a chunk of their risk to the central bank. - Bianco Research, as quoted by The Economist.
Technorati Tags: (AIG), (BCS), (BOA), (HBOS), (LEH), (LYG), (MER), (wm), asset-backed-securities, Bank-of-America, banking-system, Barclays, credit card debt, credit-crisis, credit-ratings, european-banks, Lehman-Brothers, Lloyds TSB, merrill-lynch, renewable-energy, solar-energy, structured-finance, subprime-mortgage, Washington-Mutual
This American Life is making a name for itself digging into arcane economic and financial issues. Latest example is Alex Blumberg’s valiant effort to understand and explain naked short selling. The podcast includes some interesting comments illustrating SEC Chairman Christopher Cox’s hands-off approach to regulation and his being AWOL during some of the market’s critical moments.
The piece takes a critical look at the SEC’s emergency order to curtail naked short selling of Fannie Mae, Freddie Mac and a number of Wall Street financial firms, despite the fact that the SEC already had the tools to prevent abuses of short selling. It claims that the measure in any case had little or no impact, perhaps because naked-short selling was not much of a factor in the first place. Now, according to the Wall Street Journal, Cox is seeking to further tighten and extend restrictions on short selling.
The story is also on NPR’s Planet Money podcast, an outcome of TAL’s Giant Pool of Money show, in which Blumberg and NPR’s Adam Davidson did an admirable job of explaining the origins of the subprime crisis through the voices of actual participants.
As an aside, the Episode includes an alternately amusing and chilling account of “internet enforcers” who gave a Nigerian email scammer a toxic taste of his own medicine.
Elsewhere on the radio dial, the Diane Rehm Show’s look at the Lehman fallout included interviews with the top economic advisors to the presidential candidates, neither of whom offered a very convincing plan for handling the current financial crisis, but had plenty of ideas about how to prevent one in the first place. Interestingly both sides see a need for more regulation, with even the McCain camp supporting the view that the SEC was asleep at the switch.
We’ve seen a failure for example at the SEC to be be anywhere present in these crises. - Douglas Holtz-Eakin, top economic advisor to Sen John McCain
Finally, former Fed Chairman Alan Greenspan’s comments on ABC’s This Week, are less self-justifying than usual and include a few insights, including a defense of short-sellers.
There’s no question that this is in the process of outstripping anything I’ve seen, and it still is not resolved and it still has a way to go.- former Fed Chairman Alan Greenspan.
Technorati Tags: (LEH), financial-regulation, Lehman-Brothers, naked short selling, subprime-mortgage
Research Recap predicted a financial hurricane if a solution to Lehman Brothers’ (NYSE: LEH) predicament was not announced this past weekend - but not several. Clearly the financial markets are getting to be more and more like the weather, with storms lining up behind each other to hit with unpredictable force and in unpredictable places.
With Hank Paulson and Ben Bernanke unwilling to supply any more government-issue lipstick to make Lehman sufficiently attractive, potential pig Merrill Lynch (NYSE: MER) figured they’d better nail down a date for the subprime prom. This made Bank of America (NYSE:BAC) chief Ken Lewis the individual winner (at least for now), already crowned the “New King of Wall Street” by CNBC, though Merrill boss John Thain is looking pretty clever for extracting a premium for his sickly bull. However this deal pans out, you have to give them credit for putting it together start-to-finish in less than 36 hours. For a transcript of their mutual lovefest conference call, click here.
The biggest loser without a doubt is Lehman’s Dick Fuld, apparently undone by his trader mentality that led him to gamble and lose. He could lose that title soon, now that AIG (NYSE:AIG) is in the crosshairs, edging out Washington Mutual, (NYSE: WM), at least for now. Current indications are that the government may be willing to do more to secure AIG’s future, given its importance in the insurance industry
Meanwhile, it is unclear exactly how much impact the 70-billion dollar mutual assistance fund put together by the big banks will have, but the mere fact of its creation in itself is sign of how perilous these times are. As The Economist points our in a typically succinct summary of the story so far, most analysts think that the deleveraging still has far to go. “Some question how much has taken place. Bianco Research notes that while the credit positions of the 20 largest banks have fallen by $300 billion, to $1.3 trillion, since the Fed started its special lending facilities, the same amount has been financed by the Fed itself through these windows.
In other words, instead of deleveraging, the banks have just shifted a chunk of their risk to the central bank.
Elswhere, FT Alphaville, and MarketMovers have ably delivered play-by-play color commentary.
The consensus seems to be that the stand-alone investment banking model is dead, as argued at Portfolio.com. CreditSights digs deep into the topic and sees diversified bank/brokers as the relative winners, lowering its price target for Morgan Stanley (NYSE: MS), maintaining it for Goldman Sachs (NYSE: GS) and Citigroup, (NYSE: C), while raising it for JPMorgan (NYSE: JPM) and Bank of America.
Technorati Tags: (AIG), (bac), (c), (JPM), (MER), (MS), (wm), Bank-of-America, banking-system, Citigroup, Goldman-Sachs, GS, investment-banking, JP-Morgan, merrill-lynch, morgan-stanley, subprime-mortgage, Washington-Mutual
Continued housing market weakness and the uncertain long-term future of Fannie Mae and Freddie Mac is putting yet more pressure on the beleaguered mortgage and title insurance industries.
A new report from Standard & Poor’s graphically illustrates the declining fortunes of title insurers. Unlike most other insurers who receive regular premiums over the life of the policy, title insurers generally receive one payment and reserve against estimated future losses at that time. If those losses are higher than the title insurers anticipated, their profitability will erode, S& P says.
“Moreover, the overall decline in sales volume is making the problem worse. With fewer mortgage originations, there are simply fewer title searches to conduct). The insurer can mitigate some of this effect if it has some market share in commercial title insurance, but no rated title insurer derives more than a tenth of its revenues from this source. Of the four major rated title insurers, all carry negative outlooks. The strongest among them, Fidelity National Title Insurance Co., has a financial strength rating of ‘A’, while we recently cut our rating on the weakest, LandAmerica Financial Group Inc., to ‘BBB+’ from ‘A-’.”
Mortgage insurers also face an uncertain future with the loans they insure for Fannie and Freddie, who count heavily on the mortgage insurers’ ability to satisfy claims on defaulted mortgages, S&P says.
If the GSEs’ ability to purchase loans in the future is reduced because of ongoing losses, not only would it crimp a given mortgage insurer’s revenue, but it would also reduce mortgage volume and home-buying activity.
Details are available in Mortgage and Title Insurers: Also Sucked into the Housing Swamp.
Technorati Tags: housing, mortgage-insurance, private-mortgage-insurers, subprime-mortgage, title-insurers