28JAN09:
Q1-09 DOW: 8900
Q2-09 DOW: 7250
Q3-09 DOW: 5810
Q4-09 DOW: 3960
CITI NATIONALIZED
OBAMA GETS SICK 27AUG09:
Mini Crash 21SEP09 Predicted correctly:
Bailout=Bonuses
Demise of Bear Stearns
Demise of Lehman Bros.
Demise of AIG
Subprime would cause problems
Date of 2007 crash
CRAs were to blame
G20 riots were a party
Northern Rock run
Northern Rock Nationalization
HBOS and RBS demise
UBS really was Useless
The rise and fall of Daniel Sadek speaks volumes for the current crisis in the US housing market. Only five years ago he was selling secondhand cars in Orange County, California. Then came a surge of easy money that banks, sanctioned by the US Federal Reserve, pushed into the mortgage market. Mr Sadek bought a $250 (£125) state lender's licence and began selling home loans. By the end of last year the Lebanese immigrant and self-styled Generation X-er - with his long hair, baggy jeans and T-shirt - had sold $3.8bn of loans and made $80m in profits. Cars remained a theme. He owned a fleet of sports cars and bankrolled an action movie that featured lots of crashing cars.
Not long after he smashed up his £700,000 Ferrari Enzo, his mortgage broking firm, Quick Loan Funding, went into reverse. Interest rate rises were hurting his customers.
Mr Sadek was selling new-style - at least to US homebuyers - variable rate mortgages. At the turn of the century, the US mortgage market was dominated by fixed rate loans, usually running for the full 25-year term.
Like many of the new breed of lenders, Mr Sadek sold variable loans to homebuyers with poor credit histories at rates usually two or three percentage points above the prime mortgage rate offered by mainstream banks. As interest rates started to rise, increased borrowing costs tipped many of his customers over the edge. It was the same across the country where homeowners were bagging up their belongings and handing back their keys as they found the cost of paying a mortgage crippled their finances. Some of Mr Sadek's customers have sued, alleging his firm was guilty of predatory lending.
Other firms have found themselves accused of much worse. Thousands of mortgages were sold to criminals who defrauded the system. So keen were banks to lend, that the self-certified mortgage took off. This allowed people to think of a figure for their income, multiply it by 10 and apply for a mortgage. Many were accepted only to find the buyer subsequently disappeared with the money.
While the crisis in the loans market has had devastating effects in many US households, it now risks reverberating throughout the financial system.
Many of the low-grade loans are believed to be held by US lenders caught up in the collapse of the sub-prime mortgage market. Some of the world's biggest banks supported the loans sold by Mr Sadek and other brokers. Citigroup, Morgan Stanley, Lehman Brothers and JP Morgan Chase in the US and HSBC and Barclays are just some of the lenders sitting on huge losses. A report by analysts at Lombard Street Research has estimated that the crisis could knock a hole in the banks' assets of up to £250bn. Few banks have so far assessed the extent of their losses, but they could soon be forced to address this issue.
Many repackaged the mortgage debt and sold it to other institutions as part of complex financial instruments. Banks pool the debts they buy, grade them according to their risk profile, and package them as so-called collateralised debt obligations (CDOs) to sell on to other banks and institutions. The problem is that these instruments are traded between banks which gives them a value, but no official market. Their value is based on a model contrived by the investment banks who sell them. Until one of the banks begins selling these CDOs in the open market no one really knows what they are worth. If banks are forced to sell their CDO holdings or mark down their value, it could result in a wholesale re-pricing across the sector, leaving some institutions with a large hole in their finances.
"It's back to game theory. It is in everyone's interests to sell, but the danger is that you spark a collapse that means you lose more on the debt you retain than the debt you sell. The alternative is to sit on it and hope for better times. It's almost a conspiracy of silence. But no one can think of a better idea," said one analyst.
Last week the US investment bank Goldman Sachs gave some indication of how the value of these instruments can change when it began a revaluation of its portfolio of mortgage-backed debt securities. Goldman cut the value by almost 30%, wiping $1.5bn (£750m) off the value of its assets.
Regulators in the US are ignoring the problem, say critics, because they also realise that adopting a hard line and forcing a market price on these packages of debt, will flush out catastrophic losses. The increased use of CDOs, often referred to as debt derivatives, created a web of holdings by banks which bought and sold from each other. To the US central bank the web was so wide it spread the risk and allowed banks to extend lending to poorer households.
It means that many banks now harbour debt portfolios that are difficult to value and which could turn out to be worth a lot less than expected.
Anthony Bolton at Fidelity, one of the best-known UK fund managers, recently warned that if these debt cross-holdings start to unravel, it will leave everyone with bigger losses than expected.
To the banks it is not just a paper money problem; many of the empty homes they have repossessed are now sitting directly on their books. There are districts in Orange County, across Florida and many other parts of the US where they own hundreds of homes. Congress is beginning to ask if keeping these homes empty is the best policy. Shouldn't they be sold and families move in? If that happened, the very real losses on selling homes would again leave large holes in the banks' accounts. Worse, it might cause a collapse in confidence in the housing market, with all the implications that flow from falling prices and negative equity.
In the past few months several banks have warned that mass defaults on loans in the US have cut their profits. Two hedge funds that invested in the sub-prime mortgage market run by investment bank Bear Stearns have collapsed along with a few other smaller hedge funds. Still there is little information about the extent of the CDO market, let alone the losses banks have taken in the last year.
Lloyd Blankfein, the chief executive of Goldman Sachs, said last month: "The biggest risk we face would be a very big crisis in the credit markets." His warning echoes that of others who fear that the fallout from the sub-prime mortgage crisis could spread further afield.
Some critics say the Federal Reserve and Alan Greenspan, its former chief, take a good part of the blame. In a series of speeches he encouraged innovation in the credit markets that would allow banks to price the risk of lending to low-income households and those with poor credit histories. As late as 2005 he was making speeches encouraging banks to develop this market.
He said: "As we reflect on the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means."
Without these forces, it would have been impossible for lower-income consumers to have the degree of access to credit markets that they now have.
Mr Sadek is still selling mortgages. He told the newspaper, the Orange County Register, back in May that he had sold all his cars and mortgaged his homes, including a £2m Newport County mansion, to keep his firm afloat.
Other firms have fared less well. About 93 brokers have gone bust according to one count and there could many more to follow. The banks could also be about to share the pain.
Fintag says There you go. Having started on series 4 of the OC, I now understand my attraction is not oggling at people in their late 20's playing teenagers but subconsciously oggling at the trigger that will bring the financial markets down.
In years to come when I write my best seller "The Cohens and Financial Armageddon", you will not be so smug to think I am off my rocker.
CANADIAN BEAR
Speculation Swirls Over CIBC's Subprime Exposure (reuters) Speculation about the size of Canadian Imperial Bank of Commerce's (CM.TO: Quote, Profile , Research) exposure to the troubled U.S. subprime mortgage market swirled once again on Monday as the bank's name was mentioned in another report in a U.S. publication.
"The Canadian bank CIBC has acknowledged ownership of around $330 million, though some observers say the figure could be more than $2 billion," Barron's newspaper said without identifying the "observers."
"That estimate would constitute a substantial chunk of the bank's approximately $13 billion in shareholder equity."
Rob McLeod, a spokesman for CIBC, Canada's fifth biggest bank, said that a statement the bank made last month and published in the Globe and Mail newspaper still "reflects the situation."
Bank spokesman Stephen Forbes told the newspaper in June that an article in Grant's Interest Rate Observer, a New York-based financial newsletter, speculating that CIBC could have exposure to the subprime market of up to $2.6 billion was "simply not true."
"As we have commented previously, our exposure to the subprime market is indirect through our participation in structured credit transactions," Forbes said at the time.
"The majority of this exposure is rated triple-A. Our direct exposure is well below what the report suggests."
Fueled by rising interest rates, defaults by less credit-worthy U.S. homebuyers on higher-risk, subprime mortgages have been rising in recent months, raising concerns about banks' and hedge funds' exposure to potential losses of billions of dollars.
BMO Capital Markets analyst Ian de Verteuil said he believed CIBC's "most material" exposure was to a $330 million senior secured tranche of an underwriting that ran into problems in April with the decline in fixed income markets.
"It appears as if the bank already took some charges in its second quarter for the deterioration in the subprime sector," de Verteuil said in a note to clients.
He added that it was "scarcely surprising" that a large fixed-income trading operation has some exposure to the U.S. residential subprime market.
"We believe that CIBC has good processes to ensure that unhedged trading exposures are prudent and limited. While losses can and do occur in any trading operation, we believe the impact of the meltdown in subprime in the U.S. is limited for CIBC," he said.
CIBC's stock was down 44 Canadian cents on the Toronto Stock Exchange at C$94.87 on Monday afternoon. Other banking stocks were mixed.
($1=$1.05 Canadian)
Fintag says I like the way that the news of banks being caught out and exposed to subprime trickles through. I am sure that for some institutions their PR machines are in overdrive trying to avoid doing a "Bear Stearns".
State Street passes $10bn for 130/30 (financialnews-us) State Street Global Advisors has become the first fund manager to break the $10bn (€7.3bn) barrier in assets under management for so-called "130/30 strategies", which allow traditionally long-only investors to take limited bets on share prices falling.
The figure confirms State Street's place among the top tier of firms running this type of funds. Major competitors to the Boston-based manager include Barclays Global Investors, with $6bn under management, including $1.2bn in Europe.
Princeton, New Jersey-based quants boutique Jacobs Levy Equity Management is another significant player, with $4.2bn in the strategy.
In April, a survey from US investment magazine Pensions & Investments found that firms running these funds had attracted $30bn of investment, although this figure has almost certainly risen.
Quantitative managers tend to specialize in the products, because their stock-picking models can be easily adjusted to factor in short positions.
Managers including Goldman Sachs Asset Management and Axa Rosenberg, as well as State Street and BGI, are promoting 130/30 strategies in the UK.
Fundamental managers have recently been entering the fray, with houses such as Fortis, BlackRock and Bear Stearns Asset Management developing products.
State Street has promised to launch more 130/30 fund to add to its existing stable of 14, and said it plans to run the products in "most markets and across the risk spectrum". State Street runs total assets of about $1.8 trillion.
Fintag says Ah!!!!!!!!!!!!
Well done on pulling off this media stunt. 130/30 is a joke, will always be a joke and always has been a joke but it looks like the joke is on me. To raise this sort of money is a joke.
130/30 is a pretend hedge fund strategy and has the ring tone of split caps all over it.
If BSAM are getting involved then it must be a great product.
Still, Statestreet are one of the world biggest stock lenders so they won't have any problems filling in the 30 part of the trade.
REVERSION TO MEAN
Fatal flaw in the new risk-resistant market (times) When Bear Stearns announced last month that two of its financial vehicles had lost a lot of money as a result of some misplaced bets on the fragile American housing market, the news seemed ominous.
Housing has been the dog that hasn't barked for the US economy in the past year. Or perhaps it would be more accurate to say that it has barked a fair bit and even chased one or two caravans down a couple of empty and overpriced streets, but it hasn't really sunk its teeth into the shins of the American consumer, as was widely expected.
A year ago it was almost axiomatic (at least among the gleefully gloomy community of financial commentators) that the great US housing bubble was set to burst, with consequences of untold magnitude for the American and perhaps the global economy. If US residential prices declined significantly from their excessive levels of the past few years, they would surely produce a sharp contraction in consumer wealth and spending and tip the American economy into its first recession since 2001.
But it hasn't quite worked out like that. True, weakness in the residential construction sector has subtracted something like a full percentage point from US economic growth in the past year, but this is hardly the Armageddon that was predicted. New research suggests that consumers did not seem to have spent as much of their increased wealth during the fat years as was previously thought, so when lean times rolled around, the negative effect was also much smaller.
But if the broader macroeconomic consequences of weak housing have failed to show up as expected, perhaps it is still possible that the narrower financial consequences will do the trick.
Here, attention has been focused on the market that has produced the most notorious financial neologism since Enron accounting: sub-prime lending.
Evidence of distress in the sub-prime sector - riskier loans, such as those to individuals with weaker credit histories or those based on high income multiple or loan-to-value ratios - was rife earlier this year. The financial pages were full of fabulous tales of mortgages of a design so exotic that they bordered on the rococo - 110 per cent loans advanced on the assumption that house prices would continue to rise at 20 per cent per year; no documentation “liar loans” that enabled some highly dubious individuals to borrow millions.
As house prices drifted down, these excesses were surely going to cause serious financial dislocation, with devastating consequences for some institutions and for financial markets more broadly. But again, so far, these widely expected shocks have not materialised. Why not?
Lost in so much of the handwringing hype and chronicles of collapse foretold about US markets in the past year has been the simple fact that in the past 20 years we have seen one of the most important financial revolutions in the history of capitalism.
The diversification of risk that was stimulated by financial deregulation in the 1980s has helped to shield markets from the broader consequences of financial dislocation. In the past, when economic conditions deteriorated, financial institutions that had lent money to borrowers bore the brunt of the risk. When their loans could not be repaid, these banks got into deep trouble, transmitting financial instability throughout the system.
Yet in the past 20 years, sophisticated financial instruments - securitised loans, derivatives based on the value of the underlying assets - have enabled markets to repackage and sell the original loans to investors around the world, spreading the risk so thinly that a downturn in one market does not result in financial collapse near by.
In effect, what these changes have done is to transform the famous old saying about lenders and borrowers. We used to say that if you owe the bank a thousand dollars, you've got a problem; if you owe the bank a million dollars, the bank has a problem. Now the probability is that if you owe the bank a million dollars it means you actually owe a thousand dollars to a thousand investors around the globe. If you default, you don't bring your bank down with you. It merely means pension funds and insurance companies are a little bit worse off than they were.
But what about the Bear Stearns problem, you may ask. Doesn't it suggest that systemic problems can still build from contagion, even in the revolutionary new financial markets?
Bear's problem, in fact, seemed to have stemmed not directly from overexposure to a risky market, but from poor information about the quality of some of the assets in that market.
Put crudely, some of the securitised packages of sub-prime loans bought by Bear Stearns' subsidiaries and other hedge funds had absurdly high credit ratings. The ratings agencies responsible for determining how risky an asset class looks seem to have underrated the degree of risk in some of the sub-prime market.
If you put a lot of dodgy-looking loans together in a package, simple probability theory suggests that you should get a lower total risk of default than you would have with just a single loan.
But it ought still to look much riskier than buying the debt of a large blue-chip American company. Yet somehow those were the kind of ratings assigned to some of these sub-prime instruments.
Financial markets are much more liquid, much more flexible and much more sophisticated than they were 25 years ago.
That transformation has significantly reduced the risks of financial contagion from a crisis in one sector. But those markets still need accurate and timely information to function effectively.
Fintag says As we have noted time and time again the markets are run by people under 25 who have never seen homeless people before.
Michael Berger, who admitted hiding $400m (€294m, £198m) of losses from investors in New York-based Manhattan Investment Fund, was arrested while driving near Wels, north-east of Salzburg, on Friday, Austrian police said.
Mr Berger fled the US before his sentencing in 2002 for concealing losses run up while shorting internet stocks and had been rumoured to be in the Dominican Republic.
The capture of Mr Berger brings to an end one of the earliest cases of a hedge fund hiding losses from investors by doctoring documents sent to investors and auditors - a trick that has been repeated in several other hedge frauds in the US since then.
Mr Berger raised more than $575m for his hedge fund from wealthy individuals and big institutions, including Bank Austria, Credit Suisse and a Kuwait state fund, but lost $400m of it by betting against the internet bubble.
He pleaded guilty to the charges of modifying documents sent to investors and Manhattan auditors in order to hide the losses but later tried to recant his plea, saying he had not been of sound mind when he admitted them. A judge dismissed his reversal and he failed to turn up to his sentencing hearing.
As well as being prosecuted in the US and fined $20m by the Securities and Exchange Commission, Mr Berger sparked a legal race by investors to find connected groups with deep pockets. Investors unsuccessfully sued Manhattan's auditors but secured a ruling this year that Bear Stearns, its prime broker, should pay at least $125m. Bear is appealing against the ruling.
The Austrian police have been working with the US Federal Bureau of Investigation to track Mr Berger. “He was in hiding. It took a quite a long time until we hit on where he was,” a spokesman for Austria's federal police told Reuters.
Mr Berger, described during his prosecution as an Austrian, cannot be extradited to the US if his nationality is correct. The FBI, however, lists him on its “most wanted” list as a Briton with ties to Austria, adding that he “may speak with an Austrian accent”.
Copyright The Financial Times Limited 2007
Fintag says Next - a Hollywood film.
BAHT SIMPSON
Asian economies at risk (asahi) Ten years have passed since the Asian currency crisis in 1997, a regional financial meltdown triggered by the crash of the Thai baht.The financial tsunami quickly engulfed Indonesia, Malaysia, the Philippines and South Korea, sending their economies into a tailspin and raising serious concerns about the damaging effects on the global financial system as a whole. Has the world learned the lessons from the harrowing experience?
There were two main factors behind the disaster: financial globalization, which has greatly increased global flows of highly speculative, high-octane capital from investment entities like hedge funds; and the fragility of financial systems in emerging countries that were overwhelmed by the surge of such speculative money.
The countries struck by the crisis have pushed through such reforms as unraveling the collusive ties between governments and financial institutions and injecting more transparency into the management of corporate borrowers. They have also changed their foreign exchange policies to make themselves less vulnerable to currency crises, replacing their dollar-pegged regimes with floating exchange rate systems. The countries have enhanced regional financial cooperation under Japan's initiative.
But there is no room for complacency. The forces of globalization have become even more powerful in the past decade, and speculative funds are still on the prowl, ready to pounce on their prey. If the reforms that have been implemented are not enough, the risk of another regional collapse remains high.
The Thai baht and the South Korean won have climbed backed against the dollar and the yen to their 1997 levels. The rises of the currencies have been driven by strong exports of these countries and huge flows of investment capital into their stock markets amid a global liquidity glut.
However, when Thai authorities embarked on tightening controls on capital inflow to stem the baht's rise late last year, the Thai stock market tumbled.
In Asia, developing countries, like Vietnam, have yet to start opening their financial markets. Emerging countries in Latin America, the Middle East and other areas could also become "ground zero" of a new international financial crisis. It is simply impossible to eliminate all the risks.
And China's emergence as a major economic power poses a new risk. In 1997, its stringent capital controls insulated China from the contagion. But the country's economic growth at a breakneck speed has generated many vulnerabilities within its economy.
China's foreign exchange reserves have ballooned to $1.2 trillion due to growing direct investments from Japan and other industrial countries and its massive trade surplus. In a campaign to promote exports, the Chinese government has been selling a huge amount of the yuan to buy dollars to prevent the currency's appreciation. This currency intervention has generated an excessive money supply at home, resulting in bubbles in the stock and property markets.
If these bubbles burst, China could plunge into a serious financial system crisis as Japan once did. The consequences for the global financial markets could be devastating.
The liquidity glut in Asia stems from insufficient investment relative to savings. It is important for the countries in the region to rev up domestic investment as part of efforts to transform their export-oriented economies into more balanced economies driven mainly by domestic demand.
China should spend more money on developing its social security system and environmental protection to narrow the income gap between urban and rural areas. This would help stimulate consumer spending.
Asia's emerging countries are expected to serve as the main growth engine for the world economy. But they face many policy challenges that demand urgent actions.
Fintag says ..and the Asian markets love a bubble.
The agency hotly disputes private equity companies' claim that private ownership frees companies up from short-term pressures of equity markets, allowing them to invest and plan for the long term.
But private equity firms rejected Moody's claims, saying the industry does focus on long-term growth.
The latest attack on the industry comes as new figures revealed the recent Alliance-Boots £11 billion deal, which counted as the first FTSE 100 private equity takeover, boosted the size of private equity deals for the first half of the year up to a record £25bn.
Statistics released by researcher CMBOR said the total recorded for the first six months of 2007 was just £1.5bn shy of the total recorded for the whole of the previous year.
Even without the Boots takeover, the first half would have been a record £13.9bn - 31 per cent up on the same time last year.
Fintag says After my vitriolic attack on rating agencies yesterday, I see they are going after easy prey.
No wonder the markets are following my advice [Editor:You cannot say that] predictions and shorting them like crazy: Moody's Faces the Storm (wsj)
DUMMIES
US hedge fund launches on the rise (financialnews-us) Hedge fund managers have launched 40% more funds in the US in the first half of this year than in the same period a year ago and raised more money, according to a new survey.
Managers launched 72 new hedge funds in the US between January and July this year, according to Absolute Return magazine. The new funds included three that raised $1bn (€730m) or more, and a total of $14bn was gathered.
This is significantly more than in the same period in 2006, when 51 new hedge funds were launched in the US raising just under $12bn. Last year just one fund gathered $1bn or more.
The biggest launch in the first half of this year was Carlyle Group's Carlyle Bluewave, a multi-strategy fund that began trading with an estimated $2bn. The second largest was CarVal Investors' CVI global value fund, a distressed debt fund that raised $1.4bn. GMN Capital's GMN master fund raised $1bn.
The largest single strategy for which new funds were launched in the first half of 2007 was long/short US equity. A total of 28 funds following this strategy were launched, raising collectively $4.7bn. This was up from 19 launches and $2.9bn raised during the same period last year.
Fintag says ...and how many never get past the first 6 months? Not many. But good luck anyway.
JAMES BOND
Omega Fund to Settle U.S. Bribery Inquiry (nytimes) Omega Advisers, the $6 billion hedge fund run by Leon Cooperman, will pay $500,000 to resolve a federal bribery investigation into its investment of more than $100 million in Azerbaijan with the Czech financier Viktor Kozeny.
Prosecutors in New York agreed not to charge Omega, after the 2004 guilty plea of a former executive, Clayton Lewis, who admitted conspiring to bribe Azeri leaders. Omega admitted no wrongdoing while it “acknowledges responsibility” for Mr. Lewis's conduct, the agreement says.
The nonprosecution accord stems from a criminal case pending in New York against Mr. Kozeny, who is accused of paying millions of dollars in bribes to Azeri leaders in 1998 as part of a failed effort to win control of the state-run oil company in the Central Asian republic. Investors in the deal included Omega, the American International Group and Columbia University.
“The saga relating to Omega's 1998 investment in the privatization program in Azerbaijan has come to an end,” Mr. Cooperman said yesterday in a letter to Omega investors. “We were shocked and dismayed at Lewis's betrayal of the trust placed in him.”
Mr. Lewis is cooperating in the federal case against Mr. Kozeny, who is in the Bahamas fighting extradition to New York. Omega has sued Mr. Lewis in federal court in Manhattan, asserting he failed to disclose the bribes to his superiors.
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