Bear wanted to get this out of the public eye and bury it deep. I like the part about appropriate protection through hedging- yeah sure, like that is going to work now.
Oh well, enough of watching the fear part of wall street, someday it will end and we will go back to greed.
Meanwhile my progeny desires a trip to Disneyland, so I will not be blogging for an entire week. Try to have the PPT team put the plunge on hold until I return. I like seeing carnage like this live, not on a stale chart.
Last, but not least, A perfecta in ABX space- all of the issues closed on their record lows, with a number of the BBB tranches with a 30 handle.
Grim. Nice credit crisis going on here, and unabated by the fed.
AllenM, have a nice trip. As for my own (long ways off) vacation, we've also decided to stay in the US. Taking a cross-country tour to see some of our national treasures.
I'm looking forward to a lot of hiking and sleeping in rustic cabins.
And back to the market news: Bear will hide this as best they can, but it's an ugly failure for them no matter what. Angry customers, reputation hit, etc.
In other words, market makers knew the voices of the high grade fund staff, whereas BS' brokers can hide this junk amongst all the other product they're unloading.
NO, just get rid of it when the market tanks, to try to cover it up with kitty litter..
Some of this crap is becoming old news. They all hold the toxic waste, it is how well they can hide it, and for how long..
I could be wrong, but I think this particular event is a big nothing. Bear has already taken the pr/reputational hit on the funds. There may be some minor technical reason for doing this at this time, but Bear effectively said two weeks ago we own the assets, the equity is worth nothing.
Question :
How would fund investors know if BS really took a loss after the assets are sold at 'attractive values'? Wouldn't investors be eligible for a piece of the pie if BS is able to sell the assets for a profit?
Shouldn't BS therefore let fund investors know of the 'attractive value' it received after the sale is complete?
I can only hope Ben doesn't rush in and slash rates in a lame attempt to save these hopeless mired-in-debt LBO deals that should have never been considered in the first place.
It escapes me entirely how these deals that scour every nickel out of a marginally profitable company, then saddle it with staggering debt burden ever makes any sense to anyone but the deal crafters. The ultimate Larry Kumblow ponzi scheme.
I was thinking yesterday that I didn't take the Citi risk analysis far enough. I din't try to back of the envelope an earnings impact from the hung bridges and on the balance sheet leveraged loans. Here's another set of guesswork.
In Q1 Citi earned approximately $5 billion in Net Income so I'm going to use that as a starting point.
$12 ish billion was my guestimate for their exposure. Let's say that the mere fact they have to own this at all means things need to be marked down. By how much? Here is where the guess comes in. I'm guessing the sub debt (which is likely 1/3 of the total) should yield 15% ish and are probably paying a current rate of 9ish (there is a lot of guessing going on here), tha would mean a mark of about 80. Less the 3ish points paid up front, that implies a paper loss of 17 points on $4ish billion or $680 million. On the leveraged loans, same kind of analysis says 8% ishcoupon/10%ish yield= 92 dollar price, less three points up front = an implied 5 point loss on $6 billion or $300 million.
That gets to a total potentia earnings drag of about $1 billion or 20% of earnings. That assumes the bridge equity is worth what you paid for it...which may be a sketchy assumption. This also doesn't take inot account the impact of lesser fees.
Lastly, lets say that the entire $125 billion of HY exposure they have is only half hedged (pretty conservative assmption I think) and needs 200 additional basis points in yield to be marked properly, that's 8 points on sixty billion or another $4.8 billion.
Add it all up and I think you could see a quarters worth of earnings wiped out. Not good, but still not a crisis.
Again, anyone with better analysis, please correct me.
Banker - I am with you on your thoughts on Citi. But don't look for any significant write down until next year, if then. In general and very broad terms, they will hold it all and try to sell everyone that the only reason they didn't go to market is because of the irrational market conditions caused by the sub-prime mortgage mess which dried up the credit market which then caused housing to tank. AND, all will be OK in 2009 or so 'cause Angelo said so. Therefore, we hold till then and life is good.
IMHO, that's what they will do. But if I were them, I'd go to Plan B.........
Not in and of itself, but this is where an overleveraged market where lots of things are VERY tightly coupled comes into effect. Wouldn't a huge financial institution, supposedly a bastion of stability, having an entire quarter's worth of earnings wiped out set off a chain reaction resulting in a massive crisis? I don't know the probability of this actually happening, I am guessing it to be tiny, perhaps one in some really long overseas phone number, but if it did it ought to be catastrophic to the markets as a whole.
You're on point I think. Additional leverage always makes one more vulnerable. That's whay I think the duration of this matters. Every day is incremental risk that "something" bad happens.
JR,
I don't know. You tried to sell something at 95 and it didn't work. By what logic can you not take it down meaningfully from there?
banker,
i think your back of the envelope, is in the ballpark. the problem is that there is somewhere around 25x the citi exposure in the pipeline. if we use the same arithmetic, that leads to about 125 billion dollars worth of losses on this stuff alone to spread around the big players. this kind of hit on the combined balance sheets would be devastating to the world financial system. add on a couple of hundred billion in us mortgage losses and we are starting to talk real money. at the end of the day this is still no more about fundamentals on the way down as it was on the way up. correlation risk has nothing to do with the assets themselves but just who owns them. this point is lost on all model makers and people attempting any sort of fundamental analysis. like i wrote ten days ago, i ask anyone to give some reason why absent central bank monetization of the problem this is just not going to run to completion.
since it appears to my untrained eye and ear that the fed is for the moment 'happy' to see the leverage come out of the system, my guess is that they don't come to the rescue until the think black smoke and bright orange flames are billowing and raging.
best guess is somewhere between 72 hours and 90 days.
Banker, Wouldn't holding this debt hamper their ability to pursue other deals, presuming there are any? They don't have infinite liquidity. That in turn cripples their ability to churn out all the $$$ that they produced in this qtr's earnings. That might be sufficient motivation to just take what they can and absorb the hit so they can continue to do deals.
Barely, that's the question. If PE have to take a quarter to digest these Dagwood debt sandwiches, what do they have to do to get the pipeline back up with the IBs? With Basel regs can the IBs get lending back up in a hurry? Can they even get going by Q1 08? How big is the concertina effect?
This is why the Gazprom failing to launch bothers me. They've got the biggest reserves a licence to print money, and they can't issue paper at a decent terms/rates?
A very good friend of mine who is an analyst for a major PE shop just told me that they were in a near panic today at his office. He said the market for CLOs has melted down over the last two days (especially today) and that all of their pipeline deals that had not yet secured hard financing are at risk.
He said there were extended discussions today about the possibility of a systemic meltdown in the next few days and that more than a few senior managers seemed very concerned about that possibility.
Usually a permabull, he even spoke of liquidating his portfolio tomorrow. When I hear that talk from this particular guy, it tells me that the market may be in BIG trouble.
Just wondering where you got the 25X number? I'm not saying you're wrong, just like to know. I suspect that what we will see in the HY market is kind of what we saw in 1998. The market is closed, so there will likely be (tinfoil hat time) an unspoken agreement to hold posisitons and prices at more or less constant levels around today, since that is as good a guess as any other number for a given security. It worked in 1998. Will it this time? I have no idea.
I also think your very tight time frame of between 72 hours and 90 days for Fed action is as good a guess as any other.
Barely,
Wouldn't holding this debt hamper their ability to pursue other deals, presuming there are any?
Absolutely.
They don't have infinite liquidity.
No, but again in Citis case it looks like they did a lot of maturity stretching late last year.
That in turn cripples their ability to churn out all the $$$ that they produced in this qtr's earnings.
Right on the money. You could make a case for $5 billion in losses plus some periods worth of LBO fees going away. I don't know what that number is though.
That might be sufficient motivation to just take what they can and absorb the hit so they can continue to do deals.
This is where you are sort of missing what is going on. These markets are closed. Closed as in no deals at any price closed. So they really can't either a) lay this stuff off because no one is buying at anything less that a total fire sale or b) sell any new issues for any LBO at any price. So the unload (if they could do it) would have no benefit. These loans/bridges are really, really illiquid at this point.
Your friend's deals aren't all "at risk." They are dead. They aren't pining for the fjords or resting, and while they may have beautiful plumage they are ex-deals!
As for the rest of your friend's insights...I think I'm going to be sick
As for the rest of your friend's insights...I think I'm going to be sick
Seriously. On the quarter's worth of loss for BS... from an operational perspective WHY officially take the assets under wing?
1) to massage the accounts to make that loss 'stretch out' over as many quarters as possible. You know, the solution to pollution is dilution.
2) to make sure as positive as possible it IS only one quarter's worth of loss.
But also maybe to keep us from all getting sick.
In farm country we'd call this a 'downer'... a cow falls & can't get up. Pretty big loss in value cause no one wants their filet mignon cut from a downer. But they are still processed (assuming they can get them to the plant before they die - else its rendering and almost a total loss). So they race like hell to get it out of the field & off to the pack.
The other reason the hurry is it is gut wrenching to watch the animal thrashing in the field trying to get up. Ugly beyond imagination if you've never seen one of these - I have, makes you wish you carried your gun with you everywhere. Or become a vegan.
Some of these hedge fund implosions we're watching are looking like the financial equivalent of 'downers' and somebody at BS just had the decency to get the thing out of the field & out of view. About freaking time too. They may or may not turn the thing into hamburger but we know steaks are out of the question... Glue factory is still a possibility.
banker, that sounds bleak, but not as bleak as lawfitz's little bedtime story. U
nfortunately, my timing is as impeccable as ever. I closed out my BSC & LEH puts for a tidy gain before the close Tues. If I had of known just how grim the finance markets were I would have sat tight...
banker,
don't have hard numbers, but my guesstimate is that there is around $300 billion dollars of deals in the pipeline which are announced and unfunded, hence the 25x the 12 billion.
because i am an outsider here (i am a lowly quant by trade, and my meanderings over the last 20 years or so have never landed me on the credit side of things) i can only guess at the numbers based on the stuff that i read.
since so much of the data here is opaque, i am in some sense as much in the dark as anyone else. in the end i will hang my hat on the same peg as when i was arguing CDO's with someone back in feb during the first break, whatever the loss numbers are at first blush, multiply by 2-5 to get a real approximation. we had the greatest housing bubble the country has ever seen, the unwind will be even more spectacular. same thing in leveraged credit. i believe it was back in 1993 that citi was borderline insolvent, and this was all related to the credit expansion of the late 80's. we have blown the doors off that credit expansion and it stands to reason that this de-levering is going to make that one look like a cakewalk.
thanks for all of your insights
d
So guys, seriously, bernanke is probably not sipping cocktails at the 13th hole right now. I imagine this is not going un-noticed. Based on your experience in the '80s & '98..., what do you suspect might be their course of action? Throw $$$ at the problem directly to the IBs or slash rates, or let the whole mess go into a nuclear chain reaction?
Lowly quant my butt! You regularly make comments that make me think again, so thanks for that. I think the amount out there is more like $200 billion, so a little smaller that you said, but I don't think it changes your basic point. Thanks for the reponse.
Barely,
It isn't clear this goes nuclear (I think what we have to date has been a mass dropping of daisycutters, not good). I suspect that various Fed officers have been asking Dimon, O'Neal, Mack, Cayne, Blankfein and Lewis how liquid they are. That will, I think play a big part in how the Fed acts (if at all). If those guys are showing signs of stress, I think the Fed would coo gently that they needn't worry and just to run their businesses prudently [pauses as some readers break into howls of laughter and cries of "then how'd we get here?"].
One thing you will see is the Street holding hands and singing Kumbaya a lot. Usually these folks want each other dead and will slit someone's throat for the next deal. When this happens, things get very, um, gentlemanly for a while. It is in this kind of scenario where those who regularly cry "conspiracy" are actually on the mark. The Street becomes a cooperative venture, not a competitive one for a while.
One thing we really have no history with is how Apaloosa, UBP, Blackstone, Ivy Asset and the other hedge funds will behave and whether the Fed plays any role there. I suspect none, but again, we have no history.
barely,
if the s&p were down 15% from the top, i'm sure they would be burning the midnight oil and deciding which credits to run in and buy. but with the market off a whopping 5% from an all time high the fed can not be seen as monetizing the problem just yet lest they generate a melt-up and everlasting moral hazard.
i also think that this fed wants the markets to feel some pain so that they might regain some control. i think they realize the game has spun out of control and that it needs to be reeled in. because people are still waking up and going to work and the economy seems ok, bernanke and co. walk into the theatre without apparent fear, which actually scares me the most.
as an intersting aside, did you notice that oex vol traded thru ndx vol? never happened before....
banker,
one of my friends has a bit of contact with some of our far eastern benefactors. his words lead me to believe that Kumbaya does not translate well in Mandarin.
Guys, thanks for the comments. It sounds reasonable, but another 10% off from here won't take long if 450pts get shaved off the DOW in a day. S&P even weaker. But, XOM was a big drag. They won't go down that easily.
Banker , what are the chances that BSC et al will offload RMBS , CDO 's et al to FNM and FRE ? I' sure you've read and heard that FNM and FRE have been active in the subprime space... since there will need to be a bailout , why not dump the toxic waste there and let the taxpayers foot the bill ? IMHO .... it's the only way that I see the Banks getting anything of value for equity and mezz level structured bonds / products. What are your thoughts ? Thanks 1
The breakdown of custody holdings showed overseas central banks sold $6.490 billion in Treasury debt to stand at a total $1.252 trillion.
The foreign institutions bought securities from government-sponsored agencies like Fannie Mae (FNM.N: Quote, Profile , Research) and Freddie Mac (FRE.N: Quote, Profile , Research), adding $14.726 billion from their holdings, to stand at a total $759.40 billion.
John , what are the foreign central bankers thinking , if one can actually believe the Reuter's story... I thought I read ( Asian Times ) the Chinese had CDO and RMBS indigestion lately... they certainly were not bowled over by HUD Secretary's Jackson begging to buy subprime bonds and CDOs..... the timing of today's story is curious , huh ?
I could be wrong, but I think this particular event is a big nothing.
I'm not sure anything material has changed.
Banker
uh-huh.
The collatoral isn't worth anything. Gee, wasn't Merrill trying to find some sucker weeks ago with no bites, and at that time the protection was half what it is now.
Rmemember these huge insitutions generate a ton of fee income, interest income and trading commissions just by turning on the lights in the morning. The securities business is still a minority of the income stream.
John , what are the foreign central bankers thinking
They are thinking:
How do I keep my currency competitive with all these damned dollars that keep flowing in everyday? We have people to feed & house and Americans will buy anything but damn that's a lot of dollars to sterilize & recycle back... so what do I buy? Treasuries, agency or whats behind door number three?
Reuters posts this report like clockwork every Thursday evening. It's just that this week's result seems funny compared to recent numbers. I'm posting on this in a couple of hours, but in the mean time the updated chart, going back to mid-April, is here.
If raising Fed Funds didn't have the desired effect on longer term rates, what makes anyone think lowering Fed Funds will?
Isn't it possible that lowering Fed Funds could actually raise longer term rates? Where do our rates stand via global rates (rhetorical question). I think it's amusing that the market is so quick to price in a rate cut. Think about who the Fed is, who their real local and global consituents are and who benefits from deflation.
Even if not all central bank offshore dollar deposits flowed directly to the US, it doesnt take a genius to figure out who is currently financing most of the US deficit.
The US data doesn't pick up all offshore dollar deposits. And the US data also likely underestimates official purchases of US securities. The BEA data always gets revised up after the survey of foreign portfolio holdings. And we know that the increase in the FRBNYs custodial holdings in q1 ($127.6b) was $21.3b larger than the purchases of Treasuries and Agencies reported in the US data. Add that $21.3b to $192.6b, and there was a $213.9b increase in (net) official dollar holdings in the first quarter.
BSC stock was trading at $100 just 2 years ago...and it was a $60 stock just 2 years prior to that.
People have short memories, but at the end of the day, Bear will trade back to $80 before it is all said and done...IMHO.
Why? Because the housing recession (depression) will prove to be the worst in 50 years, and BSC is the poster child of housing, leverage, and mortgage finance gone bad.
"Securities & Banking" was 2.8 billion of last qtr net income of 6.2.
From thier 2q presentation:
Securities and Banking
Fixed Income Markets: revenues boosted by credit products and commodities
Equity Markets: record revenues driven by Derivatives, Prime Brokerage and Cash Trading
Investment Banking: strong Advisory and Equity Underwriting; pipeline near record levels
I doubt this group will continue to grow at 64% yr/yr...
I could use some background on the whole FDIC/Superior Bank shite fling that happened mid '02. Any chance you could drop me a line through my site and chat?
You're right, FF, my bad...For some reason I'm a year ahead of myself today.
If you (or anyone else) can point me in the direction of any info it'd be appreciated. My situation with Fairbanks/SPS, Merrill, PMI and everyone else started back then as my loan originated with Superior and was bought by Merrill shortly after the ink was dry on the deal. I have a bit of a time believing that selling the servicing rights to my loan was so imperative that it had to be done within 14 +/- days of 9/11.
Oh, general FYI, damages in my RICO action against Fairbanks/SPS, PMI, Merrill, LaSalle and their local counsel totally $13.5 million were filed last week in NH Federal District Court.
Bear wanted to get this out of the public eye and bury it deep. I like the part about appropriate protection through hedging- yeah sure, like that is going to work now.
Oh well, enough of watching the fear part of wall street, someday it will end and we will go back to greed.
Meanwhile my progeny desires a trip to Disneyland, so I will not be blogging for an entire week. Try to have the PPT team put the plunge on hold until I return. I like seeing carnage like this live, not on a stale chart.
Last, but not least, A perfecta in ABX space- all of the issues closed on their record lows, with a number of the BBB tranches with a 30 handle.
Grim. Nice credit crisis going on here, and unabated by the fed.
Someday this war's gonna end...
AllenM, have a nice trip. As for my own (long ways off) vacation, we've also decided to stay in the US. Taking a cross-country tour to see some of our national treasures.
I'm looking forward to a lot of hiking and sleeping in rustic cabins.
And back to the market news: Bear will hide this as best they can, but it's an ugly failure for them no matter what. Angry customers, reputation hit, etc.
In other words, market makers knew the voices of the high grade fund staff, whereas BS' brokers can hide this junk amongst all the other product they're unloading.
"Those assets will now be hedged by Bear's trading team and likely sold when their values seem more attractive, says a person close to the situation."
???
If you hedge them now, won't the hedging instruments lose value if the assets appreciate to more "attractive" levels?
Are they just buying puts on comparable indices? If that's their hedging methodology, it sounds like they're just throwing good $$$ at bad.
NO, just get rid of it when the market tanks, to try to cover it up with kitty litter..
Some of this crap is becoming old news. They all hold the toxic waste, it is how well they can hide it, and for how long..
"Please Mr. Chinamen buy some nice mbs from your American friends"I'am sure they'll perform as well as your nice Blackstone investment".
ot only are all ABX at a record, so are all CMBX and all but one CDX
I could be wrong, but I think this particular event is a big nothing. Bear has already taken the pr/reputational hit on the funds. There may be some minor technical reason for doing this at this time, but Bear effectively said two weeks ago we own the assets, the equity is worth nothing.
I'm not sure anything material has changed.
Question :
How would fund investors know if BS really took a loss after the assets are sold at 'attractive values'? Wouldn't investors be eligible for a piece of the pie if BS is able to sell the assets for a profit?
Shouldn't BS therefore let fund investors know of the 'attractive value' it received after the sale is complete?
Did they pay all of their lenders? Or did they stiff them for some of it too? Bury this stuff in the footnotes, nobody read 'em anyways.
Someday this war's gonna end...
Banker,
Agreed, it's all a matter of semantics.
I can only hope Ben doesn't rush in and slash rates in a lame attempt to save these hopeless mired-in-debt LBO deals that should have never been considered in the first place.
It escapes me entirely how these deals that scour every nickel out of a marginally profitable company, then saddle it with staggering debt burden ever makes any sense to anyone but the deal crafters. The ultimate Larry Kumblow ponzi scheme.
for all we know Bear had good assetts. but by saying they did not they then had an angle. What do we know?
"Those assets will now be hedged by Bear's trading team'
Maybe they are shorting their own stock - that would offset some hellasious losses.
I'm looking forward to a lot of hiking and sleeping in rustic cabins.
Sounds like the Peak Oil scenario. We'll all be looking forward to a lot of hiking and sleeping in rustic cabins as the price of oil goes up
Just to clarify: hiking and sleeping in cabins by choice!
FAS 140 clarification given:
SEC blesses workouts on securitized loans | Real Estate and Technology News for Agents, Brokers and Investors | Inman News
That's a big deal because before if a major workout was to happen the banks would have to put the loans back on the balance sheet.
And in other news Nations Home Lending just imploded:
Mortgage Grapevine: Nations Home Lending is finished
I was thinking yesterday that I didn't take the Citi risk analysis far enough. I din't try to back of the envelope an earnings impact from the hung bridges and on the balance sheet leveraged loans. Here's another set of guesswork.
In Q1 Citi earned approximately $5 billion in Net Income so I'm going to use that as a starting point.
$12 ish billion was my guestimate for their exposure. Let's say that the mere fact they have to own this at all means things need to be marked down. By how much? Here is where the guess comes in. I'm guessing the sub debt (which is likely 1/3 of the total) should yield 15% ish and are probably paying a current rate of 9ish (there is a lot of guessing going on here), tha would mean a mark of about 80. Less the 3ish points paid up front, that implies a paper loss of 17 points on $4ish billion or $680 million. On the leveraged loans, same kind of analysis says 8% ishcoupon/10%ish yield= 92 dollar price, less three points up front = an implied 5 point loss on $6 billion or $300 million.
That gets to a total potentia earnings drag of about $1 billion or 20% of earnings. That assumes the bridge equity is worth what you paid for it...which may be a sketchy assumption. This also doesn't take inot account the impact of lesser fees.
Lastly, lets say that the entire $125 billion of HY exposure they have is only half hedged (pretty conservative assmption I think) and needs 200 additional basis points in yield to be marked properly, that's 8 points on sixty billion or another $4.8 billion.
Add it all up and I think you could see a quarters worth of earnings wiped out. Not good, but still not a crisis.
Again, anyone with better analysis, please correct me.
Can someone tell me how I can soft dollar the tip jar?
Banker - I am with you on your thoughts on Citi. But don't look for any significant write down until next year, if then. In general and very broad terms, they will hold it all and try to sell everyone that the only reason they didn't go to market is because of the irrational market conditions caused by the sub-prime mortgage mess which dried up the credit market which then caused housing to tank. AND, all will be OK in 2009 or so 'cause Angelo said so. Therefore, we hold till then and life is good.
IMHO, that's what they will do. But if I were them, I'd go to Plan B.........
Banker,
I agree with your analysis , but add "and their gain on sale pipeline is virtually gone."
Off with their hedge!
Subprime guillotine.
"Not good, but still not a crisis."
Not in and of itself, but this is where an overleveraged market where lots of things are VERY tightly coupled comes into effect. Wouldn't a huge financial institution, supposedly a bastion of stability, having an entire quarter's worth of earnings wiped out set off a chain reaction resulting in a massive crisis? I don't know the probability of this actually happening, I am guessing it to be tiny, perhaps one in some really long overseas phone number, but if it did it ought to be catastrophic to the markets as a whole.
Itsallgreek,
You're on point I think. Additional leverage always makes one more vulnerable. That's whay I think the duration of this matters. Every day is incremental risk that "something" bad happens.
JR,
I don't know. You tried to sell something at 95 and it didn't work. By what logic can you not take it down meaningfully from there?
banker,
i think your back of the envelope, is in the ballpark. the problem is that there is somewhere around 25x the citi exposure in the pipeline. if we use the same arithmetic, that leads to about 125 billion dollars worth of losses on this stuff alone to spread around the big players. this kind of hit on the combined balance sheets would be devastating to the world financial system. add on a couple of hundred billion in us mortgage losses and we are starting to talk real money. at the end of the day this is still no more about fundamentals on the way down as it was on the way up. correlation risk has nothing to do with the assets themselves but just who owns them. this point is lost on all model makers and people attempting any sort of fundamental analysis. like i wrote ten days ago, i ask anyone to give some reason why absent central bank monetization of the problem this is just not going to run to completion.
since it appears to my untrained eye and ear that the fed is for the moment 'happy' to see the leverage come out of the system, my guess is that they don't come to the rescue until the think black smoke and bright orange flames are billowing and raging.
best guess is somewhere between 72 hours and 90 days.
Banker, Wouldn't holding this debt hamper their ability to pursue other deals, presuming there are any? They don't have infinite liquidity. That in turn cripples their ability to churn out all the $$$ that they produced in this qtr's earnings. That might be sufficient motivation to just take what they can and absorb the hit so they can continue to do deals.
Barely, that's the question. If PE have to take a quarter to digest these Dagwood debt sandwiches, what do they have to do to get the pipeline back up with the IBs? With Basel regs can the IBs get lending back up in a hurry? Can they even get going by Q1 08? How big is the concertina effect?
This is why the Gazprom failing to launch bothers me. They've got the biggest reserves a licence to print money, and they can't issue paper at a decent terms/rates?
Add it all up and I think you could see a quarters worth of earnings wiped out. Not good, but still not a crisis.
Hell if they were an auto mfg'r we'd all celebrate...
"Only ONE quarter wiped out! WOOOO HOOOO!"
Perspectives, people, keep it in perspectives.
A very good friend of mine who is an analyst for a major PE shop just told me that they were in a near panic today at his office. He said the market for CLOs has melted down over the last two days (especially today) and that all of their pipeline deals that had not yet secured hard financing are at risk.
He said there were extended discussions today about the possibility of a systemic meltdown in the next few days and that more than a few senior managers seemed very concerned about that possibility.
Usually a permabull, he even spoke of liquidating his portfolio tomorrow. When I hear that talk from this particular guy, it tells me that the market may be in BIG trouble.
David in CT,
Just wondering where you got the 25X number? I'm not saying you're wrong, just like to know. I suspect that what we will see in the HY market is kind of what we saw in 1998. The market is closed, so there will likely be (tinfoil hat time) an unspoken agreement to hold posisitons and prices at more or less constant levels around today, since that is as good a guess as any other number for a given security. It worked in 1998. Will it this time? I have no idea.
I also think your very tight time frame of between 72 hours and 90 days for Fed action is as good a guess as any other.
Barely,
Wouldn't holding this debt hamper their ability to pursue other deals, presuming there are any?
Absolutely.
They don't have infinite liquidity.
No, but again in Citis case it looks like they did a lot of maturity stretching late last year.
That in turn cripples their ability to churn out all the $$$ that they produced in this qtr's earnings.
Right on the money. You could make a case for $5 billion in losses plus some periods worth of LBO fees going away. I don't know what that number is though.
That might be sufficient motivation to just take what they can and absorb the hit so they can continue to do deals.
This is where you are sort of missing what is going on. These markets are closed. Closed as in no deals at any price closed. So they really can't either a) lay this stuff off because no one is buying at anything less that a total fire sale or b) sell any new issues for any LBO at any price. So the unload (if they could do it) would have no benefit. These loans/bridges are really, really illiquid at this point.
As for my own (long ways off) vacation, we've also decided to stay in the US. Taking a cross-country tour to see some of our national treasures.
National treasures? So does that mean your going to see The Mitchell Corn Palace and Carhenge?
Or are there some other spots you had in mind? I could think up a few more...
LawFitz,
Your friend's deals aren't all "at risk." They are dead. They aren't pining for the fjords or resting, and while they may have beautiful plumage they are ex-deals!
As for the rest of your friend's insights...I think I'm going to be sick
As for the rest of your friend's insights...I think I'm going to be sick
Seriously. On the quarter's worth of loss for BS... from an operational perspective WHY officially take the assets under wing?
1) to massage the accounts to make that loss 'stretch out' over as many quarters as possible. You know, the solution to pollution is dilution.
2) to make sure as positive as possible it IS only one quarter's worth of loss.
But also maybe to keep us from all getting sick.
In farm country we'd call this a 'downer'... a cow falls & can't get up. Pretty big loss in value cause no one wants their filet mignon cut from a downer. But they are still processed (assuming they can get them to the plant before they die - else its rendering and almost a total loss). So they race like hell to get it out of the field & off to the pack.
The other reason the hurry is it is gut wrenching to watch the animal thrashing in the field trying to get up. Ugly beyond imagination if you've never seen one of these - I have, makes you wish you carried your gun with you everywhere. Or become a vegan.
Some of these hedge fund implosions we're watching are looking like the financial equivalent of 'downers' and somebody at BS just had the decency to get the thing out of the field & out of view. About freaking time too. They may or may not turn the thing into hamburger but we know steaks are out of the question... Glue factory is still a possibility.
banker, that sounds bleak, but not as bleak as lawfitz's little bedtime story. U
nfortunately, my timing is as impeccable as ever. I closed out my BSC & LEH puts for a tidy gain before the close Tues. If I had of known just how grim the finance markets were I would have sat tight...
banker,
don't have hard numbers, but my guesstimate is that there is around $300 billion dollars of deals in the pipeline which are announced and unfunded, hence the 25x the 12 billion.
because i am an outsider here (i am a lowly quant by trade, and my meanderings over the last 20 years or so have never landed me on the credit side of things) i can only guess at the numbers based on the stuff that i read.
since so much of the data here is opaque, i am in some sense as much in the dark as anyone else. in the end i will hang my hat on the same peg as when i was arguing CDO's with someone back in feb during the first break, whatever the loss numbers are at first blush, multiply by 2-5 to get a real approximation. we had the greatest housing bubble the country has ever seen, the unwind will be even more spectacular. same thing in leveraged credit. i believe it was back in 1993 that citi was borderline insolvent, and this was all related to the credit expansion of the late 80's. we have blown the doors off that credit expansion and it stands to reason that this de-levering is going to make that one look like a cakewalk.
thanks for all of your insights
d
Dryfly,
I think your last comment is on the money. Thanks.
So guys, seriously, bernanke is probably not sipping cocktails at the 13th hole right now. I imagine this is not going un-noticed. Based on your experience in the '80s & '98..., what do you suspect might be their course of action? Throw $$$ at the problem directly to the IBs or slash rates, or let the whole mess go into a nuclear chain reaction?
Credit is shut off???
Don't people understand that this stuff is backed by the full faith and credit of deadbeats who lied about their income?
David in CT,
Lowly quant my butt!
You regularly make comments that make me think again, so thanks for that. I think the amount out there is more like $200 billion, so a little smaller that you said, but I don't think it changes your basic point. Thanks for the reponse.
Barely,
It isn't clear this goes nuclear (I think what we have to date has been a mass dropping of daisycutters, not good). I suspect that various Fed officers have been asking Dimon, O'Neal, Mack, Cayne, Blankfein and Lewis how liquid they are. That will, I think play a big part in how the Fed acts (if at all). If those guys are showing signs of stress, I think the Fed would coo gently that they needn't worry and just to run their businesses prudently [pauses as some readers break into howls of laughter and cries of "then how'd we get here?"].
One thing you will see is the Street holding hands and singing Kumbaya a lot. Usually these folks want each other dead and will slit someone's throat for the next deal. When this happens, things get very, um, gentlemanly for a while. It is in this kind of scenario where those who regularly cry "conspiracy" are actually on the mark. The Street becomes a cooperative venture, not a competitive one for a while.
One thing we really have no history with is how Apaloosa, UBP, Blackstone, Ivy Asset and the other hedge funds will behave and whether the Fed plays any role there. I suspect none, but again, we have no history.
barely,
if the s&p were down 15% from the top, i'm sure they would be burning the midnight oil and deciding which credits to run in and buy. but with the market off a whopping 5% from an all time high the fed can not be seen as monetizing the problem just yet lest they generate a melt-up and everlasting moral hazard.
i also think that this fed wants the markets to feel some pain so that they might regain some control. i think they realize the game has spun out of control and that it needs to be reeled in. because people are still waking up and going to work and the economy seems ok, bernanke and co. walk into the theatre without apparent fear, which actually scares me the most.
as an intersting aside, did you notice that oex vol traded thru ndx vol? never happened before....
banker,
one of my friends has a bit of contact with some of our far eastern benefactors. his words lead me to believe that Kumbaya does not translate well in Mandarin.
Guys, thanks for the comments. It sounds reasonable, but another 10% off from here won't take long if 450pts get shaved off the DOW in a day. S&P even weaker. But, XOM was a big drag. They won't go down that easily.
Banker , what are the chances that BSC et al will offload RMBS , CDO 's et al to FNM and FRE ? I' sure you've read and heard that FNM and FRE have been active in the subprime space... since there will need to be a bailout , why not dump the toxic waste there and let the taxpayers foot the bill ? IMHO .... it's the only way that I see the Banks getting anything of value for equity and mezz level structured bonds / products. What are your thoughts ? Thanks 1
Phil: "Please Mr. Chinamen buy some nice mbs from your American friends"I'am sure they'll perform as well as your nice Blackstone investment".
Your wish is my command
Today's Reuter's report was seriously out of whack with recent experience, but I've got not one sweet clue what it means.
"Foreign central banks net buyers of U.S. debt - Fed", Reuters, July 26, 2007.
One quarters worth of earnings is wiped off the balance sheet, but where does next quarters earnings come from? That pipeline is shut off.
One quarters worth of earnings is wiped off the balance sheet, but where does next quarters earnings come from? That pipeline is shut off.
Shorting the other banks?
John , what are the foreign central bankers thinking , if one can actually believe the Reuter's story... I thought I read ( Asian Times ) the Chinese had CDO and RMBS indigestion lately... they certainly were not bowled over by HUD Secretary's Jackson begging to buy subprime bonds and CDOs..... the timing of today's story is curious , huh ?
I could be wrong, but I think this particular event is a big nothing.
I'm not sure anything material has changed.
Banker
uh-huh.
The collatoral isn't worth anything. Gee, wasn't Merrill trying to find some sucker weeks ago with no bites, and at that time the protection was half what it is now.
The loan is vapor. Deal with it.
Citi will fail however the FDIC will bail it out. I worked for FDIC from 1986 until 2005. Take that to the bank.
Citi will fail however the FDIC will bail it out. I worked for FDIC from 1986 until 2005. Take that to the bank.
That's a grim statement you're making. I hope to Ra that it isn't true....
...the bailout and your employment history that is. Screw citiscum.
fredw,
I think Bear would sell everything they could to anybody who would make them a reasonable bid. Anybody.
HK Fuey,
Rmemember these huge insitutions generate a ton of fee income, interest income and trading commissions just by turning on the lights in the morning. The securities business is still a minority of the income stream.
Will they take a hit? You bet.
John , what are the foreign central bankers thinking
They are thinking:
How do I keep my currency competitive with all these damned dollars that keep flowing in everyday? We have people to feed & house and Americans will buy anything but damn that's a lot of dollars to sterilize & recycle back... so what do I buy? Treasuries, agency or whats behind door number three?
Fredw & dryfly,
Reuters posts this report like clockwork every Thursday evening. It's just that this week's result seems funny compared to recent numbers. I'm posting on this in a couple of hours, but in the mean time the updated chart, going back to mid-April, is here.
If raising Fed Funds didn't have the desired effect on longer term rates, what makes anyone think lowering Fed Funds will?
Isn't it possible that lowering Fed Funds could actually raise longer term rates? Where do our rates stand via global rates (rhetorical question). I think it's amusing that the market is so quick to price in a rate cut. Think about who the Fed is, who their real local and global consituents are and who benefits from deflation.
John M - there is more on that topic here:
Brad Setser's Weblog... Money quote:
Even if not all central bank offshore dollar deposits flowed directly to the US, it doesnt take a genius to figure out who is currently financing most of the US deficit.
The US data doesn't pick up all offshore dollar deposits. And the US data also likely underestimates official purchases of US securities. The BEA data always gets revised up after the survey of foreign portfolio holdings. And we know that the increase in the FRBNYs custodial holdings in q1 ($127.6b) was $21.3b larger than the purchases of Treasuries and Agencies reported in the US data. Add that $21.3b to $192.6b, and there was a $213.9b increase in (net) official dollar holdings in the first quarter.
If that isnt a record, it has to be close...
BSC stock was trading at $100 just 2 years ago...and it was a $60 stock just 2 years prior to that.
People have short memories, but at the end of the day, Bear will trade back to $80 before it is all said and done...IMHO.
Why? Because the housing recession (depression) will prove to be the worst in 50 years, and BSC is the poster child of housing, leverage, and mortgage finance gone bad.
IMHO
Good luck to all.
Come buy AAA.... my load
Come buy AA....
Come buy BBB... my load
Come buy BB...
Come buy CCC....my load
Come buy C ... my load
Oh lord.... come buy D
"Securities & Banking" was 2.8 billion of last qtr net income of 6.2.
From thier 2q presentation:
Securities and Banking
Fixed Income Markets: revenues boosted by credit products and commodities
Equity Markets: record revenues driven by Derivatives, Prime Brokerage and Cash Trading
Investment Banking: strong Advisory and Equity Underwriting; pipeline near record levels
I doubt this group will continue to grow at 64% yr/yr...
(the previous post was a response to Banker's post and is in reference to Citigroup.)
Hey FFDIC,
I could use some background on the whole FDIC/Superior Bank shite fling that happened mid '02. Any chance you could drop me a line through my site and chat?
Mike,
Actually, Superior failed in 2001 about 45 days prior to 9/11.
You're right, FF, my bad...For some reason I'm a year ahead of myself today.
If you (or anyone else) can point me in the direction of any info it'd be appreciated. My situation with Fairbanks/SPS, Merrill, PMI and everyone else started back then as my loan originated with Superior and was bought by Merrill shortly after the ink was dry on the deal. I have a bit of a time believing that selling the servicing rights to my loan was so imperative that it had to be done within 14 +/- days of 9/11.
Oh, general FYI, damages in my RICO action against Fairbanks/SPS, PMI, Merrill, LaSalle and their local counsel totally $13.5 million were filed last week in NH Federal District Court.