OCC
Bank Supervision Process Comptroller's Handbook - September 2007
This is the new OCC Examinaton handbook for all of you with examination questions and concerns. Keep it handy! We will need to reference it in the coming quarters.
Late payments on U.S. home equity lines of credit rose to a 5-1/2 year high in the second quarter of 2007 but delinquencies on many other types of consumer loans fell, the American Bankers Association said on Wednesday.
Were I a stakeholder in Sallie Mae I'd take the $900m first and then hire lawyers to force the completion. This isn't a "can't close the deal" this is a blatant case of "don't want to close the deal." The moral hazard of giving out get out of free jail cards is far too large to ignore. This happens all the time with buyers' remorse. Let this go and before you know it bridge loans start looking like pier loans and there might even develop a credit crunch.
Follow the money - who benefits or not by closing or not closing the deal. The original deal was put together with two major forward-looking business assumptions that are beyond dust. First that Congressional subsidies would continue. That qualifies as a material change in anybody's book, when 1/2 or better of your value prop goes historical. 2nd that the markets would still be pumping leveraged liquidity out to support the "deal" flow of students loans. Oops.
Finally there's the little detail the WSJ commented on in the original story - why no LBO deals for financials ? Too much leverage to start with of course - this was touted as a huge SEE change in deal-making, valuations and debt structure. If you take an entity that's already weigh leveraged, add more to it and the business volume drops badly while the costs-of-doing-business moves as far in the other direction that's Material, Adverse, Change.
Voila' ! Besides paying $900M, which is likely negotiable down, is still cheaper than trying to make this thing fly AFTER doubling-up the debt load. Besides what a great maneuvering ploy on the part of Lee & Partners if they've got to deal.
That is hilarious, the deal that AJ linked to: "...annualized cash flow, including expected growth...is (only) 70 percent of its projected interest expense..."
Admittedly, I'm 15 years out of business school, and have forgotten many things that I once learned, but that seems like wildly shaky arithmetic to me.
How do they expect to cover the 30% interest expense shortfall? Refinance lower later? MEW from expected appreciation? Someone, please enlighten me; I'm still learning this 'new age' investing math.
I seem to remember not even 3 months ago a major bullish argument was that all the LBO's and takeovers were going to push all stocks up. Its obvious from the falling stock market that the loss of these deals is going to hurt, oh wait, NOT!
Slightly off topic, but I had a thought regarding the disconnect between the stock market and the situation on the ground as of the last 8 months. The stock market supposedly is a forward looking indicator. The market never looked and saw the subprime debacle, the spread of the mortgage debacle, record foreclosures, credit crunch, etc. There was never a substantial price correction, except in single stocks as if everything existed in its own vacuum. Now the market is shooting up because looking ahead the market expects a major rate cute series by the fed, and thus, stocks must go up. I am wondering if there has been a change in mentality and it is foolish and simple, but here it goes:
"Looking ahead, any and all problems will be overcome and have a short term effect on economic matters, so if you keep looking out far enough, then there is never a reason to be selling, only buying and the market goes up!"
If you believe that the housing recession and credit issues will be solved by the fed rate cuts, there is no reason to ever 'mark to market" the current conditions in the stock market because looking ahead, they technically do not exist! I know its kind of stupid reasoning, but its all I can come up with to explain. Any ideas?
I HAD to go read that for myself - OK I still am having problems believing it - are they really saying they are trying to sell loans with a DSCR of 0.69 or so?
Maybe someone does not want to waste their money on a slice of socialism:
Sallie Mae was originally created in 1972 as a government-sponsored entity (GSE). The company began privatizing its operations in 1997, a process it completed at the end of 2004 when the company terminated its ties to the federal government.
Sallie Mae is listed on the Fortune 500 and is one of the Top Innovators in IT according to InformationWeek. The company also has been recognized as one of the 100 Best Corporate Citizens according to Business Ethics magazine and one of the top 30 companies for executive women by the National Association of Female Executives.
(from sallie mae website)
But we sheeple suckers have to buy into socialism, per the IRS.
Jg- I am with you on trying to understand the logic in the Archstone deal. The article says they have a "reserve" to cover interest payments. So they are borrowing extra principal so they have a reserve to pay down the first few years of interest? Or they expect to sell assets to pay down the debt? but that lowers cash flow too.
The only reason apartments have been priced high in the last few years is because of their potential to be converted to condos, but that is dead now and apts. will again be valued by their rents.
If someone understands how the deal pencils out, let us know.
The stock market usually is a leading indicator, or at least an evaluator of risk-reward.
There are a few periods, somewhat rare, when the market becomes a measure of sentiment ("optimism") more than a risk or earnings evaluator. This is one such times. There's just a lot of optimism out there, mainly among leveraged, speculative, somewhat "sophisticated" investors (especially hedge funds). A lot of it is the Paulson/Bernanke puts, but there's more. Really, it's a belief in the concept of liquidity in general and the U.S. market's allure and infallability.
As a sentiment (optimism) indicator, I think we're even higher right now than at the end of 1999. That doesn't mean the market will drop tomorrow. It could take months. But the higher the optimism, the greater the fall generally is -- and I think the extraordinary leverage will make it worse.
It's not the fact that lawsuits against the ratings agencies are being filed that interests me as much as WHO is filing them. Here we have a pension fund showing up as a holder of those toxic products.
I used to work (until 3 weeks ago) for a studenyt lending company - Nelnet. They just laid off 400 or 12% of their workforce because they see changes in the new HEA legislation as cutting their margins by 67%.
The gravy train days of student lending are over. That's why this deal is dying, not the credit crunch. There are discussions (hushed discussions) within Nelnet about exiting the asset origination side of student lending altogether. Legislation is highly biased against private label FFELP lending and the margins are evaporating. Still money to be made in servicing (sound familar??) and on fee-based, non-loan products for the education market and the 'education seeking family'. That's the direction Nelnet is following and likely all the other major student loan players
Thanks for the MCO link, L-. I was just brainstorming last night with my wife as to what precipitating factor would start things unwinding in the market and when. Maybe it's this lawsuit, or others to quickly follow, now.
Yep, with the failed LBO deals, new ugliness in subprimes (19% in default/foreclosure/REO as of August), and this first-of-many lawsuits, it seems like the sewer pipe has ruptured, and mess is spewing out.
The stock market usually is a leading indicator, or at least an evaluator of risk-reward.
There are a few periods, somewhat rare, when the market becomes a measure of sentiment ("optimism") more than a risk or earnings evaluator. This is one such times. There's just a lot of optimism out there, mainly among leveraged, speculative, somewhat "sophisticated" investors (especially hedge funds)...
I think you've got it mostly right, but I think the key to understanding the behavior of the stock market is as follows:
1) Hedge funds are the primary players in the market now.
2) These hedge funds are mostly ponzi operations - they borrow more and more money to drive up asset prices, and they rely on the increasing prices to lure in more client money to pay interest and employ further leverage.
3) So hedge funds as an aggregate HAVE to drive the market up to make the interest payments on their debt and stay in business (also rising markets allow more funds and less skill to make money; declining markets are only profitable to a smaller number of funds, and the opportunities decrease with time).
4) Furthermore, they know they're ponzi operations and when the "deleveraging event" comes most of them will rapidly go bust. But they don't care about the losses because it's the client's money - they keep their hefty managment fees and share of the profits. In the end the only thing that matters is keeping the game going as long as possible. This is why we see stocks being driven relentlessly higher despite increasingly bad economic data, and more generally a complete disregard for risk.
5) This WILL NOT STOP until they no longer have access to liquidity, their clients panic and bail out, or some external force causes the market to collapse and spawn a killing wave of margin calls.
We have modeled a substantial part of our economy after Enron.
That the fit hit the shan is debatable. A judge has not ruled the suit has merit, nor granted class action status (lining the lawyers pockets...essentially). The interesting thing is that:
It's a pension fund
It's the teamsters.
The Teamsters Union is at least as corrupt as the rating agencies. When gangsters go to war...well there will be blood on The Street (punny no?)...guarenteed.
6) Ben has made it pretty clear the hedge funds will have access to liquidity, up to and including boat loans.
We appear to have a willing supplier of liquidity (these hedge funds have become The Economy which one has to admit is Too Big To Fail), and we have an ever willing borrower in the Hedge funds, since they aren't directly at risk, but they get all the reward.
This could go on indefinately, or
until the dollar has a crisis.
I agree with you that hedge funds drive today's market. But I don't agree hedge funds have to drive the market higher.
I know some long/short hedge funds. They have been very long all year (and very leveraged) but only because their optimism is high. Philosophically, they aren't bulls. They are sentiment forecasters, in a way.
Long/short is by far the biggest hedge fund category. If these funds sense the wind starting to blow cold, they won't just cut their gross exposures (leverage). They'll also shift more of the leverage they have short. In other words, their net long/short position will move more toward the short end. Now, I think the average l/s hedge fund is maybe 50-60% net long. (That would be about like putting 100% of your money in the market long and borrowing and going short 40% as much.) But if they move to, say, 10-20% net long at the same time liquidity is drying up, weak funds are going bust, and yen carry is crumbling...
"What is more, holders of credits and credit-related derivative products find it increasingly difficult to sell their positions in the market. This is because investors have become rather risk-averse, refraining from seeking any additional exposure to credit-related financial assets.
It is against this background that markets are said to suffer from "illiquidity" a term that would suggest that markets are no longer functioning properly. It also lends support to the notion that government intervention would be needed to get them going again. However, one may also take a different view, namely, that markets are in fact working pretty well, and that the term "illiquidity" is merely an anticapitalist propaganda term.
The market functions well
A free-market transaction be it for real or financial goods is a mutually beneficial contract between two or more participants....
So if there is no buyer, it might signify that there is indeed no one who would want to exchange scarce resources against the product under review. Or it might signify that the money price for which the seller is willingly exchanging a vendible item is too high, but that there will be an exchange if and when he agrees to a lower price.
It would hardly be surprising that those who would like to sell their assets at a higher price than the prevailing market price complain about an "illiquid" financial market....
A cyclical downturn would presumably be accompanied by a deteriorating overall credit quality. Loan losses would put additional pressure on banks' equity capital, diminishing their lending potential further....
Market intervention
It is against this outlook that complaints about an alleged "illiquidity" of financial markets, in particular the short-term money markets, have not been lost upon central banks....
By injecting additional supply of central-bank money, central banks want to prevent disruptions of the payment system and keep banks from incurring losses, as both events might trigger a widespread banking crisis, which would almost certainly have negative spill-over effects onto the real economy."
It can't go on indefinately, but the longer it goes on the greater the pain. These bridge loan to pier loan deals seem to be indicating that the end is approaching. The hedgies may be able to keep the stock market punch bowl filled for a while longer, but ABS is probably toast.
There's an interesting issue when pension funds sue, and it has to do with the definition of an ERISA fiduciary.
Many types of advisors and administrators for pension funds have been found to be ERISA fiduciaries. The key thing about ERISA fiduciaries is that there is no shield of corporate liability. All the fiduciary's personal assets are up for grabs.
This is a complex legal area that I have greatly simplified, and it may be a stretch. But I did notice the teamsters sued not only Moody's but one of their officers personally. It could put the fear of God out there.
OMFG How could I forget ERISA...If this gets granted, this could be big...even if the suit fails, pension funds are gonna be scared s-less...or at the managers are. This should be watched.
Is it possible that stock market levels have disconnected from reality and are now supported by fools hoping to make a profit on the greater fool theory...and beliving they are wise enough to escape into cash before the crash?
GM makes a deal that will dilute its stock, cost a shitload of cash and it is already in negative net worth territory and the price jumps???
I spent too many hours following mule and plow to be impressed..aghast perhaps.
"I know its kind of stupid reasoning, but its all I can come up with to explain. Any ideas?"
FDI may be part of it, our foreign trading partners have to recycle about 2-3Bil a day and with the ABS, COD, and other structured product having just bit their ass and is locked up they now have a smaller pool of assets in which to recycle their dollars, stocks, corporate bonds, treasuries, or the out right purchase of a company or real estate. It is also possible that with the collapse of housing market and it's obvious effect on consumer spending it may be in their best interest to keep the wealth effect alive and well here in the US by proping up the stock market to keep their export driven economies from collapsing. Another reason would be if they though the dollar was near or close to bottom that would be beneficial to boost returns as it appreciated against their currency. One more point would be that Big Bone Benny just put everything on sale in the US to anyone not holding dollars except maybe Zimbabwe or Norht Korea, the only problem with that is homeland security which would block a lot of deals.
Veteran Wall Street dealmaker Chris Flowers has been given access to Northern Rock's books after tabling a takeover proposal for the stricken bank.
Mr Flowers' offer is believed to be the sole approach that would keep the bank together. Other potential bidders, who include a private equity group led by US firm Cerberus, plan to break the stricken lender up and divide the assets between them.
The Chutzpah of the man - He's just pulled out of the Sallie Mae deal and back to back wants to be a deal maker in England ? Hasn't he heard that news travels fast - they do have this thing called the internet, you know..
Whether or not Moody's is an ERISA fiduciary, I would hate to be the defendant in a lawsuit brought by teamsters. Not because of the Hoffa/thug stereotype.
They have lots of members to answer to for losses, and lots of lawyers to try to set it right.
If they succeed, many other pension plans would follow suit.
If there is a parallel as some have suggested to Enron, one question is who will play the role of Arthur Andersen.
FWIW, Morningstar says that Moodies has been sued before and never experienced a material loss. They are maintaining their 5 star rating dispite the increased litigation environment.
But we sheeple suckers have to buy into socialism, per the IRS.
WMD1964 | 09.26.07 - 6:56 pm | #
Socialism? No, this is a Republican device... if the gov't wants to make loans to students, why not just make them directly (with their lower rate of interest)? Instead, subsidize private lenders, to loan at a higher rate of interest, and pass a law so that student loans (unlike all other debt) are NOT erased by BK... guaranteed cash flow!
We'd have been better off with socialism... just let the gov't loan the damn money, and cut out the middleman.
This deal is probably going to go down. The key is the connections the companies share. Most likely the buyers are trying to force Sallie Mae to renegotiate the deal at a lower price. Knowledge Maps from NewsVisual show that Sallie Mae has strong executive connections to both JPMorgan and BofA The page cannot be found . As a result, the buyers were probably able to use these connections to pressure Sallie Mae on several fronts which lead to a return to the negotiating table for a lower price.
Sometimes you hold them,sometimes you fold them,and sometimes you walk away.RUN!
No problem, just sprinkle this deal with some magic Buffett dust, and it will miraculously be saved.
Works for the stock market, why not Sallie Mae?
It's getting expensive to make crummy loans, isn't it?
OCC
Bank Supervision Process Comptroller's Handbook - September 2007
This is the new OCC Examinaton handbook for all of you with examination questions and concerns. Keep it handy! We will need to reference it in the coming quarters.
http://www.occ.treas.gov/handbook/banksup.pdf
why the breakup FEE is so huge (almost 4% here)??
central,
No kidding! Man just waft a little WBD and it will cure a rainy day! lol
Do you think that Bear thing might be just a rumor to provide a pop in their share price to close out the quarter...Naw!
Late payments rise on home equity credit lines
Late payments rise on home equity credit lines
| Reuters
Late payments on U.S. home equity lines of credit rose to a 5-1/2 year high in the second quarter of 2007 but delinquencies on many other types of consumer loans fell, the American Bankers Association said on Wednesday.
Were I a stakeholder in Sallie Mae I'd take the $900m first and then hire lawyers to force the completion. This isn't a "can't close the deal" this is a blatant case of "don't want to close the deal." The moral hazard of giving out get out of free jail cards is far too large to ignore. This happens all the time with buyers' remorse. Let this go and before you know it bridge loans start looking like pier loans and there might even develop a credit crunch.
DEALTALK-Archstone loans appear priced at pre-crunch level
| Reuters
Deal in trouble?
I'm heartbroken for JPM and BOA, that they will have to write off $900MM; where can I send flowers?
The straw that broke the camel's back was probably seeing they lent me 70K for law school.
I really don't know who was dumber, them or me!
Follow the money - who benefits or not by closing or not closing the deal. The original deal was put together with two major forward-looking business assumptions that are beyond dust. First that Congressional subsidies would continue. That qualifies as a material change in anybody's book, when 1/2 or better of your value prop goes historical. 2nd that the markets would still be pumping leveraged liquidity out to support the "deal" flow of students loans. Oops.
Finally there's the little detail the WSJ commented on in the original story - why no LBO deals for financials ? Too much leverage to start with of course - this was touted as a huge SEE change in deal-making, valuations and debt structure. If you take an entity that's already weigh leveraged, add more to it and the business volume drops badly while the costs-of-doing-business moves as far in the other direction that's Material, Adverse, Change.
Voila' ! Besides paying $900M, which is likely negotiable down, is still cheaper than trying to make this thing fly AFTER doubling-up the debt load. Besides what a great maneuvering ploy on the part of Lee & Partners if they've got to deal.
That is hilarious, the deal that AJ linked to: "...annualized cash flow, including expected growth...is (only) 70 percent of its projected interest expense..."
Admittedly, I'm 15 years out of business school, and have forgotten many things that I once learned, but that seems like wildly shaky arithmetic to me.
How do they expect to cover the 30% interest expense shortfall? Refinance lower later? MEW from expected appreciation? Someone, please enlighten me; I'm still learning this 'new age' investing math.
I seem to remember not even 3 months ago a major bullish argument was that all the LBO's and takeovers were going to push all stocks up. Its obvious from the falling stock market that the loss of these deals is going to hurt, oh wait, NOT!
Slightly off topic, but I had a thought regarding the disconnect between the stock market and the situation on the ground as of the last 8 months. The stock market supposedly is a forward looking indicator. The market never looked and saw the subprime debacle, the spread of the mortgage debacle, record foreclosures, credit crunch, etc. There was never a substantial price correction, except in single stocks as if everything existed in its own vacuum. Now the market is shooting up because looking ahead the market expects a major rate cute series by the fed, and thus, stocks must go up. I am wondering if there has been a change in mentality and it is foolish and simple, but here it goes:
"Looking ahead, any and all problems will be overcome and have a short term effect on economic matters, so if you keep looking out far enough, then there is never a reason to be selling, only buying and the market goes up!"
If you believe that the housing recession and credit issues will be solved by the fed rate cuts, there is no reason to ever 'mark to market" the current conditions in the stock market because looking ahead, they technically do not exist! I know its kind of stupid reasoning, but its all I can come up with to explain. Any ideas?
How are FirstData and Harman doing?
jg,
I HAD to go read that for myself - OK I still am having problems believing it - are they really saying they are trying to sell loans with a DSCR of 0.69 or so?
I guess the tax-effected interest expense must be ~100% of the projected cash flow. Who cares about repaying principal?
Given their track record (i.e., big chunk in Amaranth), I'm guessing that the San Diego pension fund will be first in line to buy these bonds.
Maybe someone does not want to waste their money on a slice of socialism:
Sallie Mae was originally created in 1972 as a government-sponsored entity (GSE). The company began privatizing its operations in 1997, a process it completed at the end of 2004 when the company terminated its ties to the federal government.
Sallie Mae is listed on the Fortune 500 and is one of the Top Innovators in IT according to InformationWeek. The company also has been recognized as one of the 100 Best Corporate Citizens according to Business Ethics magazine and one of the top 30 companies for executive women by the National Association of Female Executives.
(from sallie mae website)
But we sheeple suckers have to buy into socialism, per the IRS.
Jg- I am with you on trying to understand the logic in the Archstone deal. The article says they have a "reserve" to cover interest payments. So they are borrowing extra principal so they have a reserve to pay down the first few years of interest? Or they expect to sell assets to pay down the debt? but that lowers cash flow too.
The only reason apartments have been priced high in the last few years is because of their potential to be converted to condos, but that is dead now and apts. will again be valued by their rents.
If someone understands how the deal pencils out, let us know.
jg:
I guess Lehman told Tishman they could just refinance before the teaser rate reset. Oops.
MCO is sued. Sh*t is about to hit the fan.
UPDATE 1-Pension fund sues Moody's over subprime ratings
| Reuters
The stock market usually is a leading indicator, or at least an evaluator of risk-reward.
There are a few periods, somewhat rare, when the market becomes a measure of sentiment ("optimism") more than a risk or earnings evaluator. This is one such times. There's just a lot of optimism out there, mainly among leveraged, speculative, somewhat "sophisticated" investors (especially hedge funds). A lot of it is the Paulson/Bernanke puts, but there's more. Really, it's a belief in the concept of liquidity in general and the U.S. market's allure and infallability.
As a sentiment (optimism) indicator, I think we're even higher right now than at the end of 1999. That doesn't mean the market will drop tomorrow. It could take months. But the higher the optimism, the greater the fall generally is -- and I think the extraordinary leverage will make it worse.
Lurker,
It's not the fact that lawsuits against the ratings agencies are being filed that interests me as much as WHO is filing them. Here we have a pension fund showing up as a holder of those toxic products.
reposted from previous comment thread
I used to work (until 3 weeks ago) for a studenyt lending company - Nelnet. They just laid off 400 or 12% of their workforce because they see changes in the new HEA legislation as cutting their margins by 67%.
The gravy train days of student lending are over. That's why this deal is dying, not the credit crunch. There are discussions (hushed discussions) within Nelnet about exiting the asset origination side of student lending altogether. Legislation is highly biased against private label FFELP lending and the margins are evaporating. Still money to be made in servicing (sound familar??) and on fee-based, non-loan products for the education market and the 'education seeking family'. That's the direction Nelnet is following and likely all the other major student loan players
Thanks for the MCO link, L-. I was just brainstorming last night with my wife as to what precipitating factor would start things unwinding in the market and when. Maybe it's this lawsuit, or others to quickly follow, now.
Yep, with the failed LBO deals, new ugliness in subprimes (19% in default/foreclosure/REO as of August), and this first-of-many lawsuits, it seems like the sewer pipe has ruptured, and mess is spewing out.
But, I guess it's a contained sewer pipe rupture.
The stock market usually is a leading indicator, or at least an evaluator of risk-reward.
There are a few periods, somewhat rare, when the market becomes a measure of sentiment ("optimism") more than a risk or earnings evaluator. This is one such times. There's just a lot of optimism out there, mainly among leveraged, speculative, somewhat "sophisticated" investors (especially hedge funds)...
I think you've got it mostly right, but I think the key to understanding the behavior of the stock market is as follows:
1) Hedge funds are the primary players in the market now.
2) These hedge funds are mostly ponzi operations - they borrow more and more money to drive up asset prices, and they rely on the increasing prices to lure in more client money to pay interest and employ further leverage.
3) So hedge funds as an aggregate HAVE to drive the market up to make the interest payments on their debt and stay in business (also rising markets allow more funds and less skill to make money; declining markets are only profitable to a smaller number of funds, and the opportunities decrease with time).
4) Furthermore, they know they're ponzi operations and when the "deleveraging event" comes most of them will rapidly go bust. But they don't care about the losses because it's the client's money - they keep their hefty managment fees and share of the profits. In the end the only thing that matters is keeping the game going as long as possible. This is why we see stocks being driven relentlessly higher despite increasingly bad economic data, and more generally a complete disregard for risk.
5) This WILL NOT STOP until they no longer have access to liquidity, their clients panic and bail out, or some external force causes the market to collapse and spawn a killing wave of margin calls.
We have modeled a substantial part of our economy after Enron.
Enjoy.
Unions vs. willing accomplices to this credit mess (ratings agencies); breaks my heart that one side has to win.
magic Buffett dust
Buffet Fluffer
Wareen Fluffete
It's still a great time to buy a house (there's a short commercial at the beginning):
MarketWatch Broadband
"MCO is sued. Sh*t is about to hit the fan.
An Error has occured | Reuters.com? rpc=44
Lurker"
That the fit hit the shan is debatable. A judge has not ruled the suit has merit, nor granted class action status (lining the lawyers pockets...essentially). The interesting thing is that:
The Teamsters Union is at least as corrupt as the rating agencies. When gangsters go to war...well there will be blood on The Street (punny no?)...guarenteed.
Cheers,
ac - add this:
6) Ben has made it pretty clear the hedge funds will have access to liquidity, up to and including boat loans.
We appear to have a willing supplier of liquidity (these hedge funds have become The Economy which one has to admit is Too Big To Fail), and we have an ever willing borrower in the Hedge funds, since they aren't directly at risk, but they get all the reward.
This could go on indefinately, or
until the dollar has a crisis.
ac,
I agree with you that hedge funds drive today's market. But I don't agree hedge funds have to drive the market higher.
I know some long/short hedge funds. They have been very long all year (and very leveraged) but only because their optimism is high. Philosophically, they aren't bulls. They are sentiment forecasters, in a way.
Long/short is by far the biggest hedge fund category. If these funds sense the wind starting to blow cold, they won't just cut their gross exposures (leverage). They'll also shift more of the leverage they have short. In other words, their net long/short position will move more toward the short end. Now, I think the average l/s hedge fund is maybe 50-60% net long. (That would be about like putting 100% of your money in the market long and borrowing and going short 40% as much.) But if they move to, say, 10-20% net long at the same time liquidity is drying up, weak funds are going bust, and yen carry is crumbling...
LOOK OUT.
KnotRP
A few interesting snippets from this article:
The Shaking Tower of Debt - Thorsten Polleit - Mises Institute
"What is more, holders of credits and credit-related derivative products find it increasingly difficult to sell their positions in the market. This is because investors have become rather risk-averse, refraining from seeking any additional exposure to credit-related financial assets.
It is against this background that markets are said to suffer from "illiquidity" a term that would suggest that markets are no longer functioning properly. It also lends support to the notion that government intervention would be needed to get them going again. However, one may also take a different view, namely, that markets are in fact working pretty well, and that the term "illiquidity" is merely an anticapitalist propaganda term.
The market functions well
A free-market transaction be it for real or financial goods is a mutually beneficial contract between two or more participants....
So if there is no buyer, it might signify that there is indeed no one who would want to exchange scarce resources against the product under review. Or it might signify that the money price for which the seller is willingly exchanging a vendible item is too high, but that there will be an exchange if and when he agrees to a lower price.
It would hardly be surprising that those who would like to sell their assets at a higher price than the prevailing market price complain about an "illiquid" financial market....
A cyclical downturn would presumably be accompanied by a deteriorating overall credit quality. Loan losses would put additional pressure on banks' equity capital, diminishing their lending potential further....
Market intervention
It is against this outlook that complaints about an alleged "illiquidity" of financial markets, in particular the short-term money markets, have not been lost upon central banks....
By injecting additional supply of central-bank money, central banks want to prevent disruptions of the payment system and keep banks from incurring losses, as both events might trigger a widespread banking crisis, which would almost certainly have negative spill-over effects onto the real economy."
It can't go on indefinately, but the longer it goes on the greater the pain. These bridge loan to pier loan deals seem to be indicating that the end is approaching. The hedgies may be able to keep the stock market punch bowl filled for a while longer, but ABS is probably toast.
Cheers,
There's an interesting issue when pension funds sue, and it has to do with the definition of an ERISA fiduciary.
Many types of advisors and administrators for pension funds have been found to be ERISA fiduciaries. The key thing about ERISA fiduciaries is that there is no shield of corporate liability. All the fiduciary's personal assets are up for grabs.
This is a complex legal area that I have greatly simplified, and it may be a stretch. But I did notice the teamsters sued not only Moody's but one of their officers personally. It could put the fear of God out there.
rich,
OMFG How could I forget ERISA...If this gets granted, this could be big...even if the suit fails, pension funds are gonna be scared s-less...or at the managers are. This should be watched.
Cheers, (grabs a guzzle of Ol' Grandad)
Is it possible that stock market levels have disconnected from reality and are now supported by fools hoping to make a profit on the greater fool theory...and beliving they are wise enough to escape into cash before the crash?
GM makes a deal that will dilute its stock, cost a shitload of cash and it is already in negative net worth territory and the price jumps???
I spent too many hours following mule and plow to be impressed..aghast perhaps.
orfolkcounty47
Nah, look at the office supplier news today. They're just placing bets based on their gambling models.
Cheers,
"I know its kind of stupid reasoning, but its all I can come up with to explain. Any ideas?"
FDI may be part of it, our foreign trading partners have to recycle about 2-3Bil a day and with the ABS, COD, and other structured product having just bit their ass and is locked up they now have a smaller pool of assets in which to recycle their dollars, stocks, corporate bonds, treasuries, or the out right purchase of a company or real estate. It is also possible that with the collapse of housing market and it's obvious effect on consumer spending it may be in their best interest to keep the wealth effect alive and well here in the US by proping up the stock market to keep their export driven economies from collapsing. Another reason would be if they though the dollar was near or close to bottom that would be beneficial to boost returns as it appreciated against their currency. One more point would be that Big Bone Benny just put everything on sale in the US to anyone not holding dollars except maybe Zimbabwe or Norht Korea, the only problem with that is homeland security which would block a lot of deals.
==== from the ToryGraph ==
Chris Flowers looks over Northern Rock - Telegraph
Veteran Wall Street dealmaker Chris Flowers has been given access to Northern Rock's books after tabling a takeover proposal for the stricken bank.
Mr Flowers' offer is believed to be the sole approach that would keep the bank together. Other potential bidders, who include a private equity group led by US firm Cerberus, plan to break the stricken lender up and divide the assets between them.
The Chutzpah of the man - He's just pulled out of the Sallie Mae deal and back to back wants to be a deal maker in England ? Hasn't he heard that news travels fast - they do have this thing called the internet, you know..
Shameless, utterly shameless.
-K
Cheers, (grabs a guzzle of Ol' Grandad)
Thanks, Misean, I wish it was real Ol' Grandad right now, not cyber.
Whether or not Moody's is an ERISA fiduciary, I would hate to be the defendant in a lawsuit brought by teamsters. Not because of the Hoffa/thug stereotype.
They have lots of members to answer to for losses, and lots of lawyers to try to set it right.
If they succeed, many other pension plans would follow suit.
If there is a parallel as some have suggested to Enron, one question is who will play the role of Arthur Andersen.
Moody's?
rich
hanks, Misean, I wish it was real Ol' Grandad right now, not cyber.
'Tweren't cyber for me...hic.
Cheers,
Rich,
I think the teamsters are tugs (no sp). However they have loads of caish to fund a lawsuit. Thus teh blood on The Street comment.
Cheers,
FWIW, Morningstar says that Moodies has been sued before and never experienced a material loss. They are maintaining their 5 star rating dispite the increased litigation environment.
Re: Sallie Mae:
But we sheeple suckers have to buy into socialism, per the IRS.
WMD1964 | 09.26.07 - 6:56 pm | #
Socialism? No, this is a Republican device... if the gov't wants to make loans to students, why not just make them directly (with their lower rate of interest)? Instead, subsidize private lenders, to loan at a higher rate of interest, and pass a law so that student loans (unlike all other debt) are NOT erased by BK... guaranteed cash flow!
We'd have been better off with socialism... just let the gov't loan the damn money, and cut out the middleman.
"The stock market supposedly is a forward looking indicator."
The stock market is clearly in a distribuition phase.
Look at consumer discritionary (XLY), financials (XLF), soxx and cyclicals
XLY and XLF are about to break the Sept 18 low.
Regards
EWZ
This deal is probably going to go down. The key is the connections the companies share. Most likely the buyers are trying to force Sallie Mae to renegotiate the deal at a lower price. Knowledge Maps from NewsVisual show that Sallie Mae has strong executive connections to both JPMorgan and BofA The page cannot be found . As a result, the buyers were probably able to use these connections to pressure Sallie Mae on several fronts which lead to a return to the negotiating table for a lower price.