If the average NAV across the SIV sector has fallen to 71 of 100, then the average SIV is bancrupt.
This is really interesting, is there some source that gives an overview about the leverage distribution across all SIVs? That means: How many of these SIVs have a leverage over 4 (because this means trouble in most cases as a leverage of 4 needs a 25% loss to wipe out all equity)?
If the Fitch number of 14 time leverage for a typical SIV, some of the more aggressive SIV should be in trouble already. In the Aug/Sept credit squeeze, TMA got a margin call and sold 22B or prime/jumbo loan for 95% of face value. So lossing 5% of one of your "super safe CDO" is a very possible events and if some take 10 time leverage, they would have hit the 50% thersold already... I think the next few months would be interesting to see how all these SIV work out. And of course the bank that back drop their CP is going to be on the hook....
Ben Bernanke mentioned the pulling of assets onto balance sheets during his first or second cut as partial justification. So yes, this is will have an impact.
Here's another long term effect--even for banks with no SIV's.
Suppose you have a mortgage division that only makes super prime loans. But now, you cannot package them and sell them, as there are no buyers that will pay you enough to make a profit.
So you either don't make the mortgage loan---or, you simply hold them instead of securitizing.
But then, you have to reserve capital against the loans. And you have less money to loan for other economic activity.
So even if the loans perform, there is still less liquidity in the market, leading to less overall economic growth.
Now the SIV invests this $15 Billion ($1 Billion equity and $14 Billion borrowed) in longer term notes. The idea is simple: borrow short
Really? It seems there are many ways to leverage (options, and other more exotic instruments). When a source mentions "14:1" (or some other number) as leverage, I always wonder how they are measuring "leverage." Especially in a complex transaction, there are many types of leverage, and many (sometimes wildly different) ways of calculating the resulting ratio.
So in this or any SIV, do we really know that the "14:1" is simply borrowing? Does Fitch even know?
There is a conflict-of-interest involved in the situation you describe. If the bank serves as manager of the SIV, then it is a fiduciary for the investors. A fiduciary is not allowed to have conflicts-of-interest. It must manage funds solely for the benefit of investors.
So, how can the same entity that serves as manager/fiduciary make the decision to move fund assets onto its own balance sheet, presumably for its own good (and perhaps to the detriment of SIV investors)?
Newton, the NAV is for the equity portion of the SIV, so a NAV of 71% means the equity has lost 29% ($290 million in the example). But the SIV is not bankrupt - the equity is still worth $710 million.
xofruitcake, yes, some SIVs are in worse shape than others. They need to analyzed individually - some SIVs don't invest in mortgage paper at all - others probably have more leverage and invested in risker assets. I think all of them should be on the sponsoring bank balance sheets.
Rich, I don't think this impacts the investors negatively at all - they can now sell more CP. I'm sure they are happy to see this happen.
This assumes no adjustment in the ABCP. This market is frozen right now, so I would assume there is some value lost there?
Also, the capital ratios are now shot and no new credit can be extended - let the credit crunch begin...How many others will be forced to do what HSBC has done, once most banks do this the credit crunch will be cause even more pain. The entire cycle will accelerate to the downside...
And WTF is up with those 10-year yields at 3.93% now? I always thought that treasury rates were going down, but this seems to be getting a bit out of hand like every thing else does.
"once most banks do this the credit crunch will be cause even more pain. The entire cycle will accelerate to the downside..."
I thought that is the cleansing process. Once everyone put all their problem in the balance sheet and write off the problem chile, the credit market is going to re-open for the survivor. It is going to be a slow process. But this issue now is that everyone claim their balance sheet is clean but yet the investors with money to buy all this CP are not sure who lie. So they just strike and sit on the sideline buying treasury instead. The sooner we have all these write off, the sooner the problem will go away. Thelonger we keep this problem around, more collateral damage will occur
Well, if bringing SIV assets onto bank balance sheets is supposed to help calm the markets, it doesn't seem to be working near as I can tell.
Some "tells":
Long bond futures were recently up a full point in price.
The yield on the 10-year Treasury Note has dropped another 7 basis points to 3.93%, while the 2-year yield is trading just a few bps above 3%.
LIBOR rates also continue to rise despite the general easing path the Federal Reserve has been on. Three-month, U.S.-dollar LIBOR rose to 5.05% this morning vs. a recent low of 4.87% on November 2.
In other words, flight-to-quality/flight-from-risk continues to dominate market activity.
So from a CP/MTN holder's point of view, this is a big nothingburger? HSBC put the SIV on its balance sheet but won't guarantee the CP/MTN the SIV issued? $1B covers only a 6.6% decline in the value of the assets.
If the banks refuse to lend to the SIV they eventually will be liable to the SIV equityholders when the SIV equity holder when it fails as well as the holders of the Asset Back CP who relied on the bank guarantee.
If the bank lends to the SIV it is essentially loaning money with the underlying collateral being the assets of the SIV. Given that these assets are underwater the bank has to take a loan loss reserve allowance which creates losses and reduces TIER 1 capital.
The banks do not want to honor the loan commitment. That is why they are setting up the SIV bailout fund. Which they can they keep all the bad assets and value them at 100 cents on the dollar and not have the hit to allowance for loan loss reserves.
What is interesting about all of this is that Goldman Sachs states the potential for losses is $150 Billion in SubPrime mess and contagion.
Enron losses were $80 Billion had neglible effect on the economy.The losses on the NASDAQ were over $1 Trillion.
At some point it appears that either the $150 Billion number by Goldman is too low. Or that the market is overreacting.
What is the frightening part of the equation is the amount of leverage and the seizing of the commmercial paper and mortgage market.
If the Lenders are at their limits in FHLB and no borrowings available from CP market. Freddie and Fannie become the only lenders. With limits of $417,000 how does the market transact in California.
MBS, CDO's + SIV losses reduce capital which reduce the amount available to lend.
The real estate market runnup was based on easy money. With limited mortgages available how does one purchase a house even if they wanted to. So lower sales and lower prices.
At the end of the day the Government bails out the large banks and Freddie and Fannie.
As long we still have near full employment we are okay. So the FED will continue to cut rates and keep most everyone employed. And as rates go lower the value of bonds will increase to offset the CDO losses.
F. Frederson, this is great news for the HSBC SIV CP and MTN holders. HSBC is now providing a guarantee.
If the losses of the SIV exceed $1B (the equity) then HSBC will absorb the losses. That will calm the markets for HSBC SIV CP - but it does nothing for all the other SIV CP.
BTW, I'm not sure Citi can do this - their capital ratios are already pretty low.
In other words, flight-to-quality/flight-from-risk continues to dominate market activity.
Hey Mike, I know you're watch that market. Any concerns that the rally may be getting out of hand? It seems like just yesterday the 10-yr was at 5.25%.
Somebody told me today that SIV-positive is politically incorrect and not a funny thing to say when I asked about our 401k money market accounts.
ac,
SIV stands for self-inflicted violence. It is done mostly by young women (often sexually abused) who rage inwardly by cutting themselves with knives or razors, often on the arms but sometimes on the face. They also may burn themselves with candle wax. It usually is treatable by psychiatrists.
Thanks for the summary, CR. I was wondering how "taking onto the balance sheet" could square with "no impact on earnings". Although I wonder how true that would be if the assets were fully marked to market.
I assume your 15x leverage is just a guess? That is, HSBC has provided zero information about the actual asset-to-equity ratio for these SIVs, correct?
CR, well why is it called NET Asset Value, sorry for that mistake..
The big players were smart enough not to take big risks on their books, since all they can loose are the equity in the SIV, reputation and perhaps guarantees they granted..
Here is an interesting story (FT, 23rd of Nov) about the collapse of Sachsen LB, one of the first that fell and one of the most leveraged with 30.7 bn$ in conduit assets. The equity of 1.5 bn$ as shown in the balance sheet is pretty sure already wiped out..
Nemo, the leverage I used was the typical as reported by Fitch. I don't know the specifics of the HSBC SIV - but it is probably in that range.
Obviously HSBC thinks there is enough equity - but they have been wrong before!
I believe the bigger impact will be on their fiancial ratios and credit contraction.
F. Frederson, no problem. This is the reason I wrote this post to try to clear up all these issues. There is so much confusion concerning SIVs right now.
IMO, it's not the losses from the SIVs - it's the impact on the credit crunch that should be the major concern.
One question, do they have an account like "CP payable-markdown", a contra-liability account tied to the invested CP which they now have on the BS, which takes the markdowns in asset valuation onto the liabilities? [Concurrent with a contra-asset credit of the devalued asset} Or are they actually debiting the CP payable account itself, upon mark-to-market?
Also, are the issued CP and MTN broken into tranches and managed as well? Or are they generally just a single issue? [As tranched issues would make the accounting much more complex, I realize.]
ac -- tough to say. I thought we were overextended quite a few basis points ago! Clearly, I wasn't pessimistic enough about the economic outlook ... or I just underestimated the number of financial market bodies out there waiting to be discovered.
Still trying to get my head around this. Apologies for clogging the thread with stupid questions. But...
Did HSBC create a new liability for itself here in the interests of keeping the market for its CP/MTN paper liquid, or did it remove the fiction that the liability didn't exist in order to reduce uncertainty about its CP/MTN?
In other words, flight-to-quality/flight-from-risk continues to dominate market activity.
Which may continue to happen for a while, as investors with time-deposited funds (e.g. CD's) watch the calendar for the maturity date, then move the funds elsewhere. Not everyone is willing to 'withdraw immediately' as those folks in the lines at NR were doing.
FORTUNE - The next credit scandal (CDOs) "The real outrage of the credit crunch has been in the way major banks disclosed potential losses. Now, there are billions more in undisclosed risk." Banks have billions more in undisclosed risk - Nov. 25, 2007
If the equity has fallen to 71% on average, it means either (a) that the loss on a notional $15bn portfolio is $290m out of $15bn i.e. 2%; or (b) the loss on the equity portion mirrors that of the whole portfolio and is, therefore, 29% or $4.35bn.
As I posted in a comment on this story earlier on the excellent immobilienblasen blog (good for a European perspective):
it really is criminal.
if HSBC didn't have risk to the underlying assets, then it shouldn't take them onto its balance sheet. since i am guessing they are not doing it out of charity, i am guessing that they are/were at risk to those assets.
but if THAT is the case, then they should have been on balance sheet in the first place.
seems pretty clear that there has been fraud going on on a massive scale here. can you say "Enron"?
"What is interesting about all of this is that Goldman Sachs states the potential for losses is $150 Billion in SubPrime mess and contagion.
Enron losses were $80 Billion had neglible effect on the economy.The losses on the NASDAQ were over $1 Trillion.
At some point it appears that either the $150 Billion number by Goldman is too low. Or that the market is overreacting.
What is the frightening part of the equation is the amount of leverage and the seizing of the commmercial paper and mortgage market.
"
Frank.... excellent point. Things don't add up. I think a major element in all this is the lack of transparency regarding the assets. This was a benefit on the way up, since everyone could squeeze a few extra basis points out of every transaction. On the way down, a black box is a difficult sell. Hence the seizing of the markets and the impossibility of marking to market etc, etc.
This should be smaller then the S&L/Southwest meltdown of the late 80's. Everything got dinged and Texas melted down. Now it seems like Los Vegas, Florida, and parts of S Cal are in more or less the same position as TX, with the remainder of the country getting a haircut on RE. There is no reason that the global financial markets shouldn't be able to handle this -- except for the fact that everything is suspect due to lack of transparency. Call me an optimist. A fairly decent sized bubble should be digestible. The fact that it isn't means something else is going on.
The US has both survived and thrived over the last 40 years despite a number of really bad things. Price controls, double digit inflation, a couple of really stupid wars, and numerous bubbles, meltdowns, etc. Everyone remembers the last few things and then wants to go back to 1929 as an analogy
If you are at ground zero, it seems like the end of the world. For most people in the country, it is just something for the media to talk about.
Doubts on SIVs: is there Over Collateralisation in SIVs? Where does it come from? Subordination via tranching, cash reserves...; Do SIVs follow O/C tests? Which? If a SIV is restructured into a CDO, are there new and/or different rules applying onto OC tests? I have been talked about a SIV whose asset side is worth more than debt+equity stakeholders and I wonder why and if that is related to OC issues.
"Did HSBC create a new liability for itself here in the interests of keeping the market for its CP/MTN paper liquid, or did it remove the fiction that the liability didn't exist in order to reduce uncertainty about its CP/MTN?"
Literally, the former. Basically HSBC has converted the SIVs into a conventional securities arbitrage ABCP conduit, fully backed by a liquidity facility from HSBC. That is a new liability - it probably had a very small (5% or so) liquidity facility to the SIVs, but may have outsourced that. It may also have bought back some of the capital notes before the restructuring. Both of those would have shown up on the balance sheet - the former as an asset, the latter as a liability.
What wouldn't have shown up before is the total asset pool or the SIV's debt, because it had no other contractual exposure to the assets. What it's done here is take on a new liability a) to avoid pissing off the SIV investors and seriously harming its reputation, and b) to help prevent firesales which would lower the value of HSBC's balance sheet investments in ABS, which are considerable.
It's exactly the same principle as the M-LEC, though there's only one seller (two SIVs, but both managed by HSBC) and the pricing mechanism may be different.
" is there Over Collateralisation in SIVs? Where does it come from? Subordination via tranching, cash reserves...;"
It comes from the fact that SIVs issue both senior debt and equity, so a SIV with $10bn of assets will have less than $9bn of debt. Before the liquidity crisis, most SIVs had NAVs over par, because the assets they had bought increased in price.
"Do SIVs follow O/C tests? Which?"
Yes. The main test for a typical SIV is when the NAV falls below 50%, which triggers enforcement. Typically a SIV will have a higher NAV trigger which causes it to enter "restricted operations" and/or "restricted funding".
"If a SIV is restructured into a CDO, are there new and/or different rules applying onto OC tests? "
Nobody's done it yet (SIV-lites yes, but they're basically CDOs anyway) so it's hard to say what the tests will be, but the whole point of restructuring is to take the assets out of a market value structure so they will definitely be different. Most likely the O/C tests will be based on ratings, like normal CDOs.
A classical O/C test takes the par value of performing collateral (and estimated recoveries on defaulted assets), and then applies a haircut according to the rating. When a bond gets downgraded, the O/C falls. If it falls far enough, it triggers an event of default (even if all noteholders have been paid so far), leading to enforcement, which may involve liquidation, restructuring or simply reduced coupons, depending on what the controlling creditors decide to do.
Traditional CDOs don't have market value triggers, although SIV-lites do.
If the average NAV across the SIV sector has fallen to 71 of 100, then the average SIV is bancrupt.
This is really interesting, is there some source that gives an overview about the leverage distribution across all SIVs? That means: How many of these SIVs have a leverage over 4 (because this means trouble in most cases as a leverage of 4 needs a 25% loss to wipe out all equity)?
Well said, CR. Great summary of SIV's and how they are funded.
If the Fitch number of 14 time leverage for a typical SIV, some of the more aggressive SIV should be in trouble already. In the Aug/Sept credit squeeze, TMA got a margin call and sold 22B or prime/jumbo loan for 95% of face value. So lossing 5% of one of your "super safe CDO" is a very possible events and if some take 10 time leverage, they would have hit the 50% thersold already... I think the next few months would be interesting to see how all these SIV work out. And of course the bank that back drop their CP is going to be on the hook....
Ben Bernanke mentioned the pulling of assets onto balance sheets during his first or second cut as partial justification. So yes, this is will have an impact.
Here's another long term effect--even for banks with no SIV's.
Suppose you have a mortgage division that only makes super prime loans. But now, you cannot package them and sell them, as there are no buyers that will pay you enough to make a profit.
So you either don't make the mortgage loan---or, you simply hold them instead of securitizing.
But then, you have to reserve capital against the loans. And you have less money to loan for other economic activity.
So even if the loans perform, there is still less liquidity in the market, leading to less overall economic growth.
Now the SIV invests this $15 Billion ($1 Billion equity and $14 Billion borrowed) in longer term notes. The idea is simple: borrow short
Really? It seems there are many ways to leverage (options, and other more exotic instruments). When a source mentions "14:1" (or some other number) as leverage, I always wonder how they are measuring "leverage." Especially in a complex transaction, there are many types of leverage, and many (sometimes wildly different) ways of calculating the resulting ratio.
So in this or any SIV, do we really know that the "14:1" is simply borrowing? Does Fitch even know?
There is a conflict-of-interest involved in the situation you describe. If the bank serves as manager of the SIV, then it is a fiduciary for the investors. A fiduciary is not allowed to have conflicts-of-interest. It must manage funds solely for the benefit of investors.
So, how can the same entity that serves as manager/fiduciary make the decision to move fund assets onto its own balance sheet, presumably for its own good (and perhaps to the detriment of SIV investors)?
Newton, the NAV is for the equity portion of the SIV, so a NAV of 71% means the equity has lost 29% ($290 million in the example). But the SIV is not bankrupt - the equity is still worth $710 million.
xofruitcake, yes, some SIVs are in worse shape than others. They need to analyzed individually - some SIVs don't invest in mortgage paper at all - others probably have more leverage and invested in risker assets. I think all of them should be on the sponsoring bank balance sheets.
Rich, I don't think this impacts the investors negatively at all - they can now sell more CP. I'm sure they are happy to see this happen.
Best to all.
This assumes no adjustment in the ABCP. This market is frozen right now, so I would assume there is some value lost there?
Also, the capital ratios are now shot and no new credit can be extended - let the credit crunch begin...How many others will be forced to do what HSBC has done, once most banks do this the credit crunch will be cause even more pain. The entire cycle will accelerate to the downside...
Somebody told me today that SIV-positive is politically incorrect and not a funny thing to say when I asked about our 401k money market accounts.
And WTF is up with those 10-year yields at 3.93% now? I always thought that treasury rates were going down, but this seems to be getting a bit out of hand like every thing else does.
Everything in moderation, right?
"once most banks do this the credit crunch will be cause even more pain. The entire cycle will accelerate to the downside..."
I thought that is the cleansing process. Once everyone put all their problem in the balance sheet and write off the problem chile, the credit market is going to re-open for the survivor. It is going to be a slow process. But this issue now is that everyone claim their balance sheet is clean but yet the investors with money to buy all this CP are not sure who lie. So they just strike and sit on the sideline buying treasury instead. The sooner we have all these write off, the sooner the problem will go away. Thelonger we keep this problem around, more collateral damage will occur
Ahhh...foreclosure, in lieu of loan modification, is the only option for lenders/servicers then.
Well, if bringing SIV assets onto bank balance sheets is supposed to help calm the markets, it doesn't seem to be working near as I can tell.
Some "tells":
In other words, flight-to-quality/flight-from-risk continues to dominate market activity.
So from a CP/MTN holder's point of view, this is a big nothingburger? HSBC put the SIV on its balance sheet but won't guarantee the CP/MTN the SIV issued? $1B covers only a 6.6% decline in the value of the assets.
The bank as guarantors have to lend to the SIV.
If the banks refuse to lend to the SIV they eventually will be liable to the SIV equityholders when the SIV equity holder when it fails as well as the holders of the Asset Back CP who relied on the bank guarantee.
If the bank lends to the SIV it is essentially loaning money with the underlying collateral being the assets of the SIV. Given that these assets are underwater the bank has to take a loan loss reserve allowance which creates losses and reduces TIER 1 capital.
The banks do not want to honor the loan commitment. That is why they are setting up the SIV bailout fund. Which they can they keep all the bad assets and value them at 100 cents on the dollar and not have the hit to allowance for loan loss reserves.
What is interesting about all of this is that Goldman Sachs states the potential for losses is $150 Billion in SubPrime mess and contagion.
Enron losses were $80 Billion had neglible effect on the economy.The losses on the NASDAQ were over $1 Trillion.
At some point it appears that either the $150 Billion number by Goldman is too low. Or that the market is overreacting.
What is the frightening part of the equation is the amount of leverage and the seizing of the commmercial paper and mortgage market.
If the Lenders are at their limits in FHLB and no borrowings available from CP market. Freddie and Fannie become the only lenders. With limits of $417,000 how does the market transact in California.
MBS, CDO's + SIV losses reduce capital which reduce the amount available to lend.
The real estate market runnup was based on easy money. With limited mortgages available how does one purchase a house even if they wanted to. So lower sales and lower prices.
At the end of the day the Government bails out the large banks and Freddie and Fannie.
As long we still have near full employment we are okay. So the FED will continue to cut rates and keep most everyone employed. And as rates go lower the value of bonds will increase to offset the CDO losses.
Bernacke must keep cutting rates.
F. Frederson, this is great news for the HSBC SIV CP and MTN holders. HSBC is now providing a guarantee.
If the losses of the SIV exceed $1B (the equity) then HSBC will absorb the losses. That will calm the markets for HSBC SIV CP - but it does nothing for all the other SIV CP.
BTW, I'm not sure Citi can do this - their capital ratios are already pretty low.
Best Wishes.
In other words, flight-to-quality/flight-from-risk continues to dominate market activity.
Hey Mike, I know you're watch that market. Any concerns that the rally may be getting out of hand? It seems like just yesterday the 10-yr was at 5.25%.
ac,
SIV stands for self-inflicted violence. It is done mostly by young women (often sexually abused) who rage inwardly by cutting themselves with knives or razors, often on the arms but sometimes on the face. They also may burn themselves with candle wax. It usually is treatable by psychiatrists.
Thanks for the summary, CR. I was wondering how "taking onto the balance sheet" could square with "no impact on earnings". Although I wonder how true that would be if the assets were fully marked to market.
I assume your 15x leverage is just a guess? That is, HSBC has provided zero information about the actual asset-to-equity ratio for these SIVs, correct?
Ok, my bad. I read investors as purchasers of the CP/MTN, not the initial investors.
CR, well why is it called NET Asset Value, sorry for that mistake..
The big players were smart enough not to take big risks on their books, since all they can loose are the equity in the SIV, reputation and perhaps guarantees they granted..
Here is an interesting story (FT, 23rd of Nov) about the collapse of Sachsen LB, one of the first that fell and one of the most leveraged with 30.7 bn$ in conduit assets. The equity of 1.5 bn$ as shown in the balance sheet is pretty sure already wiped out..
FT.com / Comment / Analysis - Warnings behind the bail-out of a heedless bank
ac,
yeah the ten year is falling off of a cliff, which suggests to me that some level of TSHTF...question is to what degree at the moment!
Nemo, the leverage I used was the typical as reported by Fitch. I don't know the specifics of the HSBC SIV - but it is probably in that range.
Obviously HSBC thinks there is enough equity - but they have been wrong before!
I believe the bigger impact will be on their fiancial ratios and credit contraction.
F. Frederson, no problem. This is the reason I wrote this post to try to clear up all these issues. There is so much confusion concerning SIVs right now.
IMO, it's not the losses from the SIVs - it's the impact on the credit crunch that should be the major concern.
Best Wishes.
ac,
SIV stands for self-inflicted violence
rich- thanks for the heads-up.
Correction: The total asset value of Sachsen LBs conduits was 30.7 bn, so around 45 bn$ with around 2.2 bn$ of equity...
With an ABX-HE AAA of aroung 65 this probably means further steep losses for the stupid new owner...
Newton --
CR, well why is it called NET Asset Value, sorry for that mistake..
Because it's net of borrowed money.
Net Asset Value (NAV) normally means total assets (aka. Gross Position Value) minus whatever debt was used to lever up.
Gross Position Value divided by NAV equals leverage.
¡Muchas gracias, Señor Risk!
One question, do they have an account like "CP payable-markdown", a contra-liability account tied to the invested CP which they now have on the BS, which takes the markdowns in asset valuation onto the liabilities? [Concurrent with a contra-asset credit of the devalued asset} Or are they actually debiting the CP payable account itself, upon mark-to-market?
Also, are the issued CP and MTN broken into tranches and managed as well? Or are they generally just a single issue? [As tranched issues would make the accounting much more complex, I realize.]
ac -- tough to say. I thought we were overextended quite a few basis points ago! Clearly, I wasn't pessimistic enough about the economic outlook ... or I just underestimated the number of financial market bodies out there waiting to be discovered.
dotcommunist, I don't know the specifics of the HSBC accounting. I was trying to do show the general principles - not the details.
I'm sure the actual accounting is quite complex.
Best Wishes.
Still trying to get my head around this. Apologies for clogging the thread with stupid questions. But...
Did HSBC create a new liability for itself here in the interests of keeping the market for its CP/MTN paper liquid, or did it remove the fiction that the liability didn't exist in order to reduce uncertainty about its CP/MTN?
In other words, flight-to-quality/flight-from-risk continues to dominate market activity.
Which may continue to happen for a while, as investors with time-deposited funds (e.g. CD's) watch the calendar for the maturity date, then move the funds elsewhere. Not everyone is willing to 'withdraw immediately' as those folks in the lines at NR were doing.
--
Let us wait and see how the recession changes the picture and how long the denial lasts.
Markets ARE Screaming Recession, But Economists ARE Blind to the Reality
There was a melt-up in US Treasuries today and the Scam Market not only couldnt hold the gains but it is tanking.
Vast majority of economists, who have access to the public, get paid to mislead the public. That is what the free market in information is all about.
Jas
FORTUNE - The next credit scandal (CDOs) "The real outrage of the credit crunch has been in the way major banks disclosed potential losses. Now, there are billions more in undisclosed risk."
Banks have billions more in undisclosed risk - Nov. 25, 2007
Outstanding summary, CR. Very clear.
Thank you!
If the equity has fallen to 71% on average, it means either (a) that the loss on a notional $15bn portfolio is $290m out of $15bn i.e. 2%; or (b) the loss on the equity portion mirrors that of the whole portfolio and is, therefore, 29% or $4.35bn.
I, for one, don't believe (a)......
As I posted in a comment on this story earlier on the excellent immobilienblasen blog (good for a European perspective):
it really is criminal.
if HSBC didn't have risk to the underlying assets, then it shouldn't take them onto its balance sheet. since i am guessing they are not doing it out of charity, i am guessing that they are/were at risk to those assets.
but if THAT is the case, then they should have been on balance sheet in the first place.
seems pretty clear that there has been fraud going on on a massive scale here. can you say "Enron"?
"What is interesting about all of this is that Goldman Sachs states the potential for losses is $150 Billion in SubPrime mess and contagion.
Enron losses were $80 Billion had neglible effect on the economy.The losses on the NASDAQ were over $1 Trillion.
At some point it appears that either the $150 Billion number by Goldman is too low. Or that the market is overreacting.
What is the frightening part of the equation is the amount of leverage and the seizing of the commmercial paper and mortgage market.
"
Frank.... excellent point. Things don't add up. I think a major element in all this is the lack of transparency regarding the assets. This was a benefit on the way up, since everyone could squeeze a few extra basis points out of every transaction. On the way down, a black box is a difficult sell. Hence the seizing of the markets and the impossibility of marking to market etc, etc.
This should be smaller then the S&L/Southwest meltdown of the late 80's. Everything got dinged and Texas melted down. Now it seems like Los Vegas, Florida, and parts of S Cal are in more or less the same position as TX, with the remainder of the country getting a haircut on RE. There is no reason that the global financial markets shouldn't be able to handle this -- except for the fact that everything is suspect due to lack of transparency. Call me an optimist. A fairly decent sized bubble should be digestible. The fact that it isn't means something else is going on.
The US has both survived and thrived over the last 40 years despite a number of really bad things. Price controls, double digit inflation, a couple of really stupid wars, and numerous bubbles, meltdowns, etc. Everyone remembers the last few things and then wants to go back to 1929 as an analogy
If you are at ground zero, it seems like the end of the world. For most people in the country, it is just something for the media to talk about.
The data on many SIVs, (including the size and breakdown of HSBC's) is in the appendix of this fitch report:
http://www.fitchratings.com/corporate/reports/report_frame.cfm?rpt_id=353622
you may need to sign up for a free username to view it.
Most SIV's are leveraged 14 times. It seems like a magic number.
Thanks!
Thank you CR! I was thinking of suggesting a SIV Ubernerd piece but this does the job nicely.
Doubts on SIVs: is there Over Collateralisation in SIVs? Where does it come from? Subordination via tranching, cash reserves...; Do SIVs follow O/C tests? Which? If a SIV is restructured into a CDO, are there new and/or different rules applying onto OC tests? I have been talked about a SIV whose asset side is worth more than debt+equity stakeholders and I wonder why and if that is related to OC issues.
Thanks so much for your help!!
"Did HSBC create a new liability for itself here in the interests of keeping the market for its CP/MTN paper liquid, or did it remove the fiction that the liability didn't exist in order to reduce uncertainty about its CP/MTN?"
Literally, the former. Basically HSBC has converted the SIVs into a conventional securities arbitrage ABCP conduit, fully backed by a liquidity facility from HSBC. That is a new liability - it probably had a very small (5% or so) liquidity facility to the SIVs, but may have outsourced that. It may also have bought back some of the capital notes before the restructuring. Both of those would have shown up on the balance sheet - the former as an asset, the latter as a liability.
What wouldn't have shown up before is the total asset pool or the SIV's debt, because it had no other contractual exposure to the assets. What it's done here is take on a new liability a) to avoid pissing off the SIV investors and seriously harming its reputation, and b) to help prevent firesales which would lower the value of HSBC's balance sheet investments in ABS, which are considerable.
It's exactly the same principle as the M-LEC, though there's only one seller (two SIVs, but both managed by HSBC) and the pricing mechanism may be different.
" is there Over Collateralisation in SIVs? Where does it come from? Subordination via tranching, cash reserves...;"
It comes from the fact that SIVs issue both senior debt and equity, so a SIV with $10bn of assets will have less than $9bn of debt. Before the liquidity crisis, most SIVs had NAVs over par, because the assets they had bought increased in price.
"Do SIVs follow O/C tests? Which?"
Yes. The main test for a typical SIV is when the NAV falls below 50%, which triggers enforcement. Typically a SIV will have a higher NAV trigger which causes it to enter "restricted operations" and/or "restricted funding".
"If a SIV is restructured into a CDO, are there new and/or different rules applying onto OC tests? "
Nobody's done it yet (SIV-lites yes, but they're basically CDOs anyway) so it's hard to say what the tests will be, but the whole point of restructuring is to take the assets out of a market value structure so they will definitely be different. Most likely the O/C tests will be based on ratings, like normal CDOs.
The previous post was also me, by the way.
Ginger, I do thank you. Let me bother you one more time.
What is, then, a classical O/C test for a CDO?
Appreciate your help.
A classical O/C test takes the par value of performing collateral (and estimated recoveries on defaulted assets), and then applies a haircut according to the rating. When a bond gets downgraded, the O/C falls. If it falls far enough, it triggers an event of default (even if all noteholders have been paid so far), leading to enforcement, which may involve liquidation, restructuring or simply reduced coupons, depending on what the controlling creditors decide to do.
Traditional CDOs don't have market value triggers, although SIV-lites do.
Thanks again Ginger