Posted by Rick Stine
on January 27, 2011
, Hedge Funds
, Wall Street
In the Financial Crisis Inquiry Report issued today, there is a fair amount of criticism lobbed at Wall Street and the complicated securities it created that fueled the explosion of toxic mortgages. It also notes that there were quite a few hedge funds that figured this out and entered trades that would make them profitable if “the entire market crashed.”
The FICC report says it surveyed more than 170 hedge funds and a found a common strategy to be one where they went long the equity (extremely risky) portion of a collateralized debt obligation but used credit default swaps to take offsetting positions in different ranches of the same CDO.
We learn today that giant insurance company Allstate has sued BankAmerica and its Countrywide Financial unit over a bum investment. It seems Allstate bought $700 million of Collateralized Debt Obligations from Countrywide which were backed by residential mortgages originated by the mortgage lender. Allstate believes Countrywide misrepresented the quality of the portfolio.
Well, we don’t know yet the merits of this case – and we don’t know exactly what Countrywide disclosed in the offering documents for this CDO (were these stated-income mortgages? was performance of the mortgages listed in the documents? default rates? delinquencies?) To be sure, Countrywide originated some really bad mortgages and it is entirely possible that some of those made their way into the CDO Allstate bought.
Posted by Rick Stine
on July 16, 2010
, Consumer Products
, Wall Street
Three major financial institutions reported earnings today (GE Capital, the finance unit of GE, along with Citigroup and Bank of America) and while all were profitable, one sore spot stuck out when you dug through the mounds of data each company reported: Commercial real estate remains a big drag.
GE Capital had net income of $830 million – and that was after it lost $524 million in its real estate portfolio. The unit said it wrote off $186 million of bad commercial real estate debt and had $1.6 billion of non-performing assets. It placed at $6.3 billion its unrealized real estate loss.
The abacus, like the one pictured above, was a simple tool devised centuries ago to help people count and add.
The ABACUS 2007-AC1, a synthetic collateralized debt obligation at the center of Wall Street’s latest scandal, was created not that long ago and is anything but simple. Earlier today, the Securities and Exchange Commission charged Goldman Sachs and one of its executives with fraud surrounding the sale of ABACUS. Investors lost at least $1 billion and hedge fund operator Paulson & Co. picked up that amount. The charges and scandal will lead to renewed calls for tough regulation on Wall Street. And may lead to more debate about whether structured products are good or bad for financial markets.
The SEC alleges Goldman's work on a CDO enabled something else
It’s hard to say that the structured financing transaction at the heart of latest Wall Street scandal was what ultimately led to the credit crisis. But this transaction did involve a number of banks with financial ties to the deal that ultimately had to be bailed out.
This latest Wall Street drama has also dragged into it two of the biggest players on both sides of the financial markets – Goldman Sachs and hedge fund Paulson & Co.
The Securities and Exchange Commission today charged Goldman with fraud because it said the firm and an employee knowingly created a deception that allowed Paulson to make a billion dollars. The story involves some other favorite bad guys – subprime mortgages and complicated structured financial instruments. Paulson wasn’t charged.
The question is what this case might ultimately mean for both Goldman and Paulson.
Ambac's shares are up 70% today
Ok, it is good news for Ambac that the monoline insurer of bonds posted a profit late yesterday of $558 million versus a $2.3 billion loss in the year ago quarter. But the fact remains that when you peel away some of the items behind the earnings, the company still didn’t perform all that well.
For starters, it had a $133.2 million gain related to the change in value of its credit derivatives portfolio. Add to that a $472 million tax benefit. Those numbers alone add up to $605 million of gains.
It continues to see stress in its portfolio of residential mortgage backed securities. The company recorded a net loss of $385.4 million.
The worst may be over for companies like Ambac. But that doesn’t mean they are finished feeling the pain of the credit crisis.
Not their hybrid structure, nor hostile market conditions. The failure of the housing giants Fannie Mae and Freddie Mac was the result of human beings, a failure of leadership.
So said the man charged with regulating the two government-sponsored enterprises from 1999 to 2005 under what he describes as most adverse conditions.
Armando Falcon, who led the one-time little known regulatory agency with the awkward acronym, Ofheo, didn’t mince words with the bipartisan panel that’s supposed to make sense of what led us into this credit crisis and follow-up deep recession.
The New York Fed on Maiden Lane
The Securities and Exchange Commission today approved a rule today designed to reduce the risk in markets like those for asset-backed securities. But some real questions remain as to whether the new rule would really prevent much of anything.
Basically, the SEC wants issuers of asset-backed securities to retain at least 5% of the securities they are offering. As SEC Chairman Mary Schapiro says: It will force them to have some “skin in the game.”
But will making issuers have “skin in the game” really make them more responsible in evaluating risk?
If the name Jason Ader sounds familiar, it should – especially if you followed gaming and lodging companies back in the mid-1990s. Back in the day, the now 42-year-old Ader was a star equity and high-yield analyst for Bear Stearns (named among Institutional Investor’s top research analysts a number of years.) He left Bear Stearns long before it blew up. But before he moved on, he forged some strong business relationships. So Ader, and two former Bear investment bankers (Daniel Silvers and Joseph Weinberger, both 33), are playing a key role in the formation of a new real estate investment trust designed to invest in the ultra-distressed hotel business.
The REIT, Reunion Hospitality Trust (perhaps the reunion of the three Bear guys?), has filed with the Securities and Exchange Commission to sell up to $250 million of stock. It intends to use proceeds of the offering to buy assets or debt of distressed hotel companies.
Posted by Gren Manuel
on March 16, 2010
, Consumer Finance
The U.K.’s biggest mortgage lender is wanting its money back.
Certainly that’s one possible message of the ads that appeared in the U.K. papers this morning from Lloyds TSB, a unit of Lloyds banking Group PLC, which has about a quarter of the U.K. mortgages on its books.
Lloyds is advertising that “Now’s a great time to reduce how much you owe on your mortgage” because of low interest rates. To help nudge homebuyers along it’s doubling the size of mortgage overpayments that can be made without incurring penalties on variable rate mortgages.