Randomly Noted

There are a number of elements of the Morgan Keegan mutual fund fiasco that are plain outrageous. Start with making up prices for securities in a number of Morgan Keegan’s mutual funds. Continue with those made up prices often coming from the manager of the funds himself.

Yes, lying to investors is downright criminal and its good to see regulators from FINRA to the Securities and Exchange Commission go after the people involved. But to me, what is more troubling is an allegation put forth by four state regulators who also investigated what was going on with these funds – that the managers of these funds often bought securities that they never bothered to attempt to understand.

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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?

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The Wharton School of the University of Pennsylvania has been hosting some of the Wall Street CEOs who guided their firms into and out of the financial crisis. Earlier, we shared John Mack’s tale of defiance and in his own words what he did to keep Morgan Stanley afloat (click here for that video). Here, John Thain discussed what led to the financial crisis and talks about some of the controversies that surrounded his tenure as head of Merrill Lynch. He addresses Bank of America’s claim that it knew nothing about the Merrill controversial bonuses last fall and calls that claim a lie – Thain says they not only asked Merrill to pay higher amounts of cash versus stock but when Merrill proposed paying the bonuses in Merrill stock, B of A said no, pay them in B of A stock. And regarding the furor over his office redecoration that cost more than a million dollars and which he ultimately repaid out of pocket: “I’d furnish it in Ikea” if he could do it over again. The video is about 29 minutes. The first 8 minutes are a long introduction, so, you might want to start around there. Thain addresses the bonus mess around the 22 minute mark. Click here for the video or on Thain’s picture above.

The above chart tells the story of one of the few good things going on at GMAC. Auto-finance companies have been getting hammered in recent years in part because of their leasing business. Basically, the value of cars coming off their leases has been far greater than the price companies like GMAC would get for then selling the cars into the used-car market. But that trend has finally turned around and, as you ca see above, GMAC made money as it could once again sell cars for more than the values implied by the leasing contracts.

The good news stops there. Okay, they saw lower provisioning for losses in their subprime mortgage portfolio. But it is still a large $704 million. And they are increasing reserves to buyback bad mortgages that were securitized under terms of those deals. Car loans that are delinquent for more than 30 days now comprise 4.36% of the portfolio, up from 2.90% a year ago. As my colleague Aparajita Saha-Bubna reported earlier, the mortgage arm of GMAC (ResCap) reported nearly $10 billion in losses in 2007 and 2008 and while the numbers in 2009 aren’t as large, they are still big. In the most recent quarter, ResCap reported a loss of $747 million.

One of the company’s executives said during an earnings conference call today that GMAC hopes to find a resolution for ResCap by the end of the year. We’re sure the U.S. government, which now owns 35.4% of GMAC, would like to see a resolution, too. But it’s likely to be a costly one.

Bank of New York Mellon saw an opportunity and took it – even though it ultimately cost the bank $4.8 billion. BNY Mellon has a $60 billion investment portfolio of which nearly $26 billion is classified as having a high risk of impairment (those on its “watch list.”) Tossed into that category are residential and commercial mortgage backed securities along with those backed by credit cards and home equity lines of credit. Many of these kinds of securities have fallen sharply in price since the credit crisis began but have recently shown a modest climb in value.  In the 3Q, BNY Mellon estimates that those “watch list” securities increased in value by $1.1 billion.

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If this trend continues, the housing market (which seemed to be stabilizing) could get worse before it gets better.

Moody’s Investors Service today downgraded Commodore CDO III and noted that about 29% of the mortgages and other securities that the CDO has invested in are in default. That’s up from about 17% at the end of February.

Fitch took similar action in late September and noted at that time that many of the subprime residential mortgages that are part of this CDO were vintage 2004 and 2005

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Despite some of the big profits coming from banks and investment banks in the early stages of this third-quarter earnings season, it’s clear that at least one major trouble spot remains: commercial real estate. Goldman Sachs reported today an additional write-down of $120 million of its commercial real estate portfolio. J.P. Morgan yesterday said its commercial real estate portfolio is now marked to about 50 cents on the dollar. And Citigroup noted today that in its Citi Holdings unit (the one set up to hold on to assets it plans to dispose), its commercial real estate portfolio was marked down another $594 million.

Citi Holdings, by definition, likely holds the garbage of the garbage that sits on Citigroup’s books. But that said, there were some other “toxic” asset classes that showed signs of improvement. Its sub-prime portfolio was marked up $1.9 billion (more than the quarter before). Alt-A mortgages were marked lower ($196 million) but that was an improvement from the second quarter. Same with leveraged finance positions (a $24 million mark lower this quarter versus a much larger mark in the second quarter).

FDIC Chairwoman Sheila Bair told a Senate subcommittee yesterday that the regulator was working on guidelines that would encourage lenders to retool troubled commercial real estate loans. Those guidelines should come sooner rather than later if the agency wants to help banks avoid more serious capital erosion. And the fewer businesses that default on these loans, the better it is for the overall economy.

It was a trio that formed the foundation of one of the best professional basketball teams of all time – Michael Jordan, Scottie Pippen and Horace Grant.

Grant surely will always remember those days with the Chicago Bulls. And he’ll likely remember for some time his relationship with the regional brokerage firm, Morgan Keegan. Newswires reporter Suzanne Barlyn reports that Grant won a $1.46 million arbitration award against Morgan Keegan for losses he incurred in mutual funds that were invested in risky securities, like bonds made up of subprime mortgages. Grant claimed he wasn’t told of the risk factor.

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It was just a little more than a year ago that the subprime mortgage mess began to bring Wall Street to its knees. Bear Stearns went under and was sold for a lark to J.P. Morgan.  Months later,  more and more banks and investment firms took massive writeoffs because of their subprime exposure, sending the financial system into paralysis and bankrupting Lehman Brothers. The government was forced to rescue the banking system.

So, here we are just six months or so beyond the darkest days of the credit crisis and the near meltdown of the financial system, and we have a bank that just made money off subprime mortgages. And perhaps the unlikeliest bank of all…

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The market for residential mortgage backed securities remains very illiquid. The market for commercial mortgage backed securities is essentially dead. This is the corner of the credit markets that remains a big worry for federal officials because of the crucial role it has played in ultimately providing financing to homeowners and business people.

But now, there are a few signs that savvy investors are looking to play in this beaten up sector. And with these big name folks getting involved, it might just help reopen these markets sooner rather than later.

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