Monday, August 13, 2007

What Goes to Jesus Comes to Jesus

by Tanta on 8/13/2007 11:26:00 AM

. . . or, well, something. I think I skipped the "Jesus and Karma: A Cross-Cultural Perspective" unit in my continuing education course on "Business and Blasphemy: It's Better Than Turkey Metaphors."

Exhibit A, especially for lovers of schadenfreude, is those well-known theologians at Institutional Risk Analytics:

From a risk management perspective, MHP [S&P] and MCO [Moody's] look a lot more fragile when it comes to financial and reputational exposure than do leading investment banks focused on the mortgage sector like BSC or Lehman Brothers (NYSE:LEH). Unlike a financial institution, publishing companies such as MHP and MCO lack the capital cushion and access to liquidity with which to absorb large financial losses. Even though the ratings agencies reportedly charged up to three times the customary fees for CDO ratings, this compared to the fee charged for a similar size bond issue, there still is not enough money in the proverbial cookie jar to offset the added risk from these complex structured assets.

Indeed, wouldn't it be a delicious irony if one or both of the major ratings agencies were forced into bankruptcy due to legal claims made regarding CDOs? As Bloomberg noted back in May of 2007: "When it comes to CDOs, rating companies actually do much more than evaluate them and give them letter grades. The raters play an integral role in putting the CDOs together in the first place." . . .

The Almighty, it seems, does have a sense of humor. But what is the real damage to the Street from CDOs?

The illusion of an investment-grade credit rating resulted in roughly a trillion dollars worth of subprime and other non-investment grade mortgages being packaged and sold to the Buy Side. We discount the recent market upset that has seen some commentators claim, irresponsibly in our view, that CDOs have little or no value. If you consider the situation more calmly, then a haircut of 25-30% or some $250 to $300 billion in aggregate principal loss, seems reasonable to us -- at least for starts. And that's just the basic loss, not counting punitive damages and costs.

Given the above estimate of aggregate losses to the Street, the bad news coming from BSC seems just the beginning. True, the folks at BSC have been generating headlines, but there are still dozens of Sell and Buy Side firms that have yet to come to Jesus when it comes to the CDO fisasco. We are still very early in the process of unwinding the excesses of the past several years. Bottom of the first inning, to be precise.

But that does not mean that the Sell Side firms are standing still. One well-placed reader of The IRA reports that the top Sell Side firms are closing down a couple of hedge funds a day in an effort to staunch the bleeding from CDOs.

Says the Buy Sider: "I'm hearing about prime brokers shutting down hedgies, taking back collateral and then reselling the same collateral to other hedge funds without a mark to market. Is this possible?"

Of course it's possible. Whenever OTC derivatives, hedge funds and members of the Sell Side are involved, anything is possible. The great thing about CDOs and other derivative securities is that the value is set not in the public markets, but by the sales force.
So, maybe, the sales force shoulda spent some more time in church?

Exhibit B, from the Wall Street Journal (thanks, kett82!):
While many mortgage brokers screamed through the real-estate boom with blaring television ads and exotic loan structures, HomeBanc Corp. positioned itself as the good guy.

Inside the company, executives opened companywide gatherings and internal meetings with Christian prayers. Every branch office kept a chaplain on call. The company's $365,000-a-year human-resources chief, Dwight "Ike" Reighard, was the founder of a mega-church in an Atlanta suburb. He says he encouraged employees to pray, put others first and become better workers -- and also performed weddings and funerals for employees. "People who never attended church would tell me, you're my pastor," Dr. Reighard said in an interview on Saturday.

But over the past few weeks, as investors fled securities tied to mortgages, HomeBanc's sources of loan funds dried up. Unable to continue originating loans, the company staggered under the burden of its expensive sales infrastructure.

On Thursday, HomeBanc filed for bankruptcy-court protection. It fired most of its 1,100 employees on Friday and is shuttering its 22 branches and 139 kiosks . . .
Apparently counting on the Almighty's sense of humor to remain eternal and unchanging, CFC just put a bid out for that "expensive sales infrastructure." All I can say is that I'd buy tickets to the first meetings between those sleek secular suits from Calabasas and Dr. Ike's Dixie disciples of debt . . .