by Calculated Risk on 2/28/2008 08:05:00 PM

From Bloomberg: AIG Posts Biggest Loss, Misses Analysts' Estimates

American International Group Inc., the world's largest insurer by assets, posted its biggest quarterly loss as a publicly traded company after an $11.1 billion writedown of guarantees sold to fixed-income investors.

The fourth-quarter net loss of $5.29 billion, or $2.08 a share, compared with profit of $3.44 billion, or $1.31, a year earlier, New York-based AIG said today in a statement.

... AIG guaranteed $62.4 billion in collateralized debt obligations that included subprime mortgages as of Nov. 25, securities that led to fourth-quarter losses for MBIA Inc. and Ambac Financial Group Inc., the largest bond insurers.

The losses keep adding up. The confessional is very busy.

by Calculated Risk on 2/13/2008 06:48:00 PM

From the WSJ: S&P Cuts Ratings On $6.75 Billion In CDO Tranches

Standard & Poor's lowered its ratings on 66 tranches with a total value of $6.75 billion, from 10 U.S. cash-flow and hybrid collateralized-debt-obligation transactions.
...
So far, S&P has cut ratings on 1,567 tranches from 434 U.S. cash-flow, hybrid, and synthetic CDO transactions ... In addition, 2,305 ratings from 589 transactions are on watch for possible downgrades. The affected CDO tranches have a total value of $343.63 billion.

The slow steady drumbeat of downgrades continues ...

by Calculated Risk on 2/05/2008 01:53:00 PM

From Bloomberg: CDO Market Is Almost Frozen, Merrill, JPMorgan Say

Buying and selling of collateralized debt obligations based on mortgage bonds, high-yield loans or preferred shares has ground to a near-halt, traders said at the securitization industry's largest conference.

``We're definitely in a period of very low liquidity at the moment, which has actually been dropping precipitously in the last few weeks,'' Ross Heller, an executive director at JPMorgan Securities Inc., said yesterday ...

The credit crunch just won't go away. And just wait until some of the LBO debt blows up too.

Twenty-seven percent of the approximately $74 billion in bonds used in LBOs the last two years classify as ``distressed'' because they yield at least 10 percentage points more than Treasuries, Bloomberg data show.

by Calculated Risk on 2/04/2008 12:32:00 PM

From Bloomberg: Moody's Raises Loss Assumption to Almost 18 Percent for CDOs (hat tips SC, Brian)

Moody's Investors Service raised its loss assumptions to as much as 17.8 percent on 2006 subprime bonds packaged into collateralized debt obligations, heralding further ratings downgrades as defaults increase.

Losses are assumed to be at least 14.8 percent, more than double its forecast of last April ...

More downgrades coming.

by Calculated Risk on 1/22/2008 10:33:00 AM

On CDOs:

“From a valuation and management standpoint, we've evolved towards a view that for many if not most of these structures will see terminations and therefore have looked through the securities to the net asset value support by the underlying securities. In these cases we utilized external pricing services consistent with our normal valuation processes. We priced over 70% of the exposure in this manner”

Via MarketWatch:

CFO Joe Price also told listeners on a conference call Tuesday morning that the company marked down its value for CDOs and subprime loans to less than half their original value. "The combined subprime CDO sales and trading positions at 12/31 are carried at 600 million or about 30 cents on the dollar," Price said.

Credit Cards:

“We have seen an increase in delinquency in our card portfolio in those states most affected by housing problems. So give you a little insight, the quarter-over-quarter rate of increase in 30-day plus delinquencies in the combined states of California , Florida , Arizona , and Nevada increased over five times the pace of the rest of the portfolio. That group makes up a little more than a quarter of our domestic consumer card book. We have mentioned before that we expect to be in the 5 to 5.5% range for overall consumer card losses for the full year of '08. That compares to the 4.75% we experienced in the fourth quarter”

Home Equity:

“Home equity reported an increase in net charge-offs of 179 million or 63 basis points, up from 20 basis points at the end of September. 30-day plus performing delinquencies are up 25 basis points to 1.26%. Nonperformers in home equity rose to 1.25% of the portfolio from 82 basis points in the prior quarter. Even though our averaged refreshed FICO score remains strong at 721 and the combined loan to value is at 70%, we have seen a rise in the percentage of loan that is have a CLTV above 90% driven by the more recent vintaging. 90% plus CLTV currently represents 21% of the loans versus 17% in the third quarter. We believe net charge-offs in home equity will continue to rise given seasoning in the portfolio and softness in the real estate values. We increased reserves for this portfolio to 84 basis points but wouldn't be surprise to do see losses cross the 100 basis point mark by the middle of this year as we work through higher CLTV vintages. And relative to the industry's performance, we believe that our results will continue to benefit from our relationship base direct-to-consumer strategy. Again, continued economic deterioration could drive losses higher. Our residential mortgage portfolio continues to say perform well with losses at only 4 basis points in the fourth quarter. While we've seen some deterioration in subsegments, namely our community reinvestment act portfolio under our low to moderate income programs to total some 8% of the book, nothing really stands out to us at this point”

On Countrywide (from MarketWatch): Bank of America sees Countrywide deal done in second half

Bank of America CEO Ken Lewis said Tuesday that the company expects to close its previously announced acquisition of mortgage giant Countrywide Financial in the second half of 2008.

by Calculated Risk on 1/11/2008 02:42:00 PM

From the WSJ: S&P Slashes CDO Ratings (hat tip Barley)

Standard & Poor's lowered its ratings on 149 tranches from 31 U.S. cash flow and hybrid collateralized debt obligation transactions worth a total of $8.74 billion.
...
All of the downgraded tranches come from mezzanine structured finance CDOs of asset-backed securities, high-grade structured finance CDOs of asset-backed securities, or CDO of CDO transactions collateralized by U.S. residential mortgage-backed securities.

Isn't it a little early in the day for a Friday afternoon Ratings Massacre?

by Calculated Risk on 1/04/2008 12:24:00 PM

From Reuters: S&P may cut $6.42 bln CDOs affecting 149 tranches

Standard & Poor's may cut the rating on $6.42 billion of collateralized debt obligations (CDOs) following downgrades to billions of dollars worth of second-lien residential mortgage-backed securities last month.

S&P said the action affects 149 tranches from 43 U.S. cash flow and hybrid CDOs of asset-backed securities.

by Calculated Risk on 12/21/2007 12:06:00 PM

From MarketWatch: Fitch warns it may cut Ambac's AAA rating

The AAA rating of Ambac's bond insurance unit was put of Rating Watch Negative by Fitch, which means the agency will downgrade to AA+ in four to six weeks unless the company can boost is excess capital levels before then. A review by Fitch of Ambac's exposure to CDOs and residential mortgage-backed securities found that the insurer is roughly $1 billion short of the extra capital it needs ...

Yesterday, Fitch put MBIA on Rating Watch Negative, and then followed up by putting "173,022 bond issues (172,860 municipal, 162 non-municipal) insured by MBIA on Rating Watch Negative". We will probably see another large number of issues on Rating Watch Negative later today.

On topic, from Bloomberg: Muni Insurance Worthless as Borrowers Shun Ambac

State and local borrowers are discovering that buying municipal bond insurance from MBIA Inc. and Ambac Financial Group Inc. is a waste of money.
...
Many investment-grade munis would have AAA ratings without insurance if they were ranked the same way as corporate debt. Every state except Louisiana would be Aaa, based on the scale for companies, which ranks borrowers on the probability of default, according to the report by Moody's.

Municipal issuers are ranked on their fiscal health relative to other municipalities. Investors' increased willingness to buy state and local government debt without guarantees suggests that borrowers may not require the backing of insurance companies.
...
``Taxpayers give insurers $2 billion a year because of a dual-rating scale,'' said Matt Fabian, senior analyst and managing director of Municipal Market Advisors, an independent municipal bond research firm in Concord, Massachusetts. ``You could easily save taxpayers that $2 billion by rating them on the same scale as corporate bonds.''

by Calculated Risk on 12/20/2007 07:23:00 PM

Press Release via MarketWatch: MBIA Further Addresses Previously Disclosed $30.6 Billion Multi-Sector CDO Exposure

MBIA Inc. has announced that in response to media and other inquiries received as a result of information the Company posted on December 19, 2007 on its Web site relating to its collateralized debt obligations ("CDO") exposure, the Company is issuing the following statement:

The information posted on December 19, 2007 discloses no additional Multi-Sector CDO exposure. The information provides detail on the composition of MBIA's $30.6 billion Multi-Sector CDO exposure that had previously been provided in its Operating Supplement. MBIA discussed its exposure to CDO transactions with inner CDOs ("CDO-Squared") during a conference call for investors on August 2, 2007.

Standard & Poor's, Moody's and Fitch have confirmed that this information was provided to them and was taken into consideration in their recent ratings analyses. The information was also made available to Warburg Pincus prior to their entering into the previously disclosed Investment Agreement, and that agreement is not affected by this information.

by Calculated Risk on 12/20/2007 03:21:00 PM

From MarketWatch: Fitch puts MBIA on ratings watch negative after CDO review

Fitch Ratings put several ratings of MBIA Inc. on Rating Watch Negative on Thursday because of the bond insurer's exposure to structured finance collateralized debt obligations ...

Yes, more "closing the barn door".

by Calculated Risk on 12/20/2007 10:59:00 AM

Update: Q&A added.

Brian sends along this preliminary transcript (unedited) from the Bear Stearns Q4 07 Conference Call:

Fixed income net revenue for the Fourth Quarter was a loss of $1.54 billion, down meaningful it from a gain of $1.1 billion earned in the November 2006 quarter. Sequentially, fixed income revenues also decreased when compared to the gain of $118 million earned in the August 2007 quarter. The quarters results include net inventory markdowns of $1.9 billion, which included the $1.2 billion loss previously disclosed on November 14th. During the quarter, the Company had gross inventory markdown s of mortgage assets of approximately $3.2 billion. Partially offsetting these losses were hedging gains of approximately 1.3 billion.

A large component of these losses were approximately $1 billion of losses incurred related to CDO's and the unwinding of CDO warehouse facilities where customer loss mitigation arrangements proved to be inadequate. At November 30th, all CDO warehouse positions have been unwound and collateral has been sold or hedged. Remaining net losses were experienced across our U.S. And international CDO Alt A and subprime mortgage loans and securities and commercial loan inventories, reflecting weakness in Global Market conditions.

At the end of November 2007, the Company had approximately $46 billion of mortgage and asset backed loans and securities. Included in the exposure are subprime mortgage loans of $500 million, representing 2007 vintage production and $1.1 billion of investment grade subprime securities and $200 million of below investment grade securities. ABS CDO exposures are approximately $750 million at the end of the quarter. Currently, our mortgage and asset backed inventories are approximately $43.6 billion, down 5 % from quarter end.

I should point out these balances represent gross asset values and net exposures are considerably lower. And in particular, net of hedges our ABS CDO and subprime positions are net short. At year-end, the Company held $7.8 billion of retained interest in our own MBS securitizations, a 19% decline from the $9.6 billion level at August 31. The non-investment grade portion of retained interest is $1.3 billion, down slightly from the August 31 levels.

The valuation of our mortgage positions reflects a combination of observable market data, the decline in the ABX indexes and our expectations of housing prices, defaults and cumulative losses. Accordingly while no assurances can be given as to future performance, we believe our mortgage positions have been conservatively valued in light of current market conditions and expected levels of defaults and cumulative loss estimates.

At November 30, 2007, approximately 7% of the firms assets were considered Level 3 assets. Given a lack of liquidity in the marketplace for many instruments, it's reasonable at some assets [that used] to be Level 2 assets would move to Level 3. While we haven't completed the review for the 10K disclosure, it is anticipated that the amount of Level 3 assets will increase by approximately $7 billion when compared to the August 31 amounts.

Q&A

Analyst (Lehman):
Okay, lastly, how much of the markdowns in fixed income were related to CMBS and Alt A during the quarter?
Bear Stearns:
Well, of the $1.9 billion in writedowns, as I said about a billion dollars of that came from the writedown of CDO's and the unwinding of the CDO warehouse. The balance of those losses of 900 million came from re valuation of our mortgage books, both our Alt A positions as well as commercials.

Analyst
Was one much bigger than the other there in terms of Alt A or commercial?
Bear Stearns
The Alt A and other mortgages were larger than the commercial

Analyst, (Sandler O’Neill)
Okay, and in the wake of rating agency finally taking action against a bond insurer yesterday -- can you talk a little bit about A) your exposure or your dependence upon bond insurers to get to net numbers versus gross numbers and secondarily, given your merchant banking investment in ACA, do you still own a portion of that? Can you give us any details on that?

Bear Stearns
Yeah. Start with ACA. It often gets confused because our merchant banking fund is an equity owner of ACA and often creating some confusion as to what our level of involvement is away from that. The equity investment, the exposure to the Company from our equity investment through the fund is not material and as it relates to counterparty credit exposures to ACA, those exposures are also quite benign and fully reserved and reflected in the earnings and we have no additional exposure to them so I think that that is quite well contained and behind us, whatever the exposure was. As it relates to other model lines, we have very little wrapped CDO credit exposure, almost none, and whatever exposure we have for them is typically limited our credit trading books and to some extent, municipal inventories.

Analyst
Is wrap tight protection maybe something historically you've been more dependent on and seeing the way things were going you reduced your exposure to it or has it typically been something you don't have a lot of dependence an?

Bear Stearns
It's typically something we don't have a lot of dependence on.

MarketWatch adds: Bear Stearns cut 1,400 jobs in fourth quarter, CFO says

Notice all the hedging and "net" discussion. If the counterparties blow up, Bear Stearns losses will be much larger. And look at the size of the overall mortgage portfolio: approximately $43.6 billion. Bear says these losses reflect "our expectations of housing prices, defaults and cumulative losses." I wish Bear would make public their house price forecast.

by Calculated Risk on 12/20/2007 10:27:00 AM

Update: Housing Wire has more news stories, and recommends this Nomura piece to understand CDOs squared.

From Bloomberg: MBIA Bond Risk Soars on $8.1 Billion CDO Disclosure

MBIA Inc. tumbled ... after the world's biggest bond insurer revealed that it guarantees $8.1 billion of collateralized debt obligations repackaging other CDOs and securities linked to subprime mortgages.
...
MBIA posted a document on its Web site late yesterday showing it insured the so-called CDOs-squared, a potentially riskier form of security than what the company typically guarantees. Rising defaults on subprime mortgages packaged into securities have led to bond downgrades and threatened MBIA's AAA guaranty rating.

``We are shocked management withheld this information for as long as it did,'' Ken Zerbe, an analyst with Morgan Stanley in New York, wrote in a report yesterday. ``MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors.''

by Calculated Risk on 12/16/2007 09:45:00 PM

Here are a couple of different stories about CDOs and lawsuits. The first story concerns Wall Street selling CDOs to municipalities who now are claiming they were unaware of the risks.

From the Finanical Times: Lehman faces legal threat over CDO deals (hat tip Viv)

Lehman Brothers faces the threat of legal action by municipal councils in Australia over the sale of high-risk collateralised debt obligations by the Wall Street bank's local subsidiary, Grange Securities.

At least two councils in New South Wales and a third in Western Australia are considering litigation against Grange ...

The Lehman-originated Federation CDO, exposed to the US subprime mortgage market, was last month marked down to just 16 cents in the dollar by the bank, leaving councils nursing paper losses of 84 per cent.

The sale by Grange and others of many hundreds of millions of dollars worth of CDOs to Australian councils, some of which had 70 per cent or more of their total investment devoted entirely to CDOs, has sparked an investigation by the state government of New South Wales.

The second story concerns sophisticated investors wrestling over the scraps, from the WSJ: CDO Battles: Royal Pain Over Who Gets What

A recent filing in New York state court provides a window into the legal battles likely to ensue from battered investments. Big players, including Deutsche Bank AG, bond insurer MBIA Inc., Wachovia Corp. and UBS AG are tangled together over a mortgage investment vehicle named Sagittarius.
...
On Nov. 6, Sagittarius triggered "an event of default." This prompted MBIA to claim it should get all the remaining payments. That put it into potential conflict with Deutsche, the CDO's trustee, and UBS, an investor with fewer rights in the event of default.

Sorting out how to value the assets, who gets paid and whether to pull the plug on struggling CDOs is complicated business. Often little is known about who holds what. "If there's one safe prediction for 2008, it is that legal teams will be busy," wrote J.P. Morgan Chase in a recent report led by analyst Chris Flanagan.

The lawyers will definitely be busy.

by Calculated Risk on 12/12/2007 05:22:00 PM

From Bloomberg: Security Capital's AAA Rating May Be Cut by Fitch (hat tip Brian)

Security Capital Assurance Ltd. may lose its AAA credit rating at Fitch Ratings ...

The company's capital is at least $2 billion below what it needs to retain the AAA, Fitch said. SCA has four to six weeks to come up with ``firm capital commitments'' to meet the guidelines, or the rating will fall two levels to AA, Fitch said.
...
Security Capital is among seven AAA rated bond insurers that have been probed by Moody's Investors Service, Standard & Poor's and Fitch Ratings for the past month after declines in the credit quality of the securities they guarantee.

by Calculated Risk on 12/06/2007 11:19:00 PM

Note: If you are looking for a discussion of the Mortgage Freeze plan, see Tanta's The Plan: My Initial Reaction

First, here is a great graphical explanation of a CDO from Felix Salmon at Portfolio.com: What's a C.D.O.?

Now back to the Adams Square Funding liquidation. Thanks to jck for sending me the prospectus for the deal. Here are the notes:

U.S.$48,000,000 CLASS A SENIOR FLOATING RATE NOTES DUE DECEMBER 2051
U.S.$51,000,000 CLASS B-1 SENIOR FLOATING RATE NOTES DUE DECEMBER 2051
U.S.$10,000,000 CLASS B-2 SENIOR FLOATING RATE NOTES DUE DECEMBER 2051
U.S.$15,250,000 CLASS C FLOATING RATE DEFERRABLE NOTES DUE DECEMBER 2051
U.S.$16,000,000 CLASS D FLOATING RATE DEFERRABLE NOTES DUE DECEMBER 2051
U.S.$5,000,000 CLASS E FLOATING RATE DEFERRABLE NOTES DUE DECEMBER 2051
U.S.$20,000,000 SUBORDINATED NOTES DUE DECEMBER 2051

Adams Square Funding I, Ltd. (the “Issuer”) will issue the Notes referenced above on or about December 15, 2006 ...

And here were the initial ratings:

It is a condition of the issuance of the Notes on the Closing Date that (a) the Class A Notes be rated “Aaa” by Moody’s Investors Service, Inc. (“Moody’s”) and “AAA” by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”), respectively, (b) the Class B-1 Notes be rated at least “Aa2” and “AA” by Moody’s and S&P, respectively, (c) the Class B-2 Notes be rated at least “Aa3” and “AA-” by Moody’s and S&P, respectively, (d) the Class C Notes be rated at least “A2” and “A” by Moody’s and S&P, respectively, (e) the Class D Notes be rated at least “Baa2” and “BBB” by Moody’s and S&P, respectively, and (f) the Class E Notes be rated at least “Ba1” and “BB+” by Moody’s and S&P, respectively. The Subordinated Notes will not be rated.

All of the above notes are worthless, including the AAA rated (by S&P) Class A notes.

Even the $342 million in Super Senior notes were impaired. As S&P noted yesterday: "proceeds will not be sufficient to cover the funded portion of the super-senior swap in full and that no proceeds will be available for distribution to the class A, B, C, D, or E notes."

From AAA to worthless in less than a year.

by Calculated Risk on 12/05/2007 09:11:00 PM

From Standard & Poor's: S&P Cuts All Adams Square Funding I Rtgs To ‘D’ On Liquidation (hat tip Brian)

Standard & Poor's Ratings Services today lowered its ratings to 'D' on the senior swap and the class A, B-1, B-2, C, D, and E notes issued by Adams Square Funding I Ltd. The downgrades follow notice from the trustee that the portfolio collateral has been liquidated and the credit default swaps for the transaction terminated.

The issuance amount of the downgraded collateralized debt obligation (CDO) notes is $487.25 million.

According to the notice from the trustee, the sale proceeds from the liquidation of the cash assets, along with the proceeds in the collateral principal collection account, super-senior reserve account, credit default swap (CDS) reserve account, and other sources, were not adequate to cover the required termination payments to the CDS counterparty. As a result, the CDO had to draw the balance from the super-senior swap counterparty. Based on the notice we received, the trustee anticipates that proceeds will not be sufficient to cover the funded portion of the super-senior swap in full and that no proceeds will be available for distribution to the class A, B, C, D, or E notes.

Today's rating actions reflect the impact of the liquidation of the collateral at depressed prices. Therefore, these rating actions are more severe than would be justified had liquidation not been ordered, in which case our rating actions would have been based on the credit deterioration of the underlying collateral. Across the cash flow assets sold and credit default swaps terminated, we estimate, based on the values reported by the trustee, that the collateral in Adams Square Funding I Ltd. yielded, on average, the equivalent of a market value of less than 25% of par value.

Bloomberg is reporting (no link) that $165 million of debt, originally rated AAA will not be repaid.

From triple AAA to nothing. That is a deep cut.

by Tanta on 11/16/2007 08:35:00 AM

Floyd Norris sums it all up:

We should have known something was strange.

by Calculated Risk on 11/13/2007 11:35:00 AM

From John Spence at MarketWatch: Bank of America sees $3 bln in CDO mark-downs

Bank of America ... said it's currently estimating a $3 billion pretax charge in the fourth quarter to mark down collateralized debt obligations, or CDOs.
...
"As market conditions change and possibly worsen there could be additional diminution in value," [Chief Financial Officer Joe Price] warned.

by Calculated Risk on 11/12/2007 05:20:00 PM

From Dow Jones (no link yet): Fitch Downgrades $37.2B Of CDOs, Slashing AAAs to Junk

Fitch Ratings downgraded Monday the credit ratings of $37.2 billion of global collateralized debt obligations, with more than $14 billion worth of transactions falling from the highest-rated AAA perch to speculative-grade, or junk, status.
...
The rating agency said more than 60 CDO transactions are still on watch for potential downgrade, with a resolution due on or before Nov. 21.

On Monday, nearly $20 billion worth of transactions was cut from investment-grade to junk, said Kevin Kendra, managing director at Derivative Fitch.

From AAA to Junk in one fell swoop!

by Calculated Risk on 11/09/2007 03:17:00 PM

From MarketWatch: Bank of America: CDO dislocations may knock Q4 results

Bank of America Corp. said .. that dislocations in the market for ... (CDOs) will knock the bank's fourth-quarter results.

Here is the SEC 10-Q filing.

We expect these significant dislocations in the CDO market to continue, and it is unclear what impacts these dislocations will have on other markets in which we operate or maintain positions. ... We anticipate that these developments will adversely impact our results during the fourth quarter.