In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Tuesday, July 24, 2007

Wall Street Heads For the Diaper Aisle

by Tanta on 7/24/2007 07:35:00 AM

CR has been drawing our attention to what happens when "bridge loans" become "pier loans." There's another kind of what is supposed to be temporary financing on the Street known as "warehouse" lending. Mortgage bankers use warehouse lines of credit to fund loans as they are originated, carrying them in the warehouse until they can be sold to a whole-loan investor or securitized. What happens if the bottom falls out of the whole-loan or security market and nothing moves out of the warehouse? Long walk. Short pier.

CDO issuers also use warehouse funding to buy tranches of ABS and other securities to create the CDOs with. There are many different kinds of warehousing agreements, but I will note that one kind is known as a "gestational" facility. A better term might be "day care" facility, since the idea, like the bridge loan, is that somebody's going to show up at 5:30 and take the grubby little ankle-biters off your hands.

That's all in aid of extracting the utmost enjoyment out of the following, from Bloomberg, which I must say carries a headline we could only have dreamed of last year, "KKR, Homeowners Face Funding Drain as CDO Machine Shuts Down":

July 24 (Bloomberg) -- The Wall Street money-machine known as collateralized debt obligations is grinding to a halt, imperiling $8.6 billion in annual underwriting fees and reducing credit for everyone from buyout king Henry Kravis to homeowners.

Sales of the securities -- used to pool bonds, loans and their derivatives into new debt -- dwindled to $3.7 billion in the U.S. this month from $42 billion in June, analysts at New York-based JPMorgan Chase & Co. said yesterday. The market is ``virtually shut,'' the bank said in a July 13 report. . . .

``We're walking on thin ice,'' said Alexander Baskov, a fund manager who helps oversee $25 billion of high-yield debt for Pictet Asset Management SA in Geneva. ``People are trying to find value and the right price and right now nobody knows what it is. Pretty much everyone is in the dark.'' [Insert Patsy Cline chorus here] . . .

The shakeout is leading firms from Maxim Capital Management in New York to Paris-based Axa Investment Managers to delay or scrap planned CDO sales.

Maxim began buying mortgage bonds for a new CDO after completing its second deal in March. Chief Investment Officer Doug Jones in New York said he slowed the purchases, having acquired only a third of the assets planned, partly because the bank underwriting the deal grew concerned it could lose money as volatility increased. He declined to name the underwriter.

``We don't want to get too far along and create something that's not sellable,'' said Jones, who manages $4 billion of CDOs.

Banks are becoming more skittish about providing credit lines, called warehouse financing, managers use to buy assets that go into CDOs in the months before the securities are issued, said James Finkel, chief executive officer of Dynamic Credit Partners. The New York-based company manages $7 billion in 10 CDOs and a hedge fund.

``There are just very few, if any, bankers opening new warehouses,'' said Finkel.
"We don't want to get too far along." Uh huh. Today you're a little bit pregnant, tomorrow you're loading up the cart with Pampers.