by Calculated Risk on 6/20/2007 10:27:00 AM

Reported on CNBC: JPMorgan Started Selling Stearns Hedge Fund Assets Tuesday Night

update: CNBC also reporting that Deutsche Bank and others are selling hedge fund assets.

by Calculated Risk on 6/19/2007 11:33:00 PM

More from the WSJ: Two Big Funds At Bear Stearns Face Shutdown

Two big hedge funds at Bear Stearns Cos. moved toward the brink of closing down ... as a bailout plan ... fell apart ...

The funds, which once controlled more than $20 billion in a combination of investor and lender money ... had invested heavily in various securities backed by subprime loans ...

... the funds had effectively paid down $2.25 billion of their $9 billion in outstanding credit. The first two lenders to exit their positions, Goldman Sachs Group Inc. and Bank of America Corp., agreed to unwind complicated transactions with Bear without dumping lots of bonds on the broader market. ...

By unwinding those loans in an orderly manner, rather than through a series of fire-sale auctions, Bear's fund managers ... could help stave off painful ripple effects in the broader market for mortgage-backed securities and related instruments. ...

Merrill, on the other hand ... opted to revive a planned auction for hundreds of millions of dollars worth of collateral from the Bear funds.

by Calculated Risk on 6/19/2007 06:18:00 PM

From the WSJ: Merrill Lynch To Dump Bear Stearns Fund's Assets

A day after managers of a troubled internal hedge fund at Bear Stearns Cos. presented lenders with a last-ditch plan to reinvigorate the fund with additional financing, creditor Merrill Lynch & Co. pushed forward with plans to sell hundreds of millions of dollars in collateral assets out of the fund, said traders late Tuesday.

Merrill has indicated plans to sell off at least $850 million worth of collateral assets, mostly mortgage-related securities, Wednesday afternoon, according to documents reviewed by the Wall Street Journal.

Brian sent me this link with the comment: "Look out below!"

Added: Bill Fleckenstein wrote the following today before the Merrill announcement (Fleck's site):

"I have to wonder why Wall Street is working overtime to rescue a $600 million fund. On the other hand, I think we all know the answer: In a liquidation scenario, lots of people fear what would happen to leveraged portfolios across Wall Street and the world if sales of some of the fund's paper were marked to
market.
...
I can't recall a fund of this size ever being bailed out. Liquidation is the usual outcome when a fund is down 25% to 30%, as this one supposedly is. Of course, it might be down a lot more if real prices were used.
...
Apparently, all sorts of games are being played and attempts being made to avoid marking mortgage slices-and-dices to market -- in addition to the fact that many funds aren't required to mark their positions to market until the ratings agencies say so."
Posted with permission.

First, it appears the fear will now become reality - assets will be sold. However Fleck appears to suggest that hedge funds aren't required to mark-to-market until the "rating agencies say so". We have seen a wave of downgrades recently, but overall the rating agencies have been slow to react to the subprime implosion. So if the hedge funds have to wait for the rating agencies, this will take some time to play out.

by Calculated Risk on 6/19/2007 09:37:00 AM

From the LA Times: Report from UCLA team skirts the R-word

"We suspect that the weakness in the housing market is finally spilling over into consumption spending," wrote senior economist David Shulman in the quarterly forecast being released today. "Retail sales appeared to stall in April and automobile sales have become decidedly weak.

"This is not a recession, but it is certainly close," Shulman said.

And on California housing:

In a separate report on the California economy, UCLA forecasters predicted home values would continue to fall slightly or remain flat in most parts of the state as many homeowners struggled to make higher payments on adjustable-rate mortgages.

"The pipeline of mortgage resets suggests it may be mid-2009 before California sees a normal housing market again," said the report by economist Ryan Ratcliff.

This fits with this Financial Times article: Bernanke hints at thinking on housing (hat tip Roubini)

Changes in house prices could have a bigger effect on consumption than the traditional “wealth effect” suggests, Ben Bernanke said on Friday in comments that offer some insight into how the Federal Reserve may think about the continuing problems in the US housing market.

The Federal Reserve chairman told a conference hosted by the Atlanta Fed that, in addition to making homeowners richer or poorer, changes in house prices might influence the cost and availability of credit to consumers.

This is because people with equity in their homes have more at stake in avoiding default. That, in turn, reduces the premium char-ged by lenders owing to their imperfect knowledge of their borrowers’ financial circumstances.

If this theory is correct, Mr Bernanke said, “changes in home values may affect household borrowing and spending by somewhat more than suggested by the conventional wealth effect”.

by Calculated Risk on 6/19/2007 09:13:00 AM

The Census Bureau reports on housing Permits, Starts and Completions. Seasonally adjusted permits increased:

Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 1,501,000. This is 3.0 percent above the revised April rate of 1,457,000, but is 21.7 percent below the revised May 2006 estimate of 1,918,000.

Starts declined:

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,474,000. This is 2.1 percent below the revised April estimate of 1,506,000 and is 24.2 percent below the revised May 2006 rate of 1,944,000.

And Completions declined slightly:

Privately-owned housing completions in May were at a seasonally adjusted annual rate of 1,534,000. This is 0.5 percent below the revised April estimate of 1,542,000 and is 19.3 percent below the revised May 2006 rate of 1,901,000.

Click on graph for larger image.
The first graph shows Starts vs. Completions.

As expected, Completions have followed Starts "off the cliff". Completions are now at the level of starts. Starts will probably fall further, based on housing fundamentals of excess supply and falling demand, and completions will most likely again follow the next decline in starts.



This graph shows starts, completions and residential construction employment. (starts are shifted 6 months into the future). Completions and residential construction employment were highly correlated, and Completions used to lag Starts by about 6 months.

Both of these relationships have broken down somewhat (although completions have fallen to the level of starts). Why residential construction employment hasn't fallen further is a puzzle. Also the time between start and completion has increased recently.

This report shows builders are still starting too many projects, and that residential construction employment is still too high.

by Anonymous on 6/19/2007 09:12:00 AM

It's 6:00 am. Do you know where your webmaster is?

From Dow Jones Newswire, via Brian (no link):

The Web site that takes in mortgage payments for New Century Financial Corp. was down for five days last week because the company didn't have staff capable of running it, according to a hedge fund that agreed to buy the mortgage provider's loan-servicing business.

The hedge fund, Carrington Capital Management, is set to complete its $188 million purchase of the loan-servicing business on June 29. . . .

Carrington said the Web site was out of service from June 9 through June 13 because the bankrupt company "did not have the appropriate personnel."

Among the thousands who lost or left their jobs when New Century filed for Chapter 11 protection April 2 were the people who designed system security, the hedge fund says.

A collapse of the loan servicing platform, Carrington said, could cost it $300,000 to $500,000 each day it can't use the technology to track troubled borrowers and collect on their loans.

Of course, I'm sure it's just the "people who designed system security" who walked out on the place. No reason to worry about the accounting department . . . or the file room . . .

by Calculated Risk on 6/19/2007 12:02:00 AM

From the WSJ: Bear-Led Fund Gets Reprieve

Lenders granted a beleaguered Bear Stearns Cos. hedge fund an additional day to finalize a last-ditch rescue plan ...

During a meeting at Bear's Madison Avenue headquarters that lasted nearly three hours, creditors were presented with a bailout plan that included $1.5 billion in new loans from Bear, backed by the fund's assets. The plan also would bring an infusion of $500 million in new equity capital from a group of other banks, and will allow some lender's to reduce their exposure by 15%, said people briefed on the meeting.

The soap opera continues ... This fund started last August with $600 million in equity and $6 Billion in borrowed capital (talk about leverage).

According to the article the fund lost 23% from the beginning of the year through the end of April. Add: Perhaps the 23% is referring to losses on the equity, but then the fund must have suffered more losses since that time based on the size of the bailout. If the 23% refers to the entire fund, then 23% of $6.6 Billion is about $1.5 Billion - not only wiping out all the equity in the fund, but almost $1 Billion in debt too.

UPDATE: From the NY Times: Mortgages Give Wall St. New Worries. This article covers the Bear Stearns hedge fund, but also wonders about the impact on mortgage lending:

After the first cracks in the subprime mortgage business appeared late last year, several large lenders were forced into bankruptcy.

Now, the stress is sending tremors down Wall Street, as investment funds that bought a stake in those loans are starting to wobble.

Industry officials say they expect this second act to be longer and slower, unwinding over the next 12 to 18 months. The fallout could further constrict consumers with weak, or subprime, credit while helping to prolong the housing downturn.

On Wall Street, the impact could be far more significant: It could force banks, hedge funds and pension funds to acknowledge substantial losses, which had been tucked away in complex investment vehicles that are hard to evaluate. In turn, that could limit the money available for mortgage lending.

by Calculated Risk on 6/18/2007 07:50:00 PM

Click on graph for larger image.

NAHB Press Release: Builder Confidence Slips Again in June

Ongoing concerns about subprime-related problems in the mortgage market and newfound concerns about rising prime mortgage rates caused builder confidence to decline two more points in June, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), released today. With a reading of 28, the HMI now is at the lowest level in its current cycle and has reached the lowest point since February 1991.

“Builders continue to report serious impacts of tighter lending standards on current home sales as well as cancellations, and they continue to trim prices and offer a variety of nonprice incentives to work down sizeable inventory positions,” said NAHB President Brian Catalde, a home builder from El Segundo, California.

“It’s clear that the crisis in the subprime sector has prompted tighter lending standards in much of the mortgage market, and interest rates on prime-quality home mortgages have moved up considerably during the past month along with long-term Treasury rates,” added NAHB Chief Economist David Seiders. “Home sales most likely will erode somewhat further in the months ahead and improvements in housing starts probably will not be recorded until early next year. As a result, we expect housing to exert a drag on economic growth during the balance of 2007.”

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as either “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as either “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

All three component indexes declined in June. The index gauging current single-family sales slipped two points to 29, the index gauging sales expectations for the next six months fell two points to 39, and the index gauging traffic of prospective buyers fell one point to 21.

Three out of four regions posted declines in the June HMI. The Midwest posted a three- point decline to 19, the South posted a one-point decline to 32 and the West posted a five- point decline to 27. The Northeast recorded a three-point gain to 35 following a six-point loss in May.

by Anonymous on 6/18/2007 04:34:00 PM

Hey! Calculated Risk got an honorable mention by the Associated Press, for which we apparently have Barry Ritholtz to thank (don't worry, Barry, I don't think this is your fault). Here we are:

Calculated Risk -- A philosophical blog on finance and economics. No stock tips or fancy charts -- just an anonymous business executive seeking the truth about the market. Some of it is worrisome, and blunt. Investment banks have been selling the riskiest slices of debt to pension funds, he says, which are entrusted with providing for the retirement of public workers. He calls these debt offerings, called unrated collateralized debt obligations "a pig of a pig, distilled essence of pig, ur-pig, Total Ultimate X-Treme Mega Pig" and says that buying them is "playing with matches."

"No fancy charts?" What does it take to get recognition for CR's excellent and legendary charts? Animated recession bars?

We will pass over in silence the true authorship of the cascade of pig jokes. Ahem.

We may now resume being philosophical.

by Anonymous on 6/18/2007 11:39:00 AM

Everybody's all fired up about this report this morning from Fannie Mae's Berson's Weekly Commentary. I'm not, frankly, sure why; the insight about prepayments (specifically, refinance options) and subprime loan performance is not exactly news. But it does include a nice chart, helpful for those who don't tend to think in terms of mortgage flows.




The pie on the left represents 2/28s closed in late 2003 to late 2004 (which gives them a first payment adjustment date in calendar year 2006). The pie on the right represents 2/28s closed in late 2004 to late 2005. The clear implication is that delinquency and default in the earlier vintage was mitigated by refinance (or home sale) opportunities that are sorely lacking in the later vintage.

One has to remember, though, that separating the vintages like this does not mean the two pie charts include two mutually-exclusive groups of borrowers. Because these are two sequential years and the loan type in question is a 2/28, it is likely that most of the refinances of the earlier vintage do not appear as new loans in the later vintage; they would appear in a "future" pie with a reset in 2008 (or later). The point, though, is that what you see in the left-hand pie, for instance, is a very big pile of refinances that were originated in 2006, a year notorious for wretched underwriting guidelines. The slowing of the prepayments in the right-hand pie suggests that that party's over, but it also clearly means that we still have a lot of loans that "rolled" to a new loan in 2006 and 2007 and that may or may not have an escape route in 2008 or 2009 when the next reset problem arises.