by Calculated Risk on 2/19/2008 02:28:00 AM

From Reuters: Credit Suisse says writing down $2.85 bln

Credit Suisse said it was marking down asset-backed positions by $2.85 billion, which would wipe off $1 billion from its net income, but the bank would remain profitable in the first quarter.

Credit Suisse said on Tuesday an internal review which had identified mismarkings and pricing errors by a small number of traders in its Structured Credit Trading business was continuing.

From the WSJ: Now, Lehman Gets Pelted

... credit markets have worsened, and Lehman believes it is now facing a write-down in the $1.3 billion range, according to people familiar with the matter.
...
Nearly $39 billion [of debt securities and loans that are potentially vulnerable to markdowns] are commercial real-estate loans. Even as it cut way back on making home loans, Lehman continued to lend to buyers of office buildings and other assets. In the fourth quarter of fiscal 2007, ended Nov. 30, Lehman originated $15 billion of commercial mortgages, in line with the average origination in the previous three quarters.

Yet, the firm only sold off $1.5 billion of those loans, compared with more than $10 billion in the third quarter. As a result, its commercial-mortgage holdings have swelled. Now, analysts wonder how much they will have to be marked down.

The confessional is open. And the CRE lenders are queuing up.

by Calculated Risk on 2/18/2008 10:20:00 PM

From the WSJ: Ambac Hopes Capital Infusion Will Save Rating

Ambac ... is discussing a plan to raise at least $2 billion ... The extra cash, to be raised by selling shares to existing investors at a discount, would likely be a prelude to a trickier and lengthier move: splitting itself into two businesses.

The article discusses at length several of the difficult issues related to splitting the business:

Splitting the business between its municipal-bond and its riskier structured-finance operations ... would be financially and legally messy. It would pit policyholders and shareholders against both each other and regulators, and rankle investors, some of whom have been wagering through the credit-derivatives market that bond insurers would fail and default on debt.

So many different parties, and so many different and divergent interests, makes unscrambling the egg very difficult.

by Calculated Risk on 2/18/2008 05:56:00 PM

From the Pension Benefit Guaranty Corporation: New Investment Policy

The PBGC currently has approximately $55 billion to invest in the new investment policy. Under this new policy, the PBGC will allocate 45 percent of its assets to a diversified set of fixed-income investments, 45 percent to diversified equity investments and 10 percent to alternative investment classes. The agency’s previous policy set an equity investment target of 15–25 percent, although the actual level of equity investments was 28 percent at the end of FY 2007.

The PBGC had an accumulated deficit of $14 billion as of year-end FY 2007.

Because the PBGC’s obligations are paid over many years, the new investment policy is designed to take advantage of a long-term investment horizon. The strategy of increased diversification—including use of alternative investments—aims at generating returns, while providing superior protection against ultimate downside risks over time.

The policy was adopted after an extensive review process that began in mid-2007. The review evaluated current and alternative investment policies over 5-, 10- and 20-year periods. The review showed that the diversified portfolio adopted by the Board would have outperformed the current asset mix 98 percent of the time over rolling 20-year periods. The Board reviews the investment policy every two years, with the last review occurring in 2006.

“The PBGC has the ability to accept some degree of short-term volatility to achieve our goal of enhancing assets to pay benefits,” Millard said. “However, the policy is carefully structured to balance risk and returns, and to improve PBGC’s chances of reaching full funding over the long term, while maintaining our ability to meet our obligations to retirees.”

The PBGC does not select individual stocks or bonds, or actively manage its portfolio. Its invested assets are managed by professional money management firms or invested in various market indexes.

The PBGC is not funded by tax dollars, and does not enjoy the full faith and credit of the United States government. The agency is financed by premiums paid by employers, assets from failed pension plans, recoveries from bankruptcies and returns on invested assets.

The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits for about 44 million American workers and retirees participating in over 30,000 private-sector defined benefit pension plans.

by Calculated Risk on 2/18/2008 02:06:00 PM

From the AP: Some homeless turn to foreclosed homes

The rise of the bandos!

More seriously - from unkempt yards, to mosquito infected pools, to bandos squatting in the homes, vacant homes are a negative externality for the neighbors.

by Calculated Risk on 2/18/2008 12:15:00 PM

From Bloomberg: Bond Insurer Split May Trigger Lawsuits, Analysts Say

``Despite the regulatory interest in separating the exposures, the essential fact remains that all policy holders, whether municipal or structured finance, entered into contracts backed by the entire entity,'' analysts led by Jeffrey Rosenberg in New York wrote in a note to investors dated Feb. 15. A breakup is ``likely to lead to significant legal challenges holding up the resolution of the monoline issues for years.''
...
``The fact that one group of policy holders' exposures has imperiled the policies of the other does not mean they should forfeit the value of their claims altogether,'' the Bank of America analysts said.

This split isn't being driven just by regulatory interest. It appears that the combined company is worth less than the sum of the parts. Splitting the company will allow the "good bank" to write more business, increasing the value. The goal is to share that increased value equitably among the stakeholders (a difficult task) and minimize the lawsuits.

by Calculated Risk on 2/17/2008 08:42:00 PM

From the WSJ: Ambac in Talks to Split Itself Up (hat tip risk capital, sam)

Ambac Financial Group Inc. is in discussions to effectively split itself up ... A halving of Ambac would create one unit that insures municipal debt and one that would cover rapidly diminishing securities tied to the mortgages in a structure that effectively creates a so-called "good bank" and "bad bank."
...
Ambac is one of two bond insurers considering an effective break-up. FGIC Corp. on Friday notified Mr. Dinallo's office, the New York State Insurance Department, that it is pursuing an effective break-up. ... FGIC's plan came as a surprise to a consortium of banks ... and litigation may be one outcome. Ambac's plan is much further along and an announcement could be made this week.

It will be interesting to see how they unscramble the egg. I suppose the counterparties to the "bad bank" will receive equity in the "good bank".

From a finance perspective, it makes sense to split the companies. There is lost value in the "good bank" right now because they can't write new business. Splitting the company captures that lost value, and the only question is how that value - once captured - is split among the various parties. So I'd expect a split to happen, and happen soon.

by Calculated Risk on 2/17/2008 12:48:00 PM

From the Financial Times: Northern Rock to be nationalised

Northern Rock ... is to be nationalised, the UK Treasury announced on Sunday.
...
The government would introduce legislation for the move on Monday. UK listing authorities will suspend the company’s shares prior to opening of the London stock market.

Taxpayers are subsidising the bank in loans and guarantees to other lenders totalling £55bn. [Alistair Darling, chancellor of the exchequer] said he expected these to be repaid.

“It is our expectation that the company can be moved back into the private sector at the earliest and most opportune opportunity,” he said.

MarketWatch has the Statement by U.K. government on Northern Rock

by Anonymous on 2/17/2008 11:25:00 AM

Mortgage servicers: this is called "reaping what you sow."

Spend decades building ever-larger, more consolidated servicing portfolios through mergers, acquisitions, and bulk purchases. Chase marginal improvements in efficiency with automation, out-sourcing and off-shoring. Wall yourselves and your "platforms" off in centralized compounds far from your customers and their local markets, withdraw behind consumer-proof phone menus, worthless web portals, and untrained "customer service representatives." Keep your performance statistics up with aggressive collection practices; keep your operating costs down with robo-calls and impenetrable scripting. Manage yourself quarter-to-quarter with frequent purchases and sales of loan servicing in rapid succession, confusing and alienating your current and former customers, losing track of payments and account numbers, cancelling automated payment provisions at a keystroke, performing three escrow analyses (with three payment increases) in a single year. Hire a subservicer to do the grunt work, adding another layer of impenetrability and forcing even more "cost-cutting" measures to keep the subservicer profitable. Outsource your default servicing and REO management functions to a third party who talks to your own staff via phone menus and searches for ever more creative ways to extract fees from consumers, since you don't pay much. Encourage an entire cottage industry of hucksters, scammers, and pick-pockets to grow up around you, like fungus, in the name of providing "counseling" or "negotiation" or "foreclosure avoidance" services, assuring that your customers will no longer be able to tell who is legitimate and who isn't. Demonize community-based homeowner-advocacy services until you need to co-opt them to bolster your own absent credibility.

Eventually you find yourself sending pleas to your customers to return your calls disguised as wedding invitations. You have borrowers who choose the lesser evil of losing their homes in silence rather than the greater evil of trying to deal with you. Your response is to use someone else's letterhead. This, you think, will make you look trustworthy. After all, most of us already associate deceptively-packaged mailers with the same fast-talking brokers who got us into these loans we don't understand. But if it worked once, it might work again. What other choice do you have? We installed our own caller ID technology to cope with your endless annoying solicitations and hostile collections department. Goose, gander.

Your biggest fear is that we, the borrowers, will re-brand ourselves as efficient exercisers of put options and make you eat that $50,000 per loan. We will hire consultants. We will use someone else's letterhead. Somewhere in the United States, at this very moment, a borrower is folding up his deed, stuffing it into a fancy engraved wedding-invitation envelope, and writing your address on it. You will be astonished.

by Calculated Risk on 2/16/2008 04:13:00 PM

From Joe Rauch at the Atlanta Business Chronicle: Georgia loan problems worst in Southeast. (hat tip Edward)

A few excerpts:

Georgia banks reported the highest number of problem loans, with 4.74 percent of banks' loans either past due or foreclosed, the highest level of any state in the Southeast, according to data prepared by FIG Partners LLC.

That figure is a sharp increase from 3.26 percent, the figure reported at the end of third-quarter 2007.
...
Florida's banks reported a 3.26 percent default rate. That dwarfs Georgia's other immediate neighbors such as North Carolina at 1.82 percent, South Carolina at 2.16 percent and Alabama at 3.46 percent.

Metro Atlanta has an especially serious problem, with defaults reaching 6.54 percent of "local banks' balance sheets" in Q4 2007. There is also a 5 year supply of undeveloped lots in metro Atlanta (146,000 lots):

"Lot loans are the prime concern for us," said [Rob Braswell, commissioner of the Georgia Department of Banking and Finance, the primary state bank regulator]. "Developers are having a difficult time carrying these lots and we don't want banks to get into the real estate business."

Why is Georgia, and especially Atlanta, seeing so many defaults?

Click on graph for larger image.

For the most part, Atlanta didn't participate in the price boom. This graph compares the Case-Shiller house price index for Atlanta and Miami. Although prices rose much quicker in Miami, and are now falling faster, Atlanta has a higher percentage of loans in default.

One reason might be that Georgia led the nation in Interest Only loans. Another might be that lenders are able to foreclose quicker in Georgia: From the NY Times last July: Increasing Rate of Foreclosures Upsets Atlanta

Despite a vibrant local economy, Atlanta homeowners are falling behind on mortgage payments and losing their homes at one of the highest rates in the nation, offering a troubling glimpse of what experts fear may be in store for other parts of the country.
...
A big reason the fallout is occurring faster here is a Georgia law that permits lenders to foreclose on properties more quickly than in other states.

Although different markets will experience different dynamics (probably fewer homeowners are upside down in Atlanta compared to Miami), this shows that loan problems are occurring almost everywhere.

by Anonymous on 2/16/2008 04:00:00 PM

Via Housing Doom, one Blanche Evans, editor of Realty Times:

Despite what Wall Street wants you to believe, owning a home isn’t the same kind of investment as stocks or bonds. What you get is a USE asset that depreciates over time while it grows in market value. All you have to do is keep the home in good repair to maximize your investment.