by Calculated Risk on 12/20/2007 03:05:00 PM

From Bloomberg: Credit Agricole to Take Further Subprime Writedowns (hat tip Steve)

Credit Agricole SA, France's second- biggest bank by assets, will take a further 2.5 billion euros ($3.6 billion) in writedowns as the U.S. subprime crash roils debt markets.

The Paris-based bank said it will write down investments in collateralized debt obligations, securities created by bundling together bonds, by a further 1.3 billion euros before tax, and take 1.2 billion euros of provisions linked to a ratings downgrade of bond insurer ACA Financial Guaranty Corp.

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 12/20/2007 09:46:00 AM

From the WSJ: Mortgage Bets Bite Bear Stearns

Bear Stearns Cos. posted its first quarterly loss in its 84-year history on higher-than-projected $1.9 billion in mortgage write-downs.

A billion here, a billion there ...

by Anonymous on 12/20/2007 09:23:00 AM

From the New York Times:

The Federal Reserve said on Wednesday that it had collected bids from 93 financial institutions in its first auction of short-term credit, a turnout that suggested banks might be more inclined to borrow from the Fed under its auction-based system.

Banks have typically feared negative reactions from investors when borrowing directly from the Fed, which some interpret as a sign of weakness. The auction, announced last week, tries to combat that stigma by offering banks the opportunity to borrow directly from the central bank in an anonymous forum and at a lower-than-usual interest rate.

God, grant me the capital to accept the things I cannot change; the reserves to change the things I can; and the Fed Auction when all that blows up. Amen.