Freddie aka Fraudie Mac / Market Sentiment

It´s always the reaction to the news that is important....And sending the stock higher almost 10 percent on the following news is a clear sign that the complacency has taken over again....A look at the VIX is confirming this view. On top of this Doug Kasshas observed this: "Investors Intelligence bulls are back up to 46, as bears drop to 29.9 -- at respective highs and lows since January". I think this headline via FT Alphaville sums it up nicely Not as bad as feared’ is the new code for ‘buy, buy, buy’ Here are More Reasuring Facts On Phony Mae aka Fannie Mae

Eine der wichtigsten Regeln für Anleger und Trader ist jeweils zu beachten wie der Markt auf bestimmte Nachrichten reagiert. Und wenn man nach den folgenden Neuigkeiten die Aktie fast 10 % nach oben katapultiert ist das für mich ein klares Zeichen das wir uns einem Level nähern der doch langsam wieder bedenklich wird.....Der sich rapide beruhigende VIX unterstreicht diesen Trend. Doug Kass hat diese Statistik die wunderbar zum Gesamtbild passt. "Investors Intelligence bulls are back up to 46, as bears drop to 29.9 -- at respective highs and lows since January" . Diese Schlagzeile via FT Alphaville fasst es ziemlich gut zusammen Not as bad as feared’ is the new code for ‘buy, buy, buy’ Hier gibt es mehr More Reasuring Facts On Phony Mae aka Fannie Mae

Parsing Freddie's Profit Report WSJ
Freddie Mac's earnings report more clearly than ever defined the battle lines between the company's shareholders and the government, which sees it as one of its main tools to bolster the housing market.

The report the mortgage giant issued Wednesday shows that the company's cushion for losses fell sharply in the quarter, giving it one of the weakest balance sheets in the financial sector and leaving it more vulnerable to future hits from the housing crunch.

This weakening in Freddie Mac's financial footing will unnerve politicians keen to see Freddie buy and guarantee even more mortgages to alleviate the credit crunch.

And investors sniffing around Freddie's shares may also want to pay heed to the enervated balance sheet. That is because the company likely will have to sell a large amount of new stock, diluting existing shareholders, to strengthen its balance sheet.

Freddie said Wednesday that it planned to sell $5.5 billion of common and preferred stock. "I think they'll continue to raise capital," said Paul Miller, an analyst at FBR Capital Markets.

The company's weakened state was lost on investors who rejoiced that the loss was smaller than expected and drove its shares up 9%. But the smaller-than-expected loss was primarily the result of accounting changes made in the quarter that allowed the company to book certain gains in earnings and exclude certain losses.

Freddie reclassified $90 billion in securities, boosting profit by about $1 billion compared with the fourth quarter.

Hat tip Calculated Risk

Analyst: There is a headline out there that you have level 3 assets of $157 billion. I was just wondering is that true and is that related at all to the markups of the 1.2 billion gain?

Freddie Mac: No, it is not Paul. We made a determination in the first quarter that given how widely the pricing we were getting on the abs portfolio [varied] that it no longer made sense to leave that into level two. So we essentially moved the entire abs portfolio into level three. We were still using the mean pricing that we were getting from the dealers. So we’re not using a model price. That is all that is. It has nothing to do with the trading portfolio

Another change -- related to its mortgage guarantees -- reduced a potential hit to profit by about $1 billion compared with the fourth quarter. A maneuver that delays taking credit losses also allowed the company to avoid losses in the quarter.

Excluding these and some other accounting changes, Freddie's modest $151 million loss would have been a more worrisome $2 billion.

More insights via Calculated Risk On Freddie Mac Accounting Change

One way to cut through the earnings noise is to go to the balance sheet and zero in on its leverage -- the amount of shareholders' equity Freddie has supporting its $803 billion of assets, which are the loans it has retained.

In the first quarter, Freddie's assets exceeded its $16 billion of shareholders' equity -- its leverage ratio -- by 50.2 times. Fannie's first-quarter leverage ratio was 21.7 times, while the first-quarter average for the 20 largest U.S. lenders was just under 12 times, according to data from SNL Financial.

A Freddie spokesman declined to comment on its leverage specifically. And to be fair to Freddie, some of the market losses that are driving down Freddie's equity may one day be recovered. For instance, equity plunged to $16 billion from $26.7 billion in the fourth quarter, in part because of unrealized losses on securities backed by subprime mortgages.

But if Freddie were a regular bank, its regulator wouldn't let leverage get anywhere close to 50 times. At a nosebleed level like that, the regulator would push Freddie to keep raising capital, even if some of its losses in equity might be fleeting.

Shareholders could sputter about the continued dilution, but the government won't be very sympathetic.

More Reasuring Facts On Phony Mae aka Fannie Mae

This is an update on yesterdays post Reasuring Phony Mae & Fraudie Mac Facts........ The stock was under pressure premarket ( down 15 percent ) and closed higher with almost 9 percent. No wonder when you read the "bullish" points the WSJ is making...... Got gold......? More via Minyanville Five Things You Need to Know: Fannie Mae Inadvertently Predicts Housing Bottom & Barry Ritholtz Fannie Mae is Fantastic !

Das ist ein Folgepost zum dem gestrigen Eintrag Reasuring Phony Mae & Fraudie Mac Facts........ Vorbörslich war die Aktie start unter Druck und notierte bis zu 15 % schwächer. Geschlossen hat Phony Mae 9% höher. Muß wohl an den bullishen Fakten die das WSJ zusammengetragen hat liegen..... Got Gold....? Hier teilweise substanzielles von der FAZ Riesige Verluste können Fannie-Mae-Aktie nicht dauerhaft belasten sowie substanzielles via Minyanville Five Things You Need to Know: Fannie Mae Inadvertently Predicts Housing Bottom sowie Barry Ritholtz Fannie Mae is Fantastic !

Will $6 Billion Do for Fannie? WSJ
That is the amount of new money the mortgage giant said Tuesday that it would raise through the sale of common and preferred stock. But Fannie Mae could need even more capital if it really wants to shore up its balance sheet while also backstopping the national housing market.

How much more depends on an investor's view of the best way to measure the firm's net worth, as well as the amount of capital it should put aside against its burgeoning mortgage book. Bearish outlooks on these counts lead to scenarios where Fannie needs to raise anywhere from $5 billion to about $15 billion in additional funds.

Underpinning those pessimistic outlooks are the considerable headwinds that Fannie continues to face. The company posted a $2.2 billion first-quarter loss, for its third consecutive quarter in the red. The government-sponsored provider of funds for home mortgages expects national housing prices to fall 7% to 9% this year, while its exposure to hard-hit areas such as California and Florida could cause it even greater pain.

Fannie may soon have to book some big, unrealized losses it has been sitting on, further reducing its book value, or net worth.

Especially alarming: Based on market values for assets it holds, Fannie's net worth attributable to common stockholders would have been a negative $2 billion at the end of March.

For its part, Fannie doesn't see any need to raise more than $6 billion in capital. Chief Executive Daniel Mudd said on a conference call that the new funds will protect Fannie's balance sheet against future losses, allow it to expand its business and enable it to act as a bulwark for the housing market nationwide.

Mr. Mudd told investors that -- including the $6 billion in new capital, a 29% dividend cut and regulatory capital relief -- Fannie will have $48 billion in capital. That, he added, is $17 billion more than the company's federal regulator said it needs.

"We will feast off this book of business we're putting on for many years to come," Mr. Mudd said. Fannie's stock rose $2.52, or 8.9%, to $30.81 at 4 p.m. in New York Stock Exchange composite trading.

Some investors even felt Fannie didn't need to raise any new money. But that view is based on the idea that market-value losses shown by Fannie are fleeting.

Bears don't buy that, especially given the unprecedented scope of the housing crisis. They say it is a mistake to look at Fannie's regulatory capital number, which excludes large unrealized losses.

These investors argue that Fannie's market-value balance sheet gives a clearer picture. At the end of March, this market-value view showed the firm with total net worth of $12.2 billion, a bruising $23.6 billion decline from $35.8 billion at the end of 2007.

This figure comprised $14 billion in net worth attributable to preferred stock holders, while that attributable to common holders was negative $2 billion.

That $12.2 billion is the effective balance-sheet cushion against future losses. But it is equivalent to only 1.4% of Fannie's $866.7 billion in assets, measured using market values.

Not all the market-value losses will come to pass, of course. But some likely will. Fannie, for instance, disclosed that $16.9 billion of the $23.6 billion decline in market-value net worth came from increasing the value of a liability that represents future payouts on mortgage guarantees.

The increase in this guarantee obligation reflects, in part, new, higher estimates of credit losses. If these credit losses were to occur, they would show up on Fannie's books as cash payouts and realized losses.

Fannie may face pressure on earnings and its net worth in other areas. It disclosed that at the end of March it had $9.2 billion in unrealized losses on securities that haven't so far been reflected in earnings. Of these, $5.4 billion are more than a year old.

In addition, Fannie has so far balked at creating a special reserve against any portion of its $17.8 billion in deferred tax assets. The company can use those only to offset profit. As its loss-making period stretches, arguments could grow louder that Fannie needs to reserve against part of this asset. Doing so would result in another charge against profit that would hit net worth.

Those kind of charges could leave Fannie's $6 billion cushion looking awfully thin.

Condo Desperation.....Lehman Offers Money Back Guarantee

Thank god their balance sheet is strong...... :-) . For more insights on Lehman see what Mish has to say Questions Linger Over Lehman's Balance Sheet & April Fool's Offering At Lehman . I also recommend to take a view of the table Level 2 "mark to model" & Level 3 "mark to a hope & a prayer" .

Zum Glück ist deren Bilanz ja bekanntermaßen kerngesund........ :-) Wer mehr zu der "starken" Lehman Bilanz wissen möche wirft am besten einen Blick auf das was Mish zu sagen hat Questions Linger Over Lehman's Balance Sheet & April Fool's Offering At Lehman. Zudem empfehle ich einen kurzen Blick auf die Bilanzpositionen der großen US Banken Level 2 "markt to model" & Level 3 "mark to a hope & a prayer"

Condo Comfort / WSJ
In a move that speaks volumes about the glut in the condominium market, Lehman Brothers Holdings Inc. is promising some luxury-condo buyers their money back after three years of ownership.

The offer applies to some 200 condo units, priced between $480,000 and $2 million, in West Bay Club , a Lehman-owned resort community in Estero, Fla., near Naples on the Gulf of Mexico.

>Add the news via Calculated Risk and it is no wonder some are getting nervous....... Especially when you have a condo to sell in Miami

> Wenn man dann noch diese Daten via Calculated Risk hinzunimmt sollte es wenig verwundern das einige langsam aber sicher extrem nervös werden..... Das gilt besonders dann wenn man ein Condo in Miami verkaufen möchte

The new building comes on top of unprecedented supply....Lenders of all sizes have $42 billion of condominium debt on their books, according to Foresight Analytics. In just three months -- between the third and fourth quarters of last year -- the delinquency rate rose to 10% from 5.9%, says the Oakland, Calif., research firm.

In an effort to jump-start sales in a skittish market, Lehman says that for every buyer until June 1, it will guarantee that the resort will either sell or buy back the residence at the "full cost of the purchase price three years after closing."

> Charts & Stats via Inventory Tracker from my old friend Soldatthetop and his superb blog Paper Money

Naples, FL Condo Statistics

Current Count: 6863 Historical Low: 5547 Historical High: 7768 Average Range: $500,000.00 - $550,000.00 Median Range: $300,000.00 - $325,000.00 Listed Market Cap: $3,759,455,000.00

Statistics for Naples collected between 07-24-2006 and 04-23-2008

The gamble is that prices will recover during that time, and buyers will hold on to their condos.

A spokeswoman for Lehman said no one was available to discuss details of the guarantee program, which appears to exclude 10 penthouse units in two towers.

Jack McCabe, a real-estate consultant in Deerfield Beach, Fla., said other developers desperate to move unsold condo inventory might have to follow Lehman's lead in offering price guarantees as market values continue to slide and thousands more condo units in Florida come on line this year

> In the end it is probably still better to make this kind of creative offer to move inventory than to wait for things to get better........This will put lots of pressure on other players to match this kind of offer...Not good news for players like disaster stocks like WCI :-) It will be interesting to see how they will manage the accounting..... UPDATE: I also recommend to read this from Mish Condo Credit Squeeze

> Im Endeffekt ist diese Art des Marketings wohl immer noch eine der besseren Möglichkieten die Ladenhüter zu vertickern. Darauf zu warten das sich die Zeiten bessern dürfte extrem langwierig werden.... Das dürfte den Druck auf andere Speiler im Condomarkt erheblich verschärfen....Das dürfte dem übelsten Spieler WCI wohl demnächst den endgültigen Todesstoß versetzen. Man darf gespannt sein unter welchen Punkt solch geartete Geschäfte in der Bilanz auftauchen...... UPDATE: Zum Themenkomplex Condo´s sollte man zudem noch mal einen Blick auf Condo Credit Squeeze via Mish richten

Consumer Spending Break-Down / Hester

Nice quote via William Hester from his piece Consumer Spending Break-Down .

Nettes Zitat via William Hester aus Consumer Spending Break-Down

Following a Bull's game in the 90's where Michael Jordan scored 69 points and the newly acquired Stacey King contributed one point, the rookie quipped, “I'll always remember this as the night Michael Jordan and I combined to score 70 points.” Whether you're handicapping basketball games or the economy, it's always best to figure out how the major producer will perform.

It´s still amazing that some are still in denial.....

Schon erschreceknd das bei den meisten "Experten" der Groschen noch immer nicht gefallen ist.....

A quick look at economist's expectations for the economy this year shows that much is riding on the forecast of a mild slowdown. The level of GDP should be essentially unchanged the first two quarters of this year, and then expand at almost 2 percent in the second half, according to a Bloomberg poll. Underlying those estimates is the forecast for spending to grow at an average rate of one half percent in each of the first two quarters, and at about 2 percent in the second half

But they are probably betting on the never ending story of creative accounting from the government level ( Pre-Revision CPI: 9%, Disappearing Economic Indicators, Unemployment Soars, Jobs Collapse etc ) to mask the real damage. At least the officials haven´t gotten so far as the pentagon ( Behind Analysts, the Pentagon’s Hidden Hand )..... :-)

Wahrscheinlich werden hier schon die "kreativen" Berechnungsmethoden von Staatsseite eingepreist ( Pre-Revision CPI: 9%,Disappearing Economic Indicators, Unemployment Soars, Jobs Collapse usw ) die nur ein Ziel haben die Wirklichkeit in einem besseren Licht erscheinen zu lassen. Das mag kurzfristig sogar funktionieren, mittel bis längerfristig wird hier aber enormer Schaden angerichtet. Immerhin sind Sie noch nicht soweit wie das Pentagon gegangen (Bush kaufte TV-Militärexperten ).... Obwohl ich ir da auch nicht immer ganz sicher bin .... :-)

Freddie Mac's Accounting Evokes Shades of Enron: Jonathan Weil

It´s no surprise some call them "Phony Mae and Fraudie Mac".... Just in time Fannie is also out with some news. Fannie Mae Cutting Dividend 30 Percent, Selling $7 Billion in Preferred Stock to Raise Capital

Sie werden nicht umsonst auch "Phony Mae and Fraudie Mac"genannt....... Passend hierzu ist auch Fannie mit einer Meldung draussenFannie Mae Cutting Dividend 30 Percent, Selling $7 Billion in Preferred Stock to Raise Capital

Dec. 5 (Bloomberg ) -- You have to wonder if a company is playing games when its earnings hinge on predictions no mere mortal is capable of making. That's one of Enron Corp.'s great lessons. And it's one that Freddie Mac investors might heed now.

Before it collapsed in 2001, Enron recorded large profits by estimating the values of its future cash flows from energy contracts that extended 20 years or longer. It then booked those amounts as current earnings. Even if Enron's executives had been acting in good faith, which they weren't, the forecasts they made weren't humanly possible.

Freddie's results depend on similar predictions, with a twist. The Mclean, Virginia-based company is using far-out forecasts of future cash flows to avoid recognizing large losses in its net income and capital. To believe Freddie's financial statements, you must believe the government-sponsored mortgage financier can make prognostications about its cash flows and debt issuances as long as 26 years from now.

Here's how the accounting works. Freddie's Sept. 30 balance sheet shows $4.3 billion of pent-up losses on derivatives called cash-flow hedges. Companies use these side bets to guard against interest-rate fluctuations on, for example, variable-rate debt.

Changes in the hedges' values don't hit net income immediately. Instead, they go into a line in shareholder equity called accumulated other comprehensive income, or AOCI. From there, they are released gradually into net income as payments come due.

Doesn't Count
These losses also don't count in the primary gauge the government uses to measure Freddie's capital, the financial cushion that helps any company absorb losses. Had Freddie counted them in net income, it would have fallen $3.7 billion short of its minimum capital requirement at the end of the third quarter.

Freddie says it has closed out almost all its cash-flow hedge positions, meaning the losses are now fixed. It says about 70 percent of its AOCI will be released into earnings over the next five years. The rest will take longer.

So what's getting hedged? Many of the hedged items don't exist yet. That's because they are ``forecasted transactions,'' primarily future issues of debt. The company says it has hedged the cash-flow risks on such deals as far out as 2033.

Under the accounting rules for derivatives, a future deal must be ``probable'' to qualify as a hedged transaction. So must the deal's terms, such as size and timing. This is where the forecasts get tricky.

Think Back
Consider how hard it would have been for a company in 1981 to envision and hedge its cash-flow risks on a debt sale it thought back then that it would make in 2007.

``Who could have predicted the Internet being where it is today?'' Ketz says. ``Who could predict that China would be the economic power that it is? Even in the U.S., the decline of, say, General Motors -- I don't think anyone would have predicted that in 1981. These are structural changes that affect the society and economy, and they can affect the cash flows that occur.''

Predictions even a few years out are tough. Will the next president be a Democrat friendly to Freddie and Fannie Mae, or a Republican who's not? How much more will home prices fall in the next year? Where will interest rates be? And wouldn't these developments affect Freddie's business and plans?

Consider the History
A Freddie spokeswoman, Sharon McHale, says the company knows its forecasted transactions are probable because it ``has a history of issuing significant amounts of debt instruments, well in excess of amounts hedged.'' The mortgages and mortgage securities it purchases stretch over 15 to 30 years, she notes, while the longest maturity for Freddie's debt is 10 years. Therefore, ``we know there is a need for debt issuances in the future to fund existing and future mortgage securities that have not fully prepaid prior to their stated maturity.''

Still, knowing the need will exist isn't the same as knowing what the terms and risks will be.

Judging by Freddie's $34.6 billion of so-called core capital at Sept. 30, which was about $600 million above the government-set minimum, Freddie already was adequately capitalized. And by keeping its $4.3 billion of losses in the AOCI holding tank, Freddie is signaling that a like amount of benefits will materialize in years to come.

Nonetheless, after posting a $2 billion net loss for the third quarter, Freddie last week had to raise $6 billion through a preferred-stock offering and cut its dividend by half to shore up its dwindling capital. That undercuts the notion that its cash-flow hedges are working properly. If they were, then Freddie should be getting around $4.3 billion of gains over the next 26 years. So there would be no need for a capital infusion.

Yet there was such a need. And until just recently, Freddie didn't see it coming. The lesson for investors: Freddie's crystal ball is no better than yours.

> Got gold......?

Moody's Takes Ratings Action on Six of Citigroup's Seven SIVs

It will be interesting to see if the fire sale to Abu Dhabi will be enough. With all capital ratios plunging and downgrades coming fast and furious i have some serious doubts.... But as long they can pay their dividend and they remain their creativity as shown in No Kidding.... More Off Balance Sheet Vehicles For Citigroup everything is fine....Lets hope for them that this kind of deal won´t backfire like the famous "Liquidity Puts" .... I highly recommend to see this video with the analyst Meredith Whitney and hear her latest thoughts on Citigroup!

Es wird interessant zu sehen sein ob die Notoperation mit Hilfe von Abu Dhabi ausreichen wird. Da momentan alle Kapitalparameter im freien Fall sind und die Downgrades praktisch täglich eintreffen habe ich da so meine leichten Zweifel....Immerhin wollen sie weiter fleißig eine Dividende ausschütten und sind kreativ wie gewohnt wenn es darum geht die Bilanzen zu frisieren ( sieheNo Kidding.... More Off Balance Sheet Vehicles For Citigroup ) . Bleibt zu hoffen das diese Art an Konstruktion nicht wie die "Liquidity Puts" übelst zurückschlägt...... Zudem empfehle ich dringend sich das Video von der Analystin Meredith Whitney die vor einer Woche die große Krise bei Citi ausgelöst hat anzusehen. Es gibt doch noch Hoffnung das nicht alle Analysten vollkommen verblöded sind.

Dec. 1 (Bloomberg) -- Moody's Investors Service may cut the top ratings on six of Citigroup Inc.'s seven structured investment vehicles as part of a review of $130 billion in SIV debt.

The net asset value of the $64.9 billion in Citigroup SIVs dropped to below or near 60 percent, prompting the ratings action, Moody's said in a statement yesterday. The junior notes of three of the funds have been downgraded to below investment grade.

> What a difference afew weeks made....Compare this action with the Fact Sheet Citi-Advised Structured Investment Vehicles (SIVs) from mid October

> Was für ein Unterschied doch ein paar Wochen ausmachen.....Vergleicht das mit den Aussagen von Mitte Oktober Fact Sheet Citi-Advised Structured Investment Vehicles (SIVs)

• The assets are of very high quality.
  


• The SIVs have no direct exposure to U.S. sub-prime assets.
  


• The SIVs have approximately $70 million of indirect exposure to sub-prime assets through securities such as collateralized debt obligations. Those securities are AAA-rated and carry credit enhancements.
  


• All assets are rated "A" or above; 80% - 90% are rated "AA" or
  above; approximately 50% are rated "AAA"

SIVs, which sell short-term debt to buy longer-term, higher-yielding assets, were shut out of the short-term market as losses on subprime mortgage securities prompted investors to retreat from all but the safest of securities. Unable to finance themselves, three SIVs have defaulted and others are being bailed out by their sponsors. The world's 30 SIVs have more than $300 billion of assets.

``In recent weeks, Moody's has observed material declines in market value across most asset classes in SIV portfolios,'' the ratings company said in the statement.

Moody's said it surveyed 20 SIVs since Nov. 7 and expanded its review after noticing ``significant additional deterioration'' in asset values.

Moody's cut $14 billion in debt in all, mostly capital notes that rank below commercial paper and medium-term notes and are usually the first to absorb losses, Henry Tabe, managing director in charge of structured finance, said in a telephone interview. The ratings company placed $105 billion of debt on review for a downgrade and confirmed the ratings on $11 billion, Tabe said.

Links Finance Corp., a SIV sponsored by Bank of Montreal with $19.1 billion of debt, also had its junior notes cut and may have the remainder downgraded, Moody's said.

`Continued Deterioration'
SIV assets on average are 38 percent financial institution debt, 16 percent asset-backed securities and 12 percent collateralized debt obligations, Moody's said.

The downgrades are ``a reflection of the continued deterioration in market value of SIV portfolios combined with the sector's inability to refinance maturing liabilities,'' Moody's said. Net asset values have slumped to 55 percent from 102 percent in June, Moody's said, including the NAVs of the three defaulted SIVs.

Citigroup, the largest U.S. bank by assets, provided $7.6 billion of emergency financing to the seven SIVs it runs earlier this month after they were unable to repay maturing debt.

Citigroup, based in New York, created the first SIV in 1988 and is the largest manager.

The SIVs' struggle for survival, and the threat of having their assets dumped on the market, prompted Treasury Secretary Henry Paulson to broker talks with Citigroup, JPMorgan Chase & Co. and Bank of America Corp. to form an $80 billion "Superfund" to help bail them out.
Centauri, Beta
HSBC this week said it will take on $45 billion of assets from the two SIVs it manages after they were unable to finance themselves. SIVs set up by Dusseldorf- based lenderIKB and London-based Cheyne Capital Management Ltd. defaulted last month after investors stopped buying their asset-backed commercial paper.

Citigroup said in a Nov. 5 regulatory filing that it ``will not take actions that will require the company to consolidate the SIVs.'' The strategy ``remains unchanged from the disclosures in the third quarter'' filing, spokesman Jon Diat said yesterday in an e-mail statement. ``We continue to focus on liquidity and reducing leverage,'' Diat said. Citigroup's SIV assets have dropped to $66 billion from $83 billion on Sept. 30, Diat said.


Centauri Corp., the largest SIV run by Citigroup with $16.9 billion of debt, had its P1 commercial paper rating placed on review for downgrade as well as its AAA medium-term note program, Moody's said. Centauri's net asset value dropped to 60 percent from 85 percent since Sept. 5, Moody's said.

Beta Finance Corp., the second-largest Citigroup SIV with $16 billion of debt, had its senior debt ratings placed on review for downgrade after its net asset value declined to 60 percent from 87 percent, Moody's said.

Sedna, Dorada
Four other Citigroup SIVs, Sedna Finance Corp., with $10.7 billion of debt, Five Finance Corp., with $10.3 billion, Dorada Corp. with $8.5 billion, and Zela Finance Corp., with $2.5 billion, had their P1 commercial paper rating and AAA medium- term note programs placed on review, Moody's said.

Sedna's net asset value dropped to 56 percent, Five's declined to 63 percent, Dorada dropped to 62 percent and Zela's fell to 61 percent. A seventh Citigroup SIV, Vetra Finance Corp., wasn't part of the review.

The capital notes of Dorada, Beta and Centauri were reduced 11 levels to Caa3 from Baa1.

"Liquidity Puts" / Enron Reloaded Part XXI.....

Floyd Norris from the NYT has some details on more ( some call it criminal ) "creativity" when it comes to financial alchemy. Nice to see that the regulators have also missed this kind of financial engineering.... Sooner or later the auditors will also face some serious questions

Floyd Norris von der NYT hat noch mehr Details zur (kriminillen) Kreativität der Finanzwirtschaft aufgedeckt um die Bilanzen und Gewinne in einem gänzlich anderen Licht erscheinen zu lassen. Ähnlich wie in Deutschland mit der Bafin sind die Aufsichtsbehörden anscheinend vollkommen überfordert. Wie zudem die Buchprüfer all diese Dinge ohne ganz besondere Hinweise durchwinken konnten ist ein Thema für ein seperates Post.

As Bank Profits Grew, Warning Signs Went Unheeded
We should have known something was strange. The banks were doing a lot better than they should have been doing.

When the history of the financial excesses of this decade is written, that will be a verdict of financial historians. There were signs that banks were either lying about their results or were taking large risks that were not fully disclosed, but investors were oblivious.

What were the signs? Consider how banks make money. They pay low rates on short-term deposits and charge higher rates on long-term loans. So they love what are known as positively sloped yield curves. And they like to see big credit spreads, where risky borrowers are charged much more than safe ones. Put them together, and banks should clean up.

By that light, nothing was going right in 2006 and early this year. The yield curve was inverted, or at best flat. And credit spreads were at historic lows. Risky loans, whether to subprime mortgage borrowers or junk-rated corporations, were readily available at rates that seemed to assume there was only the slightest risk of default.

And yet the bank stocks were buoyant, and so were reported profits.

Instead of being suspicious, many analysts believed that banks had found a new way to prosper. Making a loan and keeping it on the balance sheet until it was repaid was so old-fashioned. It was far better to collect fees for arranging transactions and passing on the risk to others. We did not ask why passing on risks should be so profitable to the risk-passers.

In reality, it was not.

In recent weeks, we have learned of many risks the banks kept. Not only did we not understand them, but there is every indication that senior managements did not either.

Consider “liquidity puts.” Don’t be embarrassed if you have no idea what I am talking about. In a fascinating article in Fortune, Carol Loomis quotes Robert E. Rubin, now the chairman of Citigroup, as saying he had never heard of them until this summer.

What were they? Banks put together collateralized debt obligations, or C.D.O.’s, many of which held subprime mortgage loans as assets. The C.D.O.’s were financed by issuing their own securities, and the risk of mortgage defaults seemed to pass to the people who bought the securities.

But we now learn that some banks also handed out liquidity puts, giving buyers of C.D.O. securities the right to sell them back to the bank if there was no other market for them.

> At least this would explain the AAA rating for these CDO´s from the rating agencies..... ;-)

> Das würde zumindest bei einigen CDO´s das AAA Rating erklären.... ;-)

That risk may have seemed slight when the securitization market was booming. But now the banks are being forced to buy back securities for more than they are worth.

With such a put in existence, I don’t understand how the banks could get the original loans off their balance sheets. How could they claim they had sold something if they could be forced to buy it back? It will be interesting to see if the Securities and Exchange Commission challenges the accounting.

But even if the accounting was completely proper, it was not very informative. It does not appear that any banks chose to mention the puts to investors before this month. Citigroup had billions of dollars of them, and in the new quarterly report from Bank of America, we learn that it had $2.1 billion of such puts on its books at the end of 2006, a figure that rose to $10 billion by the end of September.

In other words, as the subprime market was starting to falter early this year, the bank stepped up the issuance of such puts. Presumably, that was necessary to “sell” the paper. This week Bank of America announced a $3 billion write-off. A large part of it came from those puts.

There were many other funny ways to bolster profits, like specialized investment vehicles, or SIVs. These creatures bought those C.D.O. securities, paying for them with money borrowed in the commercial paper market.

Just like banks, the SIVs borrowed short and lent long. The spreads might be thin, but they could employ leverage to make narrow margins go a long way. The SIVs did not have much capital, but so long as everyone believed in C.D.O.’s, they did not need it. The banks that set up the vehicles swore they had no continuing interest in them, and so they also vanished from any balance sheet that investors could see. Now they are costing banks money to prop them up.

Jamie Dimon, the chief executive of JPMorgan Chase, told investors this week that “SIVs don’t have a business purpose” and “will go the way of the dinosaur.” Will they take the securitization system with them? The answer to that question may be crucial in determining how soon the financial system recovers.

The most important duty of the Federal Reserve is to preserve the health of the banking system. In the early 1990s, after the last big crisis, it engineered a steep yield curve for years, helping banks to recover. When the smoke clears, the Fed will try to do that again, even if it means significantly higher long-term interest rates.

Higher long-term rates are not what either debt-laden consumers or the depressed housing market really need, of course. But such trade-offs are what come when big risks are taken, and ignored, for too long.

Producer Prices & the BLS

Besides the fact that the yoy gain for PPI was over 6 percent the qulity of way too many numbers coming out from the US is "subprime"..... More on this topic also from Barry Ritholtz in Producer Prices: Tame, or Not? & PPI Follow Up

Ganz unanhängig davon das der Jahresantieg bei über satten 6% lag und die euphorischen Überschriften von gestern bestenfalls mit Unwissenheit zu erklären sind geben die veröffentlichen Zahlen speziell aus den USA erheblichen Anlaß zur Sorge. Vertrauen wird so sicher nicht aufgebaut. Und wenn man bösartig ist könnte man meinen........ :-) Hier ist mehr von Barry Ritholtz zu diesem Thema Producer Prices: Tame, or Not? & PPI Follow Up

Minyanville / PPI
Good news, they say, producer prices rose less than forecast in October, paving the way for the Federal Reserve to formally be able to justify additional interest rate cuts with a straight face.

The Producer Price Index rose 0.1% in October, according to the Labor Department.

Core producer prices, which exclude fuel and food costs, were unchanged.

A Bloomberg survey of economists showed core prices were expected to have increased 0.2%.
One of the more amazing aspects of the report was that finished good prices were led by food, not energy as one would expect.

Prices for consumer foods moved up 1.0% in October, while energy actually showed a 0.8% decrease.

According to the BLS, gasoline prices fell 3.1% in October, following September's 8.1% rise. How this occurred is something of a mystery to us, mostly because when we look at statistics from the Energy Information Administration, an organization that presumably follows energy information and then administers it to people like us... but apparently not the Bureau of Labor Statistics... we see that from October 1 to October 29, average retail gasoline prices rose across all categories - regular, conventional and reformulated.

enlarge / bigger

via Barry

The methodology for measuring PPI contains a simple and dramatic flaw: It measures prices on a single day of the month. BLS samples for energy prices on the Tuesday of the week that contains the 13th of the month. In other words, BLS’s methodology essentially ignores all energy prices paid EXCEPT FOR ONE DAY OF THE MONTH.

The consumer food increase is also interesting because price for crude foodstuffs and feedstuffs actually decreased by 1.8% in October.

>By the way these "tame" numbers send the S&P futures up to over 1490 and the Nasdaqfuture close to 2100

> Ganz nebenbei bemerkt hat diese "günstige" Entwicklung der PPI Zahlen die Futures gestern explodieren lassen. Kurzfristig......

IndyMac Increases Credit Reserves 47 Percent to $1.39 Billion

This number from the top Alt-A originator ( 14 percent) gives a hint how ugly the situation has become beyond subprime.

That might give a hint how bad the situation for several other players is that have bought back shares hand over fist during the past years and are more involed in subprime, havn´t sold their originations etc......

bigger / größer via Calculated Risk

Forecasted Home price depreciation ranging between 6% and 10% is factored into our loss expectations that drive valuation and reserves – average HPI declines expected to be around 9%

Diese Zahlen von dem Top Alt-A Kreditgeber ( 14 %) geben ein paar klare Indizien das neben Subrpime auch andere Segmente massiv an Qualität verlieren.

Das läßt erahnen wie übel es für andere Institute aussehen muß die im Gegensatz zu IndyMac in den letzten Jahren haufenweise Aktien zurückgekauft havben und sinnlose wertvernichtende Übernahmen getätigt haben aussehen mag. Ganz zu schweigen von denen die Ihre Riskiken nicht weiterreichen konnten und noch stärker im Subprime Sektor engagiert waren.....

We Hold Direct Credit Risk On $19.02 Billion Of Total Single Family Loans Serviced In Our Whole Loans And In Non-Investment Grade And Residual Securities

> Watch the large percentage of homebuilder credit costs....

> Man beachte den gewaltigen Anteil der Rückstellungen für die Homebuilder.....

In the call they said that they had claer signs in 2005 that the market for builders has peaked, but they have ignored it. Now they are paying a high price. They have stopped making any loans to builders and have no intend to re-enter the market soon.

Im CC hat das Management zugegeben das bereits Ende 2005 ganz klare Anzeichen für Probpleme bei den Buildern zu erkennen waren. Dummerweise wurden diese ignoriert und es wirde munter weiter verliehen. Nun kommt die Rechnung. Immerhin haben Sie versprochen dieses Segment nicht weiter zu bedienen und bis auf weiteres keine neuen Kredite zu begeben.

IndyMac Bancorp Reports Third Quarter Loss of $202.7 Million, ($2.77) Per Share

• Total pre-tax credit costs were $407.7 million (versus $103.5 million in the second quarter of 2007), or a negative impact on earnings per share (“EPS”) of $3.40.
• Spread widening in the private-label (non-GSE) mortgage secondary market resulted in a loss of gain on sale and MBS securities revenue estimated at $167.2 million pre-tax for the third quarter, or a negative EPS impact of $1.39.
• After surviving the global liquidity crisis in 1998 as a REIT, we purchased a federally chartered thrift and put our entire business inside the thrift, with the result that we have no liquidity issues today, while many mortgage companies have gone bankrupt or recorded massive losses due to liquidity shortfalls.
• We protected and bolstered our capital by not repurchasing any shares since 2002 and, in fact, raised a substantial amount of capital in 2007.
• We held virtually no subprime, closed-end seconds or HELOCs for investment purposes ($112 million, or 0.3 percent of total assets at September 30, 2007).
• We were not a major subprime lender, ranking 32nd among subprime lenders (according to the National Mortgage News 2006 survey). Our subprime volume in 2006 was $2.7 billion, or 0.39 percent of the total subprime market.
• While we originated $43 billion of Option ARMs from 2005 through Q3-07, we sold all but $1.0 billion (held for investment) and $2.6 billion (held for sale), and we retained no non-investment grade or residual securities related to these loans.
• We laid off virtually all Alt-A 2005/2006 credit risk into the secondary market, retaining only $7.0 million in non-investment grade and residual securities from this production.
• We hold no investments in collateralized debt obligations (CDOs) or structured investment vehicles (SIVs) and only hold mortgage backed securities (93.5 percent of the investment grade MBS are rated AAA and AA, none of which have been downgraded).
• We made one of the only successful acquisitions this decade in the mortgage business – Financial Freedom, the largest reverse mortgage lender in the nation – while virtually all other significant acquisitions have produced very poor results.

> Almost all of the new liquidity is coming from the Federal Home Loan Banks ......

> Fast die ganze zusätzliche Liquidität kommt von Seiten der Federal Home Loan Banks ......

Our operating liquidity is at an all time high of $6.3 billion at 9/30/07, up 54% from $4.1 billion at 6/30/07, and we have no reverse repurchase borrowings or extendable assetbacked commercial paper…95% of our borrowings are deposits, FHLB advances and long-term debt

> the next slide shows a nice Level 3 aka "Mark-to-Make-Believe Gains" etc gain. Wonder why they havn´t used an assumption that would have cover the entire loss from the credit costs.......... Maybe they are conservatice.......

> Nebenbei bemerkt zeigt die nächste Grafik das auch hier mal wieder ein nicht ganz unerheblicher Level 3 aka Mark-to-Make-Believe Gains etc Gewinnbestandteil. Schon erfreulich das Sie nicht gleich eine Berechnungsgrundlage berechnet haben die gleich die gesamten Verluste im Zusammenhang mit den Kreditkosten abdeckt...... Evtl. ist IndyMac ja betont konservativ......

I want to highlight the IndyMac Presentation / pdf that is full of details about every aspect of the mortgage market

Ich möchste Euch in diesem Zusammenhang die IndyMac Präsentation / pdf ans Herz legen die vollgepackt mit Details zur aktuellen Verfassung der Hypothekenmärkte ist.

As clear as alphabet soup: banks’ CDO exposures

I think the term "Black Box" is not an understatement....... Maybe some still think their exposue is hedged via MBIA & Co. Good luck...... I also suggest to read From level three to cloud nine from Roubini via the FT & the take from Mish. Keep this in mind when some "experts" are still hyping the high dividend yield and the strong balance sheets.......

Ich denke hier trifft der Begriff der Black Box ziemlich genau ins Schwarze....... Evtl. haben ja einige Ihre Bestände auch durch MBIA & Co abgesichert und sind daher der Meinung nicht tätig werden zu müssen. Viel Glück........ Zudem solltet Ihr Euch From level three to cloud nine von Roubini via der FT und die Beurteilung von Mish nicht entgehen lassen. Behaltet diese Zahlen im Hinterkopf und schaltet am besten die Glotze ab und überspringt den Artikel in denen immer noch auf die starken Bilanzen und die hohen Dividenden hingewiesen wird.....

As clear as alphabet soup: banks’ CDO exposures / FT

Forget the banks’ Q3s. By any account, they’re billions of dollars out of date. For banks holding CDOs - and that’s most of Wall Street - writedowns will have greatly increased in the past three weeks.

The trouble is, no one, not even the SEC, knows exactly what banks’ exposures are. But the losses are beginning to come out of the woodwork: for Citi, in the news Monday, a $8bn-$10bn loss on the value of some assets. For Merrill Lynch, last week, it worked out at $8bn. For UBS, reporting their Q3s last week, $3.4bn.

Citi have painted the most comprehensive picture to date. But rather than making things clearer, it simply casts doubt on the other banks’ disclosures. Citi, for example, are reporting $8-10bn writedowns on a portfolio containing $10bn of high-grade CDO paper - which has been the principal faller in the past two weeks. But UBS only report writedowns of $3.4bn. And they hold $20bn of high-grade CDO paper.

There are very few proxies which can be used to judge banks’ CDO holdings. Even a league table of CDO deals arranged is a pretty poor indicator:

An added complication is the fact that banks are using wildly different estimates on the pricing of CDO assets. Although indices such as the ABX and TABX are valuable proxies for the market’s prices as a whole, they don’t necessarily reflect where banks individually are pricing their debt.

As reported in today’s FT, for example, Merrill Lynch, has written down mid-quality ABX debt to 63 cents in the dollar, even though the bank’s own analysts say its worth only 40. UBS, meanwhile, assumes the same debt to be worth 90 cents in the dollar. “Simple math would imply that UBS needs an additional $8bn write-down [on its $15.4bn holdings] if the ABX pricing is correct,” Merrill themselves had the cheek to point out in a report on their rival.
Here’s a breakdown of the main CDO exposures:

Citi
$10bn senior rated CDO debt
$8bn mezzanine CDO debt
$2.7bn “warehoused” CDOs
£200m CDO squared


Merrill Lynch
$8.3bn senior rated CDO debt
$5.3bn mezzanine CDO debt
$1bn “warehoused” CDO debt
$600m CDO squared


UBS
$20.2bn senior rated CDO debt
$1.8bn warehoused CDO debt

Total exposure undisclosed:

Bank of America
Undisclosed

Barclays
Q3s due November 27

Deutsche
$1.6bn on “trading activities in relative value trading in both debt and equity, CDO correlation trading and residential mortgage-backed securities.”

JPMorgan
$339m (net of hedges) “on collateralized debt obligation (CDO) warehouses and unsold positions.”

Lehman Brothers
Undisclosed

Morgan Stanley
Undisclosed

Wachovia
$534m writedown on CDOs

Citi Has Found Another $11 Billion....But Has No Plans To Reduce its Dividend level....LOL!

Thank god they don´t cut the dividend.... What a farce.... Maybe they will pimp this at CNBC and try to dance around the $ 11 billion overnight "adjustment" like the former deaf & ingorant CEO Prince. Maybe someone should tell MBIA & Co that their view on billions of CDO´s with only a low single percentage haircut is looking more and more like David Lereah during the years 2003-2006 . Maybe this guy is running their internal "models".......

Gottseidank wrd die Dividende nicht gekürzt......Da kann man natürlich leicht über die 11 Mrd $ an zusätzlichen Abschreibungen hinwegsehen. Es würde mich nicht wundern wenn es die Crew bei CNBC schafft die Dividenstory als Headline zu promoten. Besonders freut mich zudem das der ehemalig taube und ignorante CEO Prince inzwischen Geschichte ist. Evtl. sollte mal einer die letzten Abschreibungen von Citigroup mit denen von MBIA & Co ins Verhältnis setzen. Deren Sicht der Dinge mit Abschreibungen in niedrigen einstelligen Bereich sieht immer mehr wie ein verspäteter Aprilscherz aus . Evtl. ist ja dieser Typen für die Berechnung der Schadenmodelle zuständig.....

Slicing and dicing Citi’s subprime exposure / FT

Citi announced on Sunday night it was currently facing writedowns of between $8bn and $11bn, on top of the dismal numbers already reported in its Q3 statement.

What is truly shocking, however, is the speed at which these losses have been realised. Barely a month ago, Citi’s pre-Q3 trading statement, warned that it expected to realise $1.3bn on subprime-related writedowns. Which means that figure has now increased at least sixfold. To put it another way, on average Citi’s subprime-linked assets lost more that $2bn in value each week.

Citi has now disclosed it’s estimated total subprime exposure. Of the $55bn total, some $11.7bn is in its lending and structuring business and a staggering $43bn lies in exposures to collateralized debt obligations (CDOs) - huge baskets of mortgage securities.

CDOs have seen prices crash in the past two weeks, as rating agencies have slashed ratings on hundreds of mortgage backed securities. As FT Alphaville reported last week, banks could be expected to reveal more writedowns as the market tanked.

Of the $11.7bn subprime exposure Citi estimates it has in its lending and structuring business, $2.7bn lies in a “warehouse inventory” of unsold CDOs, $4.2bn in actively managed subprime loans intended for securitization and $4.8bn in financing transactions which have subprime collateral.

Of the remaining $43bn exposure, Citi estimates it has $18bn in CDOs: $10bn of which is in high grade tranches, almost $8bn in mezzanine tranches and some $200m in CDO squared structures. The remaining $25bn, says Citi, is in exposure to subprime CDOs through commercial paper. But Citi does not say what issues that CP: whether it is through off balance sheet vehicles, such as SIVs, is unclear.

"Enron-esque characteristics" / Deals With Hedge Funds May Be Helping Merrill Delay Mortgage Losses

Enron reloaded! I shouldn´t be surprised. This on top of Off Balance Sheet Vehicles, financing “Vulture Funds” to buy bank assets, UFOs (or Unidentified Financing Objects) & Level 2 and Level 3 accounting etc. makes me believe that this cartoon isn´t so far of the mark......... :-)

Enron lebt! Eigentlich sollte ich nach den letzten Meldungen über Off Balance Sheet Vehicles, die Finanzierung von “Vulture Funds” um Problemkredite aus der Bilanz zu bekommen, UFOs (or Unidentified Financing Objects) und Level 2 & Level 3 Buchführung usw nicht weiter überrascht sein. Evtl. ist der nachfolgende Cartoon doch nicht so übertrieben wie einst vermutet...... :-)

If the SEC, Auditors etc don´t act this should be viewed as another step in the bailout process..... Is still anybody wondering why gold is doing so well......

Sollten die Aufsichtsbehörden, Buchprüfer usw das auch noch durchgehen lassen darf man das wohl als weiteren Schritt in Richtung Bailout werten.....Gibt es immer noch welche die sich Fragen warum Gold so gut unterwegs ist......

Deals With Hedge FundsMay Be Helping MerrillDelay Mortgage Losses WSJ
Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said.

The transactions are among the issues likely to be examined by the Securities and Exchange Commission. The SEC is looking into how the Wall Street firm has been valuing, or "marking," its mortgage securities and how it has disclosed its positions to investors, a person familiar with the probe said. Regulators are scrutinizing whether Merrill knew its mortgage-related problem was bigger than what it indicated to investors throughout the summer.

In one deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages, a person close to the situation said. In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return, this person said.

> I assume that they aslo provide the probably very cheap financing.....

> Ich gehe mal davon aus das Merrill zudem noch die wohl günstige Finanzierung sicherstellt.....

While the Merrill-related entity's assets and liabilities weren't on Merrill's own balance sheet, Merrill might have been required to take a write-down if the entity was unable to sell the commercial paper to other investors and suffered losses, the person said. The deal delayed that risk for a year, the person said.

At issue with any hedge-fund deals is whether there was an attempt by Merrill to sweep problems under the rug through private transactions kept out of view from investors. Some previous scandals, such as the collapse of Enron Corp. and the troubles of Japan's financial system in the 1990s, involved efforts to hide problems through off-balance-sheet transactions.

Ground Zero
Merrill has become ground zero of mortgage problems in the U.S. Last week, the firm announced a $7.9 billion write-down fueled by mortgage-related problems -- one of the largest known Wall Street losses in history -- after projecting just a few weeks earlier that the write-down would be $4.5 billion. Merrill also took a $463 million write-down, net of fees, for deal-related lending commitments, bringing the firm's total third-quarter write-down to $8.4 billion.

The rapid widening of Merrill's losses has led investors to wonder whether other banks and brokerages have a good grasp of their exposure to bad debt. Bank shares fell sharply yesterday, contributing to a 2.6% fall in the Dow Jones Industrial Average. Merrill's shares fell $3.83, or 5.8%, to $62.19 in 4 p.m. trading on the New York Stock Exchange.

Making the Rounds
"Merrill has been making the rounds asking hedge funds to engage in one-year off-balance-sheet credit facilities," Janet Tavakoli, who consults for investors about derivatives, told clients in a recent note. "One fund claimed that Merrill was offering a floor return (set buy-back price)," she said in the note, "so this risk would return to Merrill." Ms. Tavakoli said such transactions would explain how Merrill's mortgage-related exposure dropped in the third quarter.

Thanks to Randy Glasbergen

In recent weeks, Merrill has been scrambling to line up hedge funds to take as much as $5 billion in mortgage-related securities, people close to the situation said, part of what Merrill executives refer to as a "mitigation strategy." Under the strategy, which started earlier this year, Merrill has tried several means of lowering the risk of its exposure to mortgage-backed securities, these people say.

In accounting for such transactions, "the general guiding principle is whether the benefits and risks of ownership were transferred," says Charles Niemeier, former chief accountant for the SEC's enforcement division and now a director of the Public Company Accounting Oversight Board. Legal questions can arise if the seller retains some exposure to the risk of the assets losing value, and if the deal is designed to disguise the picture of a business's financial health.

Other big securities firms with mortgage-related losses have arranged similar deals with hedge funds. As disclosed in a recent page-one article in The Wall Street Journal, Bear Stearns Cos. sold $1 billion of risky mortgage loans to a hedge fund under a one-year pact known as a "mandatory auction call." Bear Stearns agreed to participate in an auction for the loans that provided the hedge fund with a guaranteed minimum return.

Three big U.S. banks are assembling a group of financial institutions to create an investment pool to buy some mortgage-related securities from "structured investment vehicles" that are being forced to sell. That effort, which is backed by the Treasury Department, has also led some investors to question whether the goal is to delay the point at which banks recognize losses on troubled assets. The banks say their aim is to forestall forced selling of the assets.

In mid-July, before the credit crunch worsened, Merrill reported better-than-expected earnings with little impact from exposure to mortgage-backed securities. Asked about the firm's mortgage position on a call with analysts, Merrill Chief Financial Officer Jeff Edwards said: "Proactive aggressive risk management has put us in an exceptionally good position." Two weeks later, Mr. O'Neal personally sent an email to Merrill employees assuring them the firm had such risks well in hand.

By the end of June 2007, Merrill had CDO exposure of $32.1 billion and a subprime-mortgage exposure of $8.8 billion, totaling $40.9 billion. Much of the CDO exposure was in triple-A rated "super senior" slices. These were supposed to enjoy strong protection against defaults, but they began to decline steeply in price in late July.

By the end of September, Merrill says it reduced such positions through sales, hedges and write-downs to $15.2 billion of CDOs and $5.7 billion of subprime mortgages, a total of $20.9 billion. The write-downs totaled $6.9 billion for CDOs and $1 billion for subprime mortgages.

> Nice to see that the call for transparancy is working so well.....

> Schön zu sehen wie die Forderung nach mehr Transparenz so konsequnet umgesetzt wird.....

NAV SIVs

No wonder Paulson & Co are working overtime.......

Kein Wunder das Paulson & Co momentan sehr beschäftigt sind........

FT The point of M-LEC
Since SIVs were last in the limelight, things have not improved. In fact, asset prices in SIVs have continued to slide. Take a look at this graph, published by Fitch ratings in a note to clients:

Net Asset Value, or NAV, is a measure of the amount by which the market value of a SIVs portfolio exceeds the senior debt, divided by the capital - in other words, a measure of a SIVs underlying worth after leverage.

Not only does Fitch’s graph highlight that SIV’s fortunes have steadily worsened, it also points to a growing divide. Some SIVs are in a far worse NAV situation than others. Axon Financial, managed by TPC-Axon Capital Management, has a NAV currently at 35-40 per cent. Compare to AbAcAs Investments, managed by EBI/NSM. Its net asset value (NAV) is at around 100-105 per cent.

Even if funding briefly loosened up after August, SIV NAVs are still clearly troubled.

Citi - the prime mover behind M-LEC, is a case in point. While the bank could last week declare it had funding for all its SIV CP for the next year, it couldn’t rest on its laurels: The 3 Citi SIVs Fitch rates (in total there are 7) have seen NAVs slide pretty much in line with Fitch’s graph. On September 6, Beta’s NAV was 85.3 per cent, Five’s NAV was 81.6 per cent and Sedna’s NAV was 81 per cent. One month later, on October 8, Fitch puts Beta at 75-80 per cent, Five at 70-75 per cent and Sedna at 75-80 per cent. A decline of up to 10 per cent.

>Mish is asking in Enron Accounting at Citigroup

If a fire sale of those SIVs and conduits resulted in a 25% loss, Citigroup would have net tangible assets of $25.5 billion. If a fire sale of SIVs and conduits resulted in a 41% loss in those SIVs and conduits, Citigroup would have zero net tangible assets.

M-LEC is not only about restoring confidence and making the market more transparent. It’s about restoring asset values.

> Hellasious from Sudden Debt has a related post that is also painting a very bleak picture

> Hellasious von Sudden Debt hat ebenfalls ein Post zu diesem Thema das wenig Linderung verspricht

Hat Tip Eh