Soured Loans To Other Banks

Just one more example how banks have marked numerous assets on their balance sheets..... ;-)

Ein weiterer Beleg wie marktgerecht die einzelnen Positionen der Bankenbilanzen bewertet sind..... ;-)


WSJ
After slogging through quarters of losses from disastrous bets on the Arizona and Florida housing markets, Milwaukee-based Marshall & IlsleyCorp. is facing a new source of pain: bad loans to other banks.

The bank said Tuesday it expects to post a larger third-quarter loss than analysts had expected, in part because it will set aside $185 million for loans to other banks that have abruptly gone bad.

In fact, the bank said 75% of the now-troubled loans to other lenders were current just seven days ago on Sept. 30.

Here comes another example.......... This time it´s CRE......

Hier ein weiterer Beleg für die "überragende" Bilanzqualität wenn es um die Risikovorsorge bei gewerblichen Immobilien geht.....

Fed Frets About Commercial Real Estate WSJ

In another sign that many U.S. financial institutions are inadequately protected against potential losses on commercial real-estate loans, banks with heavy exposure to such loans set aside just 38 cents in reserves during the second quarter for every $1 in bad loans, according to an analysis of regulatory filings by The Wall Street Journal. That is a sharp decline from $1.58 in reserves for every $1 in bad loans from the beginning of 2007.

Make sure you visit the comment section for another stunning CRE story leading to the highest per-square-foot price paid for a Birmingham office property since 2001, easily topping the 2008 mark........

Empfehle zudem einen Besuch in den Comments für ein weiteres Bespiel aus der "Wunderwelt" der gewerblichen Immobilien die erzählt mit welcher Finanzierung es auch jetzt noch möglich die Quadratmeterpreise aus dem Jahr 2008 locker zu toppen .....

Silent Treatment On Bank Write-Downs

More "transparent" accounting........ At least nice to see that even the WSJ calls this accounting "bizarre".....

Schön zu sehen das die Bilanzierung im Finanzwesen seit der Krise noch "transparenter" geworden ist und...... Immerhin bleibt zu bemerken das selbst das ansonsten extrem bankenfreunldiche WSJ diese Bilanzierungsform als "bizarr" klassifiziert.....

Silent Treatment on Bank Write-Downs WSJ

Whenever asset write-downs don't hurt earnings, it pays to look closely. As banks snap up weaker peers, a little-known and somewhat bizarre accounting treatment suddenly has come to the fore.

The past 18 months has spawned the acquisitions of Wachovia by Wells Fargo, Washington Mutual by J.P. Morgan Chase, Countrywide by Bank of America and National City by PNC Financial Services Group. And while bank megamergers likely are over, there could be plenty of fair-size deals among regional banks.

Deserving special scrutiny is the accounting treatment that allows banks to write down acquired loans after the deal, but keep those hits out of their income statements.

It works like this. Bank A buys Bank B, acquiring a loan portfolio, $1 billion of which it believes won't get paid in full. It therefore takes a $200 million write-down on these impaired loans, meaning they come onto Bank A's balance sheet with a fair value of $800 million at the deal date. If those loans subsequently deteriorate, the bank typically has to book a reserve against them, hurting earnings.

However, there is a situation in which postdeal marks don't hit earnings, but only affect shareholders' equity. That is when such adjustments are based on factors that actually existed at the acquisition date, but the acquirer was ignorant of. In the example, Bank A might say it discovered after the deal that another $500 million of acquired loans were in fact impaired at the time of the deal. Bank A's income statement would avoid the hit it then takes on those loans.

Granted, banks can't know everything at the time of a deal. However, adjustments have been large in recent cases, they can take place for a whole year after the deal, and they have happened after acquirers say they have done extensive due diligence.

Moreover, outsiders have no way of gauging whether the circumstances that led to the "look-back" write-downs actually were there at the time of the deal. Their best hope is that auditors are keeping track.

PNC initially classified $19.29 billion of National City loans as impaired, as of closing at year-end 2008, marking them down to $11.9 billion. But in the first half of this year, PNC classified another $2.6 billion of National City loans as impaired, marking them down by $1.6 billion, or a sizable 62%.

If look-back adjustments weren't allowed, PNC might have had to take a hefty reserve against these loans, possibly eroding the bank's $905 million of first-half pretax earnings.

PNC said it had only 69 days between announcing the deal and closing it to review loans, while real-estate appraisers faced a "significant backlog." And the bank has booked reserves on other impaired National City loans, because of deterioration after the deal.

> Compared to other "creative" accounting stunts this example isn´t sounding really "bizarre"......;-) Will be interesting to see if Wells Fargo will use this tool to manage their earnings and especially if the market is once again willing to accept the often very poor earnings & balance sheet quality of almost all financial companies.... Could be the inflection point to short this market.....

> Verglichen mit all den anderen kreativen Bilanzierungsformen hört sich selbst das o.g. Beispiel wenig "bizarr" an......;-) Ich denke es lohnt sich darauf zu achten ob insbesondere Wells Fargo das o.g. Schlupfloch nutzen wird. Sollte der Markt die oft extrem schwache Gewinn und Bilanzqaulität der Finanzinstitue zur Abwechslung mal nicht abfeiern könnte dies der Wendepunkt für die Märkte sein.

Bad, Bad Assets.....

Some kind of follow up to Joke Of The Day "Well Capitalized......”

Wenn man so will eine Fortsetzung von Joke Of The Day "Well Capitalized......”

Dank an Randy Glasbergen

Bad, Bad Assets Floyd Norris
The F.D.I.C. announced the seizure of Colonial Bank and the transfer of the deposits to BB&T, a regional bank based in North Carolina. (As an aside, I’ll note that Colonial only wanted to expand into fast-growing areas, and never chose to enter North Carolina. Tortoise and Hare?)

You can learn all you really need to know about the assets Colonial amassed from the breakdown of what will happen to them, although details are sparse.

1. The F.D.I.C. gets $3 billion in assets that BB&T did not want at all.
2. BB&T gets $7 billion of assets.
3. BB&T gets another $15 billion of assets to manage, but the F.D.I.C. will share losses on them, in ways that are not yet disclosed.

That means that of the $25 billion in assets Colonial had, only 28 percent of them were deemed by BB&T to be worth taking on without any protection. And 12 percent were deemed not worthy of being taken under any terms.

WSJ: Loss Rates for FDIC higher than during S&L Crisis via Calculated Risk

At three of the five banks that failed Friday, increasing the total to 77 so far this year, the financial hit to the agency's deposit-insurance fund is expected by the FDIC to be about 50% of their assets.

As of Friday August 14, 2009, FDIC is Bankrupt via Mish

Below is a graph showing the DIF capital as a percentage of total bank deposits insured by the FDIC. Note that this graph is based on the old insurance limit with a maximum coverage of $100.000/account. This limit has been changed to cover up to $250.000/account until January 1st 2014. Estimates say that the change increases the deposits covered under FDIC insurance to approximately $6 trillion in total.

The current reserve ratio of 0.014%1 strongly indicates how bad this crisis has affected U.S financial institutions. However, this is not the entire story. If we take a closer look at non-current loans and charge-offs from banks one realizes that the FDIC still has a lot of work to be done. Combined non-current loans and charge-offs amounted to nearly $100 billion in Q109 compared to $15 billion/quarter pre-crisis. Moreover, according to analysts at the Royal Bank of Canada the U.S still has banking failures in the thousands to face before the crisis is over. In turn that should result in the FDIC requesting the pre-approved funding signed by the Congress in May 2009, including $100 billion from the U.S Treasury Department.

Larger Version / Vergrößerte Version

Joke Of The Day "Well Capitalized......”

Stories like this explain my "GOLD addiction"........This Cartoon from Jesse ( see "The Emporer Has No Clothes, But Who Dares To Say It" ) nails it.....

U.a. dank solcher Geschichten bin ich ein großer Anhänger von GOLD...... Dieser Cartoon von Jesse ( siehe "The Emporer Has No Clothes, But Who Dares To Say It" ) ist spot on......


Next Bubble to Burst Is Banks’ Big Loan Values: Jonathan Weil
Aug. 13 (Bloomberg) -- It’s amazing what a little sunshine can accomplish.

Check out the footnotes to Regions Financial Corp.’s latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. ( see Regions Form 10-K via Zero Hedge)

The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion.

So, if it weren’t for the inflated loan values, Regions’ equity would be less than zero. Meanwhile, the government continues to classify Regions as “well capitalized.”

> I must admit that i´m somewhat surprised to see that John Paulson purchased 35 million shares of Regions Financial Corp. He is one of the best Hedge Fund mangers out there...

> Ich muß gestehen das ich doch sehr "überrascht" bin das ausgerechnet einer der besten Hedgefondmanger überhaupt sich ausgerechnet in diese Aktie eingekauft hat ( siehe John Paulson purchased 35 million shares of Regions Financial Corp )

While disclosures of this sort aren’t new, their frequency is. This summer’s round of interim financial reports marked the first time U.S. companies had to publish the fair market values of all their financial instruments on a quarterly basis. Before, such disclosures had been required only annually under the Financial Accounting Standards Board’s rules.

The timing of the revelations is uncanny. Last month, in a move that has the banking lobby fuming, the FASB said it would proceed with a plan to expand the use of fair-value accounting for financial instruments. In short, all financial assets and most financial liabilities would have to be recorded at market values on the balance sheet each quarter, although not all fluctuations in their values would count in net income. A formal proposal could be released by year’s end.

Recognizing Loan Losses

The biggest change would be to the treatment of loans. The FASB’s current rules let lenders carry most of the loans on their books at historical cost, by labeling them as held-to- maturity or held-for-investment. Generally, this means loan losses get recognized only when management deems them probable, which may be long after they are foreseeable. Using fair-value accounting would speed up the recognition of loan losses, resulting in lower earnings and reduced book values.

While Regions may be an extreme example of inflated loan values, it’s not unique. Bank of America Corp. said its loans as of June 30 were worth $64.4 billion less than its balance sheet said. The difference represented 58 percent of the company’s Tier 1 common equity, a measure of capital used by regulators that excludes preferred stock and many intangible assets, such as goodwill accumulated through acquisitions of other companies.

Wells Fargo & Co. said the fair value of its loans was $34.3 billion less than their book value as of June 30. The bank’s Tier 1 common equity, by comparison, was $47.1 billion.

Widening Gaps

The disparities in those banks’ loan values grew as the year progressed. Bank of America said the fair-value gap in its loans was $44.6 billion as of Dec. 31. Wells Fargo’s was just $14.2 billion at the end of 2008, less than half what it was six months later. At Regions, it had been $13.2 billion.

Other lenders with large divergences in their loan values included SunTrust Banks Inc. It showed a $13.6 billion gap as of June 30, which exceeded its $11.1 billion of Tier 1 common equity. KeyCorp said its loans were worth $8.6 billion less than their book value; its Tier 1 common was just $7.1 billion.

When a loan’s market value falls, it might be that the lender would charge higher borrowing costs for the same loan today. It also could be that outsiders perceive a greater chance of default than management is assuming. Perhaps the underlying collateral has collapsed in value, even if the borrower hasn’t missed a payment.

The trend in banks’ loan values is not uniform. Twelve of the 24 companies in the KBW Bank Index, including Citigroup Inc., said their loans’ fair values were within 1 percent of their carrying amounts, more or less. Citigroup said the fair value of its loans was $601.3 billion, just $1.3 billion less than their book value. The gap had been $18.2 billion at the end of 2008.

> Unfortunately the same cannot be said about Citi’s dirty pool of assets .....

> Dummerweise gilt das bei City nicht wenn man sich die anderen Papiere ansieht ( siehe Citi’s dirty pool of assets .....

Arbitrary Accounting

If nothing else, today’s fair-value gaps highlight the arbitrariness of book values and regulatory capital. Banks already have the option to carry loans at fair value under the accounting rules. For the vast majority of loans, most banks elect not to, on the grounds that they intend to keep them until maturity and hope the cash rolls in.

Consequently, the difference between being well capitalized and woefully undercapitalized may come down to nothing more than some highly paid chief executive’s state of mind.

Fair-value estimates in the short-term can be a poor indicator of an asset’s eventual worth, especially when markets aren’t functioning smoothly.

The problem with relying on management’s intentions is that they may be even less reliable.

At least now we’re getting some real numbers, even if you have to dig through the footnotes to get them.

> REGIONS FINANCIAL CORPORATION / Shareholder Information

UPDATE:

Elizabeth Warren "We Have A Real Problem Coming" via Zero Hedge

William Black goes in depth on the biggest theft in world history

Fun commercial real estate figures and charts Agnes Crane/Reuters

Toxic Loans Topping 5% May Push 150 Banks to Point of No Return Bloomberg

Bad, Bad Assets Floyd Norris / NYT

America’s Japanese banks Rolfe Winkler

"The Emporer Has No Clothes, But Who Dares To Say It"

Jesse´s Cafe Americain is once more spot on... Thanks :-)

Jesse´s Cafe Americain trifft mal wieder den Nagel auf den Kopf.... Besten Dank :-)

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A Few Goldman Highlights........

More risk, more leverage ( & some kind of "creative accounting" - see end of the post ) ....... Brilliant!

Mehr Risiko, höherer Hebel ( & ein klein wenig "kreative" Buchführung - siehe Ende des Postings ) ..... Hat ja in der Vergangenheit erstklassig funktioniert.... Rechnet man mal die Jahre 2007 und 2008 heraus......

Reuters

A measure of the bank's trading risk, average daily value-at-risk, surged to $ 240 million in the first quarter of 2009, compared with $157 million for the three months ended February 28, 2008, implying that the bank took more trading risk

Goldman also disclosed that it has set aside $168,901 per employee on average for compensation in the quarter, almost 35 percent more than in the first quarter of the previous fiscal year

Bloomberg

Total assets on the balance sheet rose 5 percent from the end of November to $925 billion as of March 27. Of that, about $59 billion qualified as “Level 3” assets, which are the hardest to value, down from $66 billion at the end of November

For more details see Goldman Sachs Press Release

Für weitere Details bitte einen Blick in die Goldman Sachs Press Release werfen.

This from Zero Hedge fits perfectly.....

Diese Beobachtung von Zero Hedge paßt wie die Faust aufs Auge.......

A very interesting data point, also provided by the NYSE, implicates none other than administration darling Goldman Sachs in yet another potentially troubling development. The chart below demonstrates the program trading broken down by the top 15 most active NYSE member firms. I bring your attention to the total, principal, customer facilitation and agency columns.larger/größer

Key to note here is that Goldman's program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x.

The implication is that Goldman Sachs, due to its preeminent position not only as one of the world's largest broker/dealers (pardon, Bank Holding Companies), but also as being on the top of the high-frequency trading/liquidity provision "food chain", trades much more often for its own (principal) benefit

Also on the same topic via EconompicData

Zum gleichen Thema von EconompicData

If Goldman's Selling... Beware of Buying

Goldman's principal trading amounted to 20%+ of all program trading reported on the NYSE, up from between 3-5% one and two years back. In other words, leading up to a period when Goldman may be issuing several billion dollars in an equity offering, their own principal trading has amounted to 4-5x more volume than what had been typical, in an illiquid market, potentially driving up the value of financial equities in the process... interesting.

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I think this comment from Jesse´s Cafe Americain nails it....

Ich denke der nachfolgen Kommentar von Jesse´s Cafe Americain faßt es ziemlich gut zusammen......

The bulk of their profit purportedly came from speculative trading for their own accounts, using 'cheap FDIC guaranteed funds.

There will be no recovery in the real economy until the financial system is reformed and banks are restrained into productive functions within our society.

Make also sure you visit this piece from Floyd Norris and his commensts from the conference call ( seeThe Case of the Missing Month ) or this little rant via Barry Ritholtz How to Puff Up Earnings, Goldman Sachs Style.......

Denke das ein Blick in den Kommentar von Floyd Norris zum Conference Call auch nicht schaden kann ( siehe The Case of the Missing Month). Um das "positive" Bild von Goldman abzurunden noch ein kleiner Rundumschlag von Barry Ritholtz ( siehe How to Puff Up Earnings, Goldman Sachs Style )......

Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s news release, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ending in February.

The orphan month featured — surprise — lots of writeoffs. The pre-tax loss was $1.3 billion, and the after-tax loss was $780 million.

No surprise to hear this update on via Norris......

Diese Erläuterung hinsichtlich der Aufsicht im Update von Norris dürfte keine wirkliche Überraschung sein.....

What About That Other $28 Billion?

Goldman Sachs, as you know by now, wants to return that $10 billion in TARP money it got. And what about the $28 billion it borrowed in the credit markets with a guarantee from the federal government?

A spokesman tells me that Goldman has no plans to pay that back early. Nor will it say if it would have been profitable had it reported on the quarter ended in February, as it traditionally has.The spokesman did tell me something I would have included in my earlier Goldman blog had I known it, that the change in fiscal year was required when it converted to a bank holding company.

The bank regulators did not, however, force Goldman to avoid any mention of the December orphan month in the text of its earnings release, instead relegating it to a table deep in the announcement.

> What esle do you expect from a regulator that is labeling a giant hedge fund like Goldman as a bank.... ;-)

> Was soll man auch anderes von einem Regulierer erwarten der einen gigantischen Hedge Fonds wie Goldman Sachs den Bankenstatus zuspricht.. ;-)

Congratulation ( NO SARCASM ) to Goldman for placing the shares at $ 123 Goldman Sachs Raises $5 Billion to Repay TARP Funds The same kind of "creative" accounting in 2008 and the stock would have tanked 50 percent withing a day...... But at least this time it is the so called smart money ( lets hope not too many pension funds are involved.... ) and not the taxpayer on the hook.....Clearly a sign that the euphoria level is close to a peak ( Here is more evidence of some kind of exuberance ) .....

Man muß Goldman zu der Dreistigkeit gratulieren ( Diesesmal ohne Augenzwinkern ). Die haben es tatsächlich geschafft Ihre Aktien zu 123 $ zu platzieren ( siehe Goldman Sachs Raises $5 Billion to Repay TARP Funds ). Hätten die es noch vor einem Monat gewagt eigenmächtig Bilanzierungszeitrahmen abzuändern und so den äußerst verlustreichen Dezember praktisch aus dem Blickwinkel der Öffentlichkeit zu "verbannen" hätte sich die Aktie wohl binnen 24 Stunden halbiert...... Hoffe inständig das es noch weitere Unternehmen schaffen private Gelder mit welchen Methoden auch immer an Land zu ziehen..... Dann ist zumindest der Steuerzahler ( vorausgesetzt die Pensionskassen haben sich zurückgehalten ) nicht allein der Dumme....... Denke das zeigt einmal mehr das die aktuelle Marktstimmung etwas zu euphorisch ist Hier ein weiterer Beleg für eine zumindest "ausgelassene" Stimmung.......

Bad Bank, Bad Pricing.........

When you combine my initial thoughts ( see Is There Anybody Out There Believing That There Will Be A "Transparant" Bad Bank........? ) with the latest insight from Naked Capitalism & add the example from the NYT to the mix i think the cartoon describes very well the model that will be used from the governments around the world to justify the inflated "market prices" for the purchases or guarantees of the assets that will cost the taxpayer around the globe trillions.....

Denke wenn man sich meine letzten Vorhersagen ( siehe Is There Anybody Out There Believing That There Will Be A "Transparant" Bad Bank........? ) und das Posting von Naked Capitalism ansieht und das mit dem folgenden Beispiel der NYT kombiniert dürfte klar werden das die Regierungen weltweit "Berechnungsmodelle" analog dem Cartoon nutzen werden um die hyperinflationierten "Marktpreise" zu rechtfertigen zu denen die Positionen letztendlich erworben bzw garantiert werden. Die weltweiten Steuerzahler dürfte diese "Kreativität" Billionen kosten.....

Risks Are Vast in Revaluation of Assets NYT
The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency.

The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

> This conclusion from Calculated Risk & sums it up

> Diese Feststellung von Calculated Risk umschreibt das Desaster treffend.....

To be worth even 38 cents on the dollar, this must be a senior tranche. The lower tranches have absorbed most of the losses so far, and that is why S&P is currently valuing the bond at 87 cents on the dollar, but any higher default assumptions, and the value of this bond will plummet. I'm amazed, given that these are no money down 2nds that the loss severity is only 40 percent.

The bond analyzed by S.& P. is just one of thousands that the government might buy or guarantee should it go forward with setting up a “bad bank” that would acquire $1 trillion or more of toxic assets from banks.

The value of these securities is based on the future cash flow they provide to investors. To determine that, traders have to make assumptions about the housing market and the economy: How high will the unemployment rate go in the coming years? How many borrowers will default? What will homes be worth?

The Standard & Poor’s group, Market, Credit and Risk Strategies, which operates independently from the company’s credit ratings business, has been studying troubled securities for investors and banks. The bond that is trading at 38 cents provides a vivid illustration of the dilemma in valuing these assets.

The bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A.

> Finally Joseph Stiglitz via Jesse´s Cafe Americain

Obama’s administration is moving closer to buying the illiquid assets currently clogging bank’s balance sheets and preventing them from boosting lending, people familiar with the matter said this week.That amounts to swapping taxpayers’ "cash for trash,” Stiglitz said yesterday

AMEN!

Just In Time For Q3 Earnings....SEC Gives Banks More Leeway On Mark-To-Market

Surprise, surprise...... Probably the worst they can do to restore confidence..... Desperation......

Passenderweise noch rechtzeitig um die Bilanzen für das 3. Quartal noch künstlich zu frisieren..... Glaube kaum das diese Bilanzakrobatik dazu beiträgt das Vertrauen in Bankenbilanzen zu stärken..... Klingt einmal mehr nach einer weiteren Verzweiflungsaktion.....

SEC gives banks more leeway on mark-to-market Reuters

"This letter (SEC document) could be titled, pick a number, any number, as it gives bankers great leeway in choosing what numbers they will give to investors," said Lynn Turner, who served as chief accountant at the SEC from 1998 through 2001

More Mark-to-Market Quotes via Calculated Risk. Barry Ritholtz has an excellent summary Understanding the Significance of Mark-to-Market Accounting. Floyd Norris from the NYT has also some thoughts on this topic Fair Value Follies & S.E.C. Move May Relax Asset Rule

Mehr zu diesem Thema via Calculated Risk Mark-to-Market Quotes und Barry Ritholtz macht nocheinmal mehr als deutlich warum diese Bilanzierungmethodik so wichtig ist Understanding the Significance of Mark-to-Market Accounting. Darüberhinaus hat sich Floyd Norris von der NYT Fair Value Follies & S.E.C. Move May Relax Asset Rule zum Thema seine Gedanken gemacht

But i fear that this is only the beginning......Take a look at Paulsons Magic Marker hidden in his bailout plan. You don´t have be a genius to assume that this "tool" will be used not very "conservatively"....

Befürchte das dies erst der Anfang ist.... Inmitten des vorerst gescheiterten Bailout Plans verbirgt sich nachfolge Passage.... Man muß kein Hellseher sein das dieses "Werkzeug" inflationär angwendet werden wird...... via Paulsons Magic Marker Ft Alphaville

Section 132. Authority to Suspend Mark-to-Market Accounting.Restates the Securities and Exchange Commission’s authority to suspend the application of Statement Number 157 of the Financial Accounting Standards Board if the SEC determines that it is in the public interest and protects investors.

Once more via Barry Ritholtz Quote of the Day: Fair Value Accounting

Wachovia went out with a book value of $75 billion. Citi paid $2 billion. Could it be that asset values are overstated, not understated?

-Michael Rapoport, Dow Jones

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.

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

What A Difference A Week Made....Credit Suisse Discovers Another $ 2.85 Bilion "Fair Value Reduction"

As one who has listened to the entire conference call from Credit Suisse just one week ago i can assure you that this will spook the markets. Credit Suisse was besides Deutsche Bank and Goldman Sachs viewed as one of the big winners during the turbulence. But there was always doubt that their numbers might be too good to be true...... Credit Suisse is proving that this might be the case..... Should be very bad news for the confidence in the marketplace overall...... I assume the "arrogance" from the Credit Suisse management won´t be as obvious as during the last call...... Stock tanking 7 percent......

Als einer der sich vor einigen Tagen die Telefonkonferenz angehört at bin ich mir sicher das diese Meldung hohe Wellen schlagen wird. Bisher galt die Credit Suisse zusammen mit der Deutsche Bank und Goldman Sachs als einer der Gewinner der Marktturbulenzen. In der Vergangenheit sind immer wieder Zweifel aufgekommen ob "die Zahlen nicht zu gut sind um wahr zu sein" ...... Credit Suisse liefert hier eine Steilvorlage für diese Vermutung......Ich bin mir zudem sicher das die "Arroganz" von Seiten des Managements während der nächsten Telefonkonferenz sicher nicht wieder so ausgeprägt sein wird wie letzte Woche .... Aktie zur Eröffnung 7% tiefer......

Thanks to Randy Galsbergen

Credit Suisse Further to its commitment to provide transparency, Credit Suisse today announced that in connection with the operation of ongoing control processes, it has undertaken an internal review that has resulted in the repricing of certain asset-backed positions in its Structured Credit Trading business within Investment Banking.

The current total fair value reductions of these positions, which reflect significant adverse first quarter 2008 market developments, are estimated at approximately USD 2.85 billion (having an estimated net income impact of approximately USD 1.0 billion).

In the first quarter to date, we estimate we remain profitable after giving effect to these reductions. The final determination of these reductions will depend on further results of our review and continuing market developments. We will also assess whether any portion of these reductions could affect 2007 results. Finally, our internal review, which has identified mismarkings and pricing errors by a small number of traders in certain positions in our Structured Credit Trading business, is continuing.

> Here the Full Year Results from Feb. 12th & Webcast

Qatar was maybe a little bit premature....

Sieht ganz so aus als wenn einige Investoren heute leicht erhöhte Temperatur haben werden.....

Qatar fund buys Credit Suisse stake

The QIA’s move comes after Credit Suisse posted robust fourth-quarter results underscoring its resilience during the credit crisis,......

What's a C.D.O.?

I second what FT Alphaville has to say. Maybe they should send the link to all the "smart money" guys that are holding all this stuff so that they finally understand what they are holding.....

Ich kann mich nur FT Alphaville anschließen. Man sollte diesen Link all denen schicken die Besitzer dieser Papiere sind damit Sie endlich begreifen was für eine halsbrecherische Konstruktion den Weg in die Bücher gefunden haben und warum es täglich vorkommen kann das aus AAA über Nacht Junk werden kann. Ich denke da ganz besonders an ein paar deutsche Landesbänker......

Far and away one of the best graphics we’ve seen. Kudos to Felix Salmon and the people at Portfolio

Make sure you click here to start the interactive beauty!

Laßt euch dieses Schmuckstück nicht entgehen und klickt hier um die interaktive Schönheit zu betrachten.

It remains to be seen if the write down from Royal Bank Of Scotland is enough.... Maybe the age of the CDO portfolio is an explanation why they still value the mezzanine tranche with 70 percent..... The same CDO in 07 would be definitley close to zero....

Bin gespannt ob die Abschreibung der Royal Bank Of Scotland genug sein wird.....Evtl. ist ads bereits fortgeschrittenen Alter des CDO Portfolios ja die Erklärung dafür das die Mezzanine Tranche immer noch mit 70% bewertet wird. Ein CDO mit Baujahr 2007 würde wohl eher bei null notieren......

At 30 November, GBM's exposure to these super senior tranches, net of hedges and write-downs, totalled £1.1 billion to high grade CDOs which include commercial loan collateral as well as prime and sub-prime mortgage collateral, and £1.3billion to mezzanine CDOs based predominantly on residential mortgage collateral. The CDOs are largely based on ABS issued between 2004 and the firsthalf of 2006

And with news like this Surge in Auto-Loan DelinquenciesIs Latest Trouble for the Economy via the WSJ it should be clear that the problem is spreading to all parts of securitisations.

Und mit Meldungen wie diesen Surge in Auto-Loan DelinquenciesIs Latest Trouble for the Economy dürfte auch bald der nächste Pfeiler der Verbriefungskredite mehr als nur leichte Schlgseite bekommen....

First came housing loans and the subprime-mortgage crisis.

Now, signs of stress are creeping into another key consumer area: auto loans.

Delinquencies in the auto-loan market are ticking up to their highest level in several years. Lenders are tightening terms in some cases, and interest rates have risen from the rock-bottom levels of a few years ago. About $575 billion in loans for new and used cars are made annually, according to the National Automotive Finance Association.

About 4.5% of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent as of the end of September, up from 2.9% the previous month,according to a Lehman Brothers survey of companies servicing these loans. That is the biggest one-month jump in at least eight years. Lehman says 12% of subprime borrowers, who have poorer credit records, were delinquent on their 2006 auto loans as of September. That is the highest level since 2002 and up from 11.1% the previous month.

"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.

UBS Write Down Estimates "Best Case $ 6 Billion, Worst Case....

They should have floated rumors/estimates of $ 20 billion and then surprise with a lower number like Barclays, Bear Stearns etc...... Sarcasm off..... :-) . UBS has just denied that they expect a big write down . I assume it depends on what is "big" . This comment doesn´t fit well with the comments from UBS at the beginning of the month.UBS: Further Writedowns Possible and this comment from the Wall Street Journal . The example Swiss Re doesn´t give much comfort either......

UBS hätte besser schon vorher Gerüchte über 20 Mrd $ streuen sollen um dann positiv zu überraschen ( siehe Barclays, Bear Stearns usw....... ;-). Gerade hat UBS einen größeren Abschreibungsbedarf dementiert. Ich denke es ist alles eine Frage was "groß" bedeutet. Was solche Dementies selbst aus der Schweiz heutzutage wert sind zeigt "eindrucksvoll" das Beispiel der Swiss Re ........ Auf jeden Fall harmoniert das Dementi nicht sonderlich mit dem Kommentar von Anfang November UBS: Further Writedowns Possible und diesem Kommentar aus dem Wall Street Journal .

Mr. Peace ( Lehman Brotehrs) said UBS may have to record an additional loss, because he compared UBS's and Merrill's exposure to a risky CDO slice known as the mezzanine piece. His analysis shows that UBS has triple the exposure to mezzanine CDO slices as Merrill Lynch yet so far has taken a quarter of the percentage write-down that Merrill took. UBS's holding does include some added protection against losses, Mr. Peace said.

Citi do a Whitney on UBS - “A major reversal of fortune” / FT
According to a note sent out to clients by Citi analysts today, we can “realistically” expect a further $12bn writedown from UBS in the next quarter.

UBS shareholders should also expect to see the dividend slashed, and the value of their equity diluted by a rights issue of up to $7bn. UBS, Citi’s Jeremy Sigee say dryly, will almost certainly need to recapitalise.

In other words, Citi are giving UBS the Meredith Whitney treatment. Is it true what they say - every bully was once bullied?

The difference, of course, is that Citi cut to the chase in disclosing its subprime losses - releasing details of its exposure and a breakdown of the figures. Not that it did Chuck Prince any good.

UBS, however, have been far more circumspect. Consider this table of banks’ disclosed exposure and writedowns on ABS CDOs:



While UBS have the second highest ABS CDO exposure, they have taken one of the lowest writedowns.

Clearly, UBS are not marking their assets at current market prices, and are still heavily relying on marked to model prices. Consider also the fact that many of the CDOs UBS arranged and sponsored have been some of the worst hit - like the appropriately named Vertical Capital, a CDO whose AAA debt was slashed 14 notches to junk in one fell swoop.

Consider this table from Citi, which neatly summarises the price declines on MBS and CDOs (measured respectively by declines in the ABX and TABX indices from Markit) It’s pretty clear that UBS’s average writedown so far is paltry

Citi outline three possible scenarios for UBS:
First we assume markdowns similar to Merrill Lynch. Under that scenario, UBS would need to take markdowns of SFr 6.7bn in 4Q07. Translating this revenue shortfall one-to-one to PBT (thereby assuming no clawback on the cost side), the group’s PBT would be -SFr 3.2bn for a net loss of SFr2.3bn. The Tier 1 ratio would be 9.5% under Basel I and 9% under Basel II. This is below the group’s target. However, cancelling the dividend (SFr4.2bn) would bring back the ratio to 10% under Basel II.

The second scenario takes conclusions from our Fixed Income credit strategists, assuming 30% writedowns on HG ABS CDOs and 60% on mezzanine ABS CDOs. UBS would report a loss of SFr 7.9bn in 4Q07, its Tier 1 ratio would drop to 8.1% (Basel I) and 7.6% under Basel II. The Tier 1 would remain below target even if the dividend were cut, raising the possibility of a capital shortfall.

The third scenario is a worst-case scenario. Under this scenario (50% writedowns on HG ABS CDOs and 100% on mezz ABS CDOs), UBS would end up with a substantial SFr22bn writedown. The group’s Tier 1 ratio would drop to 5.8% (Basel II). Even after cutting the dividend and accounting for a lower group Tier 1 ratio of 9% (Basel II), a capital shortfall of SFr 8.5bn would remain, raising the prospects of a large capital increase/rights issue.

Fundamentals, not liquidity conditions, are behind MBS crash

Good luck to all the banks and especially the monoline insurers that still think that the ABX Indices ( see also The AAA Trap via Sudden Debt ) are not reflecting the market price....... But as long as they can convince the auditors.......

Viel Glück all denen die die immer noch glauben das die ABX Indizes ( siehe auch The AAA Trap von Sudden Debt ) nicht den wahren Wert wiederspiegeln..... Aber solange die Buchprüfer diese Zahlen abnehemen......


Fundamentals, not liquidity conditions, are behind MBS crash / FT
Many banks, if not financial institutions in general, would have you believe that the current rout in mortgage-backed debt is largely being driven by irrational fear. A few bad subprime debts buried around the structured universe are scaring buyers out of markets.

But, said CreditSights, in a note to clients on Wednesday, current pricing levels reflect fundamentals, even for the most highly-rated debt. Mortgage securities across the board are overrated and overvalued:

The harsh truth about the outlook for the AAA tranches - necessary downgrades, if not defaults - should put the lie to the argument that current low prices in AAA RMBS tranches - let alone AAA tranches of mezzanine RMBS CDOs - are somehow the victim of poor liquidity conditions, and do not reflect the true fundamentals of the situation.

CreditSights publish the results of a survey they have conducted on “188 individual relatively large RMBS deals”. The outlook, by all accounts, is grim.

Hat tip to Barry Ritholtz who has also more on this topic Financials: Worse than they look?

Dank an Barry Ritholtz der zum Thema ebenfalls treffendes zu sagen hat Financials: Worse than they look?

At root, CreditSights calculate a severity loss ratio for lenders on individual defaulting subprime mortgages based on mortgage market data collected over the past few weeks. The survey results indicate that such loss severity rates on mortgages are “painfully high”. They range from 24 per cent to 55 per cent - with a weighted average at 35 per cent. And they’re expected to rise. For second-lien mortgages - that is, second mortgages on a property, the loss severity rates average 94 per cent.

> By the way MBIA is on the hook if the losses for their RMBS CDO´s are greater than 22-28 percent.........

> Ganz nebenbei bemerkt ist MBIA ab Verlusten von 22-28 % bei Ihren RMBS CDO´s in der Haftung.....

So how do those figures translate into the capital structure of structured mortgage-backed debt? Foreclosure rates are rising higher and higher - which means the number of occasions when the above loss severity ratios have to be applied are increasing.

And it doesn’t look like the blame can be pinned on any particular vintages of MBS. Here’s a graph of foreclosures on vintages since 2004:

According to CreditSights, that should “up-end the idea that the 2004 vintage was perhaps sufficiently seasoned and composed of loans that had enjoyed enough home price appreciation since 2000, to avoid any further erosion.”

As it is, foreclosure rates are hovering at around 13 per cent on 2005 and 2006 mortgage debt. But CreditSights say there is “no end in sight” when it comes to that figure rising.

Consider then the outlook for delinquancy rates - a measure of mortgage loans not yet in foreclosure, but in trouble:

Add the 7 per cent delinquency rate for the 2006 vintage to the 2006 foreclosure rate at 12.6 and it’s already close to 20 per cent.

How then does that translate into the world of structured finance, and those RMBS tranches?

To trigger a default on the most secure subprime RMBS debt - rated AAA, and structured with a typical 18 per cent attachment rate - foreclosure rates would have to reach the 30 per cent.

As can be seen from the results of CreditSights’ survey, that scenario is indeed becoming “less and less unthinkable”. Adding the foreclosure and delinquancy rates takes us close to 20 per cent. Both are set to increase. Then there’s those painfully low severity loss ratios. Add it all together and that AAA debt is far, far, far from safe.

And we haven’t even mentioned prime tranches lower down the structure.

Far from mispricing RMBS, CreditSights even go so far as to suggest that actually, the ABX indices (which list AAA RMBS debt at around 80 cents in the dollar) are throwing up some pretty appropriate figures.

Risk rises of asset fire sale; signs ‘superfund’ has stalled

Some might argue that these are market and not fire sale prices......... But as long as they can convince the rating agencies and the auditors that their "models" imply a higher price.......

Einige könnten argumentieren das diese Preise dann Marktpreise und keine Schleuderpreise sind.... Aber solange es möglich ist die Rating Agenturen und die Buchprüfer davon zu überzeigen das die hauseigenen Modelle einen höheren Wert ergeben.......

Risk rises of asset fire sale; signs ‘superfund’ has stalled / FT
The threat of fire sales of mortgage-backed securities is mounting as rating agency downgrades have pushed debt vehicles into technical default. The prospect of forced sales comes as a US Treasury-backed plan for a “superfund” to buy up distressed mortgage securities appears to have stalled. S&P and Moody’s have received default notices for $5bn worth of CDOs, giving investors in senior tranches the right to sell assets.

The $75bn superfund plan - designed to purchase assets from distressed investments linked to banks and so prevent fire sales - seems to be stalled following the upheaval at Citigroup.

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.