Friday, March 28, 2008

Bear Stearns - Crying Over Spilled Milk

Martin Wolf writes:

I greatly regret the fact that the Fed thought it necessary to take this step. Once upon a time, I had hoped that securitisation would shift a substantial part of the risk-bearing outside the regulated banking system, where governments would no longer need to intervene. That has proved a delusion. A vast amount of risky, if not downright fraudulent, lending, promoted by equally risky finance, has made securitised markets highly risky. This has damaged institutions, notably Bear Stearns, that operated intensively in these markets.

Bear went out of business primarily because of weak/bad management. Many of the rest have problems, because Wall Street origination has a unique ability to follow the herd.

The trend toward mark-to-market and better risk management systems has been a positive development.

The ability of Wall Street to manufacture junk credit has a long history. What seems to be new, these days, is that there is a new class of investor-enabler, non-bank financials called "Hedged Funds".

In the past, the business culture of underwriting (sales for a fee) was separated from the business culture of old-line banking (lending at a spread). Glass-Steagall drew the "Chinese Wall", based on hard-won experience. Without judgment on either, it just cordoned off two cultures that didn't mix and wouldn't change. [Until idiots repealed it in 1999, tossing caution to the wind.]

Accordingly, with Bear, we discover no terra nova. Securitization will recover, at least until the next great speculation dressed-up as "sound investment". Put another way, a full-scale repeal of the credit-cycle seems unreachable.


The only exception might be that the topology now includes another category, derivatives, and the now well-worn path involved in the unexpected insolvency of a very large, highly leveraged entity, a financial super-nova, if you will, like that involving the firm with the Orwellian sounding name, Long-Term Capital Management. So far, the market hasn't come up with a solution to that problem, short of Fed intervention. (To be fair in this context, the repeal of Glass-Steagall probably has little impact, except that it went in the wrong direction altogether. Separating the underwriting of securities from the selling / attachment of "liquidity puts" might have made sense, in retrospect.)

The answer probably isn't too complex. For "Hedged Funds", it probably involves capital requirements (beyond a certain size fund) and requiring maintenance reserves of one kind or another. For derivatives, it probably involves re-thinking the structure of the OTC market in some cases as well as the ability for firms to put some contracts off balance-sheet altogether.

Just off the top of the head.

Thursday, March 20, 2008

When Vultures Don't Wait for Carrion

From DealJournal:

In the days leading up to the collapse of Bear Stearns the options market exploded, with massive bets on disaster that seemed outlandish, but ultimately have proved profitable as large hedge funds bet on the stock tanking (which it did).

The Securities Exchange Commission is looking into whether market rumors contributed to the downfall of the firm, as panicked investors pulled funds and lenders cut off credit to the Wall Street investment bank, leaving it to be snapped up at $2 a share by J.P. Morgan Chase.

VISA - It's Everywhere You Want To Be

source: prospectus


VISA, the leading card payments groups, offered itself up to the public today. Why?

It's not clear. But, maybe the phenomenal performance of the MasterCard IPO (up over 400%) caused some to want to cash in. And, boy, have they: Priced above it's guessed range, finished trading up nearly 30% from the offering price. Wow.

Looking at the prospectus, you can see why VISA is everywhere you want to be. Basically a low/no-risk skimming operation, they take fees for processing transactions through a network of affiliates.

Sure, they spend a whopping 20-25% of revenues on advertising (almost as much as personnel expense!), but they put up snappy return-on-asset and return-on-equity figures. What pension they offer is overfunded and there is very little debt.

Projections of straight-line growth are never true. The impact of identity theft on the future of electronic transactions is unknown.


Top 10 U.S. IPOs - First Day of Trading

  1. 1. Visa Inc. (2008): +28.4 percent
    Deal Size: $17.9B
    IPO Price: $44; First Day Close: $56.50
  2. 2. AT&T Wireless (2000): +7.8 percent
    Deal Size: $10.6B
    IPO Price: $29.50; First Day Close: $31.8125
  3. 3. Kraft Foods (2001): +0.8 percent
    Deal Size: $8.7B
    IPO Price: $31.00; First Day Close: $31.25
  4. 4. United Parcel Service (1999): +36.5 percent
    Deal Size: $5.5B
    IPO Price: $50.00; First Day Close: $68.25
  5. 5. CIT Group (2002): -4.3 percent
    Deal Size: $4.6B
    IPO Price: $23.00; First Day Close: $22.00
  6. 6. Conoco (1998): +8.2 percent
    Deal Size: $4.4B
    IPO Price: $23.00; First Day Close: $24.875
  7. 7. Blackstone Group LP (2007): +13.1 percent
    Deal Size: $4.1 billion


Why the big pop? Could be just excitement, but there is also this:

"They had to place Visa shares in strong hands. They didn't want another Blackstone debacle," says Scott Sweet, managing director of IPO research firm On Blackstone's (BX) first trading day, the very first trade of the day was a 19 million-share sale, which Sweet says was the largest stock flip in IPO history.-Fortune
This has to be a candidate to enter one of the indexes (possibly as Bear Stearns exits?).

Whatever the case, the few news desks that have offered a number, suggest that "V"'s debut implies a price-to-earnings of over 22. It's not cheap...

Tuesday, March 11, 2008

Third Wave - The End of Risk Taking


Recession fears -> credit spreads widen, lower dollar -> margin calls, higher prices -> deleveraging, labor shedding -> more recession fears -> credit spreads widen, lower dollar -> de leveraging, labor shedding -> margin calls ... the last "strong hands".

How much does this affect the real economy?

No one knows, but the 'third wave' of this crisis will be the most grim, I suspect.

Wall Street has problems moving 'in reverse' (shrinking, let alone shrinking abruptly) and soaring borrowing costs for companies is yet another cost that will squeeze profits in the near-term.

"Investment grade credit was the area of the market that was levered the most, 10 to 15 times," said Mark Kiesel, portfolio manager at Pimco. "It is now the cheapest as investors are deleveraging their positions."

Yesterday, the CDX index for US investment grade companies surged 15 basis points to a record wide level of 193bp. The CDX has risen from between 30bp and 40bp a year ago.

In Europe the iTraxx index of investment grade corporate debt was trading at a record 157bp, up from 146bp on Friday. On a relative basis, both these measures of investment grade credit risk have widened more than crossover credit, which is mainly junk-rated. -FT

Rock-bottom, for some, is at ... all-the-way, frankly:

In the credit crisis, spreads have widened dramatically, reducing the value of the leveraged CDS contracts that CPDOs hold. The products typically reach automatic unwind triggers if their net asset value falls by more than 90 percent.

At least one CPDO that invested in financial CDS has hit its cash-out trigger. [!!!] As spreads have widened, traders in the CDS market have expressed concerns that others may be forced to unwind.

Wednesday, March 5, 2008

Bush Official Lame Duck with 321 Days in Office

McCain anointed today at WH baby shower "campaign shower".