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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (8076)	8/3/2007 12:54:05 AM
From: John Pitera	Respond to of 33421

CDO Managers Feel Pain of Subprime Slide Losses of $50 Billion May Hit Companies; A Margin-Call Squeeze By GREGORY ZUCKERMAN August 3, 2007 The fallout from the subprime slide continues to spread. Caught up in the widening problems now are a group of little-known firms that managed exotic bundles of debt that were used to finance a rash of high-profile corporate buyouts as well as home mortgages extended to borrowers with shaky credit histories. Managers of these collateralized debt obligations, as these bundles are called, are feeling intense pressure, as CDO losses could top an estimated $50 billion and new sales vanish. One of the largest such managers, Credit-Based Asset Servicing & Securitization LLC, known as C-BASS, this week warned it was being squeezed by "unprecedented" margin calls from its lenders. Critics say these CDO managers should have known the risky nature of the debt backing the CDO pools. In many cases, CDO managers "weren't doing their job," says Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. CDOs are pools of debt instruments -- such as bonds or loans -- that are repackaged into different slices carrying various levels of risk. These slices, or tranches, are then sold to investors such as insurance companies and hedge funds. Managers hold most of the underlying debt until maturity, while monitoring and sometimes trading the securities. HAUNTED HOMES • The Situation: The fallout from the subprime-mortgage slide is continuing to spread. • The Players: Caught up now are a group of little-known firms that manage exotic bundles of debt called collateralized debt obligations. • Bottom Line: These CDO managers are feeling the pressure as CDO losses could top an estimated $50 billion -- and as new sales vanish.Almost $1 trillion of debt was in CDOs at the end of last year. New CDO issuance surged to more than $300 billion last year from less than $50 billion in 2002. While Bear Stearns Cos.' asset-management unit was the third-largest manager of CDOs that include subprime mortgages, no other Wall Street banks were in the ranking of top-20 managers as of Dec. 31, 2006, according to Standard & Poor's. Leading the manager pack was a group of money-management firms and hedge funds -- some relatively unknown, even on Wall Street. These included TCW Group Inc., Duke Funding Management, Bear, BlackRock Financial Management Inc., Vanderbilt Capital Advisors, Harding Advisory LLC and Aladdin Capital Management. Some of these firms have diversified businesses, reducing the pain as the CDO business dries up. There also were small, and sometimes inexperienced, firms managing the debt pools. Jeffrey Gundlach, chief investment officer at the TCW Group, says about a third of all managers in recent years were first-timers who had never put together a CDO deal. Mr. Gundlach says TCW avoided including riskier debt, such as second-lien mortgages, in its CDOs, but that others included that debt to make the interest rate on the CDO slices more attractive. Nonetheless, he says blaming CDO managers for the problems is like "an investor who bought the Nasdaq at 5000 back in 1999," blaming his broker when the high-technology bubble burst and stocks tumbled. "It's pretty silly." Among the big managers who have seen their CDOs put on notice for possible downgrade by Moody's Corp.: GSC Partners and ACA Capital Holdings Inc. A representative of GSC declined to comment. Representatives of ACA didn't respond to calls for comment. Some big banks refrained from acting as managers of CDOs because they were wary of the risks to their reputations in a downturn, analysts say. Still, Wall Street retained connections. Bear's private-equity arm owned 27% of the shares of the eighth-most-active manager, ACA, for example, according to the most recent securities filings. Until recently, the CDO managers found their job pretty easy. Managers bought various debt, pooled it together in a CDO structure, persuaded rating agencies to place a higher rating on it all -- arguing that the diversity of the pool meant it was relatively safe -- and then sold slices off. To get the highest yields for each slice, they sometimes bought riskier bonds. During the good times for the markets, yield-hungry investors scooped up these CDO slices without distinguishing among those managed by more-conservative or -aggressive managers. Investors, who once demanded that managers own some of the riskiest equity slice of a CDO, often dropped those demands. As riskier subprime mortgages started losing value this year, investors became wary. While Bear Stearns and others on Wall Street have expressed consternation about how some CDOs were managed, some absolve the managers, saying they simply sated the appetites of investors hungry for high-yielding investments. They also argue that Wall Street investment banks didn't always do enough homework on the subprime mortgages that were put into CDO deals. Ironically, traders say that now would be the ideal time to launch a CDO, since the recent "repricing of risk" in the market means that prices of various types of riskier debt are trading much lower.

To: John Pitera who wrote (8076)	8/4/2007 1:50:26 PM
From: Jon Koplik	Read Replies (1) \| Respond to of 33421

WSJ credit market column (re : Friday 8/3/07 "tumult") .......................................... August 4, 2007 Amid Mortgage Tumult, Worries About Curbs On Borrowing Spread By JUSTIN LAHART and SUSAN CAREY The recent turmoil in credit markets has put some mortgage lenders out of business, forced the shutdown of some hedge funds and virtually frozen the leveraged-buyout activity that was helping propel stocks. Now the worry is that the pain could spread more broadly into the economy by crimping corporate and consumer borrowing. It was another tumultuous week, with rumors flying on Wall Street and the stock market posting wide swings. Treasury bonds rallied Friday as investors sought their safety. "The worry is there will be a cramp in the financial system where nobody can borrow money," says Todd Clark, director of stock trading at San Francisco money-management and brokerage firm Nollenberger Capital Partners. "If there's a true unwillingness to lend, that's a self-fulfilling prophecy as far as an economic downturn is concerned." Boston-based hedge-fund firm Sowood Capital said it was closing its two funds after heavy losses, and a third Bear Stearns fund appeared to be in trouble as it froze investors' redemption requests. American Home Mortgage Investment Co., the 10th-largest U.S. mortgage lender, stopped taking mortgage applications and laid off the bulk of its staff. The stocks of Wall Street firms were hit, and Bear Stearns held a call with investors Friday to try to assuage their concerns. Amid turmoil in the mortgage market, nervous investors and Wall Street firms continued to back away from many types of home loans. A unit of UBS AG emailed a note to mortgage brokers Friday saying it wouldn't accept any new loan applications that day "as a result of market volatility." Credit Suisse told correspondent lenders, which originate loans for sale to bigger institutions, that it had suspended until further notice all subprime and second-lien home loans as well as some loans that give people minimal-payment options in the early years. NovaStar Financial Inc. suspended approval and funding of loans offered through brokers "due to severe dislocation" in the market, according to a note emailed to partners Friday. A UBS spokesman said, "We fully expect to be accepting applications as usual on Monday." Credit Suisse and NovaStar couldn't be reached for comment. The trouble in subprime mortgages, which many Wall Streeters had hoped would remain contained, now is causing investors to reassess risk. Corporate bonds and other debt instruments have fallen, pushing borrowing costs higher. Yields on high yield, or "junk," bonds issued by companies with risky credit ratings have risen, making it harder to finance acquisitions. Private-equity takeover deals, which often depend heavily on debt, have slowed to a trickle. In July, there were 48 corporate-bond issues, according to Thomson Financial, the lowest monthly number since 1990. With corporate balance sheets in good shape, the rise in bond yields and drop in bond issuance doesn't appear to have any economic basis, says Lou Crandall, chief economist at Wrightson ICAP. Rather, liquidity -- funds available for investing -- has dried up as investors have pulled in their reins. "This is still a liquidity event," says Mr. Crandall. "But the longer it goes on, the more potential it has to have broader repercussions." Even though corporate-bond yields have risen relative to comparable Treasury notes, Mr. Crandall points out they are still fairly low on an absolute basis. Part of the problem is that companies worry that tapping the debt market during such a volatile period could be seen as a sign of desperation. So instead, they put off their offerings, which also means they may put off the things they planned to do with the money. Many economists had hoped that increased corporate spending would help push the economy along in the latter half of the year. August is a notoriously slow month for issuance, says Arthur Tetyevsky, chief U.S. credit strategist for HSBC, so it's doubtful much will happen this month. Companies highly dependent on short-term financing could be especially at risk. Aircraft-leasing companies, such as Genesis Lease Ltd. and Aircastle Ltd., for example, have seen their stocks fall sharply over the past month. Richard Singer, chief executive of RaiseCapital.com, which matches entrepreneurs with investors, notes that while he hasn't seen an influx of messages from start-ups that suddenly can't find funding, he expects to see an "indirect impact" in September, when business in general picks up. If a few of the high-quality deals can get good prices, that may "unclog the pipeline," said Mr. Tetyevsky. A broader worry is that the economy has become increasingly dependent on financial markets to meet lending needs, with lenders slicing and dicing everything from short-term corporate loans to auto loans into securities that are then marketed to investors. If investors get spooked, then the ability of lenders to fund loans may be hampered. Investors Seeking Safety Push Up Treasurys Another dour summer Friday undercut already shaky confidence in credit markets, as a downdraft in equities and a ratings agency's negative action on Bear Stearns had investors seeking the safety of Treasurys. The benchmark 10-year Treasury note was up 14/32, or $4.375 per $1,000 face value, at 98 15/32. Its yield fell to 4.698% from 4.753%, as yields move inversely to prices. The two-year note was up 6/32 to 100 10/32 to yield 4.465%, down from 4.563%. --James R. Hagerty, Michael Hudson, Simona Covel and Michael Aneiro contributed to this article. Write to Justin Lahart at justin.lahart@wsj.com and Susan Carey at susan.carey@wsj.com Copyright © 2007 Dow Jones & Company, Inc. All Rights Reserved.