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

To: John Pitera who wrote (8101)	8/10/2007 1:14:46 AM
From: John Pitera	Respond to of 33421

Examination of Conduits ----Money Funds May Hold Subprime, Too By KAREN RICHARDSON and DAVID REILLY August 9, 2007; Page C1 Few parts of the capital markets, it seems, are immune from the problems posed by mortgages extended to risky borrowers -- even the usually staid world of money-market funds. Often viewed as an alternative to bank accounts, money-market funds post fairly mundane yields while offering investors a haven and easy access to their money. The funds tend to invest in certificates of deposit and commercial paper, which are short-term notes either issued by companies or backed by assets such as inventories or loans. But some commercial paper may be fairly racy, containing mortgage-backed securities that could include chancy subprime loans. That isn't likely to cause big losses at these funds or endanger them. Still, it is prompting money-market managers to pay closer attention to what is backing the commercial paper they buy, demand additional compensation for investing in a particular type of vehicle that issues some asset-backed commercial paper and call for greater transparency in this market. That, in turn, is bringing a *greater focus to bear on so-called conduits. These vehicles issue asset-backed commercial paper and potentially allow banks and other financial institutions to push risky loans off their books. Asset-backed commercial paper accounts for about half the $2.2 trillion commercial-paper market. The fact that mortgage loans could be causing grief in the commercial-paper market underscores how widely Wall Street packaged and then sold this kind of debt among investors. It also helps explain why problems in the subprime market have caused so much worry among investors. The problems for the asset-backed commercial paper market began earlier this week when three conduit vehicles said they wouldn't be able to redeem paper* coming due and instead would have to extend the maturity of the notes. One of these vehicles, Broadhollow Funding LLC, encountered problems due to the bankruptcy-court filing of American Home Mortgage Investment Corp., one of the country's biggest lenders. Broadhollow purchased its mortgage products from AHM, which had created the vehicle, to finance the notes it sold to investors. Broadhollow in Your Portfolio Broadhollow's notes had been held earlier this year by staid funds such as the Putnam Premier Income Trust and the Evergreen Institutional Money Market Fund, according to Securities and Exchange Commission filings. The holdings were relatively small compared with the funds' overall assets. Officials at the fund groups weren't available to comment. The problems with Broadhollow and other funds spooked the markets. "This is supposed to be the most highly liquid portion of the market," says Jon Thompson, investment officer of structured finance at Advantus Capital Management, which has $18 billion in assets, including money-market funds. "The fact that some residential mortgage-related conduits have stopped issuing paper and some are extending past their maturity dates signals you're in the first part of some trouble." Money-market managers could start switching into more short-term Treasury paper and agency discount notes, which yield less than asset-backed commercial paper but would likely present less risk, Mr. Thompson adds. "You'll see investors reassessing the programs that are out in the market and how they're structured," says Linda Klingman, a senior portfolio manager for taxable money-market funds at Charles Schwab Investment Management. She added that investors will likely demand higher interest payments from conduits whose paper can be extended, or shy away from it altogether. Investors are also likely to want more information out of the conduit vehicles that package asset-backed commercial paper. There is a worry that some of these vehicles are being used as dumping grounds for banks looking to move unwanted assets off their balance sheets. The banks are allowed to keep conduits off their books if they sell off to a third party the obligation to shoulder potential losses stemming from the way the vehicle is structured. This is known as an "expected first loss" and is typically sold for a token amount. This ostensibly puts the risk associated with the vehicle onto another party, although the bank has often agreed to pony up funds to keep the conduit running in the event of trouble. Asset-backed commercial paper "programs may be used to move assets off a sponsor's balance sheet," says Aoto Kenmochi, a senior director at Fitch Ratings. What's Inside? Gauging just what is in these conduits is no easy matter, either because they are able to frequently change their holdings or can contain slices of collateralized debt obligations, which are themselves pools of loans or mortgages. "Investors in conduits are always pushing for more clarity," says Jim Kaplan, who manages about $1.3 billion in money-market funds for William Blair & Co. in Chicago. Conduit investors typically receive monthly "pool reports" from the program administrators. But since the majority of the conduits are privately placed, they aren't required to make standardized regulatory filings, nor do they need to be timely. Now, jitters in this market may give investors new clout to change this. "This is the perfect opportunity for investors to demand more disclosure on these conduits," says Michael Dean, managing director at Fitch's asset-backed securities group. Write to Karen Richardson at karen.richardson@wsj.com1 and David Reilly at david.reilly@wsj.com2

To: John Pitera who wrote (8101)	8/10/2007 8:36:38 AM
From: Elroy	Read Replies (1) \| Respond to of 33421

BNP Paribas halted withdrawals from three investment funds because their assets -- of which more than one-third are related to subprime mortgages -- were impossible to value in the nonfunctioning secondary market. A week ago, the big French bank's chief executive asserted its exposure to U.S. subprime "is absolutely negligible." These two statements are entirely compatible, right? The funds may be impossible to value because the underlying assets are not being traded, and since Paribas itself is probably a manager of, not an investor in, the funds, Paribas sub-prime exposure might be zero. In other words, if the fund investors lose all their investment capital, Paribas may not lose anything other than the management fees that were coming from those (heading toward zero value) funds. Right?