aaah yes August of 2007 a prolific time for the markets and this thead:
| To: John Pitera who wrote (8076) | 8/4/2007 1:50:26 PM | | From: Jon Koplik | 1 Recommendation of 13609 | | 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
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| From: Davy Crockett | 8/4/2007 2:25:30 PM | | | 1 Recommendation of 13609 | | Stocks tumbled yesterday on fears that the worsening ills in the mortgage and debt markets could soon take a significant toll on consumers, businesses and the overall economy.
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Related
Job Growth in July Is the Slowest in Months (August 3, 2007)
The latest decline capped a volatile two weeks on Wall Street in which the stock market has swung wildly from day to day, reflecting rising uncertainty about the outlook for markets and the risks plaguing the economy. The biggest moves lately have often occurred shortly before trading closed.
Indeed, the market dropped particularly sharply yesterday afternoon after investors were rattled by remarks by executives at Bear Stearns, the investment bank that has been heavily involved in mortgage securities. The firm’s assurances about its own financial position were overshadowed by bleak comments by its chief financial officer about the credit markets.
“I have been at this for 22 years, and this is about as bad as I have seen it in the fixed-income market,” said Samuel L. Molinaro Jr., Bear Stearns’s chief financial officer.
The Standard & Poor’s 500-stock index fell 2.7 percent yesterday, with much of the decline coming after Bear’s conference call started around 2 p.m. The Dow Jones industrial average lost 281.42 points, or 2.1 percent. And the dollar fell noticeably against the euro and the British pound.
While consumers continue to express confidence in the outlook for the economy, the government’s monthly employment report, released yesterday morning, added to worries about the spreading impact of the housing slump. The economy added only 92,000 jobs last month, down from 126,000 in June and the unemployment rate ticked up to 4.6 percent.
Mortgage companies have significantly tightened credit lately to borrowers with weak credit histories and are even cracking down on those with solid records who are taking on riskier loans.
On Thursday, the credit worries were so severe that even Countrywide Financial, the nation’s largest mortgage company, felt compelled to tell investors that it did not face any difficulties raising money.
Lenders say they are increasingly unable to persuade investors to buy packages of home loans made to borrowers with little or no down payment or those who cannot fully document their incomes. As a result, many companies are no longer offering such loans to potential buyers.
“I have never seen it happen so quickly,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Banks always do these little cutbacks here and there. What they are doing now is a liquidity crunch. It’s a credit freeze.”
Richard F. Syron, chief executive of Freddie Mac, the large buyer of mortgages created by Congress in the 1970s, said yesterday that the speed and severity of the tighter credit terms are surprising, but perhaps necessary given the excesses in the market in recent years.
In a telephone interview from Washington, he was wary of the calls by some mortgage industry officials that Freddie Mac and its cousin, Fannie Mae, step in to buy loans and securities that private investors will no longer purchase. Mr. Syron noted that his company was operating under an agreement with its regulator that limited the size of its portfolio.
“There are some loans that are in difficulty” because credit pools are drying up, Mr. Syron said. “There are other loans that probably should never have been made and providing more liquidity will make that situation worse in the long term.”
The interest rates on many popular mortgages have risen by as much as a full percentage point, if they are available at all, said George J. Jenich, founder of FreeRateSearch.com, a consumer Web site. But rates on conventional fixed-rate 30-year mortgages have held steady.
Bear Stearns scheduled its conference call to reassure investors after Standard & Poor’s, one of the agencies that rates the creditworthiness of companies, said it was considering downgrading Bear’s credit rating because of the collapse of two hedge funds it recently put into bankruptcy after they made losing bets on mortgage securities.
Despite all the worries about credit markets, however, the economy continues to plow ahead and even yesterday’s jobs report was not weak enough to suggest that the Federal Reserve would cut its benchmark short-term interest rate when it meets next week.
But the risks to the economy do seem serious enough that investors now expect the Fed to cut its rate to 5 percent, from 5.25 percent by November, based on the price of a trading instrument that is tied to Fed policy. And the yield on the 10-year Treasury note fell to 4.68 percent from 4.77 percent Thursday evening.
Wall Street analysts say they are increasingly concerned that consumer spending will weaken as more people in housing and related sectors lose their jobs. They also worry that many homeowners will cut back as they find it harder to refinance or borrow against the value of their homes.
“You have a broad sell-off because people don’t know how far the subprime cloud is going to hang over U.S. industries,” said Jake Dollarhide, chief executive of Longbow Asset Management, an investment firm based in Tulsa, Okla. “If they don’t get assurance, they are just selling off rather than asking questions.”
The S.& P. has fallen 7.7 percent, to 1,433.06, since July 19, the day it established a record. The last two weeks were the worst such period in more than four and a half years, and the broad market index is now up just 1 percent for the year. The Dow is doing somewhat better; it has fallen 5.9 percent, to 13,181.91, since July 19, but it is still up 5.8 percent for the year.
And through it all, businesses have been reporting strong earnings. Profits are up 9.6 percent in total for the 80 percent of the companies in the S.& P. index that have released results for the second quarter, noted Douglas M. Peta, chief market strategist at J. & W. Seligman & Company, an investment firm based in New York.
Despite that, Mr. Peta said, he was not particularly optimistic about the near-term outlook for stocks and far less so about the market for debt.
“It seems to me things got every bit as silly in the credit markets in the last few years as they did in tech stocks in the late 1990s,” he said. “I still think we may have a ways to go in this.”
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| To: John Pitera who wrote (8075) | 8/6/2007 12:45:54 AM | | From: Jon Koplik | 1 Recommendation of 13609 | | GREAT comment by Jim Grant on financial panics ................................
This was in an otherwise "routine" 8/5/07 Floyd Norris NYT article about credit markets "tightening up" (lately).
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The credit squeeze is coming at a time when the American economy seems to be growing, despite problems in the housing market, and the world economy is strong. “The underlying economy is very healthy,” said Henry Paulson, the Treasury secretary, as he visited China last week. But a good economy in no way precludes credit problems. In fact, it is during good economic times that credit standards are most likely to be so lax that bad loans are made.
“Financial panics don’t happen during depressions,” said James Grant, the editor of Grant’s Interest Rate Observer. “They happen on the brink of depressions. The claim the world is prosperous is beside the point.”
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| To: Jon Koplik who wrote (8080) | 8/6/2007 3:17:32 PM | | From: tyc:> | 1 Recommendation of 13609 | | Could you explain what was "GREAT" about the comment ? Perhaps you could give an example of a depression following a financial panic.... in your experience, I mean, since 1974.
It seems to me that if financial panic causes depression, it is the bears who get depressed. | | Recommend | Keep | Reply | Mark as Last Read | Read Replies (1) |
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| To: John Pitera who wrote (8047) | 8/6/2007 3:20:05 PM | | From: John Pitera | of 13609 | | LOSING HAND How Bear Stearns Mess Cost Executive His Job
CEO Faults Spector For Mortgage Fiasco;
Bonding Over Bridge
By KATE KELLY and SUSANNE CRAIG
August 6, 2007; Page A1
On Wednesday James Cayne, the 73-year-old chief executive of Bear Stearns Cos., summoned his top lieutenant to his smoky, dimly lit office in midtown Manhattan.
The big securities firm Mr. Cayne had led as CEO for 14 years was under attack. Two of its mortgage-related hedge funds had blown up, costing investors more than $1 billion, and its stock was under siege, down 27% this year alone. The way Mr. Cayne saw it, Warren Spector, Bear Stearns's co-president and the person most often cited as his likely successor, deserved some of the blame.
He told Mr. Spector he had lost confidence in him. "I think it's in the best interests of the firm for you to resign," Mr. Cayne told Mr. Spector, people familiar with the conversation say.
Mr. Spector was taken aback, and responded that he'd been working hard to address the firm's problems, according to one of these people.
That conversation ended the close partnership between the two Wall Street veterans, a connection forged years earlier by a common love of bridge, but one that had become strained. Mr. Spector, a 49-year-old former mortgage-securities trader, has become Wall Street's highest-profile casualty in the burgeoning subprime lending fiasco. What had started as a narrow problem in a small corner of the U.S. housing market -- lending to risky borrowers -- has become a big problem for Wall Street.
The trouble at Bear Stearns has spooked investors. Bear Stearns has long been known as one of the most astute risk managers on Wall Street. Its problems come despite repeated assurances from Wall Street bankers that they have a handle on the booming market for mortgage securities. Bear Stearns, which has a huge mortgage business but a less diverse mix of other business than its investment-banking peers, has been the hardest hit. Its stock has fallen 28% since the beginning of June, and 6% on Friday alone. A Friday afternoon conference call intended to quell investors' fears about Bear Stearns's profitability attracted 2,200 listeners.
Mr. Spector's ouster may not allay those concerns. It leaves the company without a clear succession plan and without the services of a mortgage and trading expert. While Mr. Cayne is deeply involved in running Bear Stearns, he had left much of its day-to-day operation to a pair of lieutenants -- investment banker and co-president Alan Schwartz and, until last week, Mr. Spector. Mr. Cayne had been comfortable enough with their stewardship that he didn't come into the office most Fridays in the summer, preferring to stay at his home in New Jersey.
Bear Stearns's 13-member board met yesterday afternoon to formalize Mr. Spector's departure. For now, the firm will have a single president: Mr. Schwartz, a seasoned rainmaker who has advised on big mergers but doesn't have the trading experience of Messrs. Spector or Cayne. Jeffrey Mayer, co-head of global fixed income at Bear Stearns, will replace Mr. Spector on the executive committee. "There is a depth of talent in our senior management team," Mr. Cayne said yesterday in a prepared statement.
Bear Stearns has told investors that it's "solidly profitable" and that it made money during the market gyrations of both June and July. The firm said that in recent months it has moved to secure more stable financing by replacing some of its commercial-paper holdings with longer-term loans.
"They have weathered a lot of storms before, but this is a...tough hole to dig out of," said Glenn Schorr, an analyst at UBS AG. "They have funding to carry them for a while."
Nevertheless, Wall Street has been buzzing with speculation that the firm will need to seek a strategic investor. In 1987, investor Warren Buffett bought a large stake in Salomon Brothers Inc. as it struggled to fend off unwanted offers, and he later served as interim chairman to restore confidence during a crisis. Last year, Bear Stearns held talks with China Construction Bank Corp. about taking a minority stake, which would have given Bear Stearns a larger capital base and a foothold in China. But the talks fizzled after the then president of CCB, Chang Zhenming, left the bank.
Bear Stearns's Los Angeles-based vice chairman, Donald Tang, has continued to pursue the idea with other entities such as China Citic Group, according to people familiar with the matter. A person close to Bear says the firm is only interested in a joint-venture partner. But following the Chinese government's $3 billion investment in private-equity firm Blackstone Group, other Wall Street firms have been seeking similar ties, which gives Chinese entities more attractive alternatives than Bear Stearns.
Bear Stearns's troubles started in the housing market, where it had developed a lucrative business originating mortgages and packaging them into securities that were sold to investors and traded. In 2006, home prices were beginning to taper but "subprime" borrowers with sketchy credit continued to get mortgages. By the second half of that year, however, late payments and defaults were rising, shaking the subprime market, and the picture worsened after the new year. Home prices also were starting to slip, raising fears of a housing bust. At Monday meetings of Bear Stearns's executive committee, the housing market became a frequent point of discussion.
The committee didn't foresee trouble at two internal hedge funds run by Ralph Cioffi, a former mortgage-bond salesman who had been with Bear Stearns since 1987 and was a close colleague of Mr. Spector's. In 2003, Mr. Cioffi had approached his superiors about using the firm's own capital to buy and sell securities in a portion of the fixed-income market that included collateralized debt obligations, or CDOs. Some CDOs are based on pools of mortgage loans. He was successful enough that, at the end of that year, Bear Stearns's hedge-fund committee allowed him to open his own fund as part of the firm's asset-management unit.
His fund, called the High-Grade Structured Credit Strategies fund, raised about $925 million from investors and invested in CDOs. For several years, it notched positive monthly returns. Last year, he launched a second fund with roughly $640 million in investor capital. He loaded it with debt to magnify returns.
This spring, as the housing market weakened further and subprime defaults mounted, results began to slip. Bear Stearns officials didn't worry much at first. Mr. Cioffi's investments were considered by rating agencies to be high-grade investment vehicles, and their valuations had remained largely intact.
But in May, brokerage firms that had sold CDOs to Mr. Cioffi began slashing the prices, or "marks," they had previously put on those securities, leaving the two hedge funds with double-digit paper losses. In early June, some investors in the more leveraged fund asked for their money back. Because their requests added up to about $300 million -- more cash than Mr. Cioffi had on hand -- redemptions were frozen.
Bear Stearns's stock began dropping in value, and the executive committee started meeting nearly every day to discuss what to do. To the committee, it looked as though the enhanced-leverage fund had little chance of surviving, but that the first fund might be salvaged. By mid-June, the enhanced-leverage fund had missed margin calls -- requests for additional cash and collateral -- from lenders including Merrill Lynch & Co. and J.P. Morgan Chase & Co. The lenders wanted to be made whole.
Some Wall Street executives were pressuring Bear Stearns to stop the bleeding. Initially, the firm's executive committee balked. Bear Stearns executives felt they shouldn't feel obligated to lend money to a fund whose operations were separate from Bear Stearns's, and whose investors were knowledgeable about the risks. On the afternoon of June 14, J.P. Morgan's investment banking co-chief, Steven Black, and his top risk officer had a tense phone call with Mr. Spector, in which the lender urged Bear Stearns to give the fund some emergency credit, participants in the call say.
Calling the J.P. Morgan executives "naïve," Mr. Spector said Bear Stearns was the resident expert in the mortgage business, recalls one participant, and that the lenders should back off.
Early that evening, J.P. Morgan sent an in-house lawyer to Bear Stearns's headquarters with an official default notice. But a Bear Stearns receptionist told the lawyer that the firm was closed for business, and that the documents couldn't be accepted, people familiar with the matter say.
The blow to Bear Stearns's reputation, however, caused the firm to reverse course. Late the following week, after hearing a presentation from Bear Stearns's in-house mortgage team suggesting that the older fund might still contain value, the firm's executive committee authorized a secured loan to the less-leveraged fund of up to $3.2 billion. The fund ended up borrowing $1.6 billion, which it didn't repay entirely, leaving Bear Stearns's loan officers to seize the collateral remaining in Mr. Cioffi's fund. Bear Stearns could lose much of the $1.3 billion the fund still owes it, public filings indicate.
Because the asset-management division reported to him, Mr. Spector was under fire as well. He replaced the chief of that division with Jeffrey Lane, a money-management veteran who had once run Neuberger Berman LLC. Working long days and nights and seeing little of his wife, Mr. Spector told friends he was chagrined about the crisis and that he understood that the stakes were high.
Nevertheless, Mr. Spector had agreed months earlier to play with partners in a national bridge tournament in Nashville, Tenn. So he flew there in mid-July to compete. With Bear Stearns's shares reeling and concerns about the firm's management mounting, he spent about a week at the tournament, rising early to work the phones in his hotel room and jumping into the game in midafternoon. Along with his partners, Mr. Spector won the tournament. Still Mr. Cayne, who also played in the Nashville competition, was steamed that his lieutenant had been away from the office, according to people familiar with his thinking.
Years earlier, it was Mr. Spector's bridge-playing skills that had helped bring him to the attention of Mr. Cayne, a former scrap-iron salesman who had made his name as a stockbroker.
Mr. Spector, who grew up outside Washington, had won the title "king of bridge" in a national youth contest. After graduating from Bethesda-Chevy Chase High School in 1976, he attended Princeton, then switched to St. John's College, a small school in Annapolis, Md.
During his junior year, Mr. Spector wrote to Alan "Ace" Greenberg, then managing partner of Bear Stearns, to ask for a summer job. He got an offer, but turned it down because he couldn't afford to live in New York on $125 a week. Several years later, after graduating from business school, he contacted Mr. Greenberg again. This time he accepted a job offer.
He started on the firm's government-bond desk, where he helped establish the metrics and systems Bear Stearns uses today to research and trade mortgage-backed securities.
By 1987, two years after Bear Stearns went public, Mr. Spector was one of the best-paid people at the firm. Around that time, Mr. Cayne, who had not yet become CEO, was reviewing some compensation figures, and Mr. Spector's name rang a bell. He picked up the phone and dialed Mr. Spector. "Are you the Warren Spector that was the king of bridge?" he asked. Mr. Spector said he was, and Mr. Cayne invited him for a chat.
In 1990, Mr. Spector became a Bear Stearns director, and a few years later, he was named one of two people to run fixed income. In 1995, Mr. Spector's partner in overseeing the group, John C. Sites Jr., left amid speculation that Mr. Spector had pushed him out. Mr. Sites did not return calls for comment.
Mr. Spector, who wears black-rimmed glasses and maintains a trim physique, kept a relatively low profile on Wall Street. He and his wife, Margaret Whitton, a former actress who had a supporting role in the movie "Nine ½ Weeks" and played the vixenish wife of a CEO in the 1980s Wall Street parody "The Secret of My Success," have raised money for various charities, including for a hospital on Martha's Vineyard, where they own a beachfront home.
In recent years, Mr. Spector and Mr. Cayne butted heads over several issues. They didn't see eye to eye on Mr. Spector's wish to trade derivatives -- securities whose values are tied to stocks and other products -- on behalf of Bear Stearns customers. They disagreed about whether Bear Stearns should have a gym in its Madison Avenue building. (Mr. Cayne eventually agreed to add one.)
In 2004, Mr. Cayne publicly rebuked Mr. Spector for speaking on behalf of Democratic presidential candidate John Kerry, to whom Mr. Spector had donated money. (Mr. Cayne discourages Bear Stearns employees from making public statements about politics.) "If any of you were upset or offended by these press reports, please accept both his and my apologies," Mr. Cayne wrote in a memo to employees that chided his deputy.
Around that time, there was also tension over Mr. Spector's pay, due to his practice of deferring his annual compensation for a period of years, people familiar with the matter say. The firm allowed such deferrals, but Mr. Spector's total deferrals were becoming expensive for the firm, Mr. Cayne and some other executives felt. Last year, Mr. Cayne made $33.85 million and Mr. Spector took home $32.1 million, according to regulatory filings. | | Recommend | Keep | Reply | Mark as Last Read | Read Replies (1) |
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| To: John Pitera who wrote (8082) | 8/6/2007 4:37:49 PM | | From: John Pitera | of 13609 | | Market Swoons As Bear Stearns Bolsters Finances Brokerage Raises Cash, Cuts Short-Term Debt; Spector Expected to Exit
By KATE KELLY and RANDALL SMITH
August 4, 2007; Page A1
Bear Stearns Cos., a Wall Street trading titan that recently suffered the collapse of two mortgage-bond funds, took extraordinary measures to bolster its financial position amid investor fears that knocked down its shares and fed a broad stock-market swoon.
The big securities firm also plans to oust Warren Spector, Bear's powerful chief of stock and bond trading and one of the firm's two presidents, according to a person familiar with the matter. Mr. Spector, 49 years old, had been widely viewed as a leading candidate to become the firm's next chief executive. Bear's board is set to meet Monday to discuss Mr. Spector's departure, the person said.
CONFERENCE CALL
1
"Every financial institution, Bear Stearns included, is facing an extremely challenging market environment. I've been involved in the securities industry for more than four decades and I have seen a broad spectrum of market dislocations. In the stock market crash in the late '80s, fixed income troubles in the mid '90s, and the bursting of the Internet bubble in 2001, this is not the first time and certainly will not be the last time that Wall Street and the financial community will work through difficult conditions." -- Jimmy Cayne, Chairman and CEO
Read a full transcript2 of the Bear Stearns conference call, by arrangement with Thomson StreetEvents (www.streetevents.com3). Adobe Acrobat is required4.A spokesman for the firm declined to comment.
In addition to detailing the steps it has been taking to raise cash, Bear said it has reduced its reliance on short-term loans so it isn't vulnerable to being shut off from the day-to-day loans required to fund its trading operations. Wall Street firms are especially vulnerable to crises of confidence, because they depend on lenders to finance their day-to-day securities trading and other operations.
During a call with investors held early Friday afternoon, Bear's senior executives attempted to quell investor fears, saying the firm is working to offset further drops in the credit markets, which have been roiled in recent weeks.
Besides turning to loans with longer maturities, it hedged existing positions that looked risky, such as securities based on pools of so-called subprime mortgages -- loans made to borrowers with weak credit.
Bear said it reduced its short-term unsecured debt known as commercial paper to $11.5 billion from $23 billion in January. Treasurer Robert Upton said the company has unused committed secured bank lines that are "of over $11.2 billion, $4 billion of which is available to be drawn on an unsecured basis."
Over the past eight months, it has raised more than $11 billion of cash. Mr. Upton also said the firm has "unencumbered collateral" -- or assets not underpinning loans -- exceeding $18 billion.
"We're facing an extremely challenging market environment," James E. Cayne, Bear's 73-year-old chairman and chief executive, said.
After 22 years in the securities business, "this is about as bad as I've seen it in the fixed-income market," Bear's finance chief, Samuel Molinaro, said during the call. Fixed-income securities generally refer to bonds and other interest-bearing securities.
The firm is in a delicate position: It needs to demonstrate to the market that it has a strong, liquid balance sheet without suggesting it is seriously weakened or taking desperate measures to strengthen its balance sheet.
Rather than soothe frayed nerves, however, the somber comments exacerbated the market drop, with Bear stock and the Dow industrials -- which had been off about 50 points before the conference call -- falling further.
"They called it the worst fixed-income markets in 20 years, grouping it with 1987 and the bursting of the Internet bubble, and said they needed a better August just to get to the lower end of their historical range of returns," said Mike Mayo, an analyst at Deutsche Bank AG.
Bear, which employs 13,566 people, has seen its stock-market value shrink by more than one-third during 2007, bringing its total market value to about $12.5 billion -- a relatively small figure for such an institution. Some analysts have suggested the firm could be takeover bait -- a notion that Bear executives have rejected.
The Dow Jones Industrial Average, which was in the red for most of the day, started to sink further after Bear's announcement. The index ended the session down 281.42 points, or more than 2%, at 13181.91. Although the Dow is still up 5.8% this year, it has fallen nearly 6% from its record close of 14000.41 on July 19. The Standard & Poor's 500-stock index fell 2.7% Friday, while the tech-heavy Nasdaq slid 2.5%. (See related article5.)
As U.S. housing prices have weakened and many subprime loans have fallen into default this year, the stock of firms like Bear and Lehman Brothers Holdings Inc., which play heavily in the origination, trading and packaging of mortgages, have taken a beating. More recently, the dry-up in leveraged financing, which until recently was fueling the most euphoric buyout boom in history, has thrown a wrench into the brokerage firms' bond underwriting and advisory businesses, which could crimp earnings even more.
Concerns about Bear hit financial stocks particularly hard, amid mounting concern that banks are carrying more risk for mortgages and other loans now that investors have lost their appetite to buy securities backed by such debt. Lehman was downgraded by a securities analyst on Monday after it disclosed it has $43 billion of contingent commitments to finance debt-backed acquisitions by buyout firms and others, up from $13 billion six months earlier.
Lehman stock was hit particularly hard Friday, falling nearly 8%, or $4.67, to $55.78. Lehman says such commitments may be hedged or repriced to reflect market conditions. What that means is that Lehman might make offsetting trades or mark down the value of the positions if the market further deteriorates.
The market moves yesterday highlight just how jittery investors have become about the welfare of Wall Street's biggest firms, which depend on a combination of goodwill and short-term financing to stay in business.
"Everybody's waiting for the second, third and twentieth shoe to drop," said Mike Vogelzang, president of the money-management firm Boston Advisors.
During morning trading, Bear shares fell nearly 8% to $106.55, a new 12-month low. At that price, Bear stock was trading below 1.2 times its book value, or the difference between its assets and liabilities-the lowest of any major Wall Street firm.
The cost of credit protection -- or the amount investors bet against the chances that a company will default on its credit obligations -- for Bear is more than seven times higher than what it was at the start of the year. "The financial system relies on confidence, and investor confidence has been shaken in recent weeks," said Tim Compan, a corporate-bond portfolio manager at Cleveland-based Allegiant Asset Management, with $10 billion of fixed-income assets under management.
The downdraft started early in the day when ratings agency Standard & Poor's cut its outlook on Bear Stearns from stable to negative, saying its "reputation has suffered from the widely publicized problems of its managed hedge funds, leaving the company a potential target of litigation from investors who have suffered substantial losses."
The stock started to recover when Bear put out a statement saying the 84-year-old institution was "profitable and healthy and our balance sheet is strong and liquid."
Bear, traditionally a bond powerhouse specializing in mortgages, has been among the Wall Street firms most exposed to the turmoil and illiquidity afflicting the markets for mortgage and asset-backed bonds.
Already, the portfolio manager who ran the two high-grade hedge funds and the executive who had run Bear's asset management division have been sidelined after an embarrassing meltdown that cost investors as much as $1.6 billion and led to a bankruptcy filing.
Based on a relatively bullish bet on certain mortgage-related securities and an enormous amount of borrowed capital, the High-Grade Structured Credit Strategies Fund and a more leveraged sister fund performed well until late this spring, when the prices of those securities precipitously dropped. After poor returns spurred a slew of investor requests for their money back, the two High-Grade funds were faced with lender demands for additional cash and collateral that couldn't be met, ultimately forcing their closure.
Mr. Spector wasn't on yesterday's conference call. He has spent his entire career at Bear. Armed with little other than a business degree and a sharp intellect, he started at the firm in 1983 and quickly established his reputation for savvy mortgage-bond trading. Even in his late 20s, he was making such big bonuses that he caught the attention of Mr. Cayne, who had not yet become chief executive, and established a close rapport.
At 30, about two years after being named a senior managing director, Mr. Spector was given a board seat at the firm. Then a few years later, he was named co-head of fixed income, Bear's most important business unit.
In recent years, Mr. Spector, an established bridge player and golfer with homes in Manhattan's Greenwich Village section and on Martha's Vineyard, has overseen Bear's entire capital markets business - a plumb but demanding job that includes monitoring stock and bond trading.
The recent downturn in its bond business, notably in mortgage-backed securities, is a rare weak spot for Bear, a firm known for its quick-witted trading and risk management as well as its expertise in the world of home loans. And while Bear's chief financial officer, Mr. Molinaro, took note of gains in the equity and international businesses that will help to offset the revenue downturn in mortgage securities, the firm's business mix is weaker than that of peers such as Lehman, which has a robust investment-banking division as well as a huge mortgage unit.
At the right price, Bear would be an attractive candidate for a range of potential acquirers. But it has a history of resisting overtures even when times are good and is seen as unlikely to sell at a discount. Bear has extensive trading operations, as well as a prime brokerage serving hedge funds and processing their trades. The company also runs an investment bank that puts together mergers and acquisitions and corporate bond deals.
That mix of capabilities could prove desirable to a large commercial bank looking to expand ways to deploy its capital. That could include the likes of Swiss giant UBS AG, or even U.S. banks such as Wachovia or Bank of America. | | Recommend | Keep | Reply | Mark as Last Read | Read Replies (1) |
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| To: John Pitera who wrote (8083) | 8/6/2007 6:40:55 PM | | From: John Pitera | of 13609 | | Breaking Credit Market News…From 1907
Posted by Dennis K. Berman
We so love the credit markets at Deal Journal that we have spent the past few days curled up with galleys of “The Panic of 1907,” a soon-to-be-published book by University of Virginia business school dean Robert Bruner, with help from Sean. D. Carr. Bruner, you might remember, also is the author of the Deal Journal favorite: “Deals From Hell.”
The Hero of 1907
Turns out that 100 years ago, a massive bank panic spread through New York City and around the world, touched off by the blowup of a highly leveraged group of speculators (hmmm…sounds familiar) that spread to a leading New York bank (is this ringing a bell?)…that spread to still more banks (yes, it’s coming clear now)….that touched off massive bank runs (not so familiar, thank goodness)…and the eventual creation of the Federal Reserve (well, we already have that, don’t we?)
Of course, J.P. Morgan – the man, not the bank – takes a starring role, swooping in to save the day. We kind of like imagining the dashing, ever-candid Jamie Dimon doing the same, but certainly hope it isn’t necessary.
Bruner’s timing appears impeccable, of course, given the fragile state of the credit markets today. (See previous Deal Journal posts on the subject here, or here, or even here.)
We plan to get more in-depth on this book. But in the meantime, we thought it would be most interesting to pull a few of the relevant lessons that Bruner and Carr derive from their look back.
Can it happen again? the two ask.
“Almost certainly, it can. In the early 21st Century, the United States is protected by a regulatory system vastly stronger than the weak form of oversight that existed in 1907. The Fed, deposit insurance, advanced reporting systems and the like, grant a higher degree of confidence in the financial system than was afforded J.P. Morgan and his contemporaries. Yes, as Alan Greenspan, former Chairman of the Fed has said, “Highly leveraged institutions, such as banks, are by their nature periodically subject to seizing up as difficulties in funding leveraged inevitably arise. The classic problem of bank risk management is to achieve an always elusive degree of leverage that creates an adequate return on equity without threatening default. The success rate has never approached 100 percent…”
They go on to note some parallels between 2007 and 1907:
System-like architecture. The global financial system in the 21st century is vastly larger and more complicated, owing to economic growth, proliferation of products and services, entry of new players (such as hedge funds and institutions from emerging countries), cross-listing of securities among global markets, arbitrage among markets, and so on. New credit derivatives and other exotic contracts might help to reduce risk, but they have never sustained a live test: No one knows whether they will damp or amplify a crisis.
Failure of collective action. The prompt leadership by the New York Federal Reserve bank to organize a group of institutions to take over the investment positions of Long-Term Capital Management in 1998 was reminiscent of J.P. Morgan’s leadership in 1907. The Bank for International Settlements has organized a Committee on the Global Financial System that monitors the stability of global markets for the Group of 10 leading industrial nations. But in a globally complex financial system, will such collective action be possible if the crisis is triggered from beyond the reach of any of today’s regulators? | | Recommend | Keep | Reply | Mark as Last Read |
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| To: Jon Koplik who wrote (8078) | 8/6/2007 9:25:12 PM | | From: John Pitera | of 13609 | | UP AND DOWN WALL STREET DAILY |
By RANDALL W. FORSYTH
08/03/07
Earth to Economist: Credit Is Getting Tighter
WHAT GOOD ARE WALL STREET ECONOMISTS? To try to answer that question, some years ago the Federal Reserve Bank of St. Louis took a look at the collection of interest-rate forecasts published semiannually by the Wall Street Journal.
So far off the mark were their predictions the author of the study observed, that based on empirical evidence, these seers were not employed for their forecasting prowess but for their ability to attract free advertising for their employers by getting their names and their firms' names cited in the media.
Yet, the useful idiots (to use Lenin's description) of the media willingly grant these charlatans a platform to spout their nonsense. After all, there are column inches and hours to fill. Young reporters and producers uncritically take down whatever is foisted upon them by supposed experts; the editors and on-air talent see that the story is properly sourced, and the public credulously accepts it. At least that's the view from inside the sausage factory for three-plus decades.
All of which is prolog to watching one such economist/flack plying his trade on the tube the other day as I worked at home after from root-canal at the dentist. There is no credit crunch, he asserted, so long as coffers of central banks around the globe are bulging with dollars, which are readily available to be lent. Moreover, since this surfeit of credit merely was used for financial engineering, no impact will be felt on the real economy.
Brilliant! This twit had always spouted the conventional wisdom but had insinuated himself on enough Rolodexes in the media to get himself quoted. Now he was trying to say something out of the consensus, which clearly got the attention of the producer for that hour. (If you're wondering about the name of the perpetrator, you won't find it here. I have dared not speak his name before, and won't start now, lest I give credence to the notion that there's no such thing as bad publicity.)
And I would have let it pass were it not for the incomparable Stephanie Pomboy, the No. 1 maven at MacroMavens. She also caught up with this silliness, and thought it worth noting, which persuades me that I should cite it here.
"Where to begin?" she sighs. Foreign central banks are avidly diversifying away from dollars. "More importantly, even if they wanted to continue the dubious vendor-financing exercise, our trade partners are now on the receiving end of fewer bucks to do so, as U.S. imports slow sharply."
Forget that the U.S. economy has become addicted to credit. "While it is certainly true that credit is now being used predominantly for feats of financial engineering, rather than legitimate economic activity, that's precisely the PROBLEM!!! If companies had zero impulse to expand at the peak in the profit cycle, one doubts that rising borrowing costs will provide the necessary allure!"
Meanwhile, the rest of the credit-creation machine has driven off into a ditch. The collapse in the subprime is having clear and present impacts on lenders.
According to IndyMac Bancorp's chief executive Michael Perry, the secondary market for mortgages has become "panicked and illiquid." As a result this originator will make "very major changes" in its lending, according to an e-mail to the company's employees, Bloomberg News reported.
This follows on the heels of the failure of an array of mortgage originators, which no longer can sell their less-than-perfect loans into the secondary market. Without that outlet, they cannot make new loans.
Perry specifically spoke to the lack of demand for mortgages that did not conform to the criteria of the federal agencies, Fannie Mae and Freddie Mac, or for government-insured loans that are purchased by Ginnie Mae. In that regard, MacroMavens' Pomboy repeatedly has pointed to the circumscribed mortgage purchases by these agencies as yet another curb on mortgage credit.
Anecdotal evidence obviously doesn't have the heft of data, but I'm hearing tales of credit getting tighter for worthy borrowers, as a result of lenders locking the barn door after the horses have long bolted.
At a party on the East End of Long Island, one successful entrepreneur describes the hassle of getting financing to buy the building where his business is located. The building's owner is retiring and my friends want to buy him out. His long-time banker would be delighted to make the loan, but he apologetically requests all manner of documentation, in the form of my friend's personal and business records and tax returns. A year ago, this would have been wrapped up in an afternoon. Now, it takes week for a borrower whose credit is perfect, on a property fully rented, mainly by him.
Also out on the East End of Long Island, a very substantial borrower wants to buy a summer house. He's putting a down a hefty downpayment and is more than a solid borrower. The bank is eager for the business, and would have signed off on the loan in a flash a year ago, but it now needs every i to be dotted and every t to be crossed. And that's for perfect credits.
The reasonable definition of a credit crunch is when lenders are able -- but are unwilling -- to make loans. Among Milton Friedman's many insights was that the surfeit of liquidity in the Depression was not an excess of supply but a paucity of demand. Or at least from borrowers who could meet bankers' stringent standards.
The key point is that the liquidity tap is being turned off. The marginal borrower is being denied credit. And that is reverberating throughout the system.
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| To: John Pitera who wrote (8085) | 8/7/2007 12:07:11 AM | | From: John Pitera | of 13609 | | Mortgage Fears Drive Up Rates On Jumbo Loans
By JAMES R. HAGERTY
August 7, 2007
Turmoil in the U.S. home-mortgage market is starting to pinch even buyers of high-end homes with good credit records, in the latest sign that anxiety is rising among lenders and investors.
This surge in rates on so-called jumbo loans is particularly notable because rates on 10-year Treasury bonds have been falling. Normally, mortgage rates move in tandem with Treasurys, but market jitters have caused investors to ditch mortgage securities.
Meanwhile, American Home Mortgage Investment Corp. finally succumbed yesterday to the mortgage-sector chaos that had crippled it in recent weeks and filed for protection from creditors under Chapter 11 of U.S. bankruptcy law. And executives at Fannie Mae, the government-sponsored entity that along with Freddie Mac provides funding for home loans, asked the companies' government overseer to raise the maximum amount of home mortgages and related securities Fannie can hold in its investment portfolio. The goal would be to boost demand for mortgages in general, proponents of the idea said.
Among other signs of distress, Aegis Mortgage Corp., Houston, notified mortgage brokers that it is unable to provide funds for loans already in the pipeline, a spokeswoman said. And Luminent Mortgage Capital Inc. of San Francisco said it faced calls for repayments from creditors and is suspending its dividend.
Lenders -- having already slashed lending to subprime borrowers, as those with weak credit records are known -- now are jacking up rates on jumbo mortgages for prime borrowers. These mortgages exceed the $417,000 limit for loans eligible for purchase and guarantee by Fannie and Freddie. They account for about 16% of the total mortgage market, according to Inside Mortgage Finance, a trade publication, and are especially prevalent in California, New Jersey, New York City, Washington, D.C., and other locales with high home costs.
Lenders were charging an average 7.34% for prime 30-year fixed-rate jumbo loans yesterday, according to a survey by financial publisher HSH Associates. That is up from an average of about 7.1% last week and 6.5% in mid-May.
The higher costs for such loans will put further downward pressure on home prices in areas where homes typically bought by middle-class people can easily cost $500,000 to $700,000.
are typically packaged into securities and sold to investors. but as subprime weakness has made investors skittish, lenders are becoming more cautious in issuing mortgages. Though defaults have soared on subprime loans and are rising on Alt-A mortgages, a category between prime and subprime, late payments have remained rare for most types of prime mortgages. Even so, lenders have raised rates on prime jumbo loans defensively because they are unsure what rattled investors may be willing to pay for them, said Doug Duncan, chief economist of the Mortgage Bankers Association.
The jump in jumbo-mortgage rates is the latest gust in a subprime storm that has sunk two hedge funds run by Bear Stearns Cos., knocked American Home and dozens of other lenders out of business, battered an already weak housing market and fueled weeks of stock-market turmoil. Yesterday, the Dow Jones Industrial Average rebounded 286.87 points, or 2.2%, to 13468.78.
Alarmed by weakness in the housing market and rising foreclosures, investors who buy loans and securities backed by mortgages have fled the market for almost any loan that isn't guaranteed by Fannie Mae or Freddie Mac, Mr. Duncan and others said. That means lenders must either hold loans, at least temporarily, and face the risk of falling values for them, or seek out borrowers who qualify for loans that can be purchased by Fannie and Freddie.
For other types of loans, Mr. Duncan said, "there is no market." He said it isn't clear how long the market will remain disrupted, but said some mortgage bankers fear the current paralysis could last weeks. "We're getting calls from members [of the lenders' association] who are quite desperate about their circumstances," Mr. Duncan said. Large banks have the capacity to retain loans on their books, but many other lenders can only make loans that can be sold quickly.
Since defaults on lower-grade mortgages began hitting worrisome levels late last year, several dozen lenders have closed. American Home, until recently the 10th-largest U.S. home-mortgage lender in terms of loan volume, was forced to stop lending and lay off most employees last week after the Melville, N.Y., firm's creditors cut off further funding and demanded repayments.
The latest mortgage ripples come as Federal Reserve policy makers prepare to meet today to discuss the economy and interest-rate policies. They are expected to keep the target for short-term interest rates at 5.25% and maintain their focus on holding down inflation, but acknowledge increased risk to economic growth from jitters in the credit market and falling home prices.
Pressure is likely to grow for the Fed and other regulators to take steps to reassure mortgage lenders and home buyers.
The Office of Federal Housing Enterprise Oversight, or Ofheo, which oversees Fannie and Freddie, last year ordered both mortgage issuers not to make any substantial increases in their holdings because of problems with accounting and financial controls at the two companies.
But Fannie officials have argued that raising the ceiling on their mortgage purchases could help calm turmoil in the mortgage market and avoid disruptions in the flow of credit, people familiar with the situation said.
A Fannie spokesman declined to comment, as did a spokeswoman for Ofheo. David Palombi, chief spokesman for Freddie, said one other possible response to the market turmoil would be to allow the two companies to buy larger mortgages, those above the current $417,000 cap.
Ofheo's director, James Lockhart, has said the two companies have made progress in redressing their accounting and financial-control problems but need further improvement. That view could be an impediment to raising the cap.
The market disruption came as crushing news for Gary Cecere, a mechanic who lives in Croton-on-Hudson, N.Y. Mr. Cecere said he learned yesterday that Wells Fargo & Co. was no longer willing to complete a planned package of two mortgage loans that would allow him to buy a $410,000 four-bedroom home in Mahopac, N.Y. Hugo Iodice, a branch manager at Manhattan Mortgage Co. who is acting as a loan broker for Mr. Cecere, blamed tighter standards imposed by Wells Fargo on Alt-A loans. A Wells Fargo spokesman had no immediate comment.
"I was getting ready to close [on the home purchase] this week, and they basically pulled the carpet out from under my feet," said Mr. Cecere. For now, he said, his wife, five children, two cats and a dog are cramped into a two-bedroom temporary apartment, awaiting a move. Mr. Iodice said he is trying to find an alternative loan for the family.
Even borrowers with good credit records who can afford a large down payment are finding rates surprisingly steep if they can't qualify for a loan that can be sold to Fannie or Freddie. Rates on prime jumbo loans have risen so fast that "nobody in their right mind would pull the trigger" and accept one now, unless they couldn't delay a home purchase, said Darren Weisberg, president of PFG Mortgage Services Inc., a mortgage broker in Lake Forest, Ill.
Some lenders are pulling the plug on whole categories of loans. Yesterday, National City Corp., a Cleveland banking company, said it has suspended its offerings of home-equity loans or lines of credit made through brokers rather than the bank's branches. The company cited market conditions. | | Recommend | Keep | Reply | Mark as Last Read | Read Replies (2) |
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| To: John Pitera who wrote (8086) | 8/7/2007 1:55:40 AM | | From: Hawkmoon | of 13609 | | And executives at Fannie Mae, the government-sponsored entity that along with Freddie Mac provides funding for home loans, asked the companies' government overseer to raise the maximum amount of home mortgages and related securities Fannie can hold in its investment portfolio. The goal would be to boost demand for mortgages in general, proponents of the idea said.
Boost demand for mortgages?.. or Make Fannie Mae up to be the buyer of last resort for mortgage loans being dumped by the commerical banks?
It's interesting that the 10 year bond is sub-5%, but we're seeing mortgage rates fluctuating so severely last week that it would seem that 10 year rates decreasing would put a bid under mortgage rates (to decrease as well).
I'm not much of a bond person so I really don't fully understand the mechanics of how the government, commercial, and mortgage debt markets intertwine. But I have to believe that someone dumping mortgage debt in exchange for lower yielding T-bills is a situation the Fed must be concerned about.
And eventually this disparity has to be resolved by higher T-bill rates caused by people selling to buy higher yielding mortgage debt.
Does Fannie Mae stand to make a killing from being the buyer of last resort in the mortgage markets?
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