Excerpts from 'Bear Raid' Stock Manipulation: How and When It Works, and Who Benefits
When Bear Stearns collapsed in March, some insiders argued it was wrong to blame the firm's risky bets on mortgaged-backed securities. They had another culprit: malevolent traders working together in the upside-down world of short sales -- making money by knocking down Bear's stock.
No one openly admits to conducting a "bear raid," since deliberately manipulating stock prices is illegal. But Wall Street has long believed bear raids can and do take place. There has, however, been little academic research to explain the forces at work. Now two finance experts have shed some light on the process. "We basically describe a theory of how bear raid manipulation works," says Wharton finance professor Itay Goldstein. He and Alexander Guembel of the Saïd Business School and Lincoln College at the University of Oxford describe the procedure in their paper titled, "Manipulation and the Allocational Role of Prices."
Their key finding illuminates the interplay between a firm's real economic value and its stock price, showing how traders who deliberately drive the share price down can undermine the firm's health, causing the share price to fall further in a vicious cycle.
"What we show here is that by selling [the stock], you have a real effect on the firm," Goldstein notes. "The connection with real value is the new thing.... That is the crucial element."
...
[I]f the falling share price caused by a bear raid does real economic damage to the firm, other investors are likely to dump the stock as well, causing a vicious cycle of falling share prices and economic damage that would make the bear raid more profitable.
Sabaziotatos says:
This is precisely the kind of manipulation that I discussed in Sabaziotatos calls on SEC to investigate "gaming" of ABX. "Wash trades" at depressed price levels in the illiquid OTC market tracked by the ABX index most definitely could damage the "real value" of a financial services firm: fair value accounting would require the firm to mark its assets to market against the index; the lower mark would result in writedowns of asset values on the balance sheet; the writedowns would not only reduce capital ratios, but also cause a loss of confidence, which would feed back into the ABX. As the good professors point out, this rapid, self-reinforcing, pro-cyclical loss of confidence can be deadly.
Thursday, April 17, 2008
4/17/2008: Hardest to value assets escalate
Excerpts from Hardest-to-value assets escalate: 'Mark to myth' data at big banks provide clues to write-downs
By Dominic Elliott and Tom Fairless
Were it not for the credit crunch, reading the phrase "assets valued without observable market inputs" would be enough to glaze the eyes of most investors without advanced accountancy qualifications.
But in an uncertain climate of write-downs at investment banks, the term has drawn attention from analysts and shareholders.
International Financial Reporting Standards rules that applied from the start of last year require banks to break down their assets under fair-value accounting into three categories: those with market prices [Level 1]; those modeled on observable market prices [Level 2]; and those that banks are forced to value without any observable market data [Level 3].
The amount of assets on the balance sheets of Europe's largest banks in the third category, dubbed "mark to myth" or "mark to make-believe" by some analysts, almost tripled by the end of last year, according to Financial News analysis. ... The average ratio of opaque assets to total assets also rose to 3.8% last year from 1.8% at the end of 2006. Total assets under fair-value accounting for the five banks rose 23% to more than €4 trillion at the end of last year, as lenders were forced to bring more assets on their balance sheet under stricter capital-adequacy requirements and tougher market conditions.
...
In part, the jump is a reflection of markets where trading has ground to a halt and caused price tags to disappear. "A lot of assets are now in no-man's land," said Christopher Wheeler, a senior research analyst at Bear Stearns.
...
Assets modeled without reference to market prices can be of good or bad quality. However, the fact they are illiquid and difficult to value has fueled fears among some investors that they may lead to further write-downs.
The International Monetary Fund's Global Financial Stability Report, published last week, stated: "Market analysts may judge, correctly, that such a move reflects further illiquidity in the market or, incorrectly, that the firm's re-categorization of fair value methodologies represents a deliberate overestimation of the value that the assets would generate in a sale."
Matthew Clark, a European banks analyst at broker-dealer Keefe, Bruyette and Woods, said, "Some failed auction-rate certificates will be included in the bucket but, given the municipal underlying, are likely to be of sound asset quality and so not much of a concern. At the other end of the spectrum, subprime collateralized debt obligations will be complex to model and have much riskier underlyings -- these are a greater concern."
In the U.S., analysts have estimated that about 15% of Wall Street banks' so-called Level 3 assets, which are broadly comparable to those valued by European banks without observable market inputs, could be written down depending on the extent to which they are hedged.
Goldman Sachs Group Inc. increased its holdings of Level 3 assets by 39% during its fiscal first quarter ended in February to $96.4 billion, according to a regulatory filing with the U.S. Securities and Exchange Commission last week.
Goldman's ratio of Level 3 to total assets also rose, to 8.1% from 6.2%. Morgan Stanley's Level 3 assets rose 6.1% to $78.2 billion in the three months to February, while Lehman Brothers Holdings Inc.'s rose 1.3% to $42.5 billion for the same fiscal period. U.S. banks are required to reveal Level 3 assets under Generally Accepted Accounting Principles, while banks outside the U.S. follow their own jurisdictions or use International Financial Reporting Standards.
"Assets that are tough to value could or could not be problematic. That uncertainty is in itself problematic," said Mamoun Tazi, an analyst at MF Global Securities.
Banks may also have different ways of valuing such assets, making it harder for investors to compare rivals in the same sector.
A report published last month by independent research provider CreditSights showed European banks' valuations of their CDO holdings vary more than previously thought. This is partly because different regulators across Europe offer banks leeway in pricing assets under fair-value accounting.
"Consistency in accounting across the banking sector, auditors and countries is essential," said Leigh Goodwin, an analyst at consultants Fox-Pitt, Kelton.
European Commission accounting advisers this month added their voices to calls from bankers and insurers for fair-value accounting to be changed in order to prevent write-downs, as liquidations of assets lower market prices and cause banks to suffer more losses.
Last week the International Monetary Fund said, "Weaknesses in the implementation of fair-value accounting results should be addressed." It added that in a recession, banks could be required to make further write-downs while increasing capital reserves.
However, Mr. Goodwin said the additional insight into banks' asset structures under fair-value accounting is good for investors. "It would be terrible if fair-value accounting was abandoned," Mr. Goodwin said. "In tough market conditions, investors need to have as much information as possible.
"This is the time when we need mark-to-market information and as much disclosure as possible" he continued. "If banks were allowed to fudge asset values and not reflect market reality this may boost accounting profits and capital ratios, but it could backfire as investors, the interbank market, credit-rating agencies and perhaps regulators lost trust in the banks' figures."
Sabaziotatos says:
Once again we hear the argument: "We must not abandon mark-to-market accounting since we need its transparency now more than ever." This argument would make sense if mark-to-market accounting ensured transparency. It does not. The critique being leveled at mark-to-market accounting now is precisely that it introduces price distortion into the markets because of its pro-cyclicality. Advocates must stop boldly asserting that mark-to-market accounting ensures transparency, and instead try to demonstrate that it is not not pro-cyclical. For, if it is pro-cyclical, it must be abandoned or at least modified.
As for the movement of assets from Levels 1 or 2 into Level 3 when observable inputs disappear, this treatment is consistent with the guidance the SEC gave in its Sample Letter Sent to Public Companies on MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements)
By Dominic Elliott and Tom Fairless
Were it not for the credit crunch, reading the phrase "assets valued without observable market inputs" would be enough to glaze the eyes of most investors without advanced accountancy qualifications.
But in an uncertain climate of write-downs at investment banks, the term has drawn attention from analysts and shareholders.
International Financial Reporting Standards rules that applied from the start of last year require banks to break down their assets under fair-value accounting into three categories: those with market prices [Level 1]; those modeled on observable market prices [Level 2]; and those that banks are forced to value without any observable market data [Level 3].
The amount of assets on the balance sheets of Europe's largest banks in the third category, dubbed "mark to myth" or "mark to make-believe" by some analysts, almost tripled by the end of last year, according to Financial News analysis. ... The average ratio of opaque assets to total assets also rose to 3.8% last year from 1.8% at the end of 2006. Total assets under fair-value accounting for the five banks rose 23% to more than €4 trillion at the end of last year, as lenders were forced to bring more assets on their balance sheet under stricter capital-adequacy requirements and tougher market conditions.
...
In part, the jump is a reflection of markets where trading has ground to a halt and caused price tags to disappear. "A lot of assets are now in no-man's land," said Christopher Wheeler, a senior research analyst at Bear Stearns.
...
Assets modeled without reference to market prices can be of good or bad quality. However, the fact they are illiquid and difficult to value has fueled fears among some investors that they may lead to further write-downs.
The International Monetary Fund's Global Financial Stability Report, published last week, stated: "Market analysts may judge, correctly, that such a move reflects further illiquidity in the market or, incorrectly, that the firm's re-categorization of fair value methodologies represents a deliberate overestimation of the value that the assets would generate in a sale."
Matthew Clark, a European banks analyst at broker-dealer Keefe, Bruyette and Woods, said, "Some failed auction-rate certificates will be included in the bucket but, given the municipal underlying, are likely to be of sound asset quality and so not much of a concern. At the other end of the spectrum, subprime collateralized debt obligations will be complex to model and have much riskier underlyings -- these are a greater concern."
In the U.S., analysts have estimated that about 15% of Wall Street banks' so-called Level 3 assets, which are broadly comparable to those valued by European banks without observable market inputs, could be written down depending on the extent to which they are hedged.
Goldman Sachs Group Inc. increased its holdings of Level 3 assets by 39% during its fiscal first quarter ended in February to $96.4 billion, according to a regulatory filing with the U.S. Securities and Exchange Commission last week.
Goldman's ratio of Level 3 to total assets also rose, to 8.1% from 6.2%. Morgan Stanley's Level 3 assets rose 6.1% to $78.2 billion in the three months to February, while Lehman Brothers Holdings Inc.'s rose 1.3% to $42.5 billion for the same fiscal period. U.S. banks are required to reveal Level 3 assets under Generally Accepted Accounting Principles, while banks outside the U.S. follow their own jurisdictions or use International Financial Reporting Standards.
"Assets that are tough to value could or could not be problematic. That uncertainty is in itself problematic," said Mamoun Tazi, an analyst at MF Global Securities.
Banks may also have different ways of valuing such assets, making it harder for investors to compare rivals in the same sector.
A report published last month by independent research provider CreditSights showed European banks' valuations of their CDO holdings vary more than previously thought. This is partly because different regulators across Europe offer banks leeway in pricing assets under fair-value accounting.
"Consistency in accounting across the banking sector, auditors and countries is essential," said Leigh Goodwin, an analyst at consultants Fox-Pitt, Kelton.
European Commission accounting advisers this month added their voices to calls from bankers and insurers for fair-value accounting to be changed in order to prevent write-downs, as liquidations of assets lower market prices and cause banks to suffer more losses.
Last week the International Monetary Fund said, "Weaknesses in the implementation of fair-value accounting results should be addressed." It added that in a recession, banks could be required to make further write-downs while increasing capital reserves.
However, Mr. Goodwin said the additional insight into banks' asset structures under fair-value accounting is good for investors. "It would be terrible if fair-value accounting was abandoned," Mr. Goodwin said. "In tough market conditions, investors need to have as much information as possible.
"This is the time when we need mark-to-market information and as much disclosure as possible" he continued. "If banks were allowed to fudge asset values and not reflect market reality this may boost accounting profits and capital ratios, but it could backfire as investors, the interbank market, credit-rating agencies and perhaps regulators lost trust in the banks' figures."
Sabaziotatos says:
Once again we hear the argument: "We must not abandon mark-to-market accounting since we need its transparency now more than ever." This argument would make sense if mark-to-market accounting ensured transparency. It does not. The critique being leveled at mark-to-market accounting now is precisely that it introduces price distortion into the markets because of its pro-cyclicality. Advocates must stop boldly asserting that mark-to-market accounting ensures transparency, and instead try to demonstrate that it is not not pro-cyclical. For, if it is pro-cyclical, it must be abandoned or at least modified.
As for the movement of assets from Levels 1 or 2 into Level 3 when observable inputs disappear, this treatment is consistent with the guidance the SEC gave in its Sample Letter Sent to Public Companies on MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements)
- "Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. Only when actual market prices, or relevant observable inputs, are not available is it appropriate for you to use unobservable inputs which reflect your assumptions of what market participants would use in pricing the asset or liability. Current market conditions may require you to use valuation models that require significant unobservable inputs for some of your assets and liabilities. As a consequence, as of January 1, 2008, you will classify these assets and liabilities as Level 3 measurements under SFAS 157." [emphasis added]
- JPM CFO Michael Cavanagh: "And last comment, a little bit of increase - from 5% to 6% would be my estimate - in terms of Level 3 assets for the firm for the quarter, so not something that gives me any pause."
Wednesday, April 16, 2008
4/15/2008: CEO of M&T calls for rethink of mark-to-market accounting
Excerpt from Remarks to Annual Meeting of Shareholders, April 15, 2008
By Robert Wilmers, CEO of M&T Bank
In normal times, I might focus mainly this morning on several specific factors which have had the most pronounced effects on our net income. But these are not normal times for the banking industry.
No discussion of any individual bank’s results today can take place without reflecting more broadly—much more broadly—on the extraordinary time in which we find ourselves, a time in which there is a crisis of confidence in the financial services industry.
It is a crisis which has already prompted unprecedented forms of government intervention, but which calls for more—much more—action to ensure the long-term stability of our capital markets.
...
What, then, to do? There is no quick fix. However, among the approaches that must be considered are these.
...
Re-examination of the appropriateness of mark-to-market accounting for balance sheet purposes, in periods of illiquid markets. The ability to reasonably determine the fair value of certain assets in times like these is, at best, severely limited—for those that previously made markets in such assets, for all practical purposes, have gone fishing.
By Robert Wilmers, CEO of M&T Bank
In normal times, I might focus mainly this morning on several specific factors which have had the most pronounced effects on our net income. But these are not normal times for the banking industry.
No discussion of any individual bank’s results today can take place without reflecting more broadly—much more broadly—on the extraordinary time in which we find ourselves, a time in which there is a crisis of confidence in the financial services industry.
It is a crisis which has already prompted unprecedented forms of government intervention, but which calls for more—much more—action to ensure the long-term stability of our capital markets.
...
What, then, to do? There is no quick fix. However, among the approaches that must be considered are these.
...
Re-examination of the appropriateness of mark-to-market accounting for balance sheet purposes, in periods of illiquid markets. The ability to reasonably determine the fair value of certain assets in times like these is, at best, severely limited—for those that previously made markets in such assets, for all practical purposes, have gone fishing.
Tuesday, April 15, 2008
4/15/2008: State Street's unrealized mark to market losses
Excerpt from State Street's Q108 conference call (starting at about 24 minutes in)
Ed Resch, CFO of State Street:
A lot has been said over the past few months and quarters regarding the extraordinary events impacting the fixed income markets. These are not ordinary times and these are not orderly markets. Despite the high credit quality of the investment portfolio, the illiquidity in the marketplace and resulting prices affecting fixed income securities have caused the unrealized pre-tax loss on our portfolio to increase to $3.2B at 3/31/2008, up from an unrealized pre-tax loss of $1.1B at 12/31/2007, and an unrealized pre-tax loss of $309M a year ago. We believe that these prices are not reflective of the underlying value of the securities. Several examples will help me illustrate that point.
Look at the element of the portfolio we hold in student loans, about $9.2B, the vast majority, about 90% of which is covered by a 97% Federal government guarantee. At 12/31/2007, these securities were trading at 98% of par. Today, they are trading at 92% of par. There has been no significant change in the credit quality of these securities, so what are the markets telling us? I think that the market is confirming that it is illiquid. In fact, there are few buyers or few sellers at this price.
Or look at the 18 subprime securities that the rating agencies put on credit watch at the end of January. They just recently reaffirmed the ratings on 17 of these, leaving only one on watch due to its downgrade of its insurance wrap provider. They are all rated AA, but are priced between 40% and 89% of par at March month end.
These are just two examples of the impact that the current market dislocations and sporadic forced selling have had on market prices for investment grade bonds. We continue to believe that our portfolio is not at risk of permanent impairment and is not currently other than temporarily impaired. We base this belief on the results of the extensive credit analysis we have performed and continue to perform on the portfolio and believe that we will recover the principal at maturity.
I would like to stop here and provide you with a deeper look into the securities within the portfolio. If you would turn to Slide 3 in the Investment Portfolio Slide Package, you can see some of the data I am presenting. First, 15 securities have been downgraded as of 3/31/2008. These 15 securities do not include those securities that were downgraded based on downgrades of the insurance wrap provider. Based on the total number [535] of securities downgraded by the rating agencies during the past two quarters, we believe the number of rating agency actions affecting our securities is very modest and is a testimony to the quality of the assets in our portfolio.
Lastly, I'll address the asset-backed securities that are collateralized by first-lien subprime mortgages, a portfolio which I have been commenting on since the second quarter of last year. This section of the portfolio has a $933M unrealized pre-tax loss at 3/31/2008, which is about 1/3 of the total unrealized pre-tax mark-to-market loss for the entire portfolio. If you turn to slides 4 and 5, first of all, the portfolio has performed as we have expected. Our portfolio of asset-backed securities collateralized by subprime mortgages is $5.9B as of 3/31/2008, down from $6.2B as of 12/31/2007. 70% of the portfolio is rated AAA and the remaining 30% is rated AA. 3 of the securities have been downgraded, again a very small number in light of the downgrades issued by the rating agencies over the last few quarters. We have a 41% average credit enhancement based on the structure itself, which gives us confidence that these securities will mature at par. You can see this credit enhancement grow over time with pay downs that we've received. Last March, the credit enhancement was 34%, which has increased to the 41% I mentioned as of 3/31/2008. This means that even if every mortgage backing an asset were to default, we would not lose one dollar until the recovery rate for those assets fell below 59%. And further we believe the assets are well-diversified by vintage, geography, and originator. As I just noted, the negative mark-to-market on this portion of the portfolio has increased to about $933M with no securities on credit watch. Since so many securities in this category have been downgraded industry-wide over the past two quarters, we have confidence that our credit process at State Street has served us well to date and that we expect these securities to mature at par.
However, during the quarter we recorded $11.5M in other than temporary impairment, which was one asset-backed security collateralized by HELOC's and wrapped by FGIC as the insurance provider. Based on our credit analysis of the underlying collateral, and our assessment of the wrap provider, we concluded that a portion of the fair value decline was attributable to credit, and therefore we wrote the security down to its current fair value.
If you review slides 6 through 8, you can also get some further detail about the monoline coverage we have on the portfolio, mostly in the municipal bond book. Note that our overall rating would decline only slightly, from 94% to 92%, if all the wraps were simultaneously removed. The last slide gives you a breakdown of the assets by wrap provider, where you can see that 99% of the coverages is due to the municipal bond investments, usually a very high performing asset class.
So, in conclusion to my remarks on the unrealized mark-to-market loss in the securities portfolio, why do we have such confidence in our portfolio when many others are writing down assets? We are very selective in the assets we buy and put these choices through a rigorous credit process. On an ongoing basis, we monitor the performance of these securities and have found them all to be performing well. Our investment portfolio consists of securities with significant levels of structural credit enhancement, which provides protection against difficult economic environments. I hope my remarks have given you some comfort in reviewing our portfolio so that you can understand the source of our confidence.
Ed Resch, CFO of State Street:
A lot has been said over the past few months and quarters regarding the extraordinary events impacting the fixed income markets. These are not ordinary times and these are not orderly markets. Despite the high credit quality of the investment portfolio, the illiquidity in the marketplace and resulting prices affecting fixed income securities have caused the unrealized pre-tax loss on our portfolio to increase to $3.2B at 3/31/2008, up from an unrealized pre-tax loss of $1.1B at 12/31/2007, and an unrealized pre-tax loss of $309M a year ago. We believe that these prices are not reflective of the underlying value of the securities. Several examples will help me illustrate that point.
Look at the element of the portfolio we hold in student loans, about $9.2B, the vast majority, about 90% of which is covered by a 97% Federal government guarantee. At 12/31/2007, these securities were trading at 98% of par. Today, they are trading at 92% of par. There has been no significant change in the credit quality of these securities, so what are the markets telling us? I think that the market is confirming that it is illiquid. In fact, there are few buyers or few sellers at this price.
Or look at the 18 subprime securities that the rating agencies put on credit watch at the end of January. They just recently reaffirmed the ratings on 17 of these, leaving only one on watch due to its downgrade of its insurance wrap provider. They are all rated AA, but are priced between 40% and 89% of par at March month end.
These are just two examples of the impact that the current market dislocations and sporadic forced selling have had on market prices for investment grade bonds. We continue to believe that our portfolio is not at risk of permanent impairment and is not currently other than temporarily impaired. We base this belief on the results of the extensive credit analysis we have performed and continue to perform on the portfolio and believe that we will recover the principal at maturity.
I would like to stop here and provide you with a deeper look into the securities within the portfolio. If you would turn to Slide 3 in the Investment Portfolio Slide Package, you can see some of the data I am presenting. First, 15 securities have been downgraded as of 3/31/2008. These 15 securities do not include those securities that were downgraded based on downgrades of the insurance wrap provider. Based on the total number [535] of securities downgraded by the rating agencies during the past two quarters, we believe the number of rating agency actions affecting our securities is very modest and is a testimony to the quality of the assets in our portfolio.
Lastly, I'll address the asset-backed securities that are collateralized by first-lien subprime mortgages, a portfolio which I have been commenting on since the second quarter of last year. This section of the portfolio has a $933M unrealized pre-tax loss at 3/31/2008, which is about 1/3 of the total unrealized pre-tax mark-to-market loss for the entire portfolio. If you turn to slides 4 and 5, first of all, the portfolio has performed as we have expected. Our portfolio of asset-backed securities collateralized by subprime mortgages is $5.9B as of 3/31/2008, down from $6.2B as of 12/31/2007. 70% of the portfolio is rated AAA and the remaining 30% is rated AA. 3 of the securities have been downgraded, again a very small number in light of the downgrades issued by the rating agencies over the last few quarters. We have a 41% average credit enhancement based on the structure itself, which gives us confidence that these securities will mature at par. You can see this credit enhancement grow over time with pay downs that we've received. Last March, the credit enhancement was 34%, which has increased to the 41% I mentioned as of 3/31/2008. This means that even if every mortgage backing an asset were to default, we would not lose one dollar until the recovery rate for those assets fell below 59%. And further we believe the assets are well-diversified by vintage, geography, and originator. As I just noted, the negative mark-to-market on this portion of the portfolio has increased to about $933M with no securities on credit watch. Since so many securities in this category have been downgraded industry-wide over the past two quarters, we have confidence that our credit process at State Street has served us well to date and that we expect these securities to mature at par.
However, during the quarter we recorded $11.5M in other than temporary impairment, which was one asset-backed security collateralized by HELOC's and wrapped by FGIC as the insurance provider. Based on our credit analysis of the underlying collateral, and our assessment of the wrap provider, we concluded that a portion of the fair value decline was attributable to credit, and therefore we wrote the security down to its current fair value.
If you review slides 6 through 8, you can also get some further detail about the monoline coverage we have on the portfolio, mostly in the municipal bond book. Note that our overall rating would decline only slightly, from 94% to 92%, if all the wraps were simultaneously removed. The last slide gives you a breakdown of the assets by wrap provider, where you can see that 99% of the coverages is due to the municipal bond investments, usually a very high performing asset class.
So, in conclusion to my remarks on the unrealized mark-to-market loss in the securities portfolio, why do we have such confidence in our portfolio when many others are writing down assets? We are very selective in the assets we buy and put these choices through a rigorous credit process. On an ongoing basis, we monitor the performance of these securities and have found them all to be performing well. Our investment portfolio consists of securities with significant levels of structural credit enhancement, which provides protection against difficult economic environments. I hope my remarks have given you some comfort in reviewing our portfolio so that you can understand the source of our confidence.
4/15/2008: ABX, CMBX, any kind of X, out of control
Excerpts from Swaps Tied to Losses Became `Frankenstein's Monster'
By Neil Unmack and Sarah Mulholland
The latest version for AAA rated subprime mortgage bonds slumped by 43 percent since it began trading in August, according to Markit, as rising U.S. home loan delinquencies triggered a surge in the cost of credit-default swaps. That implies a 53 percent loss on the underlying mortgages, according to Schultz, almost four times the 13.75 percent rate predicted by Wachovia.
The cost to protect $10 million of AAA commercial mortgage securities jumped 10-fold during one six-month period to $100,000 a year, based on the first CMBX index from Markit. That implies about 13 percent losses on the underlying loans, more than four times the 2.8 percent forecast in the event of a recession by JPMorgan Chase & Co. analyst Alan Todd in New York.
"ABX, CMBX, any kind of X you like, are totally uncorrelated to any kind of underlying market," Swiss Re's Aigrain said at the Dubai conference.
...
"In a volatile market, this mark-to-market process becomes a self-fulfilling prophecy, driving prices down based on index trading activity rather than asset fundamentals," wrote Dottie Cunningham, chief executive officer of the New York-based CMSA.
Sabaziotatos says:
Remember these are the indices that the IMF used to estimate global losses from broad credit market deterioration of $945B, that Meredith Whitney used to estimate her latest round of losses for Citigroup, and that William Tanona used to make recent estimates for Citigroup.
By Neil Unmack and Sarah Mulholland
The latest version for AAA rated subprime mortgage bonds slumped by 43 percent since it began trading in August, according to Markit, as rising U.S. home loan delinquencies triggered a surge in the cost of credit-default swaps. That implies a 53 percent loss on the underlying mortgages, according to Schultz, almost four times the 13.75 percent rate predicted by Wachovia.
The cost to protect $10 million of AAA commercial mortgage securities jumped 10-fold during one six-month period to $100,000 a year, based on the first CMBX index from Markit. That implies about 13 percent losses on the underlying loans, more than four times the 2.8 percent forecast in the event of a recession by JPMorgan Chase & Co. analyst Alan Todd in New York.
"ABX, CMBX, any kind of X you like, are totally uncorrelated to any kind of underlying market," Swiss Re's Aigrain said at the Dubai conference.
...
"In a volatile market, this mark-to-market process becomes a self-fulfilling prophecy, driving prices down based on index trading activity rather than asset fundamentals," wrote Dottie Cunningham, chief executive officer of the New York-based CMSA.
Sabaziotatos says:
Remember these are the indices that the IMF used to estimate global losses from broad credit market deterioration of $945B, that Meredith Whitney used to estimate her latest round of losses for Citigroup, and that William Tanona used to make recent estimates for Citigroup.
Monday, April 14, 2008
4/7/2008: CFA roundtable on mark to market
Journalists Invited to Hear Investor Perspective on Fair Value (“Mark to Market”) at CFA Institute Centre for Financial Market Integrity Media Roundtable
Sabaziotatos says:
Unfortunately, I have not yet been able to get a webcast or a transcript. Here are some excerpts from the only report on the roundtable I have seen:
Sabaziotatos says:
Unfortunately, I have not yet been able to get a webcast or a transcript. Here are some excerpts from the only report on the roundtable I have seen:
- Jeffrey Diermeier, president and CEO of the CFA Institute, posed a question to the members of the institute recently asking whether fair value requirements are aggravating the global credit crisis. Fifty-five percent of 2,006 respondents said yes, while 45 percent said no. ... "We believe fair value gives you more transparency into the underlying assets," said Russell Golden, director of technical application and implementation activities at the Financial Accounting Standards Board and chairman of the Emerging Issues Task Force."
2/29/2008: Leveraged Losses: Lessons from the Mortgage Market Meltdown
Abstract from Leveraged Losses: Lessons from the Mortgage Market Meltdown
By David Greenlaw, Jan Hatzius, Anil K Kashyap, Hyun Song Shin
This report discusses the implications of the recent financial market turmoil for central banks. We start by characterizing the disruptions in the financial markets and compare these dislocations to previous periods of financial stress. We confirm the conventional view that the current problems in financial markets are concentrated in institutions that have exposure to mortgage securities. We use several methods to estimate the ultimate losses on these securities. Our best (very uncertain) guess is that the losses will total about $400 billion, with about half being borne by leveraged U.S. financial institutions. We then highlight the role of leverage and mark-to-market accounting in propagating this shock. This perspective implies an estimate of the eventual contraction in balance sheets of these institutions, which will include a substantial reduction in credit to businesses and households. We close by exploring the feedback from credit availability to the broader economy and provide new evidence that contractions in financial institutions balance sheets’ cause a reduction in real GDP growth.
By David Greenlaw, Jan Hatzius, Anil K Kashyap, Hyun Song Shin
This report discusses the implications of the recent financial market turmoil for central banks. We start by characterizing the disruptions in the financial markets and compare these dislocations to previous periods of financial stress. We confirm the conventional view that the current problems in financial markets are concentrated in institutions that have exposure to mortgage securities. We use several methods to estimate the ultimate losses on these securities. Our best (very uncertain) guess is that the losses will total about $400 billion, with about half being borne by leveraged U.S. financial institutions. We then highlight the role of leverage and mark-to-market accounting in propagating this shock. This perspective implies an estimate of the eventual contraction in balance sheets of these institutions, which will include a substantial reduction in credit to businesses and households. We close by exploring the feedback from credit availability to the broader economy and provide new evidence that contractions in financial institutions balance sheets’ cause a reduction in real GDP growth.
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