At last, some help for the bond insurers

NEW YORK - Eight large banks have joined forces to seek a rescue plan for MBIA Inc, Ambac Financial Group Inc and other troubled bond insurers battered by the global credit crunch.

The $2.5 trillion bond insurance industry is struggling with mounting losses and capital shortfalls, jeopardizing the "triple-A" credit ratings that insurers such as MBIA and Ambac depend on to function normally.

The eight banks are Barclays Plc, BNP Paribas, Citigroup Inc, Allianz's Dresdner Bank, Royal Bank of Scotland Group Plc, Societe Generale, UBS AG and Wachovia Corp.

The banks retained Greenhill & Co, a boutique investment bank, as an adviser, CNBC said, citing the unnamed source.

The banking industry itself has suffered more than $100 billion of write-downs in the last year related to mortgages and other complex debt. Bond insurers got caught after venturing beyond writing coverage for bonds typically used to finance hospitals, roads, schools and sewer systems. Instead, to increase profit, they chose to also underwrite structured products, including securities backed by risky subprime mortgages. That decision backfired last year as credit markets tightened, homeowner defaults soared, and the value of those securities sank.

Unless the market or the insurers stabilise, investors may unload hundreds of billions of dollars of bonds, raising borrowing costs and ultimately burdening taxpayers. It could also result in hundreds of billions of dollars of additional write-downs at banks worldwide, analysts have said. Standard & Poor's estimated total banking industry losses tied to mortgage problems will exceed $265 billion.

Regulators including New York Insurance Commissioner Eric Dinallo have been meeting with industry participants to discuss a rescue. Dinallo was not immediately available for comment. Credit rating agencies have taken away triple-A ratings from a handful of bond insurers.

In recent trading, the cost to protect MBIA debt against default fell to 14 percent upfront plus 500 basis points (5 percentage points) a year, from 17.5 percent upfront plus 500 basis points, according to CMA DataVision. Ambac debt protection costs fell to 14.5 percent upfront plus 500 basis points, from 18.7 percent upfront plus 500 basis points.

Incoming

The battle is over in the sub prime markets. Now we are seeing the aftermath, as the wounded report and the dead go into bankruptcy.

This story from Reuters:

"NEW YORK, Aug 29 (Reuters) - Basis Yield Alpha Fund, a hedge fund specializing in corporate and structured credit, on Wednesday filed for bankruptcy protection in the United States amid mounting losses from U.S. subprime mortgage assets, court papers show.

The Cayman Islands-registered fund, run by the Australian firm Basis Capital, listed more than $100 million of assets and more than $100 million of liabilities in its filing with the U.S. bankruptcy court in Manhattan. The fund firm managed nearly $1 billion earlier this year.

In court papers, Basis Yield said it had in June begun to suffer a "significant devaluation" in its asset portfolio, following market volatility related to U.S. subprime lending defaults. It said the devaluation led to margin calls, which it was unable to meet, and the issuance of several default notices by counterparties seeking to close out trades or seize assets.

Basis said JP Morgan Chase Bank NA, Goldman Sachs International, Citigroup Global Markets Limited, Morgan Stanley, Lehman Brothers International (Europe) and Merrill Lynch International all issued default notices. Basis Yield said it has disputed many of these notices.

Earlier in the month, the hedge fund firm told investors that losses at one of its portfolios had lost more than 80 percent in assets. Basis is among a growing number of hedge funds to have be plagued by the credit market turmoil. In July, Sowood Capital lost $1.5 billion and was forced to close down."

Markets have calmed though this week.

In the first weeks of the fiasco, markets failed. We had no way of pricing some of these instruments secured by now suspect sub prime assets. To the point that French bank Paribas suspended redemptions from 3 of their funds.

Now at least we are seeing the extent of the losses. We know there are casualties. We are starting to see the extent of the losses. The markets priced in the end of the world as we know it. Now it is becoming clearer and it is better than terrible.

Still bad, but at least we can measure it. Markets love certainty….hence relative calm is returning.

Calm returns....for now

NEW YORK, Aug 20 (Reuters) - Calm returned slowly to financial markets on Monday, but there were lingering signs that credit problems persist despite policy-makers' insistence that the global economic growth would remain solid.

The Federal Reserve on Friday cut the rate at which it lends to banks to defuse the growing crisis in credit markets and encouraged more borrowing, particularly by big banks worried about their exposure to the beleaguered U.S. mortgage market. Deutsche Bank reportedly borrowed funds directly from the Federal Reserve on Friday, although it was unclear how much, the Financial Times reported on Monday.

However, the broader credit market seemed far from normal, particularly in the housing sector, where prices are falling and defaults are rising. "Investors' confidence in the mortgage financing space is not doing well," Larry Goldstone, chief operating officer of Thornburg Mortgage Inc, said in an interview with CNBC television on Monday.

In order to meet funding obligations, Thornburg said it has sold $20.5 billion of assets and reduced short-term borrowings by an equivalent amount. Adding to the uncertainty among investors, Fannie Mae, the largest source for U.S. home loans, said it will skip its monthly benchmark note issuance in August for the first time since May 2006.

Away from the trading rooms of Wall Street, policy-makers around the world struck a sanguine tone about the impact of market volatility on the global economy, even after the Fed said on Friday that the risks of the U.S. economy slowing have grown "appreciably."

Canadian Finance Minister Jim Flaherty told reporters on Monday that it would take "some time" for the turmoil in credit markets to be resolved, but that the fundamentals of Canada's economy remain strong.

Germany's Bundesbank said the outlook for the global economy remained positive despite recent market tension, which represented a "welcome normalization," albeit an abrupt one. "Nevertheless, the risks for the global economy have increased with the correction process in the U.S. property market," the German central bank said in its monthly report.

In the wake of the market turmoil, investors have sharply altered their forecasts for monetary policy. They expect the Fed, which added another $3.5 billion on Monday in short-term liquidity, to cut its key fed funds target rate and are no longer pricing in rate increases from the Bank of England. More than half of U.S. primary dealer banks polled by Reuters predict the Federal Open Market Committee will lower the fed funds rate at its Sept. 18 meeting, or even earlier.

The European Central Bank said it would again allot more funds than strictly necessary at its weekly tender, but aimed to reduce surplus liquidity in the short-term euro money market gradually as conditions normalize.

Australia's central bank also injected a sizable amount of liquidity into the banking system, seeking to temper upward pressure on some short-term money market rates.

But few investors are confident all the troubles stemming from the U.S. home loan market have yet seen the light of day, and they fear further market turmoil could cut growth.

Richard Shelby, a member of the U.S. Senate's Banking, Housing and Urban Affairs Committee, said banks would increase their mortgage rates in the coming weeks, exacerbating tight credit. "I think it will get worse before it gets better," Shelby said in Brussels. "There will be firms that will not survive. I don't think we should bail them out."

US housing crisis deepens further

Staff at American Home Mortgage Investment Corp have been laid off

American Home Mortgage has filed for bankruptcy in the latest sign the US housing crisis is spreading from sub-prime mortgages to the higher grades of credit risk.

The collapse of America's 10th biggest home lender came amid fresh gyrations on global bond and stock markets yesterday, and growing questions over the exposure of European banks and insurers to the US property slump. Credit Suisse warned that 1.5m people were likely to default on home loans worth up to $220bn (£108bn) as a huge tranche of mortgages are adjusted upwards over the next 18 months. AHM, which issued $60bn of loans last year, asked for Chapter 11 protection from creditors and began laying off almost all of its 7,400 employees after banks abruptly cut off access to credit.

It cited a "sudden adverse impact on liquidity from the extraordinary disruptions now occurring in the secondary mortgage and real estate markets". Unlike the other 50-odd sub-prime lenders that have gone bankrupt or closed since late 2006, AHM specialised in "Alt-A" loans for mid-tier borrowers thought to be a good credit risk. The company said yesterday that the market for Alt-A debt packaged as collateralised debt obligations (CDOs) had completely dried up, making it impossible to continue normal business.

While outstanding level sub-prime debt in the market is roughly $800bn, the Alt-A segment is a close second at $700bn, mostly issued in 2005 and 2006. The rating agency Moody's said Alt-A loans are in reality little better than sub-prime debt, which already faces a default rate of 12.4pc.

Merrill Lynch said the property slump was now so serious the Federal Reserve would have to start cutting interest rates as soon as October, predicting a fall from 5.25pc to 3.75pc by the middle of next year. The steady drip-drip of bad news from the US continued to irk Europe's bond markets yesterday. The iTraxx Crossover index measuring spreads on low-grade corporate bonds surged from 400 to 430, before falling back as Wall Street rebounded from last week's violent sell-off.

Suki Mann, a credit analyst at Societe Generale, said virtually all refinancings and leveraged buyouts had been frozen as investors stood on the sidelines. "Everything is on hold. We're not going to see any deals done until there is some clarity." The Dow Jones rose 73 points to 13,225 in early trading as markets began to settle after the resignation of Bear Stearns co-president Warren Spector, who stepped down on Sunday after the collapse of two in-house hedge funds that set off the global bond bust two months ago.

The group's chief financial officer, Sam Molinari, alarmed Wall Street late on Friday by comparing the credit debacle to the dotcom denouement in 2001 and even the 1987 crash. "I have been a mortgage banker for 20 years and have never seen such a severe reaction to credit risks in the marketplace, and things may even get worse before they get better," he said.

Similar fears have begun to emerge in Germany where Jochen Sanio, head of the financial watchdog Bafin, said the credit squeeze threatened Europe with the most serious banking crisis since 1931.

IKB Deutsche Industriebank stunned the markets last week with an admission that it had taken a massive $24bn bet on the US property market without fully informing the board, and suddenly faced imminent collapse. Just 10 days earlier it had claimed to be in rude good health.IKB is being rescued by a consortium of banks offering a \u20AC3.5bn (£2.4bn) credit line, while the state-owned KfW bank has provided an \u20AC8bn guarantee for bad debts. The bail-out, orchestrated by the German government, is facing a Brussels probe for alleged violation of EU state aid rules.

Dresdner Bank yesterday admitted to $1.4bn in US sub-prime exposure, but said it was well cushioned by business at home. Germany's Union Investment has had to freeze redemptions from an $1.1bn fund invested in sub-prime loans, and even the Pharmacist and Doctors' Bank admitted $115bn in exposure.In France, Oddo & Cie is to close three funds making huge losses in sub-prime CDOs, saying it had been "caught out by the sub-prime dilemma". Insurance group AXA has closed two funds hit by the credit turmoil after a rash of redemptions in July.

In the USA - from bad to worse

The sub prime lending fiasco is a slow burning fuse. How long it is and how far it will reach, no one can be sure. Here's the latest casualty:

In a move that sent shockwaves through the financial markets and left investors millions of dollars poorer, Melville-based American Home Mortgage Investment Corp. announced yesterday that it lacked the money to pay its lenders or the credit lines to pay its borrowers. It was the largest mortgage bank to face bankruptcy in a year of bad news for the mortgage industry.

The effects of American Home's insolvency are far-reaching. The company's 7,627 employees -- including about 1,460 in Melville -- face an uncertain future. Its borrowers will lose access to $800 million in approved loans. That number is mounting by hundreds of millions of dollars each day. Major investors have announced millions in losses on the company. Banks that lent the company billions of dollars could see their stakes dissolve.

And Michael Strauss, the hard-driving entrepreneur who built American Home from a home-office operation into a top-10 mortgage bank, remaining its principal stakeholder throughout, lost $42.8 million in 20 minutes when the stock was marked sharply lower. The announcement contained shreds of the specific information that anxious investors and analysts had been clamouring for since the company kicked off a spate of ominous announcements on 6 April with a downward adjustment of first-quarter profit projections and dividend policy.

The company's executive vice president and chief investment officer Thomas McDonagh, who was paid more than $1.8 million in total compensation in 2006, had resigned only one day earlier. The company has acknowledged what many had feared: It had lost access to its credit facilities, lenders had been demanding repayment of some of American Home's debts for three weeks, and there were "substantial" additional calls for repayment outstanding.

The company said it had retained outside consultants -- companies that have assisted bankrupt mortgage firms in the past -- to help it resolve the situation in the manner "least disruptive to its business and to the many thousands of home buyers to whom it has committed mortgages." One option, the company said, was "the orderly liquidation of its assets."

Philadelphia-based RAIT Financial Trust, a publicly-traded investment pool, issued a release acknowledging that a 2005 financing line to AHM exposed its shareholders to $95 million in losses.

BY DANIEL WAGNER mailto:daniel.wagner@newsday.com?subject=Newsday.com%20Article
8:00 PM EDT, July 31, 2007

UK property looking grim - subprime is spreading!

Angela Balakrishnan

Saturday August 4, 2007The Guardian

The prospect of a mortgage debt crisis loomed yesterday after the number of home repossessions in the UK soared by 30% to an eight-year high as households struggled to keep up with mortgage payments in the face of higher interest rates. With the Bank of England expected to increase borrowing costs again before the end of the year, analysts warned that repossessions could surge even further. The first half of this year saw 14,000 properties repossessed, a 30% rise on a year ago, the Council of Mortgage Lenders said. This is the highest level since 1999 and equivalent to about 77 homes a day.

The unexpected jump was blamed on an increase in lending to borrowers with a poor credit history in the so-called "sub-prime" mortgage sector. Interest rates, which have risen five times in under a year to 5.75%, were also a big driving force in rising debt and missed mortgage payments. Economists cautioned that the impact of the recent rate increases was yet to be felt and homeowners would not be able to rely on rapid rises in the value of their homes as the housing market cools. "With the housing market slowing into 2008 and interest rates expected to hit 6%, homeowners slipping behind with their repayments may be left stranded, unable to sell their way out of trouble," said David Stubbs at the Royal Institution of Chartered Surveyors.

Nearly 2 million homeowners will be coming out of fixed-rate mortgage deals in the next 18 months and find themselves having to renegotiate terms with interest rates 1.25 percentage points higher. The CML said that 125,100 homeowners had mortgage arrears of three months or more, 4% higher than the six months to the end of December, but 3% lower than for the first half of 2006. The housing charity Shelter criticised irresponsible lending to people who could not afford the repayments. The Liberal Democrat Treasury spokesman Vince Cable said borrowers needed to be fully aware of the risks.

Pat Boyden at PricewaterhouseCoopers said while it appeared people were switching from unsecured loans to mortgage debt, households may return to credit card debt in the future to make up for shortfalls in their income against a backdrop of higher inflation in recent months and modest growth in wages.

German banking heading for crisis?

The US subprime lending fiasco is spreading to German banks, this story from Reuters yesterday:

Banks funding the rescue of Germany's IKB expect it to lose up to a fifth of its roughly 17.5 billion euro ($24 billion) investment in U.S. subprime mortgages, a source familiar with the plan told Reuters on Thursday.

The revelation of the scale of the problem prompted the Bundesbank president to make a statement to calm nerves over the affair, which watchdog Bafin had said threatened to snowball into the biggest banking crisis in Germany in more than 75 years.

To stop IKB unravelling, German banks clubbed together to provide 3.5 billion euros to cover the lender's potential losses from the subprime crisis. The source said this represented about a fifth of IKB's total exposure. "The worst case possible is, naturally, that the market collapses and nothing is realisable," said the source. "Or you might lose nothing. You can't be sure. But 20 percent is a realistic assessment." IKB, which specialises in lending to small- and mid-sized companies, has become Europe's highest-profile casualty so far of the crisis in risky U.S. subprime mortgages. Its troubles have sparked fears that other German banks might also be hurt. News of the scale of IKB's exposure sent its stock tumbling more than 40 percent. The shares closed down nearly 30 percent at 12.31 euros. Since the start of the week, the crisis has wiped out more than half of the bank's market worth. Its chief executive has left and late on Thursday a source familiar with the matter said its chairman would also quit.

PROFIT WARNING
Prior to a shock profit warning on Monday, IKB had not outlined its involvement in U.S. subprime lending. Only 10 days beforehand it had said it would be almost entirely unaffected by the problems in the American property market.

Germany's central bank chief once again tried to reassure investors, dismissing the possibility of a banking crisis. "The problems at IKB are of an institution-specific nature. They have been absorbed effectively by the support of (German state bank) KfW," said Bundesbank President Axel Weber. There had been signs earlier in the day that IKB's creditors were growing more confident after the rescue package put together by KfW -- which owns 38 percent of the company -- and Germany's banking association. "Everyone's calming down about the story," one debt trader said earlier. But others continued to fear the worst. "No-one knows what to make of the situation," Olaf Kayser, an analyst with German bank LBBW, had said earlier. "There is absolutely no information coming from IKB."

Default rates on mortgages to high-risk, or subprime, borrowers in the United States have been creeping up, leading to problems for lending banks as well as those sharing the risk. Deutsche Bank , worried about IKB's subprime exposure, had cut a credit line to the bank, said the source, a move which sparked the IKB crisis and spurred watchdog Bafin into action.

UK, Denmark and NZ most exposed to house price and interest rate shocks

Fitch Ratings said in a special report published today that the UK, Denmark and New Zealand exhibit the greatest macroeconomic vulnerability to a combination of weakening property prices and rising interest rates.

"Given record levels of household debt, rising interest rates and after several years of strong house price inflation in many countries, Fitch has assessed a range of indicators of household balance sheet vulnerabilities and house price valuation measures," said Brian Coulton, Head of Global Economics & Europe, in Fitch's Sovereign team. "For overall vulnerability, New Zealand ranks first, Denmark second and the UK third as the most exposed countries. Japan, Germany and Italy are the least vulnerable."

Fitch has ranked countries by the degree of estimated house price overvaluation and household balance sheet exposure to interest rate risk, compiling an overall index of vulnerability for 16 advanced industrialised economies. A range of financial indicators have been used to estimate these exposures, discussed in detail in the report.

On the house price front, France is the most exposed country to housing overvaluation, followed by UK, Denmark and New Zealand, which all exhibit the highest (i.e. most vulnerable) rankings, reflecting rapid house price growth including relative to incomes and rents. The US, Spain and, to a lesser extent, Ireland, show lower risk on this front although housing supply dynamics - not captured in the exercise - undoubtedly play an important role in current and prospective house price movements.

With regard to balance sheet exposure, the Nordic countries and Australia and New Zealand have the highest ranks. Norway is the most exposed to household debt vulnerability followed by New Zealand, Australia, Denmark, Finland and then Sweden. However, on this score, the UK fares somewhat better thanks to lower debt and interest service ratios and overall household net worth. France also scores much better on balance sheet risk, sharply reducing its overall vulnerability.

Again, the US and Spain fare relatively well but this may be misleading to the extent that both countries currently have high overall household debt service ratios (i.e. including interest and principal repayments), an indicator that has not been captured in the study due to data limitations. Moreover, both Spain and the US have arguably experienced the largest interest rate "shocks" among countries in the sample as real policy rates have moved rapidly into positive territory in the last couple of years.

The full report, "House Prices and Household Debt – Where are the Risks?" is available on the agency's public website, www.fitchratings.com.

Volatility sweeps global markets

From the BBC site:

US stock markets have dropped sharply, extending a global share sell-off amid fears about the effect of higher interest rates on the world economy.

There are concerns that higher rates will hit corporate profits and takeover deals, and dent consumer spending. European markets were also jittery, with London's share index closing down for a fourth day and ending at its lowest level since the middle of March. Analysts have warned that markets could remain volatile for a number of weeks. "I think you've got bargain hunters out there for sure and I think you've got some people who are still scared," said Randy Frederic of Charles Schwab & Co. "We're seeing the convergence of a whole host of sort of unrelated or only slightly related issues," he explained.

Share fall
By the close of trading in New York, the Dow Jones Industrial Average of leading shares was 208.1 points, or 1.5%, lower at 13,265.47.
Since Monday the index has lost 4.2%, its worst weekly decline in almost five years. The wider measure of the US stock market, the S&P 500, ended down 1.6%, while the Nasdaq index, which largely tracks technology stocks, was 1.4% lower. Earlier, the FTSE 100 index of leading shares on the London market had closed 36 points, or 0.6%, lower at 6215.20. France's Cac-40 index of leading shares and Germany's Dax also declined. In Asia, the Wall Street slump on Thursday led to Japan's Nikkei closing down 418.28 points, or 2.4%, at 17,283.81, while Hong Kong's index ended 2.7% lower.

Credit crunch
The main underlying problem is that many investors are worried about an impending credit crunch. In past years, financial markets, companies and consumers have all benefited from low interest rates and easy access to money, helping fuel a boom in spending, house price inflation and corporate takeovers.

Now, interest rates are rising and set to stay higher as central banks try to rein in inflation. A large part of the rise in share prices in the past year has been driven by the takeover boom, with private equity bidders pushing up the value of the firms they are targeting. Most of these deals are paid for with borrowed money and the banks who have loaned this cash have been laying off a large proportion of the loans by selling them to other investors.

However because investors are bruised by their losses in the US sub-prime mortgage market, they are now less keen now on buying the risky loans from the banks, taking away the credit needed for takeovers and prompting share prices to fall. "When there's uncertainty about financing, then private equity is not so quick to make deals," said Elliot Spar of Ryan Beck & Co.
Fred Dickson of D.A Davidson & Co said that: "We've had this massive change in investor expectations in terms of new deal flow." "The lifeguards have shouted, and investors are now starting to heed their warnings and head back to shore."

Downhill track

At the same time, oil prices have climbed, raising fears that inflation could also pick up again because of higher energy costs. US markets bounced back slightly on Friday after figures showed that the US economy had grown more quickly in three months to June than analysts had first thought. US Commerce department data showed that, on an annual basis, the US economy grew by a robust 3.4% in the second quarter of 2007. However, the respite was short-lived as analysts fretted that the figures may increase the chances of further interest rate rises in the US.

Link: BBC News