The American Recovery and Reinvestment Act (ARRA) signed into law by President Barack Obama on February 17, 2009 did rewrite Section 111 of the Emergency Economic Stabilization Act of 2008 (EESA) and did provide modified rules for the Troubled Asset Relief Program (TARP). The Stimulus or Recovery Act is worth $787 billion and it contains multiple programs: Tax Cuts – $244 billion, Aids For State and Local Government – $217 billion, Relief (Extended Unemployment, Health Insurance for Unemployed) – $120 Billion, Infrastructure – $101 Billion, Energy Efficiency – $59.5 Billion, and Human Capital – $45.5 Billion. TARP allowed the US Department of the Treasury to purchase up to $700 billion of difficult-to-value assets – MBS and CDO – from banks or other financial institutions. Since the enactment of TARP in October2008, more than 360 US banks have received at least $353 billion of funds from the Treasury. Continue reading ‘TARP Barometer’
Tag Archive for 'CDO'
In light of recent developments involving SEC and Goldman Sachs, I reckon it might he extremely helpful for my readers to witness the entire structuring process involving a High Grade Asset-Backed Securities Collateralized Debt Obligations (HG ABS CDO) deal. For the sake of simplicity, let’s assume that our CDO transaction is labeled “Pyramid”, and the three stakeholders involved in this deal are: an investment bank – the “Arranger”, a portfolio manager – the “Collateral Manager” and a series of investors. To make things easier, I would replicate the same numbers from the previous two articles on structuring and securitization. The CDO liability bonds – the “Notes” will be issued by a newly formed Special Purpose Vehicle (SPV) – the “Issuer”, called Pyramid Limited and incorporated in Cayman Islands for tax purpose. Continue reading ‘Weapons Of Mass Destruction (III)’
Goldman Sachs [GS] is to Wall Street what Ferrari is to Formula One. Last Friday, the investment bank powerhouse was accused of securities fraud in a civil lawsuit filed by the Securities and Exchange Commission (SEC). According to the complaint, in February 2007, Goldman created a Collateralized Debt Obligation (CDO) labeled Abacus 2007-AC1, at the request of John Paulson, a hedge fund manager who earned an estimated $3.7 billion in 2007 by betting against the housing bubble. As per the official statement “Goldman wrongly permitted a client to heavily influence which mortgage securities to include in an investment portfolio”. The SEC also sued Fabrice Tourre, a Goldman Sachs VP who was principally responsible for structuring the CDO transaction and for marketing the deal across the investors. Continue reading ‘SEC vs. Goldman Sachs’
At a hearing last week in Washington before the Financial Crisis Inquiry Commission (FCIC), former Citigroup CEO Charles Prince claimed that he was not aware of the mortgage-related securities that pushed the financial giant on the brink of total collapse. In addition to that, he added that nobody could have predicted that the super-senior tranches of the Collateralized Debt Obligations (CDO) would lose so much money, and the Chief Risk Officer (CRO) and senior traders did not understand the risks the bank took on. Unbelievably, he strongly defended its employees, declaring that Citigroup’s risk management group was among the best on Wall Street. His ultimate explanation stated that the bankers relied excessively on statistical models that could not predict the potential losses and the depth of the crisis. Though Charles Prince was sacked in November 2007, in the same quarter when the world’s biggest bank reported a then-record $9.8 billion loss, he received a severance package worth $40 million. Continue reading ‘CEO Wall Of Shame (II)’
Bear Stearns, at one point, the fifth-largest US investment bank, has survived the September 11th attacks, just as it had survived safe and sound other events since its founding in 1923, among them: the Great Depression, World War II and the Black Monday. In the summer of 2007, the maverick firm had to pledge more than $3 billion to bail out two of its hedge funds that had bet heavily on subprime mortgages. On Mar 10 2008, Alan Greenberg – the former Bear Stearns CEO, responding to the liquidity rumors which caused shares to drop 10% in early trading, told CNBC that the liquidity rumors were totally ridiculous. One week later, the 383 Madison Avenue investment bank was offered to JP Morgan for an initial fire sale price of $2. Continue reading ‘CEO Wall Of Shame (I)’
Now we know how the real estate market has become a bubble and the demand side of the equation. In this episode, we will look into the supply side: the lending financial institutions. Traditionally, the subprime lending is the practice of extending credit to borrowers with high credit risk — e.g. a FICO score of less than 620, unable to access prime rate loans (hence the term “subprime”). Subprime lending became popular in the US in the mid-1990s, with outstanding debt increasing from $33 billion in 1993 to an estimated $1,300 billion in 2007. This substantial increase is mainly attributable to lending institutions which quickly realized that they could make huge profits from origination fees and from selling the asset-based securities (ABS) to investors. Continue reading ‘Home $weet Home (III)’
Now, that the picture of MBS has become crystal-clear, we will move to the next level: the Collateralized Debt Obligations (CDO). These structured products are nothing more than a redistribution of credit risk, similar to the way MBS are constructed. If the assets purchased for cooking-up MBS were residential mortgage loans, when structuring CDO deals the pool of assets consists of MBS. Depending on the average credit rating of the MBS, we could structure a High Grade Asset Backed Securities CDO (HG ABS CDO) or a Mezzanine ABS CDO. In a typical HG ABS CDO, we could purchase a $1 billion collateral portfolio of MBS bonds with a weighted average coupon of LIBOR plus 80 basis points. Continue reading ‘Weapons of Mass Destruction (II)’
In a 2002 speech referring to credit derivatives, Alan Greenspan – the former FED chairman and one of the most illustrious minds I have ever come across, said that financial instruments such as credit default swaps (CDS) and collateralized debt obligations (CDO) have helped make the economy shock-resistant: “Such instruments appear to have effectively spread losses from defaults by Enron, Global Crossing or WorldCom”. If Greenspan, with a heavy background in math, could not understand the complexities of CDO, all the less so the unsophisticated investors could not assess the risk embedded in these esoteric securities. My ultimate goal is educating my readers and removing the black-box label from these securities once for all. To get to our Omega destination, we have to start at the Alpha point. Continue reading ‘Weapons of Mass Destruction (I)’
Not surprisingly, the rating agencies – Moody’s, Standard & Poor’s and Fitch, are currently tormented by a deep credibility crisis after it had been established that they awarded top ratings to scores of billions of dollars worth of sub-prime mortgage-related securities. The investors involved with these complex structured assets have relied on the agencies but they might never trust them again. The scariest thing is that the rating agencies have a serious accountability issue in admitting their flaws. For instance, I remember Moody’s claiming that employees, not the company’s practices, were to blame. Hence, they started firing the structured finance department people. Ultimately what they did was purely looking for scapegoats. What a lame excuse! Continue reading ‘The Machiavellian Watchdogs’
Believe It Or Not
Tuesday, Goldman Sachs [GS] reported the first quarter results, with net revenues of $12.8 billion, net earnings of $3.5 billion and earnings per share (EPS) at $5.59. Investment banking produced net revenues of $1.2 billion, while the trading business recorded stellar results with net revenues of $10.3 billion. Commenting on the recent SEC lawsuit, Lloyd Blankfein – Goldman Sachs CEO, claimed that the most profitable investment bank in Wall Street history had no economic incentives for the Abacus 2007 CDO deal to fail, since GS lost more than $100 million on the transaction. Moreover, we have learned that SEC decision was a 3-2 split along the party line: 3 Democrats against 2 Republicans. Unfortunately, there is nothing new under the sun in Washington. Continue reading ‘Believe It Or Not’