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)’
Tag Archive for 'Rating Agency'
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)’
While S&P 500 is having a hard time breaking the 1,111 resistance level, emerging-market stocks fell for a fourth consecutive day. Over the last couple of weeks, few events have shocked the financial world: Dubai World is struggling to restructure its debt, Greece’s bonds faced a downgrade by Fitch and Standard & Poor’s lowered its outlook on Spain to negative. The MSCI Country Index for Greece declined almost 12 percent in December, Dubai’s equity index fell 6.4 percent yesterday, while MSCI Spain sank 2.4 percent. Continue reading ‘Sovereign Debt Crisis’
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’
Before jumping into the credit spread pool, I reckon it is worthwhile spending a little time crystallizing few concepts. It is universally perceived that the US treasury bonds constitute to this day the baseline for the credit space, and they have been labeled as riskless securities. Credit rating agencies (e.g., Moody’s, Standard & Poor’s) are those institutions that evaluate the credit worthiness of corporations, municipalities and governments around the world. The rating scale starts with the AAA rating – the highest credit worthiness, lowest risk and lowest probability of default, and continues with AA, A, BBB and so on and so forth. As the credit goes down on the rating scale, the default risk – the risk associated with a debtor’s capacity of meeting payments towards its creditors, increases non-linearly. Continue reading ‘The Rising Phoenix’
CEO Wall Of Shame (II)
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)’