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Wednesday, May 13, 2009
Some More Color On Renaissance's Call Today
Our friends at dealbreaker have got some fun snippets from today's Citadel... apologies... RenTec all is good call. Explains the rerouting of all Pall Mall deliveries over the last week to East Setauket.
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GGP Inside Market Midpoint 43.25, $20 MM Sell Interest
The preliminary result demonstrates a much lower inside market midpoint than expected.
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GGP LCDS Auction In Process
The General Growth Properties LCDS auction is currently ongoing, and just finished the Initial Bidding Period. The results will be posted in about 6 minutes, eventually followed by a final Dutch auction bidding process at 2 pm. The reason this is relevant as it could provide a significant repricing and valid market test of secured obligations in the CRE market.
The participating bidders in the auction is provided below (they will hopefully work not only on behalf of their prop desk but for their clients as well).
Bank of America, N.A.
Barclays Bank PLC
Citibank Global Markets Inc.
Credit Suisse International
Deutsche Bank AG
Goldman Sachs Loan Partners
J.P. Morgan Securities Inc.
Morgan Stanley Senior Funding, Inc.
The Royal Bank of Scotland PLC
UBS Securities LLC
Zero Hedge will be following this auction very closely.
The link to follow the GGP LCDS auction can be found here.
In other news, CRE's BFF - the CMSA, issued this press release earlier. It is good to know that CMSA is actively looking after the interests of commercial real estate players, and fighting tooth and nail to make sure not even one bid gets hit as malls continue on their steady path to zero tenancy. Regardless, Gropper, who has traditionally been one of the most erudite bankruptcy judges, is not expected to provide adequate protection for Bankruptcy Remote Entities which have been filed as part of the chapter 11 process, contrary to the rhetoric below. A CMSA adverse settlement will likely be a major hit to the CMBS market in particular, and to CRE in general.
The participating bidders in the auction is provided below (they will hopefully work not only on behalf of their prop desk but for their clients as well).
Bank of America, N.A.
Barclays Bank PLC
Citibank Global Markets Inc.
Credit Suisse International
Deutsche Bank AG
Goldman Sachs Loan Partners
J.P. Morgan Securities Inc.
Morgan Stanley Senior Funding, Inc.
The Royal Bank of Scotland PLC
UBS Securities LLC
Zero Hedge will be following this auction very closely.
The link to follow the GGP LCDS auction can be found here.
In other news, CRE's BFF - the CMSA, issued this press release earlier. It is good to know that CMSA is actively looking after the interests of commercial real estate players, and fighting tooth and nail to make sure not even one bid gets hit as malls continue on their steady path to zero tenancy. Regardless, Gropper, who has traditionally been one of the most erudite bankruptcy judges, is not expected to provide adequate protection for Bankruptcy Remote Entities which have been filed as part of the chapter 11 process, contrary to the rhetoric below. A CMSA adverse settlement will likely be a major hit to the CMBS market in particular, and to CRE in general.
CMSA Actively Involved in GGP Issue; Bankruptcy Judge to Rule TodaySphere: Related Content
U.S. Bankruptcy Judge Allan Gropper plans to hold a hearing today in New York to rule on whether General Growth Properties, which filed for bankruptcy in April, will be allowed to access capital from its own special purpose entities, a move CMSA has strenuously objected to in recent weeks.
CMSA believes the inclusion of special purpose subsidiaries in the GGP bankruptcy filing may threaten the fundamental principles of structured finance and would negatively affect all of securitization. CMSA and the Mortgage Bankers Association filed an amicus brief with the U.S. Bankruptcy Court, Southern District of New York on May 1, 2009 to make its concerns known for the record. CMSA says borrowers receive favorable loan terms based on lender, investor and rating agency reliance on isolation of the commercial property from the credit exposure of affiliates of the borrower. CMSA believes the strategy pursued by GGP violates this principle and, if upheld, would put into question the reliability of the rule of law in commercial mortgage finance.
Moody’s Investors Service also weighed-in on the GGP matter, issuing a research report on the bankruptcy judge’s questions related to the recent bankruptcy filings. Moody’s highlighted adequate protection as a ‘well-worn’ bankruptcy concept, implying that Judge Gropper has hinted that adequate protection may be the path taken in his ruling tomorrow. As is common, a bankruptcy court determines what is ‘adequate’.
CMSA is actively involved in the events currently unfolding in New York and will update Membership regularly.
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JPM To Issue $5 Billion Non-TLGP Guaranteed Notes
JP Morgan continues to try and distance itself from the crowd of merely mortal banks. The issue spread on the notes will be curious as it provides yet another datapoint of how much incremental cost of debt all the other FDIC insured bank issuers will have to pony up eventually once (if) the government decides to pull its support from the banking sector and have banks fare on their own yet again.
Still waiting with (a)baited breath to see BofA/Merrill Lynch to set off on the non-guarantee path. Sphere: Related Content
Still waiting with (a)baited breath to see BofA/Merrill Lynch to set off on the non-guarantee path. Sphere: Related Content
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Administration Official "Chrysler Bankruptcy Could Last Two Years"
And so the backpedaling begins. Bloomberg quotes an administration official who has stated that the D-3's "bankruptcy might take as long as two years, not the two months President Barack Obama suggested as a target."
As expected, the only thing that will likely get done in the projected 60 day timeframe is the sale of "good Chrysler" to Fiat, which is now essentially a certainty, as the non-TARP holdouts have disbanded and there is no formal opposition to the 363 sale anymore. Yet the "bad Chrysler" that remains will be a melange of assets, liabilities, claims and contracts that will take years to sift through.
And the pain does not stop there: already Chrysler suppliers are panicking to find out if they will be chosen to sell to the emerged "good" company. Bridgestone present a good example of the confusion that is currently running amock: the company filed an objection to the 363 sale, saying that if it is not hired by new Chrysler it will likely not get paid for tires supplied while Chrysler is in bankruptcy. Filings indicate that Chrysler will roll approximately $1.5 billion of a much larger pool of trade claims, leaving many vendors with a big fat donut. Among those getting the shaft will be claimants for unpaid bills, and recipients of future profit on canceled programs.
In other news, while everyone is waiting for the FDIC to reply to the thousands of FOIA requests to disclose Perella Weinberg's compensation that have been launched from Zero Hedge, it would be curious to uncover just how big of a loss to P-W's Xerion hedge fund a 0% recovery on Chrysler loans will end up being. Now that the dust has settled after the whole Obamagate fiasco, it is time for investors to ask who, how and why fought so hard for their interests, and why there is a dramatic drop in monthly performance for the April/May period, now that asset "managers" will have to remark their Chrysler loans much lower than before, compliments of succumbing to extortion. Sphere: Related Content
As expected, the only thing that will likely get done in the projected 60 day timeframe is the sale of "good Chrysler" to Fiat, which is now essentially a certainty, as the non-TARP holdouts have disbanded and there is no formal opposition to the 363 sale anymore. Yet the "bad Chrysler" that remains will be a melange of assets, liabilities, claims and contracts that will take years to sift through.
The 60 days projected by the President at an April 30 press conference announcing the automaker’s bankruptcy only applies to a sale of Chrysler’s best assets to a new entity, said the official, who can’t be identified because the matter is confidential. Afterward, creditors would fight over unwanted factories and other assets to recover money, lawyers said.and this:
“The unsold assets and liabilities may take years to sort out due to the complexities of resolving thousands of commercial, tort, future asbestos, dealership and employee claims,” said Dewey & LeBoeuf LLP partner Martin Bienenstock, who has advised General Motors Corp. and Chrysler Financial on restructuring.
The bulk of assets left in the old Chrysler will be eight factories, valued by Chrysler at $2.3 billion. Those with claims against them include the U.S. government, provider of a $4.5 billion bankruptcy loan, and lenders with an unpaid balance of $4.9 billion on a secured loan.
“The secured lenders will stand in line behind the government when they try to recover more than the $2 billion they’ve been given in the buyout,” said Richard Hahn, co- chairman of the bankruptcy practice at Debevoise & Plimpton LLP, a New York law firm that isn’t involved in the Chrysler case.Due to the government being a provider of DIP financing, the ultimate recoveries to secured creditors could in practice be 0, as the potential impact of claims to bad Chrysler would dilute any potential recoveries to any entities behind the U.S. government.
And the pain does not stop there: already Chrysler suppliers are panicking to find out if they will be chosen to sell to the emerged "good" company. Bridgestone present a good example of the confusion that is currently running amock: the company filed an objection to the 363 sale, saying that if it is not hired by new Chrysler it will likely not get paid for tires supplied while Chrysler is in bankruptcy. Filings indicate that Chrysler will roll approximately $1.5 billion of a much larger pool of trade claims, leaving many vendors with a big fat donut. Among those getting the shaft will be claimants for unpaid bills, and recipients of future profit on canceled programs.
“[Rejected supplier claims] will possibly be lumped in with other creditors who wait for whatever can be made from the liquidation of whatever is left in bankruptcy,” Max Newman, attorney for unsecured creditors said. “It will take years for all of those assets to be disposed of.”It is these pari secured claims that will eat up any potential recoveries that had been initially offered to secured lenders.
In other news, while everyone is waiting for the FDIC to reply to the thousands of FOIA requests to disclose Perella Weinberg's compensation that have been launched from Zero Hedge, it would be curious to uncover just how big of a loss to P-W's Xerion hedge fund a 0% recovery on Chrysler loans will end up being. Now that the dust has settled after the whole Obamagate fiasco, it is time for investors to ask who, how and why fought so hard for their interests, and why there is a dramatic drop in monthly performance for the April/May period, now that asset "managers" will have to remark their Chrysler loans much lower than before, compliments of succumbing to extortion. Sphere: Related Content
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Frontrunning: May 13
- Apocalypse when? (IBD)
- More on the metamorphosis of shoots to kudzu (Bloomberg)
- Thank you, UBS - MGM Mirage catches last gust of rally, sells 81 million shares (Reuters)
- Chrysler and the rule of law (WSJ)
- GM retirees bully bondholders with Obama's help (Bloomberg)
- Japan opposition party would refuse to buy dollar bonds if elected (BBC)
- Some pessimism from Merrill for a change: "California won't go broke" (Bloomberg)
- Liz Claiborne loss widens on weak demand, promotions (WSJ)
- Citi directors face growing pressure to resign (FT)
- Real rate shock hits CEOs as borrowing costs impede recovery (Bloomberg)
- Higher taxes will damped recovery (WaPo)
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RIP: Green Shoots
Retail sales fall 0.4% in April (0.5% ex autos), second straight monthly decline. Analyst consensus was 0.1% gain. Oops.
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Tuesday, May 12, 2009
TrimTabs Records Heavy Short Covering in Consumer Discretionary And IT Sectors
TrimTabs notes that in the second half of April (Apr 16-30), short interest on the Russell 3,000 stocks dropped to 13.62 billion shares ($260 billion / 2.88% of market cap) from 13.95 billion shares ($259 billion / 2.94% of market cap) on March 31.
There was net short covering in eight of the ten major sectors with Consumer Discretionary and Information Technology receiving the largest short interest outflows of $3.1 billion and $2.5 billion, respectively. The only sectors with net short selling were Health Care and Utilities, in which traders opened new short positions worth $457 million and $183 million, respectively.
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There was net short covering in eight of the ten major sectors with Consumer Discretionary and Information Technology receiving the largest short interest outflows of $3.1 billion and $2.5 billion, respectively. The only sectors with net short selling were Health Care and Utilities, in which traders opened new short positions worth $457 million and $183 million, respectively.
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Overallotment: May 12
- US AAA credit rating at risk, former GAO director claims (Reuters)
- GM sinks to fresh low as Chapter 11 looms (FT)
- Social Security, Medicare will be depleted much earlier than expected (Bloomberg)
- Airbus orders nosedive, profit tumbles (Daily Telegraph)
- What foreclosures? After brand spanking new megaloss, Freddie Mac net worth is below $0 (FT)
- FDIC planning for huge bank failure? (The Pragmatic Capitalist)
- U.K. unemployment jumps to 13 year high (Daily Telegraph)
- Taylor says Fed may not have much time before rate rise needed (Bloomberg)
- US foreclosure program may be insufficient (FT)
- AIG trustees should answer to taxpayers, not Fed (Bloomberg)
- IMF urges stress tests on European banks (FT)
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Latest DTCC CDS Update (Week Of May 08)
"Buy CDS" - that was the overarching theme from last week as $141 billion of rerisking occurred across all major sectors. Absent some nominal CDS derisking in Oil & Gas and Tech/Telecom, every single space saw credit traders betting that risk will increase. Of course, absent some swooning on Monday of this week, irrational exuberance 2.0 still dominates the equity markets, once again implying that credit is either generally more pessimistic than equities, or that CDS traders are much faster to bail at the first whiff of the squeeze ending. Either way, the major purchasing of protection in Consumer Goods and Sovereigns continues for a second straight week, contrary to any equity correlations, while Consumer Services, Industrials and Financials saw a violent snapback from last week derisking.
Gross outstandings week over week were $500 billion higher at $28.2 trillion, consisting of $15.2 trillion in single-names and $13.0 trillion in index and index tranches.
In single name derisking there was a curious repeat of 3 of the last week's top 5 names, with Macy's and Munich Re feeling general fear and loathing, while not at all oddly someone really is dumping vacation timeshare seller and Interactive spinoff Interval Cruises, which barely budged from most hated name last week to merely second most hated name. IILG, whose equity has been caught in a vicious short squeeze over the past two months (and what hasn't) and has risen by almost 300% in that time period, continues to experience major capital structure arbitrage divergence for a second week running as accounts continue to purchase IILG CDS head over heels, implying, at least on the surface, that equity is blissfully unaware of something that will likely bite its head off any second. Additionally Volkswagen has reappeared in the top 20 deriskers category, implying credit is potentially preparing for a capital structure showdown of sorts.
Amusingly, in the rerisk column, the mega unwind of GM CDS has now finished, and another LBO special, Alliance Boots has taken the role of the mega squeeze of the week. The other names were less notable, with several usual suspects making a repeat appearance after disappearing for a few weeks over the past month.
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Gross outstandings week over week were $500 billion higher at $28.2 trillion, consisting of $15.2 trillion in single-names and $13.0 trillion in index and index tranches.
In single name derisking there was a curious repeat of 3 of the last week's top 5 names, with Macy's and Munich Re feeling general fear and loathing, while not at all oddly someone really is dumping vacation timeshare seller and Interactive spinoff Interval Cruises, which barely budged from most hated name last week to merely second most hated name. IILG, whose equity has been caught in a vicious short squeeze over the past two months (and what hasn't) and has risen by almost 300% in that time period, continues to experience major capital structure arbitrage divergence for a second week running as accounts continue to purchase IILG CDS head over heels, implying, at least on the surface, that equity is blissfully unaware of something that will likely bite its head off any second. Additionally Volkswagen has reappeared in the top 20 deriskers category, implying credit is potentially preparing for a capital structure showdown of sorts.
Amusingly, in the rerisk column, the mega unwind of GM CDS has now finished, and another LBO special, Alliance Boots has taken the role of the mega squeeze of the week. The other names were less notable, with several usual suspects making a repeat appearance after disappearing for a few weeks over the past month.
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The REIT Maturity Crunch In Perspective
As Zero Hedge's all time favorite investment bank Merrill Lynch is all too happy to attest, the REITs have proven to be a phenomenal source of underwriting revenue. Amusingly, the REITs which face staggering near-term maturities are still unable to access the debt capital markets (with one or two notable exceptions), yet have raised well over $10 billion in equity to date (which they have used almost exclusively to pay down the cheapest form of capital: secured credit facilities: why?) leaving one to truly wonder just what is the big picture here really all about (aside from ML pocketing dilution cash). So just how far down the road are recent equity raises going to take the (still) very troubled REIT space? (Why still? Redo the FFO calc with a 9% cap rate. Come back then). Answer- not all that far.
Below, I present a summary of the most notable REIT follow on offerings done in the past 2 months: as one can see the amount raised is staggering, and the main lead underwriter (sole or joint) by a vast margin is Merrill Lynch.
The two immediate take home messages here are that despite an average 24% dilution for REITs which have undergone the ML Cohen and Steers treatment, they have still outperformed the general REIT universe in price appreciation (P/FFO) by a factor of almost 300% (8.4x to 9.6x for broad universe compared to 11.7x to 14.4x for the diluted names). Odd you say?
And while the chart above shows not only the ridiculous prominence of ML in the pantheon of busy little underwriters, it also demonstrates just how much capital REITs have raised to date. The reason of course is the imminent maturity schedule for the vast majority of these. The chart below shows the 2009-2011 maturity schedule for the bulk of the major REITs split by category. One can see that based on just these main 15 companies, there is almost $20 billion in upcoming debt maturities over the next 3 years, which explains why any and all REITs will take advantage of every single orchestrated market bubble from now until they ultimately follow in the shoes of GGP, to sell the pieces of paper better known as common stock.
In other words, mother Merrill will likely not stop (and the market squeeze will likely not loosen) until there is at least another $10 billion in additional dilution from the remaining usual REIT suspects (and until ML has pocketed at least another $100 million in underwriting fees). Even so, I have not disclosed the 2012-onward maturities, where things really start to get interesting. But by then, as everyone knows, we will either have hyperinflation, and all the REITs' exiting debt would be payable down with one mere $1 trillion bill, or the S&P will be at 6.66, in either case current investors will long be gone, having sold to whatever hot potato holders are the most fervent believers in Jim Cramer's economic "fundamental analysis."
hat tip IMA5U, Chart data sourced from www.creditsights.com
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Below, I present a summary of the most notable REIT follow on offerings done in the past 2 months: as one can see the amount raised is staggering, and the main lead underwriter (sole or joint) by a vast margin is Merrill Lynch.
The two immediate take home messages here are that despite an average 24% dilution for REITs which have undergone the ML Cohen and Steers treatment, they have still outperformed the general REIT universe in price appreciation (P/FFO) by a factor of almost 300% (8.4x to 9.6x for broad universe compared to 11.7x to 14.4x for the diluted names). Odd you say?
And while the chart above shows not only the ridiculous prominence of ML in the pantheon of busy little underwriters, it also demonstrates just how much capital REITs have raised to date. The reason of course is the imminent maturity schedule for the vast majority of these. The chart below shows the 2009-2011 maturity schedule for the bulk of the major REITs split by category. One can see that based on just these main 15 companies, there is almost $20 billion in upcoming debt maturities over the next 3 years, which explains why any and all REITs will take advantage of every single orchestrated market bubble from now until they ultimately follow in the shoes of GGP, to sell the pieces of paper better known as common stock.
In other words, mother Merrill will likely not stop (and the market squeeze will likely not loosen) until there is at least another $10 billion in additional dilution from the remaining usual REIT suspects (and until ML has pocketed at least another $100 million in underwriting fees). Even so, I have not disclosed the 2012-onward maturities, where things really start to get interesting. But by then, as everyone knows, we will either have hyperinflation, and all the REITs' exiting debt would be payable down with one mere $1 trillion bill, or the S&P will be at 6.66, in either case current investors will long be gone, having sold to whatever hot potato holders are the most fervent believers in Jim Cramer's economic "fundamental analysis."
hat tip IMA5U, Chart data sourced from www.creditsights.com
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On "Rock Bottom" Housing Prices
For all who claim that rampant inflation is up next, and home price deflation is over, I present the following charts for readers to ruminate on just how much higher existing home sales inventories are relative to some semblance of a trendline, in addition to a long-term chart comparing CPI with the median home price. Not only is there massive oversupply still, but the leverage induced price boom over the past 30 years still has a ways to go before it catches up with CPI, absent the impact of cheap credit (which is why Geithner will soon be personally handing out limitless Diner's Clubs, backed by the full faith of the worthless dollar).
P.S. the phrase "rock-bottom housing prices" was uttered 5 times on CNBC in the past 3 hours. Curious what the hourly quota is.
hat tip Lev Sphere: Related Content
P.S. the phrase "rock-bottom housing prices" was uttered 5 times on CNBC in the past 3 hours. Curious what the hourly quota is.
hat tip Lev Sphere: Related Content
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First Tax-Month Budget Deficit Since 1983
The U.S. reported the first April budget deficit in over 25 years, specifically $21 billion on a significant drop in individual and corporate tax receipts. April, which is traditionally the strongest budget revenue month due to the peak in individual tax revenue collection was unable to buck the trend in second derivatives and green shoots and is likely an indication of just how much worse the economy will get with traditional Treasury revenue sources rapidly disappearing. The Congressional Budget Office, which forecasts a $1.75 trillion budget shortfall for the Sept. 30 ended fiscal year, had estimated a deficit of $19 billion, further demonstrating that green shoots are merely rose-colored glasses.
Bulls will point out that at this point the U.S. will merely print its way out of any deficit, as the government is more than happy to take the place of any and all taxpayers, and the resultant record debt/GDP ratio will be merely the "next administration's problems."
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Bulls will point out that at this point the U.S. will merely print its way out of any deficit, as the government is more than happy to take the place of any and all taxpayers, and the resultant record debt/GDP ratio will be merely the "next administration's problems."
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The Full Faith Of The DMCA
Now that Merrill Lynch has upgraded every single REIT and has a price target of +/- infinity, (conveniently pocketing over $100 million in the process), the company can focus on more pressing issues at hand (and no, not redecorating Thain's legacy office in the neo-uber-criminal style). Instead, the bank has sent not one, not two, but a whopping six cease and desist orders to Zero Hedge. As the recently acquired bank can finally afford to pay lawyers again compliments of its REIT analysts, it has decided to pursue the source of all evil: all those David Rosenberg posts Zero Hedge has published, that seek to educate and provide some color to otherwise confused and CNBC abused readers and investors.
If it is any consolation, now that David is literally out of the building, ML can sleep soundly that ZH will only focus on the bank's daily REIT upgrades (no, we have not forgotten about those) as it is alas the only source amusement coming out of doomed mother Merrill.
So, dear readers, please be aware that the following six posts will be removed at some point tonight as Zero Hedge is unable to underwrite and collect on average $10 million per REIT dilution events and thus afford any lawyers (except potentially for White & Case's Tom Lauria).
http://zerohedge.blogspot.com/2009/05/parting-thoughts-from-rosenberg-ver-10.html
http://zerohedge.blogspot.com/2009/05/shooting-shoots.html
http://zerohedge.blogspot.com/2009/05/look-back-at-week.html
http://zerohedge.blogspot.com/2009/04/are-fed-and-markets-on-same-page.html
http://zerohedge.blogspot.com/2009/04/spin-on-6-gdp.html
http://zerohedge.blogspot.com/2009/04/busy-day-for-reit-analysts.html
As for the 500 or so websites that fervently and automatically repost and redistribute ZH content, well, those we have no control over. Sphere: Related Content
If it is any consolation, now that David is literally out of the building, ML can sleep soundly that ZH will only focus on the bank's daily REIT upgrades (no, we have not forgotten about those) as it is alas the only source amusement coming out of doomed mother Merrill.
So, dear readers, please be aware that the following six posts will be removed at some point tonight as Zero Hedge is unable to underwrite and collect on average $10 million per REIT dilution events and thus afford any lawyers (except potentially for White & Case's Tom Lauria).
http://zerohedge.blogspot.com/2009/05/parting-thoughts-from-rosenberg-ver-10.html
http://zerohedge.blogspot.com/2009/05/shooting-shoots.html
http://zerohedge.blogspot.com/2009/05/look-back-at-week.html
http://zerohedge.blogspot.com/2009/04/are-fed-and-markets-on-same-page.html
http://zerohedge.blogspot.com/2009/04/spin-on-6-gdp.html
http://zerohedge.blogspot.com/2009/04/busy-day-for-reit-analysts.html
As for the 500 or so websites that fervently and automatically repost and redistribute ZH content, well, those we have no control over. Sphere: Related Content
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Guest Post: The Simplest Explanation
Submitted By Distressed Lookout
Publish at Scribd or explore others:
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Even Moody's Thinks Fed's "Adverse Case" Is A Joke
When even Moody's chimes in and notes that the Fed's "Adverse Case" assumptions are in line with their "Base Case" assumptions, one can't help but wonder in what parallel universe the Federal Reserve is expecting to see its optimistic outcome realized, especially since many of its macro worst case parameters have already been trampled by real economic data.
In this particular case, Moody's focuses on credit-card charge offs; however the same principle can easily be applied to any other axis in the Supervisory Capital Assessment Program. As Moody's says:
What all this means of course, is that American Express better pull of its equity follow on offering pretty damn quick, before all its credit card holders decide to draw down their Centurions and use the cash as collateral against which to short the credit card company. Sphere: Related Content
In this particular case, Moody's focuses on credit-card charge offs; however the same principle can easily be applied to any other axis in the Supervisory Capital Assessment Program. As Moody's says:
SCAP loss rates for credit card assets range from 12%-17% in the Baseline scenario, and 18%-20% in the More Adverse one. We currently expect industry charge-offs to peak at 12% in the second quarter of 2010, which translates, roughly, to 22% on a two-year cumulative basis [TD: their base case]As for specific differences which can account for the rose-colored tint on Bernanke's contact lenses, the rating agency provides the following color:
Therefore, the Fed’s More Adverse charge-off rate assumptions for issuers’ managed credit card portfolios are consistent with our expected range of charge-off rates for related credit card trusts. Our current assumptions are predicated on the observance of surging delinquency trends and also the expectation that the unemployment rate will peak at about 10% in early 2010. Changes in the trajectory of unemployment will have the greatest influence on the actual magnitude and timing of peak charge-off rates.
Differences exist between trust data and managed portfolios, making a direct comparison of Fed’s and our estimates difficult. For example, Chase’s credit card trust (“CHAIT”) does not include receivables from the recently acquired Washington Mutual credit card portfolio, which has comparatively much higher charge-offs.Of course, it is not possible to engineer a short squeeze if retail investors are fully aware of just how bad things are going to get, and the last thing one needs is for Capital One and other credit card companies to be unable to raise equity at this critical market inflection point, so everything ends up in proper perspective. For a good observation of how one man's Adverse Case is another man's Base Case, see the table below.
Although the Fed’s More Adverse charge-off rate assumption is much higher than our base case expectation, some of that disparity is explained by the absence of the high-loss Washington Mutual portfolio in CHAIT. Other disconnects between managed and trust data may be explained by differences in accounting for recoveries (i.e., the reporting of net or gross charge-offs) and assumptions regarding balance growth/attrition rates.
What all this means of course, is that American Express better pull of its equity follow on offering pretty damn quick, before all its credit card holders decide to draw down their Centurions and use the cash as collateral against which to short the credit card company. Sphere: Related Content
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Biggest Loan Movers: Week Of May 8
Loans have officially entered the twilight zone.
source: LoanConnector.com Sphere: Related Content
source: LoanConnector.com Sphere: Related Content
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Guest Post: Open Letter To FDIC
To: Sheila Bair, FDIC
Earlier this evening Advanta, which through its FDIC-insured bank Advanta Banc Corp makes credit card loans, declared its intentions to allow its securitization trust to go into early amortization, while concurrently launching a coercive tender offer for the securities issued by the trust. This marks the first intentional amortization event, which if unpunished, could jeopardize the stability of securitization markets, the government’s special programs to aid the market such as TALF, the bank’s depositors, and the legal rights of Advanta’s ABS investors.
As it currently stands, Advanta is on the express-train to insolvency. Faced with crippling losses and hazy capital strength (tangible equity / net managed assets = ~4%), the company decided to throw a first-of-its-kind Hail Mary pass in the hope that the FDIC would not place the firm into receivership.
Advanta intentionally avoided any and all actions to support their trust, widely used by peers, such as the issuance of additional subordinate securities. By doing so they drove the trust into imminent early amortization, reducing the value of investor’s securities, which are the bank’s off-balance sheet liability. Advanta then announced a $1.4bn predatory tender offer for the class ‘A’ securities of the trust. It was Advanta’s hope that by coercively purchasing the investor’s interest at a discount (using FDIC insured deposits, $1.1bn of which are brokered deposits), they could increase their capital support. This is akin to purchasing the ashes of your neighbors uninsured house (which you just burned down), to build a second garage. If these were on-balance sheet liabilities, this would be both illegal, and a subjective default. Moreover the FDIC would place the bank into receivership long before this could occur. The fact that these liabilities are off-balance sheet cannot, and should not insulate the bank from immediate receivership.
If this intentional amortization and tender offer were successful, it would quickly stomp the green shoots of confidence in securitization, that the Treasury and FDIC have worked so hard for, back into the ground. Advanta’s actions advantage equity holders at the expense of secured lenders, which will decrease the likelihood of investors taking further interest in this product. Other credit card lenders such as Capital One, Discover, Citibank, etc. could find it impossible to access markets in which investors have no confidence.
Lastly, Advanta’s actions increase, not decrease, the risk to the bank’s depositors. Advanta is using all available cash reserves (which the firm has built by raising brokered deposits) in order to purchase rapidly deteriorating assets. The bank is destroying all available liquidity, while decreasing confidence in its staying power.
The FDIC should send a clear signal to the market that reckless behavior by short-sighted management will not be tolerated. This is a clear cut example of when the FDIC should intervene to protect taxpayers, depositors, and the rights of ABS investors. Failure to act now will simply leave a larger hole to clean up later.
Robert Leshner
Taxpayer Sphere: Related Content
Earlier this evening Advanta, which through its FDIC-insured bank Advanta Banc Corp makes credit card loans, declared its intentions to allow its securitization trust to go into early amortization, while concurrently launching a coercive tender offer for the securities issued by the trust. This marks the first intentional amortization event, which if unpunished, could jeopardize the stability of securitization markets, the government’s special programs to aid the market such as TALF, the bank’s depositors, and the legal rights of Advanta’s ABS investors.
As it currently stands, Advanta is on the express-train to insolvency. Faced with crippling losses and hazy capital strength (tangible equity / net managed assets = ~4%), the company decided to throw a first-of-its-kind Hail Mary pass in the hope that the FDIC would not place the firm into receivership.
Advanta intentionally avoided any and all actions to support their trust, widely used by peers, such as the issuance of additional subordinate securities. By doing so they drove the trust into imminent early amortization, reducing the value of investor’s securities, which are the bank’s off-balance sheet liability. Advanta then announced a $1.4bn predatory tender offer for the class ‘A’ securities of the trust. It was Advanta’s hope that by coercively purchasing the investor’s interest at a discount (using FDIC insured deposits, $1.1bn of which are brokered deposits), they could increase their capital support. This is akin to purchasing the ashes of your neighbors uninsured house (which you just burned down), to build a second garage. If these were on-balance sheet liabilities, this would be both illegal, and a subjective default. Moreover the FDIC would place the bank into receivership long before this could occur. The fact that these liabilities are off-balance sheet cannot, and should not insulate the bank from immediate receivership.
If this intentional amortization and tender offer were successful, it would quickly stomp the green shoots of confidence in securitization, that the Treasury and FDIC have worked so hard for, back into the ground. Advanta’s actions advantage equity holders at the expense of secured lenders, which will decrease the likelihood of investors taking further interest in this product. Other credit card lenders such as Capital One, Discover, Citibank, etc. could find it impossible to access markets in which investors have no confidence.
Lastly, Advanta’s actions increase, not decrease, the risk to the bank’s depositors. Advanta is using all available cash reserves (which the firm has built by raising brokered deposits) in order to purchase rapidly deteriorating assets. The bank is destroying all available liquidity, while decreasing confidence in its staying power.
The FDIC should send a clear signal to the market that reckless behavior by short-sighted management will not be tolerated. This is a clear cut example of when the FDIC should intervene to protect taxpayers, depositors, and the rights of ABS investors. Failure to act now will simply leave a larger hole to clean up later.
Robert Leshner
Taxpayer Sphere: Related Content
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Frontrunning: May 12
- Was it a sucker's rally? (WSJ)
- Stress testing Obama's facts (WSJ)
- U.K. pub tenants held "hostage" as beer prices, rents increase (Bloomberg)
- Citi using most of TARP capital to make loans (Reuters)
- Ford selling new shares "in show of strength" (WSJ)
- Paul Krugman says V-shaped recovery priced in by market, extremely unlikely (Bloomberg)
- Advanta shuts down credit-card lending amid surging charge-offs (Bloomberg)
- The real problem with credit cards: the cardholders (Time)
- Bank of America to take Merrill public? (The Deal)
- David Geffen offered to buy NYT stake at market, Falcone wanted premium (Reuters)
- Curve watching beats room full of economic forecasters (Bloomberg)
- Is the tailwind becoming a headwind? (Big Picture)
- Bernanke says U.S. banks must test more to identify other risks (Bloomberg)
- More on the smart/dumb money issue (Technical Take)
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