100 Cayman Islands Hedge Funds Launch Despite Predictions

Despite dire predictions for the Cayman Islands hedge fund industry reported in the Financial Times this week, local figures paint a very different picture. As of 30 June there were 9,486 funds in this jurisdiction, an increase of over one hundred on the previous quarter. Other good news is that so far this year, authorizations have outstripped terminations each and every month. Ingrid Pierce, partner and head of Walkers' Hedge Fund Group in the Cayman Islands, said clients continue to have the utmost confidence in the Cayman Islands as the domicile of choice when it comes to hedge funds, and despite concerns to the contrary, very few funds have either redomiciled or determined to set up funds elsewhere.

With clients among the world's leading investment managers and financial institutions, Walkers reports a healthy flow of instructions for new funds to be established.

“Recent press commentary has pointed to a preference for new hedge funds to be domiciled in Ireland and Luxembourg at the expense of Cayman, however a more likely scenario is that these jurisdictions will co-exist with the Cayman Islands, each appealing to different if partially overlapping segments within the investor and investment manager communities,” Pierce added.

In a short article in the UK’s leading financial paper, The Financial Times, the future picture of the Cayman Islands hedge fund sector was painted as bleak, with some hedge fund managers stating that institutional investors are increasingly choosing to invest in funds that comply with Europe’s onshore Ucits regime rather than unregulated offshore hedge funds.

Mark Fleming, a partner at Tiburon Partners, an Asia specialist that runs both Newcits and Cayman funds, said that the Cayman Islands would “wither on the vine” and his firm would not open another Cayman fund.“If I was a Cayman lawyer with more than three or four years of career expectation I would wonder what I’m going to do with the rest of my working life,” he told the FT. Dan Mannix, head of sales at London-based RWC Partners, said his firm was also looking at redomiciling its Cayman funds into the EU. “Funds in offshore centres such as the Caymans are not favoured at the moment by the investment community,” he said.

However, Pierce pointed out that, while UCITS funds are suitable for particular strategies and investors with certain requirements, they are wholly unsuitable for a large number of other funds that continue to enjoy the benefits offered by funds established in Cayman.

“This shows that the Cayman model is incredibly resilient and this is borne out by the statistics on fund registrations as well as the experience of Walkers and other firms regarding instructions for the establishment of new funds,” she said.

Meanwhile, on Thursday morning Anthony Travers, Chairman of Cayman Finance, said he was bemused by the comments made to the FT. Based on CIMA’s figures, he predicted there would be in excess of 10,200 fund registrations by the financial year end. “This will exceed the all-time high watermark for the Cayman fund Industry,” he added.

Company incorporations were also growing again, he noted, with increases of over 14% for Q1 and 24% for Q2. “It is more helpful to report on the actual numbers rather than the wishful thinking on the part of competitor jurisdictions,” Travers observed.

“We take a statistical approach to these matters and will also look forward to comparing the performance metrics of our traditional and successful hedge fund product to the EU regulated ‘Newcits’ funds over the next couple of years. Monthly fund dissolutions in Cayman appear well within historical norms and do not evidence any trend towards redomiciliation. We would anticipate however that fund managers with a purely retail product will in the immediate term create a Eurocentric model but Cayman has not historically provided a UCITS product,” the Cayman Finance chair explained.

An article in Hedge Funds Review concerning Dalton Strategic Partnership’s doubling the investment risk of its Melchior European Fund in a bid to seek higher returns illustrated the point that Cayman offers a different kind of fund regime.

Magnus Spence, a partner in the firm, pointed out that traditional hedge fund investors are still prepared to take more risk in order to achieve higher returns outside of UCITS where investors are happy to sacrifice returns for a lower risk profile. Spence pointed out the need of the hedge fund sector to offer investors the choice. "If we want to be attractive to both types of hedge fund investors we need to be structured in the right products and we need to have the right risk return profile," Spence added.

Pierce pointed out that Cayman's leadership of the investment funds industry as the domicile of choice for hedge funds has developed over time as a result of its pro-business, cost efficient environment within a strong system of regulation that adheres to international standards. Even though Cayman was catering to higher risk investors, she said, it was still likely to be able to maintain access to the European market.

“Looking at any of the likely conditions that non-EU countries would be required to meet in order for their funds to gain access to the European market, there is nothing to suggest that the Cayman Islands will not maintain its leading position and continue to play a valuable role in the international financial system.”

Over the medium to long term, Pierce indicated that it was unlikely that the AIFM Directive will adversely impact Cayman’s position. “Government has already demonstrated its commitment to do everything within its power, acting with propriety and integrity, to safeguard its place among the world's leading international financial centres, including, where necessary, making amendments to its regulatory and legislative regime,” Pierce told CNS.

The statistics from CIMA reveal that despite the economic recession and the international criticism that Cayman and other offshore jurisdictions have faced in recent times, the hedge fund business here remains solid.

At 30 June 2010 there were 8929 registered funds in Cayman, 427 administered and 130 licensed. In January 158 funds were domiciled and 74 terminated, while in February there were 104 started and only 32 terminated; in March 100 came and 35 went; and again in April 96 new funds arrived compared to 28 which ended; In May 70 funds were gained compared to 36 terminations; and in June 57 were registered while 46 terminated.

The legislation which has caused some concern for the local fund industry, however, is the proposed EU Alternative Investment Fund Managers directive which would block funds from outside the region from being marketed to Europeans countries unless the jurisdiction adopted “equivalent” legislation, a restrictive barrier few countries are expected to meet.

The controversial proposal provoked a storm of opposition, not just from offshore jurisdictions such as Cayman but also the US and Europe’s governments. As a result the EU is now engaged in an effort to reconcile the now three separate suggested versions of the AIFMD text produced by the European Commission.

Instead of an “equivalence” stipulation, it is expected that non-EU fund jurisdictions will need to meet four criteria, such as having co-operation agreements between their regulators and those in the EU, not being blacklisted over money laundering or terrorist financing failures, having tax treaties with Europe and allowing reciprocal access to their market for European products. This means the Cayman Islands would have much less difficulty in complying with the AIFMD and therefore the industry is far less likely to suffer any adverse effects.

Source: www.caymannewsservice.com

Data Commoditization in the Securitization Markets (Part 3)

2. Loan Data Vendors – these are data vendors who specialize in the collateral (loan) information. This seems to overlap with component #1 item C (in blog entry 2 of this series), and to some degree it DOES overlap, however, Intex has not been known for providing the level of loan detail and in particular, ongoing historical monthly payment information that a proper Loan Data Vendor provides. Intex does provide monthly collateral information but it can be quite difficult to see and/or analyze it from an historical perspective. This thereby creates a market “niche” that various companies have stepped into in order to capture this need. Examples include Loan Performance (this is the largest and most well-known of the loan data vendors) , Black Box, ABSNet (Lewtan), Lender Processing Services, S&P and others. Most importantly this component includes at least the following:

a. Loan Data: this includes many fields of information relating to the actual loan itself including such things as original balance, current balance, purchase price of the property, zip code, state, MSA (Metropolitan Statistical Area), loan purpose (purchase, refinance or cash out), occupancy status (primary residence, investment property); documentation of income or assets, sale price, loan to value ratio, first or second lien, interest rate, loan type (fixed rate or adjustable rate mortgage), if an ARM loan, then what index does the loan reference, Interest Only period (if any), any prepayment penalties and for how long, loan modification details and so forth.

There are over 20 million loans within non-agency securitized deals so you can see that this is a fairly large data set.

b. Historical monthly payment records. These records tell you each month whether the borrow has paid and if so, how much; if the borrower is delinquent and how many days (30, 60, 90+); whether the loan is in foreclosure proceedings and, if it has already been foreclosed, how long it has been in REO. Also, when the property has been liquidated and whether there have been any losses and so forth.

Some loan data vendors provide web-based tools that you can use to query their loan data but many firms also license to routinely receive the data from the loan data vendor onto their own computer systems because they have mortgage research groups who want to be able to analyze the data in depth in order to assist them to predict the future performance of the loans based on what the historical data shows. This provides only a partial picture of the borrower and the property serving as collateral. See the next section for an extremely important additional piece of the puzzle.

Source: www.theticasystems.com

Data Commoditization in the Securitization Markets (Part 2)

Today we continue our discussion of the RMBS data industry with a brief section on “Deal Data Vendors”.

1. Deal Information Data Vendors – by this we mean those data vendors that provide information about deals which includes:

*Overall deal information (Deal name, issuer, investment banker, servicer, trustee, whether the deal is Prime, AltA, Subprime, Original and Current Deal Balance, Cleanup-Call details, etc)
*Tranches (cusips, tranche names, original and current balances, coupon information, writedowns, ratings, credit support, etc)
*Collateral data (loan-level details, loan originator, collateral group related information and historical payments, etc)
*Triggers (primarily cumulative loss and delinquency triggers)
*Hedge Information (interest rate swaps, monoline bond guarantees, etc)
*Historical performance (especially useful for deal surveillance purposes)
*and so forth

A notable example of a data vendor who has all of the above is Intex. This is the most familiar and most widely used vendor of deal information in the industry. There are others including ABSNet (Lewtan) and Markit that also provide this information, but none to the degree that Intex does. Intex has been the longest and most firmly entrenched player in this space and consequently, the most costly.

Whereas it’s true that Intex provides deal information inside deal files and that these files are routinely delivered to a properly licensed client’s own file server, these files are made up of “one deal per file” therefore it becomes quite difficult to compare deals or query across all subprime deals and so forth.

What is really necessary is for a client to have software that reads all of the data about the deals (as enumerated above) into a proper database which can then be queried and analyzed with the purposes of spotting trade ideas or opportunities or generating various reports.

Note that this component does NOT include Bond Analytics – see the 5th component for more data about Analytics Providers)

Source: www.theticasystems.com

Data Commoditization in the Securitization Markets (Part 1)

Introduction

As has occurred within many industries throughout history, the data vendors that provide various information about securitization have been undergoing huge changes causing large price decreases and company consolidation. Additionally, we are seeing many new partnerships springing up concurrent with the increasing need for coherent complete systems to manage all information relating to securitized deals. Without a complete picture of your ABS bonds, how can you accurately assess risks and price volatility?

In this article, we will be reviewing what the key components of a securitization system should be and take a look at some of the vendors participating in each of those components and then describe some of the market forces which we think are creating more and more of a “commoditization” of securitization information.

This trend, we believe, is leading to substantial price compression for securitization data products, causing data to become cheaper and more accessible. This trend is continuing into the future and will result in better deals for industry participants.

In this paper, we describe all the major components of an RMBS information system so as to provide a broad overview of the data industry and how it relates to trading activities. We then go on to talk about some new initiatives in the industry and what their potential impacts will be on the various players in the market place and what this means for your firm.


Data Components of an ABS System

There are five primary components making up the key data needs relating to securitizations. Without these, a firm engaged in trading bonds backed by mortgages is going to be “picked off” by other firms and might as well not be trading as it’ll be just too risky.

These five components are:

1.Deal Information Data
2.Loan Data
3.Enhanced Loan Data
4.Predictive Model
5.Bond Analytics

Historically, trading firms have emphasized one or more of the above components, mostly due to lack of investment in technology and data. It is no longer enough to be “two guys and a Bloomberg” in this industry. What is needed are comprehensive yet flexible systems.

Source: www.theticasystems.com

Credit IO’s – Don’t Be a Slave to Your Data

In this blog we’re going to address a common complaint that we’ve seen users have: that when they’re putting together systems, too much automation creates a “black box” which then doesn’t permit the user to adjust the data in the manner in which they see fit.

Let’s face it, traders are on the front lines evaluating complex securities such as ABS bonds and the more you can permit users to take the data and create useful models that don’t “lock them into a particular view” of what’s being traded, the better it will be. Most often, traders build their own spreadsheets and, in general, do a great job. However, the lack of ability to dynamically communicate with a database of securities information can cause a great deal of trouble in the ABS market, if only when the next month’s data set comes out from trustees and they find themselves scrambling to manually update their spreadsheets.

Additionally, IT departments blanche at the thought of those overly flexible, manipulable spreadsheets that defy “systemization”. In this article we will discuss a specific example and how to satisfy the needs of both areas: IT and the Trading Desk.

Let’s take up the subject of “Credit IO’s”.

Definition: A Credit IO is an ABS bond which is sufficiently far down in the Capital Structure of an ABS deal that, based on the level of collateral defaults and loss severities that the market is currently experiencing, cause an investor to NOT expect any payment of principal.

Assumption: the bond’s principal WILL be written down to zero at some point. The investor expects NOT to get any principal back. However, until that point, the bond can earn interest cash flows therefore it’s an “Interest Only” bond.

Key Factor: Loss timing. Between now and precisely WHEN the bond is fully written down, the bond will be earning interest. Those monthly cash flows are worth something. The faster the bond will be written down, the less interest cash will be received. The longer the bond exists, the longer the bond will receive cash flows. The trick is to figure out when the losses will hit the bond. The timing of the losses will therefore have a dramatic effect on the price that an investor should be willing to pay for the bond. Less time until the fully-written down point = lower price.

So let’s take a look at some of the elements relating to the data side of this. Here are some of the relevant points:

1. Delinquencies

2. Foreclosure and REO timelines

3. Loss Severities to be used in determining how much of each loan will be lost due to defaults.

4. Credit Enhancements levels – primarily overcollateralization (OC) and each tranche’s current level of credit support (how much of the capital structure is supporting the particular tranche(s) we are evaluating).

On a Bloomberg you can bring up a simplistic method of evaluating this by typing an ABS cusip followed by the Mortgage key (F3) and then typing “MTCS” . This gives you the ability to take the deal’s current level of 60 day and 90 day delinquencies and apply a particular percentage of each that you expect to go through to default. The amounts of loans in Foreclosure (FC) and Real Estate Owned (REO) are assumed to be 100% in default. So we have as an example:

	%	% that will default	default amt
% of Deal 60+ Day Delinq	8%	60%	4.8%
% of Deal 90+ Day Delinq	5%	70%	3.5%
% of Deal in FC	3.5%	100%	3.5%
% of Deal in REO	2.5%	100%	2.5%

For a total of 14.3% that we expect to end up in full default and thereby experience a loss.

Sum those figures up (14.3%) and multiply by a single loss severity input and you will have the approx amount of the deal that you will experience as a loss. Let’s say we use 50% Loss Severity. That will give us 7.15% of the outstanding collateral balance in the deal that we expect to impact the deal’s capital structure in the form of losses. Compare that amount versus the particular bond’s credit support that you’re evaluating and if you have a ratio (called the “Coverage Ratio” on Bloomberg), that is less than 1.00, then that bond is likely to disappear completely because there is simply not enough support for the bond to survive. Anyone with access to a Bloomberg can do the above. The above doesn’t actually try to predict WHEN the losses will occur – only that they are expected to occur at some point in the future. It also does not let you consider future loans that are current on their mortgage payments or are 30 days delinquent that will come down the “pipeline” into the more severely delinquent states and finally into realized losses. It also doesn’t try to tell you what it all means in terms of a “price” that you might be willing to pay for the bond.

So let’s kick this up a notch.

Loan-Level Delinquency information

First of all, let’s assume that we have access to loan-level information and that we know, not only the current delinquency status of each loan but exactly when the loan entered that status. Intex provides good loan level data for deals from about 2006 and onwards. Loan Performance provides loan-level information for all deals – loan level information is generally what Loan Performance is known for (but they don’t have very good data about the capital structures nor can they do really good cash flows on the bonds as Intex does). The point is that loan-level delinquency information is available.

So let’s retrieve all the loans from a particular deal into a spreadsheet from our database of loan-level information. Ideally, this should be automated from within the spreadsheet so we can always refresh the data whenever we need to ensure that it is representative of the most current data in our database.

We now have our hands on which loans are in which delinquency condition. Now, if we simplistically project out maximum timelines that all the loans will experience in FC and REO before they hit their loss point, we can derive a table of months going forward and WHEN those losses will be experienced.

For example, we can state the following:

A. Let’s say that a loan has been in FC for two months already: Let’s permit 6 months for the total “normal” amount of time that a loan is going to be in FC so that there are expected to be 4 months more of FC time for this particular loan. Then permit 6 months more for the full REO process. This means that month 10 is WHEN we expect the loss to hit.

B. Let’s say that a loan is currently in REO and has been so for 4 months. Permitting 6 months of complete REO time suggests that we have 2 more months to go. So 2 months from now is when we think we will realize a loss on this loan.

C. Let’s say that a loan has just become 90 days delinquent for the first time. They’re probably going to be in FC real soon, but maybe we feel that we should allow an additional month of being 90 days delinq. So we would have 1 more month of 90 days delinquency. A full 6 months of FC and 6 months of REO so that we expect the loss to hit in month 13.

We can continue to do the above for 60 days delinq loans and 30 day delinq loans. And possibly take some current loans based on the idea that some of these will also hit the skids.

Let’s assume an overall “Loss Severity” of 60%. According to some market participants 60% is getting more and more real. This means that, given a loan amount of $100,000 you are expecting to lose $60,000. Apply the loss severity input to each of the loan balances and sum those loss amounts up into each of the months you have projected into the future.

The result is that you end up with a table of months into the future within which losses can be summed up – month by month. At that point we have a relatively simplistic table giving us WHEN we expect the losses to hit. These losses will be applied to the bond’s outstanding balance and will eventually “amortize” the bond’s principal, via write-downs, down to zero. At each month, you calculate what amount of interest the bond should receive. Then we apply the loss amount for that month and decrease the bond’s outstanding principal balance so that in the next month there will, of course, be less interest earned. We keep doing this until the bond’s balance has been written down to zero, at which point you’re not earning any more interest on the bond. At that point, the bond has disappeared. Then sum up the interest payments that you received during the time when the bond was still “alive” and you have the amount of cash you’re going to receive on this bond. Divide that by the principal currently outstanding on the bond and you have the price that might be indicative of what you would be willing to pay. Notice that this last sentence is disregarding the time value of money. It can be an enhancement to “present value” (PV) those interest cash flows and then sum up the PV-ed cash flows to get a more accurate price.

It should be noted that if there is any “OC” remaining at the bottom of the capital structure in the deal, you have to allocate the loss amounts to the OC first before they start to impact the bond you’re evaluating. Likewise if there are any bonds BELOW the one you’re evaluating, because of the fact that losses are allocated from the bottom of the capital structure upwards, then each of those bonds below your bond each have to be written down to zero before the loss amounts start to impact your particular bond. The point being that your spreadsheet application must retrieve all of the bonds and any OC BELOW your bond and apply the loss amounts to EACH of their principal outstanding amounts BEFORE the losses start to impact your particular bond. Of course, this means that ALL of the bonds below the one you’re evaluating are also, each one, a “Credit IO” bond.

A few other observations

I want to emphasize that decreasing the FC and REO timelines in the model will have the impact of decreasing the amount of time that the bonds will survive thereby decreasing the length of time that the bonds will earn interest resulting in a lower price that one would be willing to pay for the bond. Obviously, if you’re buying you want to pay as low as possible so underestimating time lines will help you. If you’re selling, you’ll probably want to consider that the time lines are longer so that you can sell it for a higher price. These are the normal competitive sort of interests in the market place.

The above represents a simplistic model but one which gives a much greater degree of flexibility than the Bloomberg MTCS function. Done correctly, it also permits the user to adjust the time lines and severities to ones which they feel comfortable with when evaluating “Credit IO’s”.

Also, by keeping all of the above factors in mind, the user/trader can still perform the analysis in the way that they see fits best for the environment they’re in. They’re not “locked” into a “black box” which they can’t see inside of.

There are, of course, much more extensive features that can be built into such a model which are not within the scope of this blog.

Jack Broad is the CEO of Thetica, LLC. Thetica's ABS Trader Tools allows you to price bonds faster and easier. You can analyze data across many deals at once, from multiple vendors and run many scenarios at the same time with rapid results. Integrated into your own systems for easy and fast customizable access to the data you need.

Source: www.theticasystems.com

SEC Proposes New Disclosure Rules for Target-Date Funds

Securities and Exchange Commission

On the heels of the turmoil caused by the financial crisis, regulators are proposing new rules governing how target-date funds are named and marketed.

The rules, announced late Wednesday, are part of an effort to provide transparency for investors and guide investment decisions, the Securities and Exchange Commission said.

The SEC's proposals would require an allocation tagline next to a fund's name, stating the proportion of cash, stocks, and bonds in the portfolio, and more detailed disclosure on the types of investments made throughout the life of the fund.

The market turmoil in 2008 revealed many investors' misunderstanding of how target-date funds managed their money. In some cases, investors in funds close to maturity were shocked to discover the high proportion of stocks in their portfolios. For example, Oppenheimer Transition 2010 /quotes/comstock/10r!ottnx (OTTNX 7.47, +0.02, +0.27%) lost 41% in 2008.

The market meltdown showed that target-date funds could lose money and perform in ways investors did not expect, SEC Chairman Mary Shapiro told The Wall Street Journal.

The SEC worried that the retirement year, which is a part of the fund name, led investors to believe the fund's performance depended solely on this factor. While there is one date, risk levels vary widely depending on asset allocation.

The proposals would see target-date fund marketing materials provide more detail on investment mixes through the course of the fund. Both print and electronic brochures would need to include graphics that depict the asset allocation and clearly noting that the mix changes over time.

Disclaimer text would also be revised to realign investor expectations. Marketing materials would have to encourage investors to consider their own risk tolerance and the fact that the fund may be in the red, even at the target date.

"Together these rule amendments are designed to foster investor understanding of target-date funds and reduce the possibility that investor will be confused or misled," Shapiro said in a statement.

The SEC will seek public comment on the amendments for a 60-day period following publication in the Federal Register.

Created in the mid-1990s, target-date funds offer an all-in-one investment choice, letting holders choose an approximate retirement date as the fund automatically changes the mix of cash, stocks, and bonds to more conservative balances as the date approaches.

Since their inception, target-date funds have grown quickly and are a popular choices in 401(k) plans. According to the SEC, assets held in target-date funds total about $270 billion.

Source: www.marketwatch.com

Reverse Mortgage Pools Keep AAA Rating says Fitch

The Ratings Outlook of HECM Trusts backed by reverse mortgage loans continue to hold their AAA rating said a statement from Fitch Ratings. The classes confirmed consist of a pool of reverse mortgages mortgages (HECM) insured by the Federal Housing Administration and their ratings outlook remains stable.

During the review Fitch compared the actual pay-down performance of the classes to its own cash flow projections and found that there have been no trigger events.

“Taken as a whole, reverse mortgage securitizations are definitely performing better than most other non-agency residential mortgage securitizations of the same vintage,” said Joe Kelly, Partner at New View Advisors, a capital markets and investment bank specializing in the reverse mortgage sector. “The bonds secured by reverse mortgage securitizations have not experienced the downgrades and write-downs so widespread in other sectors of the securitization market.”

However, Kelly said that with any HECM investment vehicle, the issue of taxes and insurance defaults affect the deals. “Some of the HECM loans in these securitizations have defaulted and some of these trusts now own REO properties. Of course, the role of the servicer is very important here, so it is significant that Fitch recently upgraded Financial Freedom’s servicer rating.”

Even with the T&I issues, Kelly added, “generally speaking the reverse mortgage securitization sector is performing well under difficult economic conditions, and Fitch’s recent ratings affirmations attest to that.”

Source: www.reversemortgagedaily.com

Owners Stop Paying Mortgage ... And Stop Fretting About It

For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of.

Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”

A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.

This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.

“I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”

Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

While there are no firm figures on how many households are following the Pemberton-Reboyras path of passive resistance, real estate agents and other experts say the number of overextended borrowers taking the “free rent” approach is on the rise.

There is no question, though, that for some borrowers in default, foreclosure is only a theoretical threat for a long time.

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier.

In some states, including California and Texas, lenders can pursue foreclosures outside of the courts. With the lender in control, the pace can be brisk. But in Florida, New York and 19 other states, judicial foreclosure is the rule, which slows the process substantially.

In Pinellas and Pasco counties, which include St. Petersburg and the suburbs to the north, there are 34,000 open foreclosure cases, said J. Thomas McGrady, chief judge of the Pinellas-Pasco Circuit. Ten years ago, the average was about 4,000. “The volume is killing us,” Judge McGrady said.

Mr. Pemberton and Ms. Reboyras decided to stop paying because their business, which restores attics that have been invaded by pests, was on the verge of failing. Scrambling to get by, their credit already shot, they had little to lose.

“We could pay the mortgage company way more than the house is worth and starve to death,” said Mr. Pemberton, 43. “Or we could pay ourselves so our business could sustain us and people who work for us over a long period of time. It may sound very horrible, but it comes down to a self-preservation thing.”

They used the $1,837 a month that they were not paying their lender to publicize A Plus Restorations, first with print ads, then local television. Word apparently got around, because the business is recovering.

The couple owe $280,000 on the house, where they live with Ms. Reboyras’s two daughters, their two dogs and a very round pet raccoon named Roxanne. The house is worth less than half that amount — which they say would be their starting point in future negotiations with their lender.

“If they took the house from us, that’s all they would end up getting for it anyway,” said Ms. Reboyras, 46.

One reason the house is worth so much less than the debt is because of the real estate crash. But the couple also refinanced at the height of the market, taking out cash to buy a truck they used as a contest prize for their hired animal trappers.

It was a stupid move by their lender, according to Mr. Pemberton. “They went outside their own guidelines on debt to income,” he said. “And when they did, they put themselves in jeopardy.”

His mother, Wendy Pemberton, who has been cutting hair at the same barber shop for 30 years, has been in default since spring 2008. Mrs. Pemberton, 68, refinanced several times during the boom but says she benefited only once, when she got enough money for a new roof. The other times, she said, unscrupulous salesmen promised her lower rates but simply charged her high fees.

Even without the burden of paying $938 a month for her decaying house, Mrs. Pemberton is having a tough time. Most of her customers are senior citizens who pay only $8 for a cut, and they are spacing out their visits.

“The longer I’m in foreclosure, the better,” she said.

In Florida, the average property spends 518 days in foreclosure, second only to New York’s 561 days. Defense attorneys stress they can keep this number high.

Both generations of Pembertons have hired a local lawyer, Mark P. Stopa. He sends out letters — 1,700 in a recent week — to Floridians who have had a foreclosure suit filed against them by a lender.

Even if you have “no defenses,” the form letter says, “you may be able to keep living in your home for weeks, months or even years without paying your mortgage.”

About 10 new clients a week sign up, according to Mr. Stopa, who says he now has 350 clients in foreclosure, each of whom pays $1,500 a year for a maximum of six hours of attorney time. “I just do as much as needs to be done to force the bank to prove its case,” Mr. Stopa said.

Many mortgages were sold by the original lender, a circumstance that homeowners’ lawyers try to exploit by asking them to prove they own the loan. In Mrs. Pemberton’s case, Mr. Stopa filed a motion to dismiss on March 17, 2009, and the case has not moved since then. He filed a similar motion in her son’s case last December.

From the lenders’ standpoint, people who stay in their homes without paying the mortgage or actively trying to work out some other solution, like selling it, are “milking the process,” said Kyle Lundstedt, managing director of Lender Processing Service’s analytics group. LPS provides technology, services and data to the mortgage industry.

These “free riders” are “the unintended and unfortunate consequence” of lenders struggling to work out a solution, Mr. Lundstedt said. “These people are playing a dangerous game. There are processes in many states to go after folks who have substantial assets postforeclosure.”

But for borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future.

“I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. “I told the lady at the bank, ‘I can’t afford $2,500. I can only afford $1,300.’ ”

Mr. Tsiogas, who lives on the coast south of St. Petersburg, blames his lenders for being unwilling to help when the crash began and his properties needed shoring up.

Their attitude seems to have changed since he went into foreclosure. Now their letters say things like “we’re willing to work with you.” But Mr. Tsiogas feels little urge to respond.

“I need another year,” he said, “and I’m going to be pretty comfortable.”

Source: www.finance.yahoo.com

Wall Street Critic Frank to Shepherd Final Reform Bill

Joining Frank on the panel will be Senator Christopher Dodd, the Democratic author of a Senate bill on the issue, as well as Democratic Senator Blanche Lincoln and Republican senators Richard Shelby and Saxby Chambliss, aides said.

The Senate had been expected to name the other senators on the panel, but it adjourned on Monday without doing so. Aides said leaders hope to make an announcement in a day or so.

A source close to Senate discussions said the following eight other senators would be named to it: Democrats Tim Johnson, Charles Schumer, Tom Harkin, Patrick Leahy and Jack Reed, and Republicans Mike Crapo, Judd Gregg and Bob Corker.

One Senate aide said that list was valid, but no official confirmation was available.

House Speaker Nancy Pelosi must name the members of the panel from the House of Representatives. She may wait until the second week in June to do that, aides said.

As chief author of the House's bill, Frank can be expected to press for a tough crackdown on bank oversight, although his bill is in some ways less hard-hitting than the Senate's.

Under the Senate bill approved just last week, for instance, banks would have to spin off their swap-trading desks into affiliates. That provision, authored by Lincoln in the Senate, is not in the House bill.

Banking interests are digging in for a last attempt to water down reforms and carve out loopholes for themselves. The legislation, once enacted, will be the biggest overhaul of financial regulation since the Great Depression of the 1930s.

Dodd Pushed Bill Through Thursday

Dodd, riding a wave of voter antipathy toward Wall Street bailouts and big bonuses for bankers, pushed his version of Wall street reform through the fractious Senate last Thursday night after three weeks of dramatic debate.

Dodd and Frank, both Democrats, are committed to reform following the 2007-2009 financial crisis that slammed economies worldwide, unleashing a powerful political backlash against Wall Street and a global wave of reform initiatives.

Their conference committee must merge the House and Senate measures into a single bill, pass it through both chambers and send it to President Barack Obama. He is expected to sign it promptly into law. That could happen by July 4, analysts say.

The final shape of the legislation will also depend on the other members of the panel.

Lincoln Provision not in House Bill

The Lincoln provision is not in the House bill. Nor is a plan for setting up a new government panel to choose credit rating agencies to assess new debt instruments.

Lincoln, chairman of the Senate Agriculture Committee, faces a difficult primary election run-off on June 8 in Arkansas, her home state. The conference committee probably will not get down to work until after that date.

The Senate on Monday approved a nonbinding measure from Republican Senator Sam Brownback that aims to exempt car dealers, as the House did, from the oversight of a new federal financial consumer watchdog. The vote to approve was 60 to 30.

The Senate voted 87 to 4 to approve a motion from Republican Senator Kay Bailey Hutchison to tell the conference to set limits on applying to insurance companies the limits on proprietary trading proposed for banks under the Volcker rule.

"Proprietary trading is essential to the life insurance and property-casualty insurance industries," Hutchison said.

The rule -- named for its author, White House economic adviser Paul Volcker -- is another example of the Senate bill being somewhat tougher. The House bill does not contain the rule, but it would let regulators ban proprietary trading in cases where it threatens financial stability.

The Senate bill explicitly endorses the rule, but lets regulators write the details for it, possibly watering it down. Senators Carl Levin and Jeff Merkley, both Democrats, want to harden that provision to reduce regulators' latitude.

"I urge our colleagues in both chambers as they discuss final Wall Street reform legislation ... to strengthen the Dodd proprietary trading provisions, and to include a ban on conflicts of interest," Levin said in floor remarks on Monday.

Frank has said the conference may take about a month.

Shelby and Chambliss both voted against the Senate bill. They are the senior Republicans on the banking and agriculture committees, respectively. Dodd chairs the banking committee.

Source: www.reuters.com

Asset-Backed Securities Succumb to Sovereign Woes

[Original Article Written by Sarah Mulholland]

Yields on bonds backed by everything from skyscraper loans to credit card payments rose relative to benchmarks as concerns that European debt woes would derail an economic recovery roiled credit markets.

The gap, or spread, between top-rated securities tied to property loans and the benchmark swap rate rose 0.25 percentage point to 4.05 percentage points last week, according to JPMorgan Chase & Co. data. A month ago, the bonds paid a difference of 2.8 percentage points. Spreads on top-rated securities linked to consumer debt, such as credit cards and auto loans, have widened as much as 0.2 percentage points since the end of April, according to Wells Fargo Securities.

Credit markets swooned and stocks plunged as European leaders’ response to Greece’s sovereign debt crisis unsettled investors. Bonds that bundle loans to consumers, businesses and property owners have been on a “market rollercoaster,” according to Citigroup Inc. analysts led by Jeffrey Berenbaum.

“Investors could find little solace in the fact that this time around, unlike previous episodes of market meltdowns in 2008-09, securitized markets were not the main source of the general market volatility and anxiety, but rather one of its victims,” the New York-based analysts said in a May 21 report.

Banks and finance companies rely on the asset-backed market to raise cash so they can make new loans. Increased borrowing costs can lead to a ratcheting back of credit to consumers and businesses.

Reviving Issuance

The Federal Reserve started its Term Asset-Backed Securities Loan Facility last year to revive issuance and jumpstart lending after sales dried up amid the credit seizure. The component dedicated to asset-backed bonds ended in March. TALF was extended through June for bonds backed by commercial- property loans.

As the European sovereign debt crisis abates, and there is more clarity about the shape of the financial reform bill passed by the U.S. Senate on May 21, investors will probably abandon “worst case scenarios,” according to JPMorgan analysts led by Alan L. Todd.

The volatility will “continue over the very near term,” the New York-based analysts wrote. “Quantifying and handicapping a turning point is somewhat difficult given the binary nature of the prevailing issues.”

The Standard & Poor’s 500 Index lost 1.3 percent and the Dow Jones Industrial Average declined 1.2 percent to its lowest level since Feb. 10.

Source: www.businessweek.com

Germany Bans Short Selling, Angers Hedge Funds

Germany has instituted a controversial ban on naked short selling, hoping to prevent speculators from disturbing the financial markets. Germany has banned naked short selling in some stocks, euro-dominated bonds, as well as credit default swaps--likely a reaction to the role of CDC's in Greece's debt crisis.

But funds say they make markets more efficient and the ban could create more problems.

"I think it's ridiculous," said Pedro de Noronha, managing partner at hedge fund firm Noster Capital, which invests in credit default swaps. "All it proves is how scary it is to have people who are unsophisticated in ... financial markets imposing regulations on products they don't understand."

The move bans naked shorts in some financial stocks and euro-denominated bonds, as well as related transactions in credit default swaps (CDS), which attracted controversy during Greece's debt crisis, although funds say they accounted for a fifth or less of activity in Greek sovereign CDS.

David Stewart, chief executive of high-profile London-based hedge fund firm Odey Asset Management, warned the move could create, rather than remove, dislocation in financial markets.

"This could be very frightening for everyone. Once you start interfering with the markets it leads to dislocation," he said. "If there's just soundbite politics ... and no real co-ordination it's very unsettling."

Source: www.reuters.com

‘Lack of Trust’ Pummels Bank Lending in Europe: Credit Markets

Money markets are showing rising levels of mistrust between Europe’s banks on concern an almost $1 trillion bailout package won’t prevent a sovereign debt default that might trigger a breakup of the euro.

Royal Bank of Scotland Group Plc and Barclays Plc led financial firms punished by rising borrowing costs, British Bankers’ Association data show. The cost to hedge against losses on European bank bonds is 62 percent higher than a month ago. Investment-grade corporate debt sales in the region plummeted 88 percent last week to $1.2 billion from the previous period, according to data compiled by Bloomberg.

The rate banks say they charge each other for three-month loans in dollars rose to a nine-month high, even after a government-led rescue designed to prevent Greece from defaulting, and a new financial crisis. The euro fell to its weakest against the dollar since 2006.

Bank lending “conveys a lack of trust in the system,” said Robert Baur, chief global economist at Des Moines, Iowa- based Principal Global Investors, which manages $222 billion. “Banks are a little reluctant to lend overnight as they don’t know the full extent of what is on the bank balance sheets.”

The three-month London interbank offered rate in dollars, or Libor, climbed to 0.46 percent today, the highest since Aug. 7, from 0.445 percent on May 14 and 0.252 at the end of February, according to the British Bankers’ Association.

The spread between the three-month Libor rate and the overnight indexed swap rate, a barometer of the reluctance of banks to lend that’s known as the Libor-OIS spread, increased to 24 basis points, the most since Aug. 17, from 22 basis points.

Spreads Widen

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government securities climbed 3 basis points on May 14 to 171 basis points, or 1.71 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The index fell from 177 basis points a week earlier, the first decline since the period ended April 16.

Investors seeking to protect themselves from losses on corporate bonds or speculate on creditworthiness drove credit- default swaps higher today. The Markit iTraxx Europe Index of contracts linked to the debt of 125 companies climbed 5.4 basis point to 115.2 basis points as of 11:25 a.m. in New York, after earlier advancing to the highest level in more than a week, according to Markit Group Ltd. The contracts rise as investor confidence deteriorates and fall as it improves.

Markit CDX Index

The Markit CDX North America Investment Grade Index, tied to 125 companies in the U.S. and Canada, rose 2.75 to 110.6. The index was at 118.7 on May 7.

The extra yield investors demand to own emerging-market bonds instead of Treasuries rose 15 basis points on May 14 to 295 basis points, according to JPMorgan Chase & Co.’s Emerging Market Bond index. Spreads rose as high as 328 a week earlier.

European policy makers’ plan to prevent a sovereign-debt collapse that threatened to tear apart the common currency was released May 10. The loan package offers as much as 750 billion euros ($923 billion), including International Monetary Fund backing, to countries facing instability, while the European Central Bank said it will buy government and private debt.

The euro dropped to $1.2235, the lowest level in more than four years, before erasing losses to trade little changed at $1.2349.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said Greece may not be able to repay its debt in full, and former Federal Reserve Chairman Paul Volcker said he’s concerned the euro area may break up. Sony Corp., the world’s second- largest maker of consumer electronics, said it may suffer a “significant impact” if Europe’s deficit spreads, while Chinese Premier Wen Jiabao said the foundations for a worldwide recovery aren’t “solid” as the sovereign-debt crisis deepens.

Commercial Paper

Concerns have spilled into the market for commercial paper, debt used by companies and banks for their short-term operating needs. Rates on 90-day paper are more than double the upper band of the federal funds rate, about twice the average in the five years before credit markets seized up in mid-2007.

“The list of banks able to tap the three-month market remains extremely limited with access spotty and expensive,” Joseph Abate, a money-market strategist at Barclays in New York, wrote in a May 14 note to clients.

Rates on commercial paper for 90 days are 25 basis points above the upper band of the Fed’s zero to 25-basis point target rate for overnight loans among banks. While far below the 245- basis point gap reached in October 2008, the spread is more than double the 10-basis-point average in the five years before credit markets seized up in the middle of 2007. As recently as February, financial CP rates were below the federal funds rate.

‘Scarce Liquidity’

Except for banks with little exposure to European sovereign risk, lenders “have found liquidity to be scarce, securing funding only one month and shorter and mostly concentrated inside one week,” Abate from Barclays wrote in the report.

The rate at which Edinburgh-based Royal Bank of Scotland, the U.K.’s biggest state-controlled bank, told the BBA it could borrow for three months in dollars rose 3 basis points today to 49 basis points. The bank’s rate is up from 36 basis points since April 30 and is 3 basis points above three-month Libor.

RBS finance director Bruce Van Saun said last week the bank held 1.5 billion pounds ($2.2 billion) in Greek debt with about 400 million pounds of unrealized losses. Credit exposure to Greece was less than 1 billion pounds, he said. “Overall, our exposure to Greece is moderate, and any potential economic impact, I would say, is manageable,” Van Saun said on a May 7 conference call.

RBS spokesman Michael Strachan declined to comment further.

Barclays, Credit Suisse

The reported rate for London-based Barclays, the U.K.’s third-largest bank by market value, was unchanged today at 47 basis points, having climbed 2 basis points last week to the highest level since July 2009, Bloomberg data show. The bank’s rate is up from 34 basis points on April 30 and 1 basis point above three-month Libor. On average, Barclays reported a rate that was 1.3 basis points below Libor during the past year.

Barclays spokesman Mark Lane declined to comment.

Credit Suisse Group’s rate has jumped 12 basis points this month to 48, compared with an average 1.5 basis points higher during the past year, and is 2 basis point higher than Libor. The firm’s primary sources of funding are long-term debt, shareholders’ equity and deposits, said Marc Dosch, a spokesman for Switzerland’s biggest bank by market value.

Releasing its first-quarter results last month, the Zurich- based bank said its “exposure to Greece is not material” and its “exposure to the other southern European economies that have been subject to credit downgrades is relatively limited.”

Source: www.bloomberg.com

"Mea Culpa" from Morgan Stanley on Rising Treasury Yield Call

[Original Article Written by Mike "Mish" Shedlock]

Treasury yields are sinking again this weekend, after a huge rally over the past few weeks. This prompted a "Mea Culpa" from James Caron, global head of interest-rate strategy at Morgan Stanley.

“This is a mea culpa from me on our rate call,” James Caron, global head of interest-rate strategy at Morgan Stanley, wrote at the start of a May 13 report. The New York-based firm, the most pessimistic among the Fed’s 18 primary dealers, reduced its year-end 10-year note yield forecast to 4.5 percent from 5.5 percent. “We did not appropriately discount the sovereign risk conditions which have contributed to keeping yields low.”

Treasuries, the benchmark for everything from corporate bonds to mortgage rates, have returned 3.4 percent since December, including reinvested interest, the most at this point in a year since gaining 8.48 percent in 1995, according to Bank of America Merrill Lynch indexes.

“The issue with this big bailout package is it probably stabilizes things in the short run but doesn’t address the root causes of the problem,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut. “These countries are going to have to get their fiscal houses in order, and if they don’t, given the mechanisms that have been put into place, it creates an unsustainable situation.”

Yield Curve as of 2010-05-16

Forgive me for asking but I have a few questions:

1. Shouldn't treasury yields be rising in a recovery?

2. Is this representative of all the hyperinflationist talk we have been seeing?

3. Are short term rates at .14% remotely synonymous with hyperinflation or even inflation?

4. Same question as above except for 10-year yields at 3.41%

The "Mea Culpa" from James Caron is admirable. Now, where the hell is the "Mea Culpa" from hyperinflationist clowns preaching hyperinflation for the last 10 years?

Source: globaleconomicanalysis.blogspot.com

Prosecutors Ask if Eight Banks Duped Rating Agencies

[Original Article Written by Louise Story]

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.

Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities.

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.

Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is also interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved, said the people with knowledge of the investigation, who were not authorized to discuss it publicly.

Contacted after subpoenas were issued by Mr. Cuomo’s office notifying the banks of his investigation, representatives for Morgan Stanley, Credit Suisse, UBS and Deutsche Bank declined to comment. Other banks did not immediately respond to requests for comment.

In response to questions for the Times article in April, a Goldman Sachs spokesman, Samuel Robinson, said: “Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned.”

Goldman, which is already under investigation by federal prosecutors, has been defending itself against civil fraud accusations made in a complaint last month by the Securities and Exchange Commission. The deal at the heart of that complaint — called Abacus 2007-AC1 — was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005.

At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to workers like Mr. Yukawa who had been working at much lower pay at the rating agencies, according to several former workers at the agencies.

Around the same time that Mr. Yukawa left Fitch, three other analysts in his unit also joined financial companies like Deutsche Bank.

In some cases, once these workers were at the banks, they had dealings with their former colleagues at the agencies. In the fall of 2007, when banks were hard-pressed to get mortgage deals done, the Fitch analyst on a Goldman deal was a friend of Mr. Yukawa, according to two people with knowledge of the situation.

Mr. Yukawa did not respond to requests for comment. A Fitch spokesman said Thursday that the firm would cooperate with Mr. Cuomo’s inquiry.

Wall Street played a crucial role in the mortgage market’s path to collapse. Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

Banks were put on notice last summer that investigators of all sorts were looking into their mortgage operations, when requests for information were sent out to all of the big Wall Street firms. The topics of interest included the way mortgage securities were created, marketed and rated and some banks’ own trading against the mortgage market.

The S.E.C.’s civil case against Goldman is the most prominent action so far. But other actions could be taken by the Justice Department, the F.B.I. or the Financial Crisis Inquiry Commission — all of which are looking into the financial crisis. Criminal cases carry a higher burden of proof than civil cases. Under a New York state law, Mr. Cuomo can bring a criminal or civil case.

His office scrutinized the rating agencies back in 2008, just as the financial crisis was beginning. In a settlement, the agencies agreed to demand more information on mortgage bonds from banks.

Mr. Cuomo was also concerned about the agencies’ fee arrangements, which allowed banks to shop their deals among the agencies for the best rating. To end that inquiry, the agencies agreed to change their models so they would be paid for any work they did for banks, even if those banks did not select them to rate a given deal.

Source: www.nytimes.com

Hedge Fund Paulson & Co Files 13G on American Capital (ACAS)

Due to activity on April 19th, 2010, John Paulson's hedge fund firm Paulson & Co has filed a 13G with the SEC regarding shares of American Capital (ACAS). John Paulson's fund has disclosed a 15.5% ownership stake in American Capital (ACAS) with 43,725,000 shares. The vast majority of shares are held in the firm's Recovery Fund and Advantage Plus Fund. Regular readers of Market Folly will already be aware of this position because we previously reported that Paulson would be acquiring a new ACAS stake. This is not new information, but it does confirm what we already knew.

Paulson added shares of ACAS via a $295 milion stock offering from the company where he paid $5.06 per share. ACAS now is trading and Paulson & Co appears to be the largest investor in American Capital. ACAS will use this much needed capital infusion to help restructure debt.

In other news relating to Paulson & Co, you of course know that they've been put in the spotlight as of late due to the accusations surrounding Goldman Sachs and the subprime mortgage trade. John Paulson set out to clear the air in his recent letter to investors. In terms of his hedge fund's recent execution, you can also view Paulson & Co's recent performance numbers here.

Taken from Google Finance, American Capital is "an equity firm and a global asset manager. The Company invests in private equity, private debt, private real estate investments, early and late-stage technology investments, special situation investments, alternative asset funds managed by the Company and structured finance investments."

Source: www.marketfolly.com

Louis Bacon Listed as UK's Richest Hedge Fund Manager

An American hedge fund manager has claimed the top spot on the London's Sunday Times August "rich list." Moore Capital Management manager Louis Bacon’s is the UK's richest hedge fund manager with an estimated $1.6 billion fortune.

Moore Capital Management chief Louis Bacon’s £1.1 billion fortune placed him atop the list of the U.K.’s richest hedgies, edging out Sail Advisors’ Robert Miller, who took the top spot last year. Bacon’s wealth increased by 69% last year from £650 million; Miller’s horde rose 27% to £950 million from £750 million.

Bacon ranked 49th on the overall Times list, which included “the most” hedge fund managers “in recent years,” according Sunday Times editor Ian Coxton. In March, Forbes ranked Bacon as the 655th-richest man in the world, tied for 36th among alternative investments billionaires.

The head of the largest hedge fund in Europe enjoyed the largest percentage increase in his fortune last year: Alan Howard, founder of Brevan Howard Asset Management, saw his wealth more than double to £875 million, up from £375 million, good enough for 66th place on the overall Times list.

Source: www.finalternatives.com

London and Paris Square Off Over Hedge Fund Regulation

The UK, particularly its capital city, has been a staunch ally of hedge funds in the push back against regulation while other European Union countries such as France have been pushing for tough regulations on the industry. Now, the two countries are set to face off over the regulations--all within weeks of UK elections--and neither side looks willing to compromise.

Such a move is likely to escalate a long-running spat between Britain and France over how to treat foreign funds under the new regime.

Privately, Paris has threatened to use European Union voting rules to push through the law over the objections of Britain, said diplomats.

With London largely isolated on the issue, it would be easy for France to win the backing of a majority of European countries to sign off the law.

But this would break with European diplomatic practice where large countries like Britain are rarely bullied into accepting something they do not want.

Michel Barnier, the French commissioner in charge of an overhaul of financial services across the European Union, has intervened to head off a full-scale row between the two countries.

But at a meeting last week in Madrid, French economy minister Christine Lagarde told Barnier France was standing firm and would not concede to British demands that foreign funds be entitled to a license to do business across all 27 EU countries.

Source: www.reuters.com

Marc Faber – Governments Will “Bankrupt Us”

Current economic policies are not sustainable and the world faces doom because “the governments are taking over”, said Marc Faber, editor of The Gloom, Boom & Doom Report.

“They will all bankrupt us and expropriate us, but it may not happen tomorrow. They’ll give us something to play with, until the whole system breaks down … they’ll just print money and print more money,” he told CNBC.

“What I object to the current government intervention in so-called ’solving the crisis’, (is that) they haven’t solved anything. They’ve just postponed it.”

Source: www.investmentpostcards.com

Paulson May Face Litigation Following Goldman 's SEC Suit

Paulson & Co., the world’s third- largest manager of hedge funds, may face civil litigation for its role in the collateralized debt obligations that led to the fraud charges against Goldman Sachs Group Inc., according to Christopher Whalen.

Billionaire John Paulson’s hedge fund made $1 billion on the CDOs that contributed to the worst financial crisis since the Great Depression. Whalen, a banking analyst at Institutional Risk Analytics in Torrance, California, said that allegations the firm helped shop a package of debt they were actively betting against opened it up to litigation in the wake of the suit by the Securities and Exchange Commission.

“I’m not sure they will escape civil litigation arising from this,” Whalen said in a Bloomberg Radio interview with Tom Keene on April 16. “You can bet the parties who lost money here are going to be seeking redress.”

While buy-side firms don’t often sue their dealers or advisers, the SEC suit will have done most of the legwork and attracted publicity, opening the door for other parties to claim damages, Whalen said.

Paulson & Co. said April 16 it had no authority over the selection of assets linked to the Goldman Sachs mortgage security from whose decline it later profited. Paulson oversees about $32 billion in hedge funds, third in the world behind JPMorgan Chase & Co. and Bridgewater Associates LP.

‘Duty of Care’

Goldman Sachs created and sold CDOs tied to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that Paulson’s hedge fund helped pick the underlying securities and bet against them, the SEC said in a statement today. Goldman told investors that ACA Management LLC, a firm that analyzes credit risk, selected the portfolio and didn’t disclose that Paulson helped pick the underlying debt, according to the SEC.

The banking system has too many firms with conflicts of interest such as Moody’s Investors Service Inc. and other credit rating companies that signed off on the CDOs, Whalen said.

“The old duty of care, know your customer, suitability, all the rules that made our market the envy of the world have been cast aside,” he said. “We’ve got to go back to the old- fashioned rules and say if you’re a banker and you sell somebody a security, you can’t knowingly work against their interests.”

Source: www.bloomberg.com

Hedge Funds Regain Power in Negotiating with Investors

Investors got used to holding the whip hand during the credit crisis as hedge funds had to hand back hundreds of billions of dollars to clients, leaving managers desperate for assets and in a weaker position to haggle on fees.

However, investors are now finding many funds have both healthier looking client lists after last year's 20-percent returns and long memories when it comes to which investors deserted them during the tough times.

Downward pressure on hedge funds' lucrative fees has evaporated, executives say, and they look unlikely to fall further now that demand and performance have picked up.

"I don't think (that fees will fall further)," said Thames River Capital's Ken Kinsey-Quick, whose portfolios invest in hedge funds. "This is where supply and demand seems to be settling."

The well-known structure of 2 percent annual management fees and 20 percent fees, commonplace before the financial crisis, has come under pressure as investors pulled out $330 billion in the year to June 2009, according to Hedge Fund Research HFR.L.

Source: www.reuters.com

ABS Market and the Great Transparency Myth

As mentioned in an earlier article, rating agencies have taken a huge hit to their reputations because they have been very slow to react to the market and have been outright wrong about their "opinions" as to ratings. So if there is so much dependency that financial institutions have soldered into the rating agencies disclaimed opinions (see how little they trust even themselves), what else can be done to come up with better and more timely quotes for market participants. There's been a lot of press relating to how UN-transparent the market in ABS and mortgage backed securities has been and how this has contributed to the problem. Today's rant is not so much of a rant as a series of things that can be done to provide varying degrees of market transparency and thereby add liquidity to the business of offering prices for ABS securities:

1. Use the CDS on ABS market as a proxy for quotes on cash. Sure, there will be some "basis" (difference between the quotes on ABS CDS and the underlying quotes on cash instruments), but as in the Corporate Bond market, CDS quotes go a very long way to giving one and all a pretty good feel for what the market perceives is the riskiness of these securities. The CDS market is so far ahead of the rating agencies as an indicator as to make the rating agencies almost "redundant" (I'm using the British meaning of the word here). In fact they're so bad, I'd be hesitant to even include them at all, except as perhaps the very "tip of the iceberg" with a big warning sign all over it: "use at risk to your own investment health."

2. Additionally, use the ABX Index market as a secondary proxy. If there are no quotes available for the "single name CDA on ABS" from 1 above, then it's quite possible to find the ABX tranche that the specific bond is "most like" and use that as an approximation of the price. See http://www.markit.com/ for more information on ABX pricing.

3. Use actual trade prices. For all corporate bond trades in the US, it is required that no more than fifteen minutes after a trade, it be entered into the NASD TRACE (trade reporting and compliance engine) system. The counterparties to the trades are anonymous, but you can see the date and time of the trade, the price, the yield and most sizes of transactions. Make it a requirement that all ABS trades (and even ABX trades) be entered into TRACE and published broadly. Just this step alone would increase transparency greatly.

4. Make it a requirement for all dealers to submit daily indicative pricing for all Cusips that they have traded within the last 6-12 months. These need not be "firm" prices, but should obviously be as real as possible and as close to where a firm would trade if required. If all dealers were required to submit pricing daily, then the "bad prices" would be able to be weeded out. Each dealer can be "scored" in some way so as to ascertain the general quality of its routine pricing and these scoring tables could also be kept up to date. Again, http://www.markit.com/ would be an obvious candidate for managing something like this as they're already the "arbiter" for ABX products as well as, to a lesser extent, single name CDS on ABS.

5. To continue further along the "transparency curve", given a dealer, in the absence of known marks from the first three sources above, should be able to search through its database of "bid lists" and "color" data. Doing this for a single bond or retrieving the data for comparable bonds can go far towards assisting with working out what the price should be. This, of course, assumes that each trading desk has had the foresight to actually create and maintain a database of quotes and color historically. I've seen some where the primary source of bid list and related histories are gigantic Excel spreadsheets. These do function, but are very difficult to share amongst the participants of an individual trading desk. Better yet is to provide simple programs for dealing desks to save their quotes away to a real database for use by whoever is permissioned to see those quotes. If you don't have a database already, you're basically still in grade school at this point.

6. Use Bloomberg. Bloomberg has got several very useful functions to assist in calculating price based on spread and vice versa. If a firm doesn't want to commit to a single price/yield, then give a range of prices and yields to as to give at least an idea of price. To make this more detailed, the more information that is given will result in higher quality prices for example, if the CPR rate was disclosed along with the quote. Attribution should be given to indicate that the pricing comes from Bloomberg.

7. Use Intex. Intex has an "applications programmer's interface" which can be utilized to produce a wide range of complex scenarios. Some of the ways these can be analyzed are as follows:

-CPR's
-CDR's
-Loss Severities
-Collateral can be "bucketed-up" into various groupings such as "Fixed", "ARM" and further into "2/28", "3/27" and further still with "2/28 with a 2 year preempt penalty", etc. Each of these collateral groupings can have separate CPR, CDR and Loss Severity curves applied to them.
-Interest Rate stresses

Creating standard ways of stressing the above and providing matrixes of results for "Px/Yield" tables could go far towards assisting with determining the variability of any given bond to a wide variety of scenarios. The Intex API is quite complex but with some effort and education, the above can be made into a valid means of providing quotes to clients and to the public. Bottom line is that the above presents a fairly wide range of options for giving quotes in the market place. To the degree all of them are used determines the quality of any single dealer. The dealers should be scored according to their ability to not only do the above, but publish the above with the necessary information for other market participants to see how the results were arrived at. So what's all this about lack of transparency? With the above raft of solutions things should get quite a bit clearer. Let's hope it's not too late.

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Jack Broad is the CEO of Thetica, LLC. Thetica's ABS Trader Tools allows you to price bonds faster and easier. You can analyze data across many deals at once, from multiple vendors and run many scenarios at the same time with rapid results. Integrated into your own systems for easy and fast customizable access to the data you need.

Source: www.theticasystems.com