Mortgage Brokers Ball.. 80's Deja Vu?

Possibly the most despised financiers in America, the nation's mortgage bankers, widely blamed for playing a central role in the global financial meltdown were whooping it up this week at a glittering annual convention

"We're all still here and we're still standing," declared Kieran Quinn, outgoing chairman of the association, who took the floor to a pounding chorus of Coldplay's Viva La Vida. He arrived shortly after a colour guard in full military regalia hoisted a US flag while an opera singer belted out The Star-Spangled Banner.

It reminds me of the coverage of the 'The Predator's Ball' the nickname for the annual conference thrown by Michael Milken for the private equity head honcho's of their day.

The last such event was much the same as the latest Mortgage Brokers Ball (doesn't have the same ring does it). In an environment where Drexel (Milken's firm) was under investigation and the public and politicians were rounding against him and his clients, bold statements were made.

Just like the Mortgage Brokers Ball Milken and others relayed the sentiments that 'we are still here' and it's 'business as usual'. That was the last such Ball as Drexel was, effectively, closed down by the government and Milken went to jail. Insider traders like Boesky and Levine joined him for a stretch and everyone got a little depressed that the gravy train had stopped.

The media rounded on Milken, Michael Thomas of the New York Observer. He had, variously, called Milken 'scum' a 'pig' and, oddly, 'beetle'. Commenting on Milken's impending sentencing he wrote "Whatever Judge Wood gives Mr. Milken won't be enough" and he hoped that life inside - and an introduction to buggery - would help him remember all the other crimes he had committed. 'The prospect of having one's sphincter enlarged to the circumference of the Holland Tunnel by the rigors of the prison social calendar often works wonders when it comes to refreshing memories'. Asked why he hated Milken so much he said "He looks like someone you would like to hate" adding” You don't have to know what a junk bond is to become infuriated by one".

The mortgage boys would do well to look back at this period of history and take some lessons in how things could turn out for them soon.

In a normal year, nobody would take much notice of a gathering of home loan originators. But a noisy group of protestors were on hand to remind the mortgage bankers of their unpopularity. Campaigners outside the conference centre wielded placards reading "grand theft bailout" and "jail greedy bankers - let them rot".

Bill Hackwell of Answer, a protest coalition involved in the demonstration, said: "We wanted to make sure they didn't think it was going to be business as usual as they meet to work out how to cover themselves."

It is clear to all now that unscrupulous lenders gave inappropriate mortgages on customers who could never afford to repay them. The MBA's own figures show that 9.1% of mortgages on US family homes are in arrears - the highest figure since records started 39 years ago.

Although it looked like business as usual at the conference with some admitting errors were made, some in the industry were not prepared shoulder all of the blame.

"There's certainly no lack of blame to be shared around the entire global economy," one said. "To say one industry is responsible for all this is a little simplistic."

His view was echoed by Ted Eric May, managing partner of law firm Sheldon May which specialises in servicing the mortgage industry: "Politicians and the general public are looking for easy people to blame. All of us are to blame. Our society has gone from living within our means to borrowing without restraint."

Inside the conference's exhibition hall stories of reckless lending were discussed. Phillip McCall, a mortgage fraud investigator, cited a case of a warehouse worker who applied for a mortgage, claiming an income of $7,500 per month: "Basic common sense is going to tell you someone in a warehouse is not going to be earnings $90,000."

This kind of application was left unchecked by mortgage lenders, but there is a point for apportionment of blame here. The warehouse worker, by falsely claiming his income was this high, committed fraud. This story is by no means a solitary case, one wonders if those who took out such fraudulent mortgages will be prosecuted.. I very much doubt it.

The last High Yield Bond Conference (the official name for the Predator's Ball) had a record attendance of 3,000 issuers and investors and the mood was optimistic. Milken had said previously that he was 'proud' to be in the High Yield Bond business and talked about raising '$6 out of every $10' to build homes for Americans to achieve their home-ownership dreams.

Sipping a drink as a guitarist played gentle melodies in the conference's foyer, Cary Burch, the chief executive of mortgage software provider LSSI, said mortgage lending was a force for good: "I'm proud to be part of this industry. It's been great to help people achieve their home-ownership dreams."

At least it was only a financial crisis that has come to haunt us from the 80's and not florescent socks and shoulder pads...

Source HF Markets - Online Trading

The Banks KIlled The Golden Goose... What Next?

The crisis in the financial system reached epic proportions over the last few weeks. The collapse of Lehman, Bear Stearns going, AIG bail-out, Goldman and Morgan changing status and the "RTCII" bail-out being discussed at the moment has changed the landscape for the industry, but how will it look after this?

Whether you agree with the recent government moves on short sellers or not, we have to get used to the fact that this is the tip of the iceberg for knee-jerk regulatory moves, or should we say 'political moves'.

The situation is not just US based, it world-wide. German Finance Minister Peer Steinbrueck told parliament the turmoil would leave "deep marks" on both sides of the Atlantic, but called it primarily an American problem.

"The world will never be as it was before the crisis," Steinbrueck, a deputy leader of the centre-left Social Democrats (SPD), told the Bundestag lower house.

"The United States will lose its superpower status in the world financial system. The world financial system will become more multi-polar," he said.

Chancellor Angela Merkel, says "the days of laissez-faire capitalism are over".

French President Nicolas Sarkozy, whose country holds the rotating EU presidency, has called for a global summit to overhaul a "crazy" financial system.

So what have the politicians got on their minds? Steinbrueck proposed eight steps to prevent a recurrence of the turmoil, including an international ban on "purely speculative" short-selling, new rules to hold individuals accountable for financial missteps and an increase in capital requirements for banks in order to offset credit risks.

Higher capital adequacy I can live with and is a good idea, but the other stuff just shows the mentality of politicians who don't really understand the financial world.

How would you identify 'purely speculative short selling' and how would that 'fix' the financial system?

Just a few pointers to Herr Steinbrueck:

When is short selling not speculative? Would this be when a company is, in the eyes of some faceless bureaucrat, actually over-valued?

Would there then be a 'list' or a warning system saying it’s now OK to short this company? Wouldn't you like to be the first to get that list!!!!

Perhaps it’s not speculative if it’s a 'hedge'. But then you are allowing some speculators to short but not others. How would that work and who would you decide this? Would you have to submit your trades to a regulator before you placed the trade?

Let’s face it, it is a silly, naive suggestion, but remember, this is coming from a politician who actually has the powers to do this, at least in Germany.

How scary is that?

Also, shorting, far from being a 'financial weapon of mass destruction' is a way to limit risk. Lest say I am trading in the banking sector. One bank looks good to trade, the other looks a little over valued. So you 'pair-trade' them. You go short on one and long on another. If the sector as a whole takes a dive while your trade is on you win on your short and lose on your long, this risk based trading stops people losing more money than they normally would.

The problem is that short selling is an easy thing to point at for a politician. Something that is easily digestible for the average non-financial guy. The simple message is 'short sellers profit from your pension fund going down'. Easy sell n'est pas?

But if you believe in banning short sellers who profit from driving prices down, then you must ban buyers when shares are driven to unrealistic prices.

The issue that is being missed on the short selling rules is this. If a company has been driven down to a point where its shares price is way below its asset value then the market will correct it. If I saw a stock trading at a discount to its assets then, all things being equal, I would be buying like crazy. The shorts would have to cover and 'hey-presto' we have priced the stock.

The ban on short selling does not address the wider market and fundamentally avoids the real issue because saying it would be the death knell to a politician. That is that credit was too easy, people borrowed too much and now they are feeling the pain... It is not a popular story but it is at the crux of this mess.

If you want to stop this happening again, restrict credit to people who can actually pay it back, make mortgages a mandatory 20% deposit and no more than 3 times single or joint earnings.

Problem is this would hit the housing market, hit first time buyers and make property less lucrative. Is that a bad thing?

What politicians also fail to grasp is that creating or changing rules that open the doors to the creation of huge banking and trading institutions is, frankly DUMB!!

How many times have you heard this phrase in the past 6 months; 'Too big to fail'. Hello, McFly is there anybody there?

The latest round of consolidations is needed but not desirable. The easiest way to regulate this situation is not to change the law and investigate every merger/acquisition. All the regulators need to do is increase capital adequacy. Basically if you want to go ahead and merge yourself into a giant firm then the risk you pose to the market should be minimised.

Have the banks in a situation where they can only leverage once over their asset base.

Whoah! Have you any idea how much liquidity that would take out of the market? I hear you say.

The answer is yes I do. But the one thing we know about the financial system is that where there is a gap another firm will move into that space. What is wrong with spreading the liquidity/risk across 1000 firms instead of one giant one? It would be easier to manage and it would be less of a risk to the system.

But the firms wouldn't make as much money.. I hear you, but they were the ones who killed the Golden Goose, why should they be allowed to dominate the market once again?

What about hedge funds, will we see and end to them? I don't see how. Maybe they will be called something else but the genie is out of the bottle now. How will you stop them?

OK, tomorrow they ban 'hedge funds'. How do you define that? A hedge fund is simply a company that issue shares and then invests its capital. Are you going to ban investment companies?

Increasing capital adequacy for banks and traders would limited hedge fund borrowing, limit bank trading, and, ultimately make the system less volatile. Limiting credit to the credit worthy would end the ponzi scheme of the housing markets and credit cards, this is where the focus needs to be.

Think about it. How can a 20 year old straight out of university get 50k in credit from the card companies? How was that going to end well?

It is not a popular thing to say. We have all got used to the fact that we can have a slice of the dream of wealth and it was housing that drove this. The game should be over, but it is such a political hot potato. Who will be strong enough to tackle it? If Obama gets the US Presidency and the Tories win in the UK and make the painful moves necessary to restrict credit, then there will be a back lash from the public, why? Because standards of living will go down.

More expensive credit and less of it, for traders, banks and the public alike, is the key to solving this problem, anything else will be a political band-aid aimed at pulling the wool over the public’s eyes and the game will just start over again.

If we really want to change the financial system it does not mean bankers and traders will be thrown to the dogs and told they have salary caps. It will be everyone buying a cheaper house, a cheaper car, saving more, buying less and returning to a society where credit is something you earn, not simply something that is given to keep the merry-go-round going.

AIG - The Next Shockwave?

Despite sell-offs on an unprecedented scale many are observing that 'it could have been worse'. This, you would imagine, would give hope to the market that we have not reached a panic selling situation, unfortunately we still have a huge monkey on our shoulder; American International Group (AIG).

The worry is that today we are going to see the failure of the giant insurer and that would bring blood on the screens again.

Matt Cheslock, a senior specialist at Cohen Specialists said "If AIG fails tomorrow morning, it's the same thing written all over this market, I don't think anyone is going to want to take any positions overnight."

The Federal Reserve refused to provide temporary financing for AIG, which has incurred $18 billion in losses over the past three quarters from soured mortgages. But the government has asked Goldman Sachs and JP Morgan Chase to lead a group of banks to offer up to $75 billion in credit for the troubled insurer.

AIG's survival, however, remains uncertain and that is not a good place to be for the markets and the dithering of the Fed on this one could cause further huge losses in the market.

"So far, the efforts of the US government have failed to bring any stability to the financial markets,'' said Kathy Lien, director of currency research at Global Forex Trading.

The events of the last few days have been a huge shift in the power structure on Wall Street, echoing or sentiments of yesterday Justin Urquhart Stewart, investment director at 7 Investment Management in London said "It's a return to pure capitalism, the survival of the fittest—the government can't and won't bail everybody out,"

AIG has reached this position because of losses on its mortgage business which has now caused it rating to be dropped by at least two notches by the top three global ratings agencies.

Moody's Investors service cut AIG rating from A2 to Aa3 Standard & Poor’s rating service cut the rating from A-minus to AA-minus and Fitch Ratings reduced from A to AA-minus. These ratings are still 'investment grade' but for how long?

Once the world's largest insurer by market capital fell 61 percent and continues to fall in today's trading.

Market commentators opinions are that AIG should be bailed out as the consequences of letting it fail could be huge. Jim Cramer, CNBC commentator and former hedgie said ""I would radically have to change my view of where the market’s going if AIG fails, this one needs to be stopped. I don't know how to stop it. AIG is too big to fail."

The affect on the wider market of a failure of AIG are wide reaching. Kenneth Lewis, chief executive of BoA, said that "I don't know if a major bank that doesn't have some significant exposure to AIG". A collapse of AIG would "be a much bigger problem than most we've looked at." He added.

The health of AIG’s book of credit-default swaps (CDS), which are contracts sold to protect debt investors, are seriously in doubt. The ratings cuts technically trigger collateral calls from the debt investors who bought those swaps, because the likelihood of default on the swaps has increased and so the investors require more of a reward to hold on to them.

Unlike Freddie and Fannie, where rumors were rife that the bail-out would be a shoo-in, market sentiment around AIG is not so positive. The people that we have spoken to today believe that the talks taking place right now are crucial to the integrity of the financial markets and should AIG be allowed to fail, all bets are off.

This is an historic week in the markets. Having been in this industry for 20 years I have seen nothing like it, the opportunities for profit are massive, the opportunity for losses, equally as massive.

One thing is for sure, when the dust settles there will be some very, very rich traders who have played this market well, and some who are significantly poorer than they were.

We wish you the best of luck, be careful out there....

Source http://www.hf-markets.com/

Fotune Favours The Brave?

I recently returned from a trip to Canada. My flight was not going back until the Saturday so I decided to go to the airport via Niagara falls... never been there, thought it would be a box to tick on the 'things to do before you die' list.

While the Falls are indeed, impressive, I didn't realise they were in the middle of an industrial estate and overshadowed by tacky hotels.

There is a vantage point, right at the top of the Falls, where you are no more than a few feet away from water cascading down the escarpment and it gives you an odd falling of wanting to jump in. Obviously I resisted, or you would have heard about my death on CNN, but it did get me to thinking about the latest funds being raised.

Some intrepid investors are moving into the wounded structured credit markets, raising the hope that some stability may return. Dozens of asset managers have created funds since the start of the credit crisis to invest in distressed or mispriced asset-backed securities, collateralised debt obligations (CDOs) and other structured credit instruments.

"Some people have raised considerable amounts of money to invest in structured distressed assets," said Don Brownstein, chief executive and investment officer of U.S. hedge fund firm Structured Portfolio Management. "They believe there is blood on the ground, and they figure they will get to lap some up."

I can't help thinking that these investors are standing in a similar position as I was on the Falls.

OK, at some time there will be time to get into this market but is that now?

Start-ups are coming from groups with a track record in structured credit, such as Solent, Zais, Bluemountain and Structured Portfolio Management, banks such as Citigroup, Lehman and Goldman Sachs, and other big players such as Blackstone, AXA and PIMCO, along with a few hedge fund firms with no experience in structured credit, according to press releases, Web sites and industry sources.

"Some have been up and running since September; they probably started too early. Others have cash that is not deployed, and some are in the formation process," said Markus Kroll, a partner in Palomar.

A number of hedge fund groups now focusing on credit say they plan to give structured credit a miss, regardless of any opportunities. Pulling back from the edge Centaurus Capital Chairman Bernard Oppetit told the Reuters Hedge Fund and Private Equity Summit earlier this month, "Structured credit is not our style. We have always avoided correlation risk; it is a very dangerous market,"

To shield themselves from the consequences of short-term volatility and to be able to invest in illiquid securities, the new funds typically lock up investor money for three to five years, though that makes fund-raising difficult, Kroll said.

It seems to me that some of these funds are looking at this market in the same way thrill seekers have looked at the falls... build a sturdy barrel, take the leap and everything will be OK..15 have tried most died... including some guy on a jet ski in 1995...

Fortune favours the brave?... Good luck with that.