We are in Deep Trouble

I knew the financial markets were weak, but kinda had a feeling that things are bottoming out. Then today’s news about Carlyle Capital has force me to revisit my assumption. Sub-prime mess is one thing but turmoil with the agency (Fannie/Freddie) will devastated the financial markets. We are in serious, serious sh*t if this Carlyle Capital incident is just the beginning of the turmoil with agency securities. Say bye-bye (well, not total bye-bye but you get the point) to the securitization market, leveraged loans, private equity, etc. It’s going to be BRUTAL. I am bearish by nature but for once, I am really really hoping things turn positive for my sake and for all of our sake. Below is a snippet of recent announcement: " Carlyle Capital and the mortgage REITs invest in investment-grade mortgage-backed securities issued by Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research). Mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac saw spreads widen against U.S. government debt for a fourth straight day on Wednesday. Carlyle Capital, a Dutch-listed affiliate of private equity firm Carlyle Group CYL.UL, said it had received margin calls totaling more than $37 million from seven financing parties on Wednesday and was unable to meet the demands for extra collateral to cover its market positions for four of them." Reuters

LOL! Bernanke prints $37 million ever couple nanoseconds.

Yeppers.

virginCFAhooker Wrote: ------------------------------------------------------- > LOL! Bernanke prints $37 million ever couple > nanoseconds. So I’ve noticed that you are getting quite cynical of late…

I just got off the phone with one of my colleagues who told me that GS, Credit Suisse, and Lehman are continuing to reduce headcount across the board, and there will be a bunch of cuts at Citi coming up too. (Since I no longer work on the sell-side, I have to rely on “hearsay” for my news since I don’t see it every day) Maybe this is just the beginning, but hopefully the Fed gets their act together and acts quickly. With respect to private equity, you really aren’t seeing any large buyout deals going down, or even many middle-market deals for that matter…but there’s still activity in the lower end of the middle market at the moment. Lenders aren’t taking many chances on risky businesses or companies that have a modest amount of capex or capitalized R&D, but there’s still some private equity activity for stable, lower-MM companies valued in the 6-8x EBITDA range. Hopefully this stuff doesn’t get chomped up in the recession, either…

Maybe this is just the beginning, but hopefully the Fed gets their act together and acts quickly. just curious what you would want to see them do?

nolabird032 Wrote: ------------------------------------------------------- > Maybe this is just the beginning, but hopefully > the Fed gets their act together and acts quickly. > > > > just curious what you would want to see them do? I really dont know. You would think that with the ABK/MBIA/SCA situation getting better, this should stabilize the market somewhat, or at least provide some temporary relief. But that’s not the case. There is so much widespread fear right now, I dont know if there’s anything the fed can do. Like Bernanke said, we need some form of fiscal intervention.

Do you think that because ABK/MBIA/SCA can issue some debt, that they are now a legit AAA? Does anyone really think a company can have the same risk as a treasury? The rating agency game is over. You’re right though - lots of fear.

negativefcf Wrote: ------------------------------------------------------- > I knew the financial markets were weak, but kinda > had a feeling that things are bottoming out. Then > today’s news about Carlyle Capital has force me to > revisit my assumption. Sub-prime mess is one thing > but turmoil with the agency (Fannie/Freddie) will > devastated the financial markets. We are in > serious, serious sh*t if this Carlyle Capital > incident is just the beginning of the turmoil with > agency securities. > > Say bye-bye (well, not total bye-bye but you get > the point) to the securitization market, leveraged > loans, private equity, etc. It’s going to be > BRUTAL. I am bearish by nature but for once, I am > really really hoping things turn positive for my > sake and for all of our sake. > > > > > > > > Below is a snippet of recent announcement: > > > " Carlyle Capital and the mortgage REITs invest in > investment-grade mortgage-backed securities issued > by Fannie Mae (FNM.N: Quote, Profile, Research) > and Freddie Mac (FRE.N: Quote, Profile, > Research). > > Mortgage-backed securities guaranteed by Fannie > Mae and Freddie Mac saw spreads widen against U.S. > government debt for a fourth straight day on > Wednesday. > > Carlyle Capital, a Dutch-listed affiliate of > private equity firm Carlyle Group CYL.UL, said it > had received margin calls totaling more than $37 > million from seven financing parties on Wednesday > and was unable to meet the demands for extra > collateral to cover its market positions for four > of them." Reuters Not that it makes the picture a lot brighter, but you need to notice that in the article, it’s the Carlyle fund that is in default, not the securities they bought, so the story is more tied to that fact that the SIV with Carlyle stamped on it was overleveraged, and now that the incredibly illiquid agency MBS they own are selling off (spreads are widening across the board independent of delinquency/default… Last report I saw showed a 0.06% delinquency rate for agencies…), the fact that there are no bids out there prevents them from meeting their margin requirements. Not that I think it’s a great time to buy agency bonds, but this piece isn’t necessarily indicative of decling credit in the FNMA portfolio. More of a story of how the illiquidity and volatility in the market is killing a big name.

i read on dealbreaker that CS financial sponsor 1st yr analysts were basically told to not come back to work. this is before their 1st year bonus payout.

negativefcf Wrote: ------------------------------------------------------- > I knew the financial markets were weak, but kinda > had a feeling that things are bottoming out. Then > today’s news about Carlyle Capital has force me to > revisit my assumption. Sub-prime mess is one thing > but turmoil with the agency (Fannie/Freddie) will > devastated the financial markets. We are in > serious, serious sh*t if this Carlyle Capital > incident is just the beginning of the turmoil with > agency securities. > > Say bye-bye (well, not total bye-bye but you get > the point) to the securitization market, leveraged > loans, private equity, etc. It’s going to be > BRUTAL. I am bearish by nature but for once, I am > really really hoping things turn positive for my > sake and for all of our sake. > > Below is a snippet of recent announcement: > > > " Carlyle Capital and the mortgage REITs invest in > investment-grade mortgage-backed securities issued > by Fannie Mae (FNM.N: Quote, Profile, Research) > and Freddie Mac (FRE.N: Quote, Profile, > Research). NegativeCFC…I just think your timing of this post is 2 months too old. I’m not trying to attack the post. Most pundits agreed on the point several weeks ago that it would get worse before it got better, which I think the worst is not yet over but maybe we only have another 4-6 weeks before we see some bright light. Also, they say this “credit crisis” was started by brokers overextending credit to high-risk homeowners, as opposed to a spike in oil prices (which could certainly sour things further, if it already hasn’t happened) or terrorist attack which would sour peoples moods. My point being, this is just like eating a whole pizza after a night of drinking. You won’t get any sleep and you’ll suffer from indigestion for a day or two. I just read a WSJ article of how many companies, as opposed to homeowners, have a huge supply of cash on hand to wait out the storm. My guess is that the prices will bottom out in 4-6 weeks, then companies with excess cash will swoop in, and things will get back to normal…like everytime. If we can bounce back from 9-11, Katrina, etc. then I think a little credit crunch will be small potatoes.

On ABK/MBIA, I am not assuming things have return to more “normal” environment. I was making the point that it has provide some relief to the general market sentiment. For what it’s worth, I am long AGO, which doesn’t touch much of the subprime business. ahahah, Mortgage REITs own a fair % of agency bonds. If the Carlyle fund can’t meet margin calls they have no choice (assuming no capital infusion) but to sell the agency bond in the open market at losses, which would further push price down. Delinquency (beyond the perception of further deterioration) has little impact. The Main catalyst is the tightening repo market and the catastrophic impact from margin calls. If you’re well-capitalized, you can easily weather the margin calls. Unfortunately, all mortgage REITs exhibit high leverage. The lowest is 9x (NLY). It’s not hard to phantom how a couple of very leverage mortgage REITS could be forced to sell “illiquid” agency bond at depressed price, which leads more stringent margin calls (m-to-m), which then impacts other (lower leverage) mortgage REITS… etc. etc. MTo, I don’t think this is old news. If it was, the Mortgage REITs would not be getting its’ *ss absolutely creamed today. If you think things will normalize in the next 4-6 weeks, you would buy all the mortgage REITs you can get you hands on. KFN is yielding 15%, DFR yielding 30%+.

negativefcf Wrote: ------------------------------------------------------- > On ABK/MBIA, I am not assuming things have return > to more “normal” environment. I was making the > point that it has provide some relief to the > general market sentiment. For what it’s worth, I > am long AGO, which doesn’t touch much of the > subprime business. > > ahahah, Mortgage REITs own a fair % of agency > bonds. If the Carlyle fund can’t meet margin calls > they have no choice (assuming no capital infusion) > but to sell the agency bond in the open market at > losses, which would further push price down. > Delinquency (beyond the perception of further > deterioration) has little impact. The Main > catalyst is the tightening repo market and the > catastrophic impact from margin calls. If you’re > well-capitalized, you can easily weather the > margin calls. Unfortunately, all mortgage REITs > exhibit high leverage. The lowest is 9x (NLY). > > It’s not hard to phantom how a couple of very > leverage mortgage REITS could be forced to sell > “illiquid” agency bond at depressed price, which > leads more stringent margin calls (m-to-m), which > then impacts other (lower leverage) mortgage > REITS… etc. etc. > > MTo, I don’t think this is old news. If it was, > the Mortgage REITs would not be getting its’ *ss > absolutely creamed today. If you think things will > normalize in the next 4-6 weeks, you would buy all > the mortgage REITs you can get you hands on. KFN > is yielding 15%, DFR yielding 30%+. I don’t disagree, there will be plenty of people out there who get hurt by this, but my point is that the problem is market related, as opposed to fundamental. In other words, it’s a problem where REITs/SIVs/IBs/Hedge Funds are passing around cash among each other, as opposed to subprime, where cash gets handed out to people who essentially flush it down the toilet. As for Mortgage REITs, you may know better than me, but how much of there leverage comes through managing CDO’s as opposed to debt issues and bank loans? In other words, although they’re highly leverred, do you know how much they can get called on?

I think you are spot on when you said it was market related rather than fundamental. FYI: I picked some KFN today, solely based on this premise. When its market-related, you would think that it will self-correct in a relatively short period as “smart money” comes in to drive it to its equilibrium. That’s not happening in the debt market for some reason. I am looking at CDS, for instance, and the implied default rate is 15% for IBM. The “market” is telling me that IBM has a 15% chance of going belly-up??? I dont think so. But we’re seeing this phenomenon for the last six months or so. There are so many example of mispriced securities: muni, leveraged loans, CDS, auto securization, etc. It’s mind boggling. Pimco and the Buffets of the worlds are probably having a field day. Well-capitalized players will do very very well in the long run. This is about safest bet I can make or say. The million dollar question is when do things become “normalized”/“stabilized”? With today’s news, its very hard for me to say that it will be “soon” rather than later. Like I said, I think its the beginning of turmoil in the agency market. I dont think the agency market will simply bounce back in a matter of days; it should in theory, but it doesn’t seem that way. Who’s going to buy agency bond when there’s fear that the mortgage REITS would be force to sell its portfolio in the open market? I hope I am wrong. And I honestly mean that.

Well Reagan is dead, but Volcker is still kicking…I think it’s time send Ben Bernanke back down to the minors!

jax26 Wrote: ------------------------------------------------------- > i read on dealbreaker that CS financial sponsor > 1st yr analysts were basically told to not come > back to work. this is before their 1st year bonus > payout. Could you post the link for this please?

negativefcf Wrote: ------------------------------------------------------- > I think you are spot on when you said it was > market related rather than fundamental. FYI: I > picked some KFN today, solely based on this > premise. When its market-related, you would think > that it will self-correct in a relatively short > period as “smart money” comes in to drive it to > its equilibrium. > > That’s not happening in the debt market for some > reason. I am looking at CDS, for instance, and the > implied default rate is 15% for IBM. The “market” > is telling me that IBM has a 15% chance of going > belly-up??? I dont think so. But we’re seeing this > phenomenon for the last six months or so. There > are so many example of mispriced securities: muni, > leveraged loans, CDS, auto securization, etc. It’s > mind boggling. Pimco and the Buffets of the worlds > are probably having a field day. Well-capitalized > players will do very very well in the long run. > This is about safest bet I can make or say. > > The million dollar question is when do things > become “normalized”/“stabilized”? With today’s > news, its very hard for me to say that it will be > “soon” rather than later. Like I said, I think its > the beginning of turmoil in the agency market. I > dont think the agency market will simply bounce > back in a matter of days; it should in theory, but > it doesn’t seem that way. Who’s going to buy > agency bond when there’s fear that the mortgage > REITS would be force to sell its portfolio in the > open market? > > I hope I am wrong. And I honestly mean that. I think there are two things at work preventing the market from correcting itself: 1) Regardless of the fundamentals, if you’re a hedge fund and if you’ve been betting on credit correlations to subprime by buying protection in other credit-class CDS, especially other asset backed classes like agency and CMBS, you’ve been printing cash. And you know what they say about momentum investors perpetuating themselves… 2) Say you invest in these things professionally. We can categorize you in two ways A) You’re an established player. This probably means you’re a mutual fund or insurance company, because I assume for the purpose of this discussion (in the interest of being conservative) that sub-investment grade paper is fairly priced. So if you’re one of these guys, selling protection in CDS is about as far from your mandate as you could possibly be from your mandate. In this case, if you want to buy something, you have to be ready to pay .90 on the dollar and turn around to see the market at .8 @ .85 in a couple of hours. It’s tough to have the stomach for that… B) You’re an opportunity fund. You have to convince investors to throw money at one of the worst performing trades out there and you also have to hold there hand while it blows up in there face (as it will a couple of times inevitably), and keep them convinced of inherent value. Not an easy job–especially in this market (where Carlyle is getting margin calls) Not that I don’t think the market will correct itself eventually, there are just some huge hurdles. Also, it kind of sucks, because this really is getting in the way of real business and getting a lot of good people laid off…

The world’s richest man is once again warren buffett. Ask yourself how he got there? He got there by reading investors business daily and buying hot stocks that form a cup & teapot handle right before breakouts and socows. He also bought when there was fear but I think that’s just bs.

In this environment–hell, in any environment–cash is king. Liquid reserves and the ability to support current cash flows will put anyone–be it an individual or firm–out on top. What we’re witnessing is the implosion of the debt culture in our society–of negative savings rates, tapped-out consumer debt, burgeoning budget deficits, over-leveraged households, and so on. The irony is that all this credit expansion is what has driven the economy in the “good old days.” And it’s amazing how everything is drawn to scale: everyone from the local Joe American to XYZ Corporation, States Governments, and Uncle Sam is gasping for cash. And all in the meantime, we’re facing headwinds of more conflict coming from the middle east that can culminate to another war in Lebanon, Syria, and Iran. The only thing you can do is grab some popcorn watch.

gdiddy Wrote: ------------------------------------------------------- Your signature is funny. You will learn to LOVE that reading.