Futures are down as Asia and then Europe opened down. Get ready to hear a lot more economic stimulus plans from many governments. The dollar is up, commodities are down roughly 2 percent, and the bond market is closed.
Elsewhere:
1) Sign of the times: American Express' application to become a bank holding company was approved by the Federal Reserve.
What does this mean? Several analysts noted that it means AmEx [AXP 22.97 -1.01 (-4.21%) ]is assuming that the funding difficulties everyone is experiencing will be longer and more protracted than many expected.
By becoming a bank holding company, they are trying to broaden their funding sources, and will gain greater access to capital under the current and any future government-sponsored programs. And they do need capital. In the next six months, AmEx will need $4 billion in net commercial paper and $7 billiion of long-term debt.
Now they can turn to the real issue: stemming the losses coming from their consumer credit card division.
2) Las Vegas Sands [LVS 5.20 -2.80 (-35%) ]reported earnings below expectations, more importantly several projects are being delayed to preserve capital, and they are about to announce a $2.1 b capital raise. MGM [MGM 11.38 -1.28 (-10.11%) ]and Las Vegas Sands down 7 percent pre-open.
3) Here is is the type of news we WANT to be seeing. Citigroup [C 10.93 -0.28 (-2.5%) ]is joining JP Morgan[JPM 36.44 0.03 (+0.08%) ] by offering mortgage refinancings. Reducing consumer debt burdens is a key part of getting the economy going; expect to see more of this in the very near future.
Citigroup to Rework Thousands of Mortgages
This will have long-term positive effects for a variety of reasons (reduced foreclosures, increased confidence, reworked mortgage terms could be favorable) and while it may not be moving the needle this morning, as time goes on this news has a greater effect that its being given credit for this morning.
4) REITS. Lots of discussion on the Street yesterday about the fallout from the Circuit City bankruptcy, believed to be the latest of several bankruptcies coming. Impact on the REITs was profound, with many mall REITs down ten percent or more.
Credit Spreads
Pros Say: Currency Trends in Reverse
Credit Crunch Timeline
It's not just poor fundamentals killing REITs: they are experiencing higher capital costs as well. Interest rates are higher, the underwriting criteria has become much stricter, and loan-to-value ratios are dropping. It means that a lot of companies are going to de-leverage.
Speaking of funding difficulties: the Yellowstone Club, an exclusive mountain retreat in Montana which boasts former VP Dan Quayle and Bill Gates among its members, filed for bankruptcy Monday because they could not secure new financing.
Tuesday, November 11, 2008
Tuesday, November 4, 2008
Credit Default Swap
I am sure you have all heard about these credit products, so now I will explain them in lay terms. Credit Default Swap (CDS) contracts have been compared to insurance, because the buyer pays a premium, and in return receives a sum of money if a specified event occurs. However, this is a slightly misleading comparison because the buyer of a CDS does not need to own the underlying security; in fact the buyer does not even have to suffer a loss from the default event.
Basically one company agrees to insure the assets of another company at the insured party pays the insuring party a yearly fee or premium. Lets say an asset management (Company A)firm owned a $10m Lehman Brother bonds and that that bond carried a A+ rating. Now a smaller firm (Company B)agrees to insure that bond in case of default at a rate of 5% per year for a period of two years.
If the Lehman bond went into default after one year, Company A would have paid Company B $500,000, however Company B would owe Company A the balance of the insured bond or $10,000,000.
Critics of the huge credit default swap market have claimed that it has been allowed to become too large without proper regulation, and that because all contracts are privately negotiated, that the market has no transparency. Furthmore there have even been claims that CDS's exacerbated the 2008 global financial crisis by hastening the demise of companies such as Lehman Brothers and AIG.
In the case of Lehman Brothers it is claimed that the widening of the bank's CDS spread reduced confidence in the bank and ultimately gave it further problems that it was not able to overcome. However, proponents of the CDS market argue that this confuses cause and effect; CDS spreads simply reflected the reality, that the company was in serious trouble. Furthermore they claim that the CDS market allowed investors who had counterparty risk with Lehman Brothers to reduce their exposure in the case of their default.
This works except when the bond defaults and company B only have $5,000,000 and therefore can not afford to pay Company A what it is owed. No we have a loose-loose situation and neither party is made whole.
All of this came during the Asian financial crisis of 1997. Some very smart bankers at JP Morgan Chase decided that they needed to "hedge" against double losses.
Basically one company agrees to insure the assets of another company at the insured party pays the insuring party a yearly fee or premium. Lets say an asset management (Company A)firm owned a $10m Lehman Brother bonds and that that bond carried a A+ rating. Now a smaller firm (Company B)agrees to insure that bond in case of default at a rate of 5% per year for a period of two years.
If the Lehman bond went into default after one year, Company A would have paid Company B $500,000, however Company B would owe Company A the balance of the insured bond or $10,000,000.
Critics of the huge credit default swap market have claimed that it has been allowed to become too large without proper regulation, and that because all contracts are privately negotiated, that the market has no transparency. Furthmore there have even been claims that CDS's exacerbated the 2008 global financial crisis by hastening the demise of companies such as Lehman Brothers and AIG.
In the case of Lehman Brothers it is claimed that the widening of the bank's CDS spread reduced confidence in the bank and ultimately gave it further problems that it was not able to overcome. However, proponents of the CDS market argue that this confuses cause and effect; CDS spreads simply reflected the reality, that the company was in serious trouble. Furthermore they claim that the CDS market allowed investors who had counterparty risk with Lehman Brothers to reduce their exposure in the case of their default.
This works except when the bond defaults and company B only have $5,000,000 and therefore can not afford to pay Company A what it is owed. No we have a loose-loose situation and neither party is made whole.
All of this came during the Asian financial crisis of 1997. Some very smart bankers at JP Morgan Chase decided that they needed to "hedge" against double losses.
Subscribe to:
Posts (Atom)
