by Tanta on 7/18/2007 09:13:00 AM

I know a lot of you people really like Gretchen Morgenson's reporting. I know this because every time I blow a gasket over something she's written, I get a bunch of comments to the effect that I should be nicer to someone who is the Friend of the Little Guy Investor.

I think it's really nice of Ms. Morgenson to be the Friend of the Little Guy Investor. I merely want her to 1) understand what she is writing about and 2) write about it clearly.

I jumped on her case several months ago for her apparent inability to understand the difference between the rating of a tranche and the credit quality of the underlying loan pool. She's at it again:

While risky mortgages are thought to have been central to the funds’ misfortunes, Bear’s letter said that “unprecedented declines in the valuations of a number of highly rated (AA and AAA) securities” contributed to June’s woeful performance.

The more conservative of the two Bear Stearns funds was the older; established three years ago, it generated monthly gains of roughly 1 percent to 1.5 percent until March. Bear Stearns started the more leveraged fund last summer, just as the mania for mortgage securities was topping out. At their peak, the funds were valued at $16 billion, including the leverage that they used.

The announcement that the funds are now almost worthless came as a surprise to many on Wall Street. “How did you go from reporting very high returns to suddenly now saying the collateral is worth nothing?” asked Janet Tavakoli, president of Tavakoli Structured Finance, a research firm in Chicago.

The Bear Stearns funds, like so many others, bought collateralized debt obligations, investment pools consisting of hundred of loans and other financial instruments. Wall Street divides the pools up in slices based on their credit quality and sells them to investors.

That first paragraph implies that AA- and AAA-rated securities are not backed by "risky mortgages." That last paragraph implies that loan pools are tranched by the credit quality of the underlying loans, rather than by priority of payments.

And I honestly don't think Janet Tavakoli is registering surprise that the funds are now worthless. My impression is that she's registering surprise that as recently as April they were asserted to be worth something. It seems to me that's rather an important part of the story.

Ms. Tavakoli said other hedge funds would face a tougher time justifying to both investors and regulators the value they have assigned to mortgage-backed securities they hold. “Depending on how aggressive the S.E.C. wants to be, this could get ugly,” she said.

Yes, indeed it could get ugly. But you'll have to forgive me for thinking that if it does, Morgenson is going to be surprised by it, until someone finally explains to her how MBS work.

I've also seen three separate reports just this morning that put the peak value of the funds, including leverage, at $20 billion, not $16 billion, but under the circumstances such discrepancies aren't that . . . surprising. Hedge funds are, well, secretive, and the numbers are hard to nail down. Still, quoting an "all in" number doesn't exactly get to the point about the relationship between leverage and losses here.

So much for the New York Times. At least the Financial Times got a mildly amusing quote from someone (thanks, Walt!):

“They are a big investment house. They are supposed to be professional,” said one fund of funds executive. “There is nothing to do now except maybe go shoot the guy who did it.”

Yeah, sure. They're hedge fund investors. They are supposed to be high net worth folks who can afford losses. There's nothing to do now except maybe go buy FDIC-insured bank CDs (apparently capital preservation strategies are worse than shooting yourself).

by Tanta on 7/18/2007 08:29:00 AM

Fortunately there's a free market in bond ratings:

Moody's Investors Service says it is paying a high price for its tough stance on lax lending standards for commercial mortgage-backed securities.

In a new report that assesses the status of the market, the Moody's Corp. unit said it was passed over and not hired for 75% of the commercial mortgage-backed securities rating assignments issued in the past few months as a result of its requirement that issuers add an extra layer of credit enhancement. Moody's said issuers are "rating shopping" -- meaning they were hiring competitors that would hand out higher ratings on securities.

by Tanta on 7/18/2007 07:28:00 AM

The Mackey saga continues:

July 17 (Bloomberg) -- Whole Foods Market Inc., the largest U.S. natural-foods grocer, said its board formed an independent committee to investigate postings made on financial message boards by Chairman and Chief Executive Officer John Mackey.

Whole Foods also has been contacted by the U.S. Securities and Exchange Commission, which is conducting its own inquiry into Mackey's messages, the company said today in a statement.

Mackey posted anonymous messages on Yahoo! Inc.'s financial chat boards from 1999 to 2006 using the name ``rahodeb.'' Some of his comments praised his company's performance while others criticized rivals such as Wild Oats Markets Inc., which Whole Foods is seeking to buy.

``I sincerely apologize to all Whole Foods Market stakeholders for my error in judgment in anonymously participating on online financial message boards,'' Mackey said today. ``I am very sorry and I ask our stakeholders to please forgive me.'' Mackey is also co-founder of the company.

The committee has retained Munger, Tolles & Olson LLP to assist in its internal investigation, the Austin, Texas-based company said.

That ought to produce about the most entertaining set of board minutes ever. Perhaps if Mackey's lucky they'll find enough variants on "hole f00dz diretorz r HOT!!1!!!" to keep them in a decent temper.

by Tanta on 7/17/2007 07:33:00 PM

From Fitch:

Fitch Ratings-New York-17 July 2007: Fitch Ratings takes rating actions on the following First Horizon Home Loan Mortgage Trust issues:
Series 2006-AA3:
--Class A affirmed at 'AAA';
--Class B1 affirmed at 'AA';
--Class B2 affirmed at 'A';
--Class B3 rated 'BBB' is placed on Rating Watch Negative;
--Class B4 downgraded to 'B+' from 'BB';
--Class B5 downgraded to 'CCC' from 'B' and assigned distressed recovery (DR) rating of 'DR1'.

Series 2006-FA2:
--Class A affirmed at 'AAA';
--Class B1 affirmed at 'AA';
--Class B2 affirmed at 'A';
--Class B3 rated 'BBB' is placed on Rating Watch Negative;
--Class B4 downgraded to 'B+' from 'BB' and placed on Rating Watch Negative;
--Class B5 downgraded to 'CCC' from 'B' and assigned distressed recovery rating of 'DR2'.

The mortgage loans consist of conventional, fully amortizing, adjustable-rate, as well as conventional, fully amortizing, fixed-rate mortgage loans secured by first liens on single-family residential properties. As of the June 2007 distribution date, the transactions are 13 and 15 months seasoned and the pool factors (i.e., current mortgage loans outstanding as a percentage of the initial pool) are 0.73% and 0.81%, respectively. These transactions are serviced by First Horizon Home Loan Corporation, rated 'RPS2' by Fitch.

The affirmations reflect credit enhancement (CE) consistent with future loss expectations and affect approximately $554 million of outstanding certificates. All classes in the transactions detailed above have experienced small to moderate growth in CE since closing. The negative rating actions, affecting approximately $10.8 million of outstanding certificates, reflect deterioration in the relationship between CE and expected losses.

Approximately 4.76% of the current collateral balance for series 2006-AA3 is more than 60 days delinquent. This includes bankruptcy, foreclosures and real estate owned (REO) of 0.51%, 2.10% and 0.38%, respectively. The credit enhancement for the B-3, B-4 and B-5 classes is 1.60%, 0.92% and 0.37%, respectively.

For series 2006-FA2, approximately 2.71% of the current collateral balance is more than 60 days delinquent. This includes foreclosures and real estate owned (REO) of 1.70% and 0.30%, respectively. The credit enhancement for the B-3, B-4 and B-4 classes is 1.22%, 0.73% and 0.37%, respectively.

So what are these loans? Well, according to the prospectus for 2006-AA3:

Substantially all the mortgage loans were underwritten pursuant to the seller’s “Super Expanded Underwriting Guidelines,” which guidelines generally allow for FICO scores, loan-to-value ratios and debt-to-income ratios that are less restrictive than the seller’s standard full/alternative documentation loan programs.

And 2006-FA2? You guessed it: "Super Expanded."

by Calculated Risk on 7/17/2007 06:27:00 PM

On Bear Stearns:

New York, July 17, 2007 -- Moody's Investors Service has placed under review for possible downgrade thirteen tranches from eight deals issued by Bear Stearns in 2006. The collateral backing these classes consists of primarily first lien, fixed and adjustable-rate, Alt-A mortgage loans.

The ratings were placed under review for downgrade based on higher than anticipated rates of delinquency in the underlying collateral compared to current credit enhancement levels.

On IndyMac:

New York, July 17, 2007 -- Moody's Investors Service has placed under review for possible downgrade two tranches from two deals issued by IndyMac INDX Mortgage Loan Trust in 2006. The collateral backing these classes consists of primarily first lien, fixed and adjustable-rate, Alt-A mortgage loans.

The ratings were placed under review for downgrade based on higher than anticipated rates of delinquency in the underlying collateral compared to current credit enhancement levels.

It is worth repeating: the collateral consists primarily of Alt-A, first lien mortgage loans.

UPDATE: Reuters story: Moody's may cut Bear Stearns, IndyMac ABS (hat tip AllenM)

In addition, Moody's also said it may cut the ratings of eight tranches from three deals issued by Nomura Asset Acceptance Corporation in 2006. The collateral backing these classes consists of primarily first lien, fixed and adjustable-rate, Alt-A mortgage loans.

UPDATE2: More from Moody's (hat tip Brian)

Moody's has noted a negative trend in delinquencies for first-lien, Alt-A mortgage loans originated in late 2005 and 2006. Recent data shows that these first-lien, Alt-A mortgage loans have delinquency rates that are higher than original expectations, and a number of transactions may, in light of their current rating levels, be insufficiently protected against the greater than anticipated losses implied by such high delinquency levels. These loans were originated in an environment of aggressive underwriting, which combined with prolonged home price pressure has caused significant loan performance deterioration and is the primary factor in these reviews.

During the course of these reviews, Moody's will seek to identify the underlying cause of delinquency within each of the 33 transactions, as well as to assess the overall impact these early delinquencies will have on each transaction's projected lifetime losses. It is anticipated that the current rating reviews will be resolved over the next two months as more information becomes available and Moody's completes its analysis.
emphasis added

by Calculated Risk on 7/17/2007 06:02:00 PM

DataQuick reports: Southland home sales slowest since 1993

Southern California's real estate market slowed to its lowest sales pace in 14 years last month, led by steep sales drop-offs in the Inland Empire and other affordable markets, a real estate information service reported.

A total of 20,166 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 1.5 percent from 19,874 for the month before, and down 36.2 percent from 31,602 for June last year, according to DataQuick Information Systems.

Last month's sales were the slowest for any June since 1993, when 19,947 homes sold, the lowest for any June in DataQuick's statistics, which go back to 1988. The strongest June was in 2005, when 40,156 homes sold. The June sales average is 29,041.

Sales in June 2007 were almost exactly 50% of June 2005. In '93 (a similar June for SoCal), existing home sales were 3.74 million nationwide. Activity in California has probably fallen much more than other areas of the country, but this suggests that nationwide existing home sales have declined significantly, and might have fallen below the 5 million level (SAAR).

by Calculated Risk on 7/17/2007 05:31:00 PM

From the WSJ: Two Bear Funds Nearly Worthless, Investors Told

The assets in Bear's more levered fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, are worth virtually nothing, according to people familiar with the matter. The assets in the other larger, less-levered fund are worth roughly 9% of the value since the end of April, these people said. The April valuations weren't immediately available but in March, before their sharp losses, the enhanced leverage fund had $638 million in investor money, while the other fund had $925 million.
...
Bear disclosed this information to investors earlier Tuesday and is expected to make a statement Tuesday evening, these people said.

by Calculated Risk on 7/17/2007 03:58:00 PM

From the WSJ: Banks May Sweeten Terms Of Loans for Chrysler Deal

Wall Street banks that are arranging financing for Cerberus Capital Management LP's acquisition of the Chrysler Group are looking to sweeten the terms on loans ...

... bankers marketed a $10 billion loan for Chrysler's auto business at 3.75 percentage points above the London Interbank Offered Rate, compared to the 3.25 percentage points discussed when the road show kicked off about three weeks ago, Standard & Poor's said.

And another $2 billion in financing for the auto company is now being marketed at seven percentage points above the London interbank offered rate, compared to the original six percentage points. The banks are also offering to sell those loans at less than 100 cents on the dollar in a bid to further entice investors to the deal.
...
Pricing for $8 billion in loans for Chrysler Financial is also expected to change...

J.P. Morgan Chase & Co., Bear Stearns Cos., Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley have committed to raising money for the deal that will require Cerberus to raise about $62 billion in debt.

by Calculated Risk on 7/17/2007 03:05:00 PM

From Dow Jones: Credit Markets Brace For Expected Bear Hedge Fund Disclosure (hat tip Yal)

Credit markets braced Tuesday afternoon for an expected disclosure of valuations later in the afternoon from two Bear Stearns Cos. (BSC) hedge funds that nearly collapsed in June.

Investors in the two funds, which invested heavily in complex collateralized debt obligations with exposure to the subprime mortgage market, are expected to recover a minimal amount, if anything at all, of their stakes, according to market participants.

A conference call for investors is scheduled for 4 p.m, these participants said.

by Calculated Risk on 7/17/2007 12:53:00 PM

Click on graph for larger image.

The NAHB reports that builder confidence fell to 24 in July.

NAHB Press Release: Builder Confidence Falls Further In July

A surplus of unsold homes on the market, combined with ongoing concerns in the subprime mortgage arena and affordability issues associated with tightened lending standards and higher interest rates, continue to take a significant toll on builder confidence, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI declined four points to 24 this month, which is its lowest level since January of 1991.

“The bottom line is that the single-family housing market is still in a correction process following the historic and unsustainable highs of the 2003-2005 period,” noted NAHB Chief Economist David Seiders. “Builders are actively trimming prices and offering buyer incentives to work down their inventories, but meanwhile there is a large supply of vacant existing homes on the market, and affordability problems persist despite efforts to attract buyers.

“In spite of these challenges, we expect to see home sales get back on an upward path late this year and we expect housing starts to begin a gradual recovery process by early next year. At that point, this market will be operating well below its long-term potential, providing plenty of room to grow in 2008 and beyond.”

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as either “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as either “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

All three component indexes declined in July. The index gauging current single-family sales and the index gauging sales expectations in the next six months each declined five points to 24 and 34, respectively, while the index gauging traffic of prospective buyers declined three points to 19.

Likewise, all four regions of the country posted declines in the July HMI. The Northeast and South each saw five-point declines, to 31 and 26, respectively, while the Midwest slipped a single point to 19 and the West declined three points to 25.