Week of June 23, 2008
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Risk News Archive
Credit Risk
Bond Insurers Want $125 Billion of Cover Wiped Out
Investors Hide as Banks Come Knocking
Demand Flat at Discount Window
Investment in U.S. Commercial Real Estate Falls 70 Percent
Banks Find New Ways to Ease Pain of Bad Loans
A Brave New World for Financial Regulation
Moody's May Align Municipal Debt Ratings With Corporate
Health REITs Provide Bright Spot
OCC: Standards Tighter in Retail and Commercial
Credit Crisis Could Last Another Four Years, Predicts BlackRock's Doll
NY Fed Chief Urges Global Bank Framework
S.E.C. Proposes Tighter Rules for Credit Ratings Companies
REIT Trading Volume Jumps as Goldman Urges Caution
Market Risk
Key Data Still Suggest a Recession
Inflation Now Enemy No. 1 for Fed
U.S. May Face Greater Competition for Foreign Investment in Coming Years
Economists Predict More Pain Ahead But No Recession
Slowing Economy Helps Curb Inflation
Economy Remains Sluggish, Fed Says
Operational Risk
Agencies to Mull Basel II Approach
Fed, SEC Near Accord to Redraw Wall Street Regulation
Guidance Focuses on Liquidity Risk
Enterprise Risk
Insurance Industry Poised for Growth Despite Challenging Environment
'Red Flags' and the Five Stages of Grief
As Fed Hurries Up, Banks Catch-Up
Securities Lending
Sec Lending Sees Challenges, Opportunities in Credit Crunch
Consumer Lending
Lending Limbo: Can Any Borrowers Qualify In Today's Market?
Data on Housing Relief Questioned
Data Doing More Steering of Delinquency Handling
Illegal Immigrants Are Good Risks, Lenders Find
Servicer Offers a Deal to Banks Clinging to Assets
Mortgage-Securities Revival Proves Elusive
Credit Risk
Bond Insurers Want $125 Billion of Cover Wiped Out
Financial Times (06/22/08) ; van Duyn, Aline
Following a rash of credit ratings downgrades among bond insurers, MBIA, Ambac, and FGIC are turning to banks and asking to "commute" $125 billion in risky debt securities as a way to limit their financial losses. These bond insurers and banks holding the credit default swaps in question would need to reach an agreement on the value of these contracts in order for the strategy to succeed. The uncertainty surrounding the value of these contracts continues to weigh heavily on bond insurers' ratings, which is why an agreement would greatly improve their chances of obtaining market stability. Standard & Poor's estimates the nominal value of these credit default swaps and collateralized debt obligations at $125 billion, and Merrill Lynch, UBS, and Citibank are just a few of the firms taking large writedowns in relation to these securities. If the banks and bond insurers reach an agreement, the banks would receive an upfront payment in exchange for declaring the insurance policy void.
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Servicer Offers a Deal to Banks Clinging to Assets
American Banker (06/23/08) P. 9 ; Berry, Kate
Fort Worth-based Residential Credit Solutions Inc. is a startup devoted to purchasing and servicing distressed mortgages, but President Dennis Stowe says banks and lenders are hesitant to unload their assets as they weigh whether it is better to sell nonperforming assets at substantial discounts or hang onto them despite the likelihood of additional price declines. According to Randy Appleyard, Residential Credit's head of asset sourcing, "We can move the assets off their books and make it a sale, because we bring two things--capacity and capital. Or if a bank wants to take those assets to market, we can bid for them." The company underscores the importance of loss mitigation and indicates that suitable strategies do not involve keeping assets and letting them further deteriorate. The firm could handle up to $6 billion in loans and services $1 billion currently, and Stowe points out that its loss mitigators handle only 125 cases each--far fewer than the 500 to 1,000 cases taken on by loss mitigators at many third-party servicing firms.
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Investors Hide as Banks Come Knocking
Wall Street Journal (06/23/08) P. C1 ; Sidel, Robin
Sources report that large investors are increasingly reluctant to participate in capital-raising transactions in the wake of the billions of dollars in losses that banks have incurred due to bad loans and bad investments. Most of the banks that distributed new securities in recent months have continued to experience substantial declines in share price, and one banker states that "Investors are tired of trying to catch a falling knife." Many Wall Street firms and commercial banks have raised capital, and in the coming months many more financial institutions are expected to apply the same strategy as regulators put pressure on these institutions to guarantee that they have sufficient capital levels to weather the credit squeeze. "Obviously, the investors who jumped in early are down materially, but I don't feel by any measure that the market is closed or dead," says KBW Inc. Chairman and CEO John Duffy. He blames a great deal of the recent stock-value slide on "the sentiment that the banks didn't raise enough capital and will be back to the market at even lower prices." In a recent report, Sandler O'Neill & Partners banking analyst Joseph Fenech comments that the decline in share prices of banks that recently raised capital is partly attributable to doubt as "investors began to assess the possibility that many companies would soon be back to the well for additional capital and/or began to more fully digest the massive dilution associated with these actions."
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Mortgage-Securities Revival Proves Elusive
Wall Street Journal (06/23/08) P. C2 ; Bryan-Low, Cassell; Mollenkamp, Colleen
In the last several months, numerous hedge funds have been dabbling in down-and-out securities linked to the fate of U.S. homeowners, most notably bonds backed by subprime mortgages. Economists and legislators are keeping a close eye on their moves, believing they can play an important part in ending the turmoil that has weighed down the nation's financial markets. To date, however, these funds have had little success in attracting investors, as placing a value on mortgage securities in these uncertain times continues to be complicated. Nevertheless, the case to buy remains compelling, with the prices of highly rated subprime-backed securities having plunged nearly 40 percent on average since the credit crisis took hold in the summer of 2007.
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Demand Flat at Discount Window
American Banker (06/20/08) P. 20 ; Rehm, Barbara A.
The Federal Reserve Board reported on June 19 that discount window borrowing was more or less flat, standing at $21.8 billion on June 18. A little more than $14 billion of the loans will come due within 15 days, and the remaining $7.85 billion will mature within 16 to 90 days. A less than 2 percent increase in loans to commercial banks to $13.7 billion was posted, while loans to investment banks experienced a 4.4 percent decline to $8.15 billion. This was the third week in a row that investment banks requested less than $10 billion and the total is less than 25 percent of the $37 billion investment banks borrowed in late March when the facility had been opened for only a week. Discount window lending is still led by the New York Fed, which distributed $18.65 billion of the loans, while the San Francisco Fed and the Chicago Fed issued $1.84 billion and $806 million, respectively.
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Investment in U.S. Commercial Real Estate Falls 70 Percent
Los Angeles Times (06/19/08)
Banks continued to clutch their purse strings during the first quarter of 2008, contributing to a 70-percent slide in U.S. commercial property investment. According to the National Association of Realtors, investor commitment to commercial real estate during the January-through-March period sank to $48.2 billion from $157.8 billion a year earlier. "Slow economic growth is lowering demand for commercial space, mostly in the office and industrial sectors," said NAR chief economist Lawrence Yun. Even so, he noted that the commercial real estate market is holding up much better than it did during the last recession in 2001.
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Banks Find New Ways to Ease Pain of Bad Loans
Wall Street Journal (06/19/08) P. C1 ; Enrich, David
Banks are engaging in creative maneuvers to downplay bad loans, although these moves, while legal, could arouse deeper suspicion about financial stocks. David Fanger with