Friday, 14 March 2008 01:00

Counterparty risk chatter around the Web

Stories from RGE Monitor and around the net related to Banks, Brokers, & Bullsh1+ part 2:

  • Carlyle Capital Corp (CCC) defaults on about $16.6 billion of AAA agency debt as widening spreads led to huge losses and margin calls on position leveraged 32 times. Lenders seizing all of its assets--> Carlyle Group's only material financial exposure to CCC is through a $150 million unsecured subordinated revolving credit agreement with CCC.
  • Sudden Debt, FT: Almost all structured finance transactions are based on unfunded margin debt--> Margin debt cannot be "restructured" with falling asset prices.
  • Brunnermeier/Pedersen (Princeton/NYU), BIS: Under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals.
  • Whalen (IRA), Joseph Mason: With prime brokers and hedge funds there is no such thing as a "true sale" or complete risk transfer because the hedge fund has little capital and the prime broker, as a result, ultimately bears all the risk. Same as securitized assets landing back on balance sheet without capital to account for them.
  • InvestorsInsight: Hedge Funds are net sellers of credit protection in CDS market, like insurers. Seides: hedge funds sell 32% of all CDS ($14.5 trillion) with only about $2.5 trillion in net assets under management--> watch counterparty risk.
  • S&P via FT Alphaville 75% of loans to junk-rated U.S. companies provided by HF/non-banks (about $400bn)--> worst asset class performance in Q4.
  • Peloton hedge fund run by former Goldman Sachs partners is liquidating $1.8bn ABS fund that produced 87% gain in 2007. Potential $9bn asset fire sale.
    Strategy: go short subprime paper, go long prime rated paper--> as of Jan 2008 however spreads on both low and prime rated assets widened due to deleveraging (=reverse leveraged bets on good assets). Margin calls triggered decision to unwind.
  • FT Alphaville: January 08 worst month for hedge funds since August 1998 LTCM episode--> average fund tracked by the HFRX index lost more than 2% in January, with event-driven funds, which include activists, the worst hit with a 3.39% loss. Equity long-short funds with net long exposure down too.
  • Times: London prime broker: nearly two-thirds of London-based hedge funds had lost between 4% and 10% of their value in Dec/Jan. A “significant number” had lost much more. Suspended redemptions, emergency measures introduced.
  • S&P via FT Alphaville 75% of loans to junk-rated U.S. companies provided by HF/non-banks (about $400bn)--> worst asset class performance in Q4.
  • BofA: Structured finance (CLOs), LBO financing, "loan to own" lending were main driving forces--> defaults set to rise, market totally illiquid.
  • Ritholtz: Brokers' exposures to CCC: numbers making the round on trading desks:
    -Citibank (C) $4.7B
    -Lehman (LEH) $3B
    -BoA (BAC) $2B
    -UBS $1.8B
    -Bear Stearns (BSC) $1.7B
    -ING $1.5B
    -JPMorgan (JPM) $1.4B
    -Calyon $1.3B
    -Merrill Lynch (MER) $760m
    -BN Paribas $600m
    -Credit Suisse $500m

    Last modified on Friday, 14 March 2008 01:00
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