The credit market mess is affecting the finances of an increasing number of government bodies. A weekend story in the New York Times described how small towns in Norway had taken steep losses on complex US debt instruments (why were they even taking the currency risk?).
Today, Bloomberg reports that the further SIV downgrades are hitting government cash funds. Montana had already seen withdrawals, but Connecticut appears to be a new victim, although its exposure (at least as of now) is not as great.
From Bloomberg:
Montana and Connecticut state-run investment funds hold debt tainted by the subprime mortgage collapse that was cut or put under review by Moody’s Investors Service, leaving local governments vulnerable to losses.
Moody’s lowered its rating on commercial paper issued by the Orion Finance structured investment vehicle, or SIV, to “Not Prime” on Nov. 30, saying its net asset value is inconsistent with Orion’s former Prime-1 rating. Montana owns $50 million of the paper. Moody’s put another $105 billion of SIVs on review for a possible downgrade, of which Montana holds $80 million and Connecticut holds $300 million, records showt….
Montana’s $2.2 billion fund has already had $250 million of withdrawals since the fund’s $90 million holding of Axon Financial was cut to “D,” or default, by Standard & Poor’s last week. It was lowered to “Not Prime” by Moody’s on Oct. 23.
The Montana pool, managed by the Montana Board of Investments, has 25 percent, or $550 million, invested in SIVs, all of which carried top investment ratings when purchased….
Connecticut’s Short-Term Investment Fund, which invests cash for state agencies and municipalities, is holding $300 million in debt issued by SIVs that may be downgraded by Moody’s. The state’s $5.8 billion fund held notes issued by SIVs affiliated with Citigroup as of Sept. 30: Beta Finance, Dorada Finance and Five Finance, according to its most recent quarterly report.
Connecticut also holds $100 million in defaulted SIV notes issued by Cheyne Finance.
Lewis, a member of the Legislative Audit Committee in Montana, questioned whether the state board’s policy of allowing pool participants to remove their money at full value, which concentrates the risk among those with money still entrusted to the pool. The majority of the money in the pool belongs to state agencies….
Carroll South, executive director of the Montana Board of Investments, said Nov. 30 he will have enough cash to address any further withdrawals
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Ill bet you a truckload of Enron Jedi collateral that the toxic debt is linked to Countrywide swapped CMOs that are worth about as much as the virtual truck Im backing up which is linked to Citi asset backed securites which are cross-hedged to Morgans trust that is being held for investment off the books.
Not funny, but why are these rubes in a position to bet on unregulated yield enhancing derivatives which are built to explode? Dumb!
Fitch receives two event of default notices for two CDOs
News Digest, 3 December 2007
Fitch has received two event of default notices for two Fitch-rated CDOs: GSC ABS CDO 2006-4u, managed by GSC Group, and Orion 2006-2, issued by NIBC Credit Management. Both are primarily collateralized by US subprime mezzanine RMBS and were issued in the last quarter of 2006. They also had small buckets of other US structured finance CDOs and have upward of 90% 2005-2007 US subprime RMBS collateral exposure.
In a report today on CDOs, Fitch said GSC Group’s GSC ABS CDO had experienced upward of 50% negative collateral migration in its underlying portfolio, with another 15% of collateral on watch for downgrade prior to delivering its event of default notice. In this case, the EOD was triggered by the sum of the outstanding adjusted collateral balance and reserve account totaling less than the commitment amount.
In the case of NIBC’s Orion 2006-2, more than 75% of the portfolio was downgraded since closing at the time of the EOD notice. According to Fitch, at the time of its report, the controlling class had not taken any action.
Fitch analysts say that as the US subprime market continues down the path of unprecedented negative performance, Fitch expects to see continued collateral downgrades that could put more CDOs at risk of triggering EODs, specifically overcollateralization EODs.
Fundamentals, not liquidity conditions, are behind MBS crashMany banks, if not financial institutions in general, would have you believe that the current rout in mortgage-backed debt is largely being driven by irrational fear. A few bad subprime debts buried around the structured universe are scaring buyers out of markets.
But, said CreditSights, in a note to clients on Wednesday, current pricing levels reflect fundamentals, even for the most highly-rated debt. Mortgage securities across the board are overrated and overvalued:
The harsh truth about the outlook for the AAA tranches – necessary downgrades, if not defaults – should put the lie to the argument that current low prices in AAA RMBS tranches – let alone AAA tranches of mezzanine RMBS CDOs – are somehow the victim of poor liquidity conditions, and do not reflect the true fundamentals of the situation.
CreditSights publish the results of a survey they have conducted on “188 individual relatively large RMBS deals”. The outlook, by all accounts, is grim.
At root, CreditSights calculate a severity loss ratio for lenders on individual defaulting subprime mortgages based on mortgage market data collected over the past few weeks. The survey results indicate that such loss severity rates on mortgages are “painfully high”. They range from 24 per cent to 55 per cent – with a weighted average at 35 per cent. And they’re expected to rise. For second-lien mortgages – that is, second mortgages on a property, the loss severity rates average 94 per cent.
So how do those figures translate into the capital structure of structured mortgage-backed debt? Foreclosure rates are rising higher and higher – which means the number of occasions when the above loss severity ratios have to be applied are increasing.
And it doesn’t look like the blame can be pinned on any particular vintages of MBS. Here’s a graph of foreclosures on vintages since 2004
http://ftalphaville.ft.com/blog/2007/11/07/8715/fundamentals-not-liquidity-conditions-are-behind-mbs-crash/
This is a bit off-topic perhaps, but the next time anyone tells you that all this activity helped lower-income borrowers achieve the dream of home ownership, refer them to this:
http://seattletimes.nwsource.com/html/localnews/2004049184_predatorylending03m.html
An awful lot of the loans at the root of all this were made to people who already had homes. Some of those people don’t have their homes anymore, and some of them are not good bets to keep them much longer.
85% of subprime was refi, many during the frenzy took out ARM and IO etc and dropped their fixed rate in the belief that they could refi later into a fixed. Many were probably cash out and consolidation loans. Feldstein based on FED data says that 9 trillion dollars was taken via MEW from 99 to 05.
Im waiting to hear how Blackrock deals with Florida bonds, as IMHO, they have a conflict of interest in packaging trusts in Florida; I blame dumb teachers and and people that cant read.
On that note… Guess who just gace Blackrock 43 Billion?
>>>China Investment Corp is keen to play the role of market stabilizer like other sovereign wealth funds that have bought into financial institutions hit by subprime woes, the head of CIC said on Thursday.
But Lou Jiwei said the $200 billion fund would need up to a year before it was ready to make major investments overseas.
“Currently, because of the subprime issue, some big financial institutions have reported problems. I have noticed that some sovereign wealth funds have injected capital into them,” Lou said at a banking forum in Beijing.
“They are not doing so for the public good but from a long-term investment perspective. They are stabilizing the market. CIC will also do the same thing,” he said.
Anon of 1:53 AM,
Good tip. Will run it down. I assume it was an investment in one of BlackRock’s funds, rather than the purchase of a stake in the management company (that would be major news, although it’s also logical that Merrill might sell some of its holdings in BlackRock to plug the hole in its balance sheet).