Fed sets Deadline for CDS Clearinghouse Framework

Posted by Patrick O'Connor on 10/28/08 7:24 am

Better late than never…the Fed set an October 31 deadline for exchanges to craft guidelines for making the $55tn credit default swaps (CDS) market safer.  The previously unregulated CDS market is largely responsible for the credit crisis.  Read More.

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Does your school district own interest rates swaps?

Posted by Tim Hope on 10/17/08 10:19 am

That is right. Incredibly, in the midst of a major credit contraction it is coming to light that some school districts are proud owners of interest rate swaps.  Such swaps are derivative instruments that can be used to exchange periodic payments with the amount being determined by an underlying bond issue.  One school district found that its rate on a $55 million floating rate bond issue ballooned from about 1.9% to 15% during the last week of September.  In addition, the firms that sold the swaps to the district received millions of dollars in fees that the district claimed were not properly disclosed.  The SEC is presently investigating.  Given the trouble that sophisticated Wall Street financial engineers and risk manager are presently experiencing with their derivative exposure, it is more than amazing that such instruments are being sold to local public school districts.  Click here to read more.

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Fed and European Central Banks Make Historic Moves

Posted by Patrick O'Connor on 10/13/08 11:29 am

U.S. and European governments took unprecedented action during the weekend by pumping trillions of dollars into the global banking system.  As a result, stocks soared around the world.

U.S. Treasury aims to help healthier banks

European governments pledge nearly $2 trillion

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Unlimited dollars to be auctioned by European banks

LIBOR rates come down

Asia might not benefit from European and U.S. liquidity injections

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Maybe the Sky isn’t Falling

Posted by Peter Knapp on 10/10/08 1:33 pm

These are painful times for our clients and our firm.  I haven’t spoken to anyone here who is sleeping well.  Worry about our clients and our own futures keeps us up at night.  We are in the financial industry, where the pain is prodigious.  However, 94% of Americans are in non-financial industries and while their financial assets are being devastated, at least one University of Chicago economic expert thinks they should be just fine because the credit crises really won’t affect them very much.  This sounds flippant and out of touch at first. However, the fact that the financial industry has a long history of sometimes violent volatility without impacting the rest of the economy lends credence to the thesis.  For this somewhat calming and positive viewpoint, read more.

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Where the rubber meets the road: credit availability in corporate America

Posted by Tim Hope on 10/2/08 11:05 am

The hidden underbelly of the current credit squeeze does not necessarily show up as a flashing number on the TV news.  Rather, the lack of routine credit availability is impacting corporate America in an insidious viral manner.  Some firms are cutting their dividend payments while others are tapping credit lines while they are still available.  Other firms are closing plants, stores and delaying previously negotiated takeover deals in an effort to conserve cash that continue to be difficult to get.  Such actions are yet another indication of the real impacts of the frozen state of the credit markets.  Click here to read more.

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The “Man Behind the Curtain”

Posted by Tim Hope on 9/24/08 10:47 am

Everyone must be familiar with the scene from the Wizard of Oz when the wizard is finally discovered behind the curtain only for him to proclaim “pay no attention to that man behind the curtain.” The current financial crisis has at its root a “man behind the curtain” in the form of the major rating agencies.  There are reports that the firms substituted theoretical mathematical assumptions for the opinions of their own analysts in a rush to grade issues for fee income. The result was that securities with coveted AAA ratings were packaged up and sold into the marketplace throughout the world despite the fact that they contain securities that were anything but top rated.  Between 2002 and 2007, rating agencies pumped out top flight ratings on roughly $3.2 TRILLION of mortgage debt pools even though they contained mortgages from homeowners with damaged credit and undocumented incomes.  Without the AAA rating the securities would not have been available for purchase by banks, insurance companies and pension plans.  As subprime borrowers have defaulted many of the securities have been downgraded and fallen in value and in some cases written off entirely (or close to it).  While the Wizard of Oz had a happy ending, it remains to be seen how the present story will unfold.  Click here for an excellent article on the topic . 

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Buffett Investing $5B in Goldman Sachs

Posted by Patrick O'Connor on 9/23/08 2:43 pm

Financial stocks are rebounding in aftermarket trading after Warren Buffett announced that Berkshire Hathaway will purchase $5 billion worth of preferred Goldman shares and receive warrants to buy another $5 billion worth of common shares at $115 per share.  Read More.

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Money Squeeze Rippling Beyond the Headlines

Posted by Tim Hope on 9/22/08 11:44 am

Franchisees of a major worldwide fast food chain are experiencing difficulty obtaining financing for routine business improvements through their usual lender, a major money center bank.  The problem is so acute that some franchisees are being encouraged to locate other sources of lending themselves.  This is a surprising development given that such borrowing would seem to be the bread and butter of any lender.  Click here to read the whole story.

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Tight Credit Market Driving Up Corporate Financing Costs

Posted by Tim Hope on 9/18/08 10:07 am

For the week ending September 17th, the U.S. commercial paper market has shrunk by 4.2% the largest such decline in 26 years.  Commercial paper is a major source of short term corporate financing.  The tightening credit conditions can clearly be seen in the increased borrowing costs for corporations.  Consider that overnight rates on commercial paper increased by 1.38 percentage points this week for a rate of 3.46%.  The 30 day rate has moved 73 basis points higher to a rate of 3.1% (each percentage point represents 100 basis points).  While at the same time, three month Treasury bill yields have fallen to levels not seen in half a century.  In light of some money market funds that are struggling to maintain their one dollar NAV, such an increase in commercial paper rates can be seen as yet another signal that market participants lack confidence in anything but direct obligations of the US government. Click here to read more

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Another Volatile Session on Wall Street

Posted by Patrick O'Connor on 9/16/08 1:58 pm

AIG is still scrambling for cash and the Fed surprised some investors by keeping interest rates unchanged.  As a result, today’s trading session bounced in and out of positive and negative territory 25 times.

Fed could still takeover AIG

Legal hurdles could prevent Fed from putting AIG into conservatorship

Fed keeps rates at 2%

Morgan Stanley announces solid earnings

Goldman Sachs announces weaker than expected earnings

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