Editor's Corner: Bank of America to offshore real estate reviews Also Noted: Spotlight On... Some credit hedge funds win News From the Fierce Network:
Today's Top News1. Candid emails at S&P surface in case
If recent history has shown anything when it comes to putting executives on trial, it's that email evidence isn't necessarily rock solid. These days, if prosecutors were to go to their supervisors with plans to go to trial with mainly email evidence, they might not get the green light. That said, email evidence can be wonderfully entertaining. And Rolling Stone offers some choice examples from S&P executives. You might find yourself laughing hard---or crying hard. The emails come from evidence amassed in support of private litigation against S&P. "Lord help our [expletive] scam . . . this has to be the stupidest place I have worked at," writes one Standard & Poor's executive. "As you know, I had difficulties explaining 'HOW' we got to those numbers since there is no science behind it," confesses a high-ranking S&P analyst. "If we are just going to make it up in order to rate deals, then quants [quantitative analysts] are of precious little value," complains another senior S&P man. "Let's hope we are all wealthy and retired by the time this house of card[s] falters," writes another. Frank Parisi, S&P's chief credit officer for structured finance, wrote an email saying that the model used to rate residential mortgage-backed securities in 2005 and 2006 was slightly better than "if you just simply flipped a coin." For more: Read more about: Standard & Poor's, Credit Rating Companies 2. Investment banks fared well in first half despite deal drop off
While the markets are staggering now, the reality in the first half of the year was radically different. Investment banks took advantage of the favorable underwriting environment and generated a strong increase in fee income, despite a relative dearth of mergers. Thomson Reuters data show that investment banking fees rose 9 percent to $36 billion in the first six months of the year. Out of all fees globally, nearly 60 percent was generated in the Americas, "illustrating how the US market has recovered compared with the rest of the world," according to the Financial Times. The environment for issuance was favorable to say the least, and issuers were falling over each other to market securities, debt and equity. The biggest winner might have been JPMorgan Chase, which overtook Goldman Sachs to land in the top spot in the global league tables. "The engine of growth was again debt capital markets, which had their best start to a year since 2007. Global equity issuance also staged a strong recovery, up 36 per cent on the same period last year to $381bn. "Appetite for even the riskiest investments improved with initial public offerings performing more strongly than in the first half of 2012. In Europe the number of IPOs doubled." Mergers and acquisition fees proved to be a disappointment, however. The value of deals announced fell 9.7 per cent in the first half. The big question is whether the fee party is about to end. To be sure, the third quarter has been marked by extreme turbulence in the debt and equity markets. That will likely lead to a pause in underwriting, something we hope is only temporary. For more:
Read more about: mergers, fees 3. Lewis Ranieri is back, prices MBS offering
For long-time Wall Street executives, the name Lewis Ranieri will strike a chord. Back in the 1980s, he was one of the great Wall Street personalities, a real character, so to speak. For many years, he ruled the bond traders at Solomon Bros., where he rose eventually to vice chairman---until it all imploded. He was a featured executive in Liar's Poker, the classic Michael Lewis book about then incredibly powerful trading firm. Without question, he was a seminal figure in the rise of mortgage-backed securities. As such, he has taken some criticism, especially in the wake of the residential MBS nightmare that accompanied the financial crisis. But he has never lost the faith. In fact, he's a bigger believer in his creation than ever. Shellpoint Partners---the firm that Ranieri chairs---has generated headlines by selling $251 million in residential MBS encompassing loans backed by private insurance, not a big GSE. The offering was not without hiccups. As noted by DealBook, the firm was forced to offer some concessions at the last minute, offering buyers a bit more protection. But in the end, the deal was priced. We'll see if Ranieri can scale this concept. If the government were to get rid of Fannie Mae and Freddie Mac once and for all, that might help. For more:
Read more about: Lewis Ranieri 4. Bridgewater takes a performance hit
In the hedge fund industry, Ray Dalio has long sparked fascination, not only for his solid returns but for the cultish philosophy that powers his firm, Bridgewater Associates. His company is well-known for its All Weather fund. As noted by Reuters, the All Weather fund rose 14.7 percent last year. For the last 3 years, the fund has delivered a return of 34 percent, which isn't bad. But this year, the fund has run into trouble. In June, the fund fell about 6 percent. For the year, it's down about 8 percent. The All Weather Fund relies on a so-called "risk parity" strategy that is "supposed to make money for investors if bonds or stocks sell off." It has been marketed by Bridgewater and others as way to not only hedge against market turmoil but to thrive in many environments. "Bridgewater created a portfolio based on two of the four basic economic scenarios: rising growth, falling growth, rising inflation, falling inflation. Different types of assets do well in each of these scenarios and the all-weather portfolio contemplates spreading its risk evenly." Money managers tell Reuters that the strategy "does not perform when both stock and bond prices tumble," which we've seen in recent weeks. All in all, this may end up being a mere blip for this closely watched fund firm. That said, it also highlights just how tricky the macro environment has become. The surge in rates has tripped up a lot of asset managers, presenting an opportunity for the cream to truly rise. How managers play this cosmic inflection point will speak volumes about their talent and their firms' marketability. For more:
Read more about: Hedge Fund Performance, Bridgewater 5. Modest proposal for bond liquidity woes
Some might think that the bond market is a bastion of liquidity, rivaled only by the stock market. But that would be way off the mark. The Financial Times notes that big issuers such as General Electric or JPMorgan Chase at any given moment have more than 1,000 different bonds outstanding, "all offering different interest rates and maturing at different times, yet only a tiny handful trade regularly." Given the angst about the near-term future of bonds in general, "improving liquidity in the bond market has moved to the top of investors' agenda because Wall Street banks are retrenching." The fact remains that "banks hold fewer corporate bonds in their trading books today than they did a decade ago when the market was much smaller, 75 percent less than the peak in 2007, according to Fed data, and 45 percent less according to an analysis by Goldman Sachs that strips out mortgage securities." That may have reduced liquidity. It's fair to say that ETFs and ETNs have become more popular, as the direct holding loses favor. Several ideas have been floated to address the problem. Some think electronic trading is one answer. Blackrock thinks that standardization of securities is another. It "is urging companies to put bond issuance on a regular schedule, just as the US Treasury does with government bond sales, and standardise corporate bonds. "The idea is that, the more comparable these investments are, the more willing people will be to trade them in the secondary market." It's doubtful that the SEC will embrace the idea any time soon. Issuers certainly will balk at any proposal that on the surface will crimp their flexibility. They certainly do not want to be on an enforced schedule, and they enjoy their freedom to tailor maturity dates to their liking. For more:
Read more about: Bond Liquidity Also NotedSPOTLIGHT ON... Some credit hedge funds win The credit crunch has spelled bad news for lots of credit hedge funds this year, but some have been nimble enough to identify arbitrage opportunities between cash and non-cash products. One credit hedge fund manager told IFR he would be postponing his summer vacation to take full advantage of the bonanza. The big play seems to be arbitrage involving single-name CDSs and CDS indexes. Article Company News:
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Monday, July 1, 2013
| 07.01.13 | Candid S&P emails surface
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