Here Comes a Second Wave of Defaults and Losses

Incoming.

HousingWire
Fitch: Alt-A Mortgages Deteriorating More Rapidly than Expected
By PAUL JACKSON
December 15, 2008

Citing “a rapid deterioration of U.S. Alt-A RMBS performance,” Fitch Ratings again took the hatchet to its previous assumptions for Alt-A mortgages on Monday morning, revising its surveillance methodology and updating loss projections for all U.S. Alt-A RMBS.

Fitch said it now expects losses on all Alt-A collateral to far exceed the estimates of its ‘moderate stress’ scenario in its late ratings update earlier this year. “Market developments, ongoing home-price declines and loan performance trends in the Alt-A sector over the prior six months have effectively eliminated the possibility of this stress scenario,” said Fitch in a statement.

The rating agency said it now expects average cumulative losses om 2005, 2006 and 2007 vintage Alt-A transactions to hit 2.72, 6.78 and 9.58 percent, respectively, up dramatically from expectations at the agency earlier this year.

Fitch cited a “rapid increase in 60+ day delinquencies experienced over the past six months,” despite servicers’ collective efforts to hold off on actual foreclosure sales — likely implying that a halt to foreclosures is having little effect in resolving borrower delinquencies. Between May and October 2008, Fitch said that 60+ day delinquencies for the 2007 vintage increased from 8.80 percent to 14.65 percent; 2006 and 2005 vintages also experienced steep increases rising from 10.30 percent to 14.24 percent and 6.57 percent to 8.79 percent, respectively.

While delinquencies are continuing to pile up, cumulative losses are not — at least, not yet.. “The small increase in cumulative losses relative to the rising level of 60+ day delinquencies reflects, in part, the lengthening foreclosure/liquidation timeline being experienced throughout all vintages,” analysts at the agency wrote.

All of which means that it’s time to get ready for a whole new slew of downgrades to Alt-A in the coming few weeks. Fitch warned in its note Monday that it expects that it will downgrade many senior bonds to below investment grade — just in time for fourth quarter earnings.

Rogue Nation

Explanations of significant losses at investment firms are often attributed to rogue traders. These are traders who have schemed to defeat security measures. These rogues extended their trading portfolios credit exposure far beyond the limits of compliance, racking up substantial losses to be taken, if not risking the actual solvency of their firms. If they do not incur losses they are often not discovered. It is the losses that precipitate the collapse.

Nick Leeson of Barings, Toshihide Iguchi of Resona Holdings, Yashuo Hamanaka at Sumitomo, John Rusnak at Allied Irish Banks, Luke Duffy of Australia National, Chen Jiulin of China Aviation, and Jérôme Kerviel with Société Générale are examples of rogue traders operating since 1995 with combined losses of approximately $12 billion disclosed.

All of them together cannot begin to match one of the great Ponzi schemes in history. This was recently disclosed to be the work of Bernard Madoff, a highly respected executive and former chairman of the NASDAQ, who was apprehended when he confessed to losses of $50 billions.

Not all of his investors were innocents. His returns were literally too good and too mysterious to be true. Many thought that Madoff was trading on insider information or some other fraudulent scheme that was cheating the 'little people.' They did not realize it was they who were being cheated. It is the basic principle of a confidence scheme that you rely on naivete, or the greed and moral indifference of your victims.

The SEC was well aware of problems at Madoff from whistleblowers, and even a cursory examination of the fund's holdings would have exposed the fraud. The SEC was routinely blind to outrageous excesses on Wall Street in the past fifteen years because of the cult of deregulation and chronic underfunding from a Congress in the grip of lobbyists.

In a fraud this large, when it seems as though all those in the know are getting paid, people ignore it when they see it, discourage disclosures, and go along to get along. There is no better example of this on a private scale than the mortgage market in the US where fraudulent valuations and organized collusion were rampant among the banks, appraisers, title companies, the government agencies, Wall Street, and government regulators.

Is there a correlation between rogue traders and market bubbles? History seems to suggest that there is. Yet there are rogue traders every so often even in less ebullient times, but those tend to be isolated and specifically related to secular market innovations such as leveraged buyouts.

In a general monetary bubble rapid and steadily rising asset prices make compliance lax, trading stories that would otherwise be suspect believable, and of course when the money is flowing everyone is getting paid, so there is an atmosphere of general easiness, laissez-faire, and corruption.

Are we near the end of this? Is Bernard Madoff the ultimate rogue trader, the maestro of pyramid schemes, of well-heeled deception?

The status quo likes to blame a 'rogue' because it makes it seem as though the system itself is fundamentally sound. A clever individual acting alone has managed to outsmart the system and find some loophole to exploit until they are caught and exposed. This is a story to maintain confidence in the institution. It promotes unexamined, non-critical trust in the full faith and credit of a system that permits fraud to exist and flourish.

Sadly, this is not the end of the revelations, write-downs and losses.

Bernard Madoff was exposed because declining prices crippled the mechanism of his fraud, as they always do. To his detriment he was not an integral segment of the banking system. If he had been, he might have merely been declared insolvent, retained his honor and his bonuses, been backstopped by the NY Fed, and put into an arranged merger.

Bernie Madoff's mistake was in not incorporating his fraud on a broader scale. He operated on a relatively specialized area of turf in Palm Beach and New York, with collateral damage to the usual suspects on the international stage who are always willing to buy mislabeled American risk.

We believe that there are much greater deceptions being covered up now as we speak, not involving individuals so much as entire companies who have engaged in wanton accounting and securities fraud for the past twenty years.

The losses will eventually top 15 trillion dollars worldwide, and threaten to plunge the world economy into a serious economic dislocation.

Where will the losses come from that will break down the rest of the Ponzi schemes?

History informs us that most of the perpetrators will never be prosecuted, and even though exposed will eventually once again become respected members of society. This is how it was after the Crash of 1929.

The reason for this is that the frauds cut so deeply into the establishment and so far and wide beyond the financial system into the government that they are literally too big to jail.

Indeed, we are already see many of the characters who helped to set this credit bubble rolling in the 1990's coming back into government service with the new 'reform' administration.

The last bubble to fail that will expose these remaining Ponzi schemese is the US dollar and the Treasury bonds. They are the products of a nation that has been overtaken by a rogue culture of sociopaths and swindlers.

Bernie Madoff was no rogue trader. He was successful for as long as he was because he blended in, he was one of the crowd, he was an independent player within the greatest financial swindle in history, the US financial markets and ultimately the US dollar.

Experience suggests that you will ignore this warning, wishing to think of yourself as an insider. After all, it is the weak, the naive, the unsuspecting, the under-developed, the unsophisticated others that are the victims, and indeed they are. After all, what can stop this? The returns are so good, and have been paid steadily for so many years. And you are among the smart ones, the elect.

The endgame will come and strike the astonished like lightning.

You will not realize what has happened until you wake up one day and the accounts are empty, the returns cannot be paid, the promises are proven false, and the principal is gone.

And you will be facing the teeth of the storm with pockets full of empty promises and worthless paper, and no one will be able or willing to help.

And those responsible will say that you were lazy and foolish, and need to be smarter and work harder like them. Those who you imagined were shepherds will be revealed as ravening wolves.

How do we know this? It is already happening again.

Goldman and Morgan Set to Hit the Street with Losses this Week

Since a significant portion of the anticipated losses will be coming from writedowns in commercial real estate the projected reports are probably difficult to make with accuracy. The Banks have a great deal of accounting discretion, and it is probably tied to their tax and public relations strategy among other things.

As you may recall, there was quite a fuss when it was reported that Goldman was setting aside $7 billion of its $10 billion in TARP money to be paid out in bonuses this month. To put it into perspective, those bonuses are about half of the money required to put some health into the US automotive sector.

Goldman and Morgan have been paying more attention to the outrage in the public and the Congress since then, but they are still on a heady Masters-of-the-Universe fast track.

UK Telegraph
Goldman faces $2bn loss – its first since 1929
By Simon Evans
Sunday, 14 December 2008

As the banking giant prepares to unveil shock figures, Morgan Stanley braces itself to add its own bad news

Goldman Sachs, the US investment bank, is this week expected to post its first loss since the Wall Street crash of 1929 when it unveils full-year results on Tuesday.

In the week when many Square Mile bank staff find out if they have scooped a bonus this year, Morgan Stanley is expected to complete a miserable Christmas picture when it also reports a loss, one day later.

Alex Potter, banking analyst at stockbroker Collins Stewart, said: "For these two remaining November year-end reporters, the past three months will have been pivotal to their year as well as to the 2009 outlook. This period encompassed the Lehman failure, as well as the nationalisations of Fannie Mae, Freddie Mac and AIG."

Analysts expect Goldman to say that it lost close to $2bn (£1.4bn) in the last quarter of 2008, compared to a $3.18bn profit during the same period last year.

Big losses are expected at the bank's proprietary property arm, Whitehall, which owns, among other investments, New York's Rockefeller Center. Sources suggest that Goldman will reveal writedowns of more than $2bn on the fund.

Big losses are also believed to have been recorded in its key principal investments portfolio, with some estimates suggesting they could come in as high as $3.5bn.

Goldman laid off 250 staff in Europe last week, the majority of the cuts coming at its London offices in Fleet Street, as part of a drive to slash the group's headcount by 10 per cent.

Morgan Stanley is expected to post only its second loss since it went public in 1986 – around $300m for the fourth quarter is forecast – although some estimates suggest that figure could be as high as $900m.

The ratings agency Standard and Poor's has estimated that Morgan Stanley owns $7.7bn of commercial real estate loan assets – none of which has been written down.

Morgan Stanley's numbers will come days after Bank of America's chief executive, Ken Lewis, revealed that the bank, which snapped up ailing rival Merrill Lynch earlier in the year, is looking to lay off as many as 35,000 jobs in the next three years. It is anticipated that the move will save as much as $7bn.

Prince Alwaleed Takes a Haircut

Prince Alwaleed Loses 19% of Wealth on Global Slump
By Shaji Mathew

Dec. 14 (Bloomberg) -- Prince Alwaleed bin Talal, Citigroup Inc.’s largest individual investor, lost 19 percent of his personal wealth in the past year as the global economic slump reduced the value of banking and property assets, according to Arabian Business.

The Saudi billionaire was ranked the wealthiest Arab with assets worth $17.08 billion as of Dec. 2, the 2008 Rich List, published on the Dubai-based magazine’s Web site today said. That compares with $21 billion a year ago, the magazine reported, citing Alwaleed’s private financial accounts.

“Everyone has been guessing for 20 years” about the assets, Alwaleed was quoted by Arabian Business as saying. “I want you to get it right -- to get it absolutely right.”

Financial firms worldwide have taken $980 billion of writedowns, losses and credit provisions since the start of the current turmoil in the financial markets, according to data compiled by Bloomberg. More than 200,000 jobs have been cut across the industry and the U.S. benchmark Standard & Poor’s 500 Index has dropped 40 percent this year.

Making Money

Alwaleed, a nephew of the late King Fahd bin Abdulaziz al-Saud, stands out among more than 2,000 Saudi princes because he’s made money. After earning a bachelor’s degree from Menlo College near San Francisco, he returned to the Persian Gulf and parlayed an inheritance of less than $1 million into a billion- dollar fortune in the 1980s, mostly through real-estate investments, according to Riz Khan’s biography “Alwaleed: Businessman, Billionaire, Prince” (William Morrow, 2005.) (Meaning no offense, great Prince, but we are a little skeptical of these stated results and methods. - Jesse)

The Prince, 53, built his fortune by investing in brand-name companies he considered undervalued, including Apple Inc., News Corp. and Time Warner Inc. Forbes magazine estimated he was worth $21 billion in March, ranking him 19th among the world’s billionaires.

Alwaleed was lauded by Time magazine as the Middle East’s answer to Warren Buffett, the Sage of Omaha, after his 1991 investment in Citicorp, Citigroup Inc.’s predecessor, helped make the Saudi billionaire one of the world’s five richest people.

This year, Alwaleed’s investments haven’t kept pace with regional benchmarks. The shares of his Riyadh-based Kingdom Holding Co. have slumped 60 percent -- more than Saudi Arabia’s Tadawul All-Share Index or Buffett’s Berkshire Hathaway Inc. Kingdom Holding said Nov. 20 Alwaleed will boost his Citigroup stake, his largest holding, to 5 percent. The bank’s stock has fallen more than 70 percent since Jan. 1.

Assets

Kingdom Holding’s assets are valued at $7.98 billion, while the Prince owns real estate worth $3.196 billion and his media assets such as LBC and Rotana Holding are valued at $1.6 billion, Arabian Business said, citing financial accounts of the billionaire.

“The Prince keeps a significant amount of cash at all times, which is instantly accessible,” the magazine reported, without giving further details.

Alwaleed’s other major assets are valued at $1.679 billion, and include a Boeing 747, an Airbus A380, yachts and 400 vehicles, a collection of jewelry, and investments in a French port and stakes in Lebanese and Palestinian companies.

The billionaire is one of two Middle Eastern investors racing to build the world’s first kilometer-high skyscraper in the Persian Gulf. On Oct. 13, Kingdom Holding announced plans for the Kingdom Tower, part of the $27 billion Kingdom City real-estate project in the Red Sea city of Jeddah.