 |
||||||
| Friday, November 20, 2009 |
Contact Us
|
 RSS
|
|||||
|
|
| |
|||
|
||||||
|
||||||
|
|
ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
|
|
|
|
November 16, 2008 12:01 AM ET
Bloomberg
Citigroup CEO Vikram Pandit has to deal with a growing volume of troubled securities. And he's far from the only big bank chief with a bigger hole in his balance sheet.
And while the Treasury Department has been pumping fresh capital into the banking system through its Troubled Asset Relief Program, it last week reneged on the part of the plan that would have actually relieved banks of their troubled assets by buying them directly. Many markets have been left in the lurch because they continue to lack transparency, which in turn continues to keep investors at bay. That means more multibillion-dollar write-downs are undoubtedly on the way. The amount of those write-downs is as yet unknown, but many of the largest financial companies, including J.P. Morgan Chase, Citigroup and Morgan Stanley, have recently reported an increase in level three assets—the kind that do not trade and so cannot be marked to market but must be marked to management’s models. And if recent events have taught anything, it’s that models have a tendency to miss by wide margins. More striking, perhaps, is the concurrent increase in level two assets—those that the Financial Accounting Standards Board defines as not actively traded but having “observable” inputs from the market prices of comparable securities. (Level one assets are those that are actively traded and easily valued.) In the third quarter, J.P. Morgan, for example, reported $119 billion in level three assets, measured at fair value on a recurring basis, for which it bears economic exposure. That accounted for almost 6% of recurring assets in the quarter, compared with $71 billion at the end of 2007, or less than 5% of total recurring assets. For the third quarter, its level two assets were $1.58 trillion, or 78% of recurring assets. At the end of December, those assets made up under 75% of total recurring assets. Similarly, Citi said that its level three assets on a recurring basis as of the end of September were $157 billion, or 11.7% of total recurring assets, up from about $133 billion, or 10.3%, of such assets at the end of last year. At Morgan Stanley, level three assets at the end of the third quarter were $78.4 billion, up 7% from the second quarter. The haphazard state of the markets, where only some securities are trading hands, however cheaply and rarely, has given companies some leeway in valuation and what constitutes level two or level three assets, said Timothy Batchelor, managing director at Duff & Phelps, who helps companies with valuation. “Essentially, we’re living in a level 2.5 world,” he said. “You’re trying to value a level three asset with the best information available,” he explained, because companies don’t like the risk of having to rely on their own assumptions to value the assets and also because the market doesn’t particularly like big jumps in level three assets. Mr. Batchelor called the third quarter a “period of transition” in which certain illiquid assets, such as auction-rate securities, were “in flux.” “As we look forward to the fourth quarter,” he said, “it will become clearer how the financial institutions are going to come out on these issues.” The Treasury’s decision last week to walk away from its plan to buy up problem securities probably solidified the issue for many. Companies and investors waiting for Uncle Sam to kick-start the markets were disappointed. Citigroup, for example, could have sold about $79 billion worth of its assets in the now-abandoned buyback part of the TARP, Fox-Pitt analyst David Trone estimated in September. “I was hoping there would be a couple of phases to [TARP],” said Anton Schutz, president of Mendon Capital Advisors and portfolio manager of the Burnham Financial Services Fund. “I very much agree with [the Treasury] putting equity into these companies, but I still wanted to have them in the market, helping to create some price discovery.” Mr. Schutz expects to see level three assets rise again for the banks in his portfolio in the fourth quarter, since the securitizations markets remain so poor. “So far we’ve begun to see only the best-quality assets loosen up,” he said. “It’s going to take a little time to go down the food chain.” The Treasury, which has already pledged $250 billion to banks, is apparently hoping that by giving banks more money, they’ll be able to manage their own problem assets, some of which may be illiquid now but could prove to have value in the future. The Treasury’s current arrangement with American International Group (see the AIG stories on Page 3) has begun to help clear up the market for collateralized debt obligations, which is some of the most “toxic” debt out there. That’s a contrast to the CDO auctions that take place nearly every day at Annaly Capital, which handles about 70% of the auctions for CDOs that are in default. With the “worst” subprime securitizations, said Wellington Denahan, chief investment officer at the firm, the super-senior AAA tranche holder usually gets about 20 cents on the dollar. Prices aren’t likely to improve soon without the government being involved, Ms. Denahan said, since buyers are leery after a few companies got burned, such as BlackRock, which said last month that the $15 billion in subprime and Alt-A mortgages it bought from UBS have lost 30% of their value. Still, with the wide range of value in the underlying assets, another option might be: If you can’t sell ’em, buy more. J.P. Morgan, for example, has started a fund to buy undervalued assets. “If you have a pool of conforming mortgages, not in one of the ‘crazy states’ [like Florida or California], should it be selling at 70 cents on the dollar?” asked Mr. Schutz of Mendon Capital. “It’s an opportunity to buy, if you have that capital.” FW
|
|
|
|
CRAIN'S BENEFITS OUTLOOK 2009
SPECIAL REPORT
MOST POPULAR
|
MORE ANALYSIS
Crain Financial Group:
InvestmentNews |
Pensions & Investments |
Workforce Management
Copyright ©2009 Crain Communications Inc
All rights reserved.
Privacy Policy |
Terms & Conditions