——————————————————-
Credit Brothel Raided, Even Piano Player Not Safe: Mark Gilbert
By Mark Gilbert
Aug. 3 (Bloomberg) — As the financial-liquidity police raid the credit-market brothel, even the piano player faces arrest. The malaise enveloping global markets is becoming increasingly indiscriminate in choosing its victims.
At the start of July, Tunisia hired Daiwa Securities SMBC Co. and Nikko Citigroup Ltd. to help its central bank sell yen- denominated bonds. By the time the fund raising finished this week, Tunisia’s borrowing costs had risen by almost a quarter of a percentage point.
So the taxpayers of an African nation suffer because Joe Blow in Detroit can’t pay his mortgage.
In Germany, while IKB Deutsche Industriebank AG’s losses aren’t up to the system-shaking standards of Long-Term Capital Management LP, its subprime woes have nevertheless inspired a government-engineered bailout. In Asia, Taiwan Life Insurance Co. booked a $13 million first-half loss on its investment in one of the failed Bear Stearns Cos. funds.
In Australia, at least three fund companies are in trouble. Basis Capital Funds Management Ltd. and Absolute Capital Group, both based in Sydney, froze investor accounts last month.
Macquarie Bank Ltd., Australia’s largest securities firm, said this week two of its funds may lose a quarter of customers’ investments even though “there have been no defaults in the portfolio and no reason to believe that the loans will not continue to pay their interest and repay principal.”
`Unprecedented’ Crisis
In France, stockbroker and money manager Oddo & Cie said this week it plans to close three funds overseeing a total of 1 billion euros ($1.37 billion) because of the “unprecedented” crisis in U.S. asset-backed bonds. It wasn’t even concentrated in the toxic waste; more than half of the collateralized debt obligations in the funds were rated AAA or AA.
Investors from Harvard University to the Chinese government are licking wounds after the latest salvo of repricing. Harvard waved bye-bye to about $350 million invested in hedge fund Sowood Capital Management LP, which lost more than 50 percent of its value last month. China spent $3 billion buying stock in Blackstone Group LP’s initial public offering in June; the shares have since lost about a fifth of their value.
In the U.K., plans by Mitchells & Butlers Plc to sell a 50 percent stake in 1,300 pubs to billionaire Robert Tchenguiz in a deal worth 4.5 billion pounds ($9.1 billion) were derailed this week, with the company citing credit-market “turbulence.”
Honey, I Shrunk the Company
The winner of this week’s “Honey, I Shrunk the Company” award has to be American Home Mortgage Investment Corp. Worth more than $1.8 billion just six months ago, the company’s value dropped to as low as $56 million this week.
The lender specializes in Alternative A mortgages, a catch- all classification for loans made to borrowers that don’t meet the standard to be classified as “prime” while not scoring low enough to drop into the subprime category.
In April, American Home Mortgage said demand from financial companies that buy and repackage its so-called Alt-A mortgages was “stabilizing.” This week, banks cut its credit lines.
Perhaps part of its downfall was the May decision to let customers make their mortgage payments using American Express Co. credit cards. Think about that for a second. Using your Amex card. To make your mortgage payments. Can you spell usury?
A cardholder with a $3,000 monthly obligation could earn enough points in a year to get a free DVD player or portable video player. Never mind that gizmos like that come free with cornflakes these days. Or that the hapless borrower would be paying double interest for the privilege.
Collateral Damage
Moody’s Investors Service said this week it plans to take a harder look at bonds backed by those Alt-A mortgages, which are turning out to look more like subprime loans than it expected.
“Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines,” senior Moody’s credit officer Marjan Riggi said in the report.
As a consequence, Moody’s may increase its loss estimates on even top-rated debt containing adjustable-rate Alt-A mortgages by as much as 40 percent. As the rating companies dig deeper into the derivatives they graded in recent years, banks and investors will see the creditworthiness of their holdings sink lower.
At least 70 U.S. mortgage companies have shut, gone bust or sold themselves since the start of last year, according to Bloomberg data. As Dennis Gartman, economist and editor of the Suffolk, Virginia-based Gartman Letter, is fond of saying in his research reports, there’s never only one cockroach.
Cockroach Counting
What investors have to decide, especially those still confident about the outlook for stocks, is how many cockroaches they are willing to endure before deciding the credit market is cracked, derivatives are doomed, and the economy imperiled.
The credit bordello has enjoyed some wild times in the past few years, luring customers into the room at the back where the exotica are displayed. As the raid ensnares more and more of the regulars, newcomers are likely to become increasingly wary of the derivatives market’s wares. And when the piano player is led off to jail, the music stops.
To contact the writer of this column: Mark Gilbert in London at [email protected]
—————————————————
