Post by jeffolie on Feb 15, 2007 18:54:50 GMT -6
A reader brought an important article from Institutional Risk Analyst to my attention. It offers a good discussion of the hole HSBC has dug itself into, but also goes on to well describe the smoke and mirrors being employed by big banks like JPM.
Jamie Dimon, chief executive of JPMorgan Chase (NYSE:JPM), disclosed last week that JPM held only $5bn of higher-risk sub-prime loans, just two per cent of its total retail portfolio. He then bragged that the bank had sold much of its mortgage exposure — but to whom? Fact is that JPM, the largest derivative dealer on earth, likely sold much of its loan exposure to its hedge fund clients, highly leveraged entities that have significant clearing and credit exposure to JPM. As the wheels start to come off of the mortgage collateral wagon in 2007, a number of money center banks and broker dealers, particularly the ones with large prime brokerage operations, may be forced to repurchase CDOs from hedge funds, mutual funds, banks and other clients who discover to their dismay that there is no bid for this paper, credit agency rating or no. This situation will be particularly poignant for JPM, which seemingly was the proximate cause of the Amaranth hedge fund failure and even profited from the fund’s demise, as we wrote in a previous issue of The IRA.
Question: Why do you suppose that neither the asset managers at Goldman Sachs (NYSE:GS) nor Morgan Stanley (NYSE:MS) have filed a legal claim against JPM for the Amaranth collapse? According to our colleagues at Institutional Investor, quoting Gas Daily, MS Alternative Investment Partners Absolute Return Fund lost two-thirds of its $4.3 million allocation due to the Amaranth collapse, while its Institutional Fund of Hedge Funds lost 55% of its value. II also reports that GS, in its Nov. 14 filing with the SEC said only that its Global Relative Value Fund, with $95.6 million, “experienced negative performance for the quarter due primarily to significant losses in energy-related investments by a single GRV advisor, Amaranth Advisors, following a dramatic move in natural gas prices.”
While Amaranth’s failure arose from losses in the commodities markets, the example seems relevant to a discussion of the relationship between a prime broker and a hedge fund regarding other types of investments, say sub-prime loans and CDOs. Indeed, in the wake of the Amaranth fiasco, we hear that some of the larger hedge funds have demanded and won new credit facility provisions which essentially turn conventional credit lines into term loans, with no reset or call provisions to adjust for changes in collateral value. This means that a hedge fund holding a portfolio of rancid, sub-prime CDOs could effectively force a dealer bank or BD to finance same indefinitely, even though there is no cash bid for this entirely unique, opaque collateral.
As and when a dealer is forced to bite the bullet and repurchase the CDO from a recalcitrant customer, doubtless at or around par value, the dealer then will be forced to immediately mark-down the collateral and take a loss — assuming the auditors are paying attention. The alternative for the dealer would be to pull the fund’s credit line and potentially force yet another fund collapse. Either way, the effective moratorium on litigation which seems to have prevailed in the wake of the Amaranth collapse will end and the full ugliness of the CDO marketplace will become increasing transparent. Stay tuned.
wallstreetexaminer.com/blogs/winter/?p=434#more-434
Jamie Dimon, chief executive of JPMorgan Chase (NYSE:JPM), disclosed last week that JPM held only $5bn of higher-risk sub-prime loans, just two per cent of its total retail portfolio. He then bragged that the bank had sold much of its mortgage exposure — but to whom? Fact is that JPM, the largest derivative dealer on earth, likely sold much of its loan exposure to its hedge fund clients, highly leveraged entities that have significant clearing and credit exposure to JPM. As the wheels start to come off of the mortgage collateral wagon in 2007, a number of money center banks and broker dealers, particularly the ones with large prime brokerage operations, may be forced to repurchase CDOs from hedge funds, mutual funds, banks and other clients who discover to their dismay that there is no bid for this paper, credit agency rating or no. This situation will be particularly poignant for JPM, which seemingly was the proximate cause of the Amaranth hedge fund failure and even profited from the fund’s demise, as we wrote in a previous issue of The IRA.
Question: Why do you suppose that neither the asset managers at Goldman Sachs (NYSE:GS) nor Morgan Stanley (NYSE:MS) have filed a legal claim against JPM for the Amaranth collapse? According to our colleagues at Institutional Investor, quoting Gas Daily, MS Alternative Investment Partners Absolute Return Fund lost two-thirds of its $4.3 million allocation due to the Amaranth collapse, while its Institutional Fund of Hedge Funds lost 55% of its value. II also reports that GS, in its Nov. 14 filing with the SEC said only that its Global Relative Value Fund, with $95.6 million, “experienced negative performance for the quarter due primarily to significant losses in energy-related investments by a single GRV advisor, Amaranth Advisors, following a dramatic move in natural gas prices.”
While Amaranth’s failure arose from losses in the commodities markets, the example seems relevant to a discussion of the relationship between a prime broker and a hedge fund regarding other types of investments, say sub-prime loans and CDOs. Indeed, in the wake of the Amaranth fiasco, we hear that some of the larger hedge funds have demanded and won new credit facility provisions which essentially turn conventional credit lines into term loans, with no reset or call provisions to adjust for changes in collateral value. This means that a hedge fund holding a portfolio of rancid, sub-prime CDOs could effectively force a dealer bank or BD to finance same indefinitely, even though there is no cash bid for this entirely unique, opaque collateral.
As and when a dealer is forced to bite the bullet and repurchase the CDO from a recalcitrant customer, doubtless at or around par value, the dealer then will be forced to immediately mark-down the collateral and take a loss — assuming the auditors are paying attention. The alternative for the dealer would be to pull the fund’s credit line and potentially force yet another fund collapse. Either way, the effective moratorium on litigation which seems to have prevailed in the wake of the Amaranth collapse will end and the full ugliness of the CDO marketplace will become increasing transparent. Stay tuned.
wallstreetexaminer.com/blogs/winter/?p=434#more-434