.what a year - 2008

The folloing arthors are all in investment banks or investment division in Canadian banks. Enjoy reading and hope you like it too.

去年六七月，忙着一个USD 700 mm high yield bond private placement deal. 一切就绪，七月十六号周一sales force launched the sale, 周二S&P宣布review all morgage-related securities, and possible downgrading many of them. 市场一片哗然，融资成本急剧上升,client 和 我们最终不得不取消这次融资。现在回过头来看，当时如果get deal done, 不管market pricing 多么高， 完全好于现在完全没有liquity 的市场， no matter how credit-worthy your client is. Consider Canadian Big 5 banks borrowing spread is now 200 bp over 5 year gov't bonds, v.s. 50 bp spread a year ago.

From a perspective of history review:

(Irresponsible borrowing + irresponsible lending) -->subprime morgage crisis --> defaults + foreclosures --> housing prices slump --> Morgage-backed securities MBSs & CDOs priced down --> Mark-to-Market accounting rule forced banks to write down assets dramatically ---> substantial losses and everyone in desperate need to raise cash and shore up Balance Sheet --> no credits, no liquidity, financing closed to everyone --> bankruptcies --> damage to real economy and on edge of recession.

简单的说，最根本的是housing markets. 什么时候房价到了底，stablize 了，才到经济看好的时候。美国人民习惯了house equity=提款机, 而美国经济又是消费主导，一旦consumer 弱了demand, 麻烦就长久了。

现在的financial crisis, 直接的根源是financial institutions 不停的write down assets & report losses. Regulation 对financial institutions 有capital requirements. 融不到资，就是死路一条。解决的办法有两个，1。 change accounting rules. No mark to market any more but historical prices. 2. take toxic assets away from financial institutions' B/S. 两种方法都能避免write down.

但是方法1行不通。用 Ben Bernanke 的话说，不再mark-to-market 对investor confidence 打击太大, 市场需要rely on instituions best estimates of their assets. 用 Jeff Robin (CIBC's chief economist) 的话说，you can't change the rule while the game is in the middle of the play.

那么政府700 billion的 bail-out plan 就能理解了: 政府把所有的toxic assets 都拿走，留给finnaical institutions a clean balance sheet. No further write downs/losses, markets will stablize over time.

Bail out 的作用肯定是有的，至少不会再有大的financial institutions file for Chapter 11. GS and MS will likely survive (Buffet 10% dividend deal is just unbelievably rich). 但是感觉是治标不治本，副作用还挺大。(别的不说，inflation 肯定是上去的，print 那么多的money, Fed has to tight soon, which on the other hand hurtseconomy)。Root cause 还是在housing markets. 怎么让经济好转，人民有钱，房价起稳，才是良药。

就像发高烧的人，仅仅在额头上贴冰块是不行的，还是要找到良药下肚。从美国政府的角度来讲，financial industry 烧得奄奄一息了，还是赶快加冰块降温保命（bail-out plan)，至于良药治病(housing), 现在管不着了，慢慢来吧

Q 1:

A couple of thoughts regarding the bailout:

1). the $700 bln will be paid by installments ($250/100/350 bln). How much existing "toxic assets" on major financial institutions' B/S now? how much more assets we may expect to be downgraded to be "toxic" in the coming future?

2). the answer to the first question depends largely on the housing market, as you elaborated. Maybe more accurately, depends on the Default rate and Delinquent rate. Here comes three factors for the Default rate: housing price, unemployment rate, and the housing inventory absorption rate. To make things even more complicated, we don't know how many % of the mortgage payers are for pure investing/speculating, and how many % for self-occupancy.

3). above are just RMBS (maybe some CMBS). How much other ABS, underlying assets of credit card receivables/car loans/student loans, are under the danger of downgrading? How serious it is about that pool of "toxic assets candidates"?

Any comment?


A 1:

1, Nobody knows exactly how much "toxic waste" there are on the Bank's balance sheet among US Banks or around the world. Some banks are not forth coming on their exposure, others are financed through off-balance sheet funding vehicle, therefore, the the exact number is a mystery. However, according to Mr. Bill Gross, another $500billion seems to be need to calm the market.

2, In terms of US housing market. There are two things need to be considered. a) the Asset value keeps falling. When the asset value reaches the bottom, that's when we will start seeing the recovery of the debt/credit related financial crisis. b)stress tests on existing mortgage debts, two street conventions are based on UBS and JP Morgan methodology, Intex and Markit seems to be the only two data source provide necessary data for analysis. However, due to complexity of the underlying asset classes are not simply subprime, alt-a or prime mortgages, but also include RMBS, CMBS, CDO, CDO Squares. Information related to complex ABS are difficult to help analyst to figure out whether these are subprime, alt-a or prime related products. Different assumptions are utilized for delinquency rate, and default rate. However, honestly speaking, when Merrill sold their "toxic waste" for 22cents on a dollar back in Aug, everyone was shocked on the street. Fortunately, no such fire sales were followed by other banks.

3, Seems like the trouble related to the Mortgage related ABS has spilled over into other asset classes. GM selling GMAC, big three suspended their leasing options for new vehicles. The ripple effect is yet to be seen on the main street.

A 2:

Like Z mentioned, no one know the exact size of the taxic waste. Two reasons: 1. The complexitiy of the securities. For many MBS, CMBS, CDOs, they were sliced and re-packaged N times that nobobody knows exactly what's the underlying assets are, let alone the intrinsic values. 2. The disfunctioning markets makes valution extremely difficult if not impossible.

Two methods of valuation: intrisic value approach that discounts future cash flows to the present value. For a MBS, for instance, as you said, future payments are unpredictable because of the unknown default rates and delinuent rates. Those inputs are contingent on the economy - on a macro level, the GDP growth rate, inflation and unemployment rates; on a micro level, how consumer feels of their pockets, therefore the willingness to spend, as well as how corporates feels of the profit prospects in intermediary or long term, hence the willingness to invest/expand. In short, in a world filled with high uncertainty, the best maybe creat senarioes to get a sense of how bad it could be.
Even the discount rate is changing dramaticlly because of the dramatic change of availability of liquidity and the degree of risk aversion of the market. Therefore, intrisic valuation even using complex simulation models do not work well in current situation. Garbage in, garbage out.

The market relative valuation works only if market is functioning. In fact, asset pricing is a pivatal role of capital markets. but now markets totally disfuncting - no liquidity, no flow, no trade, no financing. Everything is still, no trading to give a fair market value of assets. What a terrible situation it is. JP Morgan acquired WaMu. The latter has $176 billion exposure to mortgage markets, including more risky ones with payment deferral options . JPM write them down 31 billlion. This latest transaction will provide a benchmark to gauge the value of similar assets. JPM may derived the 20% mark down based on current available information. But things will and are changing. Maybe 40% write down is appropriate 3 months from now.

Back to your topic, is $700 billion enough?　Some say the first tranche may be $350 bn that's far from enough. Like you and Zuluking said, if mortgage trouble spill over to other security classes via the deterioration of economy, this could be only the begining of the end.

we are in an uncharted era, everthing is experimental in nature. Let the smart guys like Paulson and Benanke to cope with the tough situation. We just carefully observe, think and learn.

Part 2:

说明一下啊，自己不是高人，刚开始在投行干不多久，处于学习和知识积累的原始阶段。要求自己 follow markets, make sense of what's happening now and what’s happened in the past, 就可以啦。Only if 一年前能写出现在发生的事情，哈哈，那我早就成亿万富翁了。Think of Lehman's stock, 52 week high of $67.73 and closing yesterday at $0.29. 更不用说利用杠杆 and long put options 等等的回报了。

当然，forward looking, predicting future 是自己努力的方向，现在还远远没有那个水平。实业家和金融家，一个经营实体，一个经营预期。A senior or successful banker, economist, investment professional or financier 都是在做predicting the future with the definition of success being a higher possibility of accuracy on average over time. 通俗的说是bets on a binary outcome: Long position 是说你看好未来, 你认定underlying assets 会涨，Short position 则相反。这个underlying asset 可以是实物，比如 real estate, commodities. 也可以是虚物，a paper claim or contract. 比如 bonds, stocks, options.

能先人一步，看出大势，提前布局，才是牛人。成为牛人，要站在前人的肩膀上，精通历史的前提下，Look forward to make reasonable bets. Bernanke 被称为研究1929-1933 Great Depression 的第一人。有此基础，才能掌门Fed, 决定未来as he makes interest rate decision 是基于对未来六个月或者一年经济，市场的预期 given the lagging effects。

事物都有两面性，辩证的统一于一体。比如Finance 的核心就两个字：Risk + Reward. 所有一切的金融活动都围绕着这两个字。金融活动放大了的人性, 也就两个字：Fear + Greed， 对应于金融的R&R. 我对risk的理解，risk=uncertainty. Uncertaintyyou are making bets now on future events/outcomesuccess or failure = judgment call of a probability on outcome. No arbitrage 的另外一个定义是：Future cash flow with CERTAINTY must earn RISK FREE rate. Rate spread 恰恰是uncertainty 的体现。正因为 risk, uncertainty, bets, rewards 金融行业才是那么的精彩，那么的令人exciting. 投行的人很多喜欢Poker game，因为poker game 一样在玩 risk, rewards, bet with uncertainty.

大成功者，常常能在绝望中看到机遇，在疯狂中看到涅灭。巴菲特在市场对投行一片绝望之时，砸向GS 5 billions. GS 在07年初所有商行和投行都为之疯狂的mortgage securities 中took short position，成为唯一一家没有report loss的big financial institution. 看到帖子，有人问投行是不是就此没落了，要我说，yes and no. Yes because standalone investment BANK 确实不存在了，No because Investment BANKING绝对不会没落，只是经历一个big cycle, and big adjustments, 两三年后在废墟（也是养料）之中，会重新站起而更加辉煌。这是capital markets 资本主义核心特征决定的。

另一个帖子说，家长给孩子选专业，远离金融，还是医生好。个人感觉，现在恰恰应该进学校学金融。1. You not only learn the books, but have a chance to learn much much more by observing markets combined with your knowledge from school. 2. 就像买房买股票，大部分人是买涨不买跌，所以挣钱的人是少数。如果你同意这是一个cycle, 就应该在现在金融危机，到处layoff的时候入场，而非相反。2005，2006 年经济腾飞，金融烫手的时候去学MBA 现在毕业，很难找工作。两三年后，实体经济起稳发展，虚拟经济（金融业）的作用就是放大实体经济的辉煌而会更加灿烂。3。更不要说中国的金融人才需求，given the potential to develop our homeland’s capital markets.

最后再说一下自己对投行的理解, z写过这方面很好的文章。投行有广义和狭义之分。广义的投行很广，包括investment banking, capital markets (that include debt capital markets DCM, and equity capital markets, ECM, foreign exchanges, derivatives markets), sales and trading, or even include brokerage and equity research. 纯正的投行是指狭义的Investment Banking. 主要做两个业务线：Capital raising and M&A advisory. Capital raising 帮企业从markets中筹钱，包括IPO, secondary offering, debt underwriting, private placements. M&A financial advisor 就是帮企业买或卖assets or entities. 有人说Lehman 投行干的活就是自己投5块，leverage up 95, 再卖出101 or 102. 这仅仅是 Lehman capital markets division 的 一小部分业务，i.e., financial products origination and sales. 看看official news on a deal that says “Barclays … acquired Lehman's North American investment banking and capital markets businesses for $250 million in cash...” Investment banking 和capital markets 两个部门干的不是一样的活。


Another article:

这一段时间，太多的事情发生了。美国的银行不论大小，一个接着一个在倒闭。独立投行的操作模式在美国彻底改变了。美国政府的700个亿的救市计划到底能不能有效果，大家都在拭目以待。但是，有一个肯定的答案就是美元在700个亿救市后将会贬值。

美国人心惶惶， FDIC 和加拿大的CDIC一样，如果银行倒闭的话，会保证银行储蓄客户的存款在10万美金之内不会有任何损失。对于一般的中产阶级，有一定的存款的话，可以分散到几个银行，而保证自己的存款，养老经不会被这次金融危机吞并掉。但是对于，有钱人来说，或是大型机构来说，这10万美元的保证打水漂都不够。一时间纷纷涌入treasury market. 这就造成了一个非常非常奇怪的现象。9月19日这周，美国的t-bill market在史无前例的情况下跌倒了negative yield. 也就是说，投资人，知道买了t-bill后，会损失一部分钱，但还是纷纷投入到treasury bill 当中去。因为，大家都相信美国政府不会破产。（这其实也是很值得讨论的一个话题，这就不说了）。这也说明，现在美国人有多么的慌张。treasury会跌到负数原来是不可想象的。过去这几周将会被写入历史。其实，我们现在经历的都将被写入历史。

再作个比较，昨天，周五（9月26日），MacDonald's的CDS叫价26.5bps,而Uncle Sam的CDS一度叫到了30bps. 也就是说投资人甚至认为uncle sam的破产机会要比麦当劳都要高。市场简直到了发疯的地步。

在这种情况下，投资人纷纷跳水，套现。 股市近期还会下跌，原来很liquide的money market的流通率也变得不流通了。一时间，大家都在买黄金，买政府债券。

Peace out...