lawyerliz_IHB
New member
Calculated Risk said they were leveraged 32 to 1. No room for losses at all.
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Thornburg Mortgage Meltdown
- Thread starter optimusprime_IHB
- Start date
NEW -> Contingent Buyer Assistance Program
SoCalGal_IHB
New member
With a platinum portfolio, I don't know what WOULD be comfortable leverage, do you?
lawyerliz_IHB
New member
Nope, but obviously 32 to 1 was too much.
SoCalGal_IHB
New member
I just read an article about a hedge fund that was leveraged 2:1, also with a high quality portfolio and it, too, went under. Collateral damage. This is from John Mauldin's newsletter.
Leverage in Reverse Gear
Leverage is going in reverse, and with a vengeance. And it is happening all up and down the economic food chain, regardless of the underlying credits. Brokers and commercial banks are being forced by regulators to call in loans and reduce exposure in order to raise capital. They are raising margins on all sorts of companies and individuals. They are requiring higher margins even for Fannie Mae debt, even though everyone knows the US government would step in if there was a problem.
This reduction in leverage is forcing funds and companies to sell assets into markets that simply do not want to buy anything. Loan sssets that are otherwise solid credits are going for 80 cents on the dollar. I am talking about municipal bonds and high-rated bank loans with default rates of less than 1%. This is a market in severe crisis.
And it is also starting to hurt ordinary people. I have a friend who does a lot of work on eBay. She has good credit. Rather than a bank line of credit, she simply uses credit cards. Or did. This week she got three letters reducing her limits to levels below what she already had on the cards. There are numerous such anecdotal stories circulating.
Let me tell a personal story to illustrate the problem. In 1976 I was a young entrepreneur, working as a print broker. There was a severe paper shortage at the time. I borrowed $10,000 from my friendly personal banker and used it to buy traincar loads of paper. Things went well. I got a lot of business just because I had access to paper in my warehouse. But my bank ran into trouble and the regulators forced them to reduce their loan book. They cancelled any loan they could. I politely suggested that they stick to the terms of our agreement (otherwise known as telling them to go pound sand). When they realized that I did not intend to destroy my business to help their balance sheet, they called my mother (I swear this is true - I was 26 at the time) and told her they would ruin my credit if she did not pay the loan for me. They so worried her that she actually did so, and then told me afterwards. Maddening.
The point is that a bank or broker in a capital crisis will do what it feels it has to do to get back into balance. Relationships that you thought you had are gone with the wind. And with accountants and regulators requiring a much more vigorous mark-to-market on asset prices, banks are forced to reduce lending of all types. This is going to slow down the US economy.
Case in point: a small hedge fund called Tequesta had a portfolio of prime jumbo mortgages made to high-net-worth individuals. These were really solid loans with very low default rates and good collateral. The fund actually made small but steady returns and was only leveraged by two times.
Shouldn't be a problem, right? But Tequesta got its loans from Citibank. As we all know, the selling started in subprime markets but soon migrated to all credit markets. This, in turn, "... created problems for smaller, less-liquid markets. Jumbo mortgage bonds like Tequesta used, for instance, saw valuations drop as dealers and rival mortgage hedge funds refused to indicate at what price they would be willing to buy this paper. Lacking bidders, Tequesta's bonds fell in value. So began a vicious cycle.
"Tequesta's portfolio managers watched on the sidelines as banks dumped billions of dollars worth of mortgage bonds to free up capital. Even bonds backed by loans to the wealthiest Americans traded lower.
"This raised alarms among Tequesta's lenders. Executives at investment-bank prime brokerage operations saw the sharp drop in the value of Tequesta's holdings and demanded additional collateral. In turn, they forced the fund to make additional sales to meet the margin calls."
Eventually the fund simply had to shut down, as Citi simply sold the bonds at whatever price they could get, forcing large losses to investors who thought they had invested in a conservative strategy.
Remember, these loans were good loans. This was not junk. There were simply no buyers of any type of mortgage debt that is not guaranteed by the US government, so "mark-to-no-market" created a serious distortion.
What we have to realize is that about 60% of what Paul McCulley calls the "shadow banking system" has vaporized into thin air and is never coming back. The SIVS, CLO, CDOs, and the rest of their alphabet friends which bought the debt are now in the process of selling anything they can as they close up their funds. Pension funds and insurance companies which bought the debt are understandably on strike. The world economy is going to have to find new structures and buyers for all sorts of debt. This is not going to happen overnight. It will take at least a year, maybe more.
Leverage in Reverse Gear
Leverage is going in reverse, and with a vengeance. And it is happening all up and down the economic food chain, regardless of the underlying credits. Brokers and commercial banks are being forced by regulators to call in loans and reduce exposure in order to raise capital. They are raising margins on all sorts of companies and individuals. They are requiring higher margins even for Fannie Mae debt, even though everyone knows the US government would step in if there was a problem.
This reduction in leverage is forcing funds and companies to sell assets into markets that simply do not want to buy anything. Loan sssets that are otherwise solid credits are going for 80 cents on the dollar. I am talking about municipal bonds and high-rated bank loans with default rates of less than 1%. This is a market in severe crisis.
And it is also starting to hurt ordinary people. I have a friend who does a lot of work on eBay. She has good credit. Rather than a bank line of credit, she simply uses credit cards. Or did. This week she got three letters reducing her limits to levels below what she already had on the cards. There are numerous such anecdotal stories circulating.
Let me tell a personal story to illustrate the problem. In 1976 I was a young entrepreneur, working as a print broker. There was a severe paper shortage at the time. I borrowed $10,000 from my friendly personal banker and used it to buy traincar loads of paper. Things went well. I got a lot of business just because I had access to paper in my warehouse. But my bank ran into trouble and the regulators forced them to reduce their loan book. They cancelled any loan they could. I politely suggested that they stick to the terms of our agreement (otherwise known as telling them to go pound sand). When they realized that I did not intend to destroy my business to help their balance sheet, they called my mother (I swear this is true - I was 26 at the time) and told her they would ruin my credit if she did not pay the loan for me. They so worried her that she actually did so, and then told me afterwards. Maddening.
The point is that a bank or broker in a capital crisis will do what it feels it has to do to get back into balance. Relationships that you thought you had are gone with the wind. And with accountants and regulators requiring a much more vigorous mark-to-market on asset prices, banks are forced to reduce lending of all types. This is going to slow down the US economy.
Case in point: a small hedge fund called Tequesta had a portfolio of prime jumbo mortgages made to high-net-worth individuals. These were really solid loans with very low default rates and good collateral. The fund actually made small but steady returns and was only leveraged by two times.
Shouldn't be a problem, right? But Tequesta got its loans from Citibank. As we all know, the selling started in subprime markets but soon migrated to all credit markets. This, in turn, "... created problems for smaller, less-liquid markets. Jumbo mortgage bonds like Tequesta used, for instance, saw valuations drop as dealers and rival mortgage hedge funds refused to indicate at what price they would be willing to buy this paper. Lacking bidders, Tequesta's bonds fell in value. So began a vicious cycle.
"Tequesta's portfolio managers watched on the sidelines as banks dumped billions of dollars worth of mortgage bonds to free up capital. Even bonds backed by loans to the wealthiest Americans traded lower.
"This raised alarms among Tequesta's lenders. Executives at investment-bank prime brokerage operations saw the sharp drop in the value of Tequesta's holdings and demanded additional collateral. In turn, they forced the fund to make additional sales to meet the margin calls."
Eventually the fund simply had to shut down, as Citi simply sold the bonds at whatever price they could get, forcing large losses to investors who thought they had invested in a conservative strategy.
Remember, these loans were good loans. This was not junk. There were simply no buyers of any type of mortgage debt that is not guaranteed by the US government, so "mark-to-no-market" created a serious distortion.
What we have to realize is that about 60% of what Paul McCulley calls the "shadow banking system" has vaporized into thin air and is never coming back. The SIVS, CLO, CDOs, and the rest of their alphabet friends which bought the debt are now in the process of selling anything they can as they close up their funds. Pension funds and insurance companies which bought the debt are understandably on strike. The world economy is going to have to find new structures and buyers for all sorts of debt. This is not going to happen overnight. It will take at least a year, maybe more.