February 9, 2009
Wanted: Private Buyers for Toxic Assets. See Uncle Sam
By Walter Hamilton
To rid banks of their toxic loans, the Obama administration apparently wants to rely on purchases of those assets by private investors -- but with the government’s help.
Whether those investors will step up will depend on how favorable Uncle Sam makes the terms. And the better for them, conceivably, the worse for taxpayers. . . A key risk is that the plan could help a relative handful of private investors pick up appealing assets at favorably cheap prices, while leaving the government with all the dreck "and taxpayers with all the losses," said Julia Whitehead, president of Whitehead Miller Advisors Inc.
Back to top
THE WALL STREET JOURNAL
July 14, 2008
New Rules Loom For Bond-Rating Firms
By Aaron Lucchetti
Bond-rating firms could face rules on new products similar to those already in place for stock and derivatives exchanges, as part of a House bill likely to be proposed Monday.
The proposed legislation by Reps. Gary Ackerman (D., N.Y.) and Mike Castle (R., Del.) would give the Securities and Exchange Commission authority to stop bond-rating firms from unilaterally putting triple-A marks on new structured-finance products. Instead, regulators would have to approve certain new products, with the SEC required to base decisions on the product's structure and underlying assets . . . Julia Whitehead, and banking professor Joseph Mason of Louisiana State University worked on the plan.
Back to top
Forbes Magazine
February 28, 2008
The Hot Seat
By Joshua Levine
Marc Ladreit de Lacharriere has built the third-largest credit rating agency in the world. Can he withstand the subprime catastrophe?
So, am I still a billionaire?" Marc Ladreit de Lacharrière recently asked as he opened the heavy steel door that leads to his office in a 19th-century Parisian mansion just down the street from the Musée d'Orsay. Lacharrière owns 66% of Fimalac, which, in turn, owns 80% of Fitch Group--as in Fitch Ratings, one of the three large credit rating agencies (along with Moody's (nyse: MCO - news -people ) and Standard & Poor's) that have come under withering fire lately. Since May 2007 shares of Fimalac have fallen 59% on the Paris bourse to $50.50, and with them a big chunk of Lacharrière's net worth, to $1.1 billion.
It's still a pretty good racket, even though Fitch's 16% share of the credit ratings business makes it third after Moody's and S&P. To market any kind of public debt security, you pretty much need a rating from one of the big three. (The Securities & Exchange Commission has sanctified six others, but these have little traction with bond buyers.) There are no price wars, and it's almost impossible for anyone to win a lawsuit against you, based on the consequences of your opinions, smart or dumb, thanks to the First Amendment. "It's a license to print money," says Julia Whitehead, a consultant . . . who submitted testimony before Congress last September on the role of credit ratings agencies.
Back to top
THE WALL STREET JOURNAL
December 17, 2007
CDO Battles: Royal Pain Over Who Gets What
By Aaron Lucchetti
First came the bankers who created funky mortgage investment vehicles. Now come the lawyers.
A recent filing in New York state court provides a window into the legal battles likely to ensue from battered investments. Big players, including Deutsche Bank AG, bond insurer MBIA Inc., Wachovia Corp. and UBS AG are tangled together over a mortgage investment vehicle named Sagittarius.
CDOs had become one of the most popular ways for sophisticated investors to tap into the housing boom. Now many of the opaque portfolios are suffering deep losses.
"No one has cracked the code on how to work these out and divvy things up," says Julia Whitehead . . . When senior holders stake their claim to struggling CDOs, it threatens other investors who accepted more risk to get higher returns. The process of sorting out the rights of different holders is complicated and seems likely to play out differently than in corporate bankruptcies . . .
Back to top
Financial Times
September 17, 2007
Darkness descending on the hedgies
By John Dizard
Hudson: "That's it man, game over, man, game over! We're in some real pretty s--- now! What the f--- are we going to do now? What are we going to do?"
Newt: "We better get back, 'cause it's going to be dark soon, and they mostly come out at night . . . mostly"
Aliens (1986)
Yes, leveraged fund people, it will be dark soon, and they will be coming out. The bankruptcy bar, the liquidators . . . There are two types of investors and portfolio managers now in the markets: those too young to have had any lessons from past downturns, and those who have had out-of-date lessons . . .
Don't think that your assets are safe from offsets or seizure because they're still above water, according to your calculations. It's the bank or prime broker's valuations that count. Read those counterparty agreements again. You will see that you will lose the argument. This is a serious problem in market sectors that depended on mark-to-model, or marking to a market in which liquidity has disappeared.
"In some cases," says Julia Whitehead . . . ."the default notice from the bank will have two lines in it. Their view is that they have nothing to explain."
Back to top
THE WALL STREET JOURNAL
September 7, 2007
Ratings Firms' Practices Get Rated
By Aaron Lucchetti
In the wake of mortgage-market turmoil, regulators plan to probe how the big credit-rating companies are paid and whether they are independent enough of the Wall Street firms that issue bonds.
The Securities and Exchange Commission and state attorneys general in New York and Ohio have begun to examine how the ratings firms evaluated subprime-mortgage-backed securities that grew into a trillion-dollar market. Julia Whitehead . . . says it would be hard to change the model of bond issuers paying ratings firms, but she argues ratings firms should be held more accountable when they do a poor job rating bonds.
Back to top
Dow Jones Daily Bankruptcy Review
June 29, 2006
Turnaround Professionals Watch Vulnerable Industries
By David M. Toll
With the economy refusing to breakdown, professionals who make a living by fixing troubled companies have been as frustrated as the Maytag repairman. Now, their patience may be about to be rewarded. The prospect of an interest rate spike, unstable equity markets and soaring prices for commodities such as energy, resins and steel is gladdening the hearts of turnaround professionals and investors everywhere. These warning bells are also inspiring a quest to identify the industries that will be most vulnerable to an economic downturn when it finally arrives again.
Newspaper publishers, meantime, still face their share of problems, from rising paper costs to competition from the Internet as a source of news and information. “A lot of their basic business is going away,” said Julia Whitehead. . .
Back to top
Dow Jones Daily Bankruptcy Review
April 22, 2009
The BAPCPA Follies
As the rising ranks of the unemployed threaten to overwhelm any stimulus induced recovery, it is ironic that Chapter 11, once a haven for struggling companies, now looks like death row. With so many companies blowing up a nanosecond after declaring bankruptcy these days, fingers are pointing at the gradual evisceration of Chapter 11 protections by creditor advocates, efforts which culminated in the debtor unfriendly measures embodied in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA. While BAPCPA's unfavorable treatment of retailers has received most notice, the financial services industry is also experiencing its share of BAPCPA-induced trauma.
Back to top
Dow Jones Daily Bankruptcy Review
January 7, 2009
For Private Equity Investors, The Work Is Just Beginning
Over the past 18 months, we have seen the investment stars of the credit decade fall out of the sky – mortgages, commodities, hedge funds. Whispers are growing that private equity will soon join them. Certainly, the pace of private equity investing was just as accelerated in the bubble days of 2006 and 2007 as it was for all those other now-discredited investment categories.
Investors seduced by the rapid return of private equity money deployed in 2004 and 2005 doubled down on their previous bets in the hopes that private equity would deliver the excess returns of the future, allowing them to sock their money away for 10 years and pull it out when their rainy day needs came calling. And it wasn’t just novices drawn to the private equity flame. Calpers, among the most seasoned of all private equity investors, committed $25 billion to private equity in 2006 and 2007 – as much as it had invested in the category over the previous 15 years. Some might say Calpers’ bet is paying off.
Back to top
Dow Jones Daily Bankruptcy Review
January 23, 2008
Some Structured Finance Products Are Needed, Now More Than Ever
The near complete disarray of the structured finance markets is indisputable. Almost inexorably, it seems, investor flight has spread from subprime securities to structured finance vehicles tinged with subprime to entire structured finance investment categories and now to investment funds, insurers and financial institutions, some with only a glancing exposure to structured finance.
Though we have long argued that today’s quagmire would never have grown so deep without the rating agencies’ willingness to slap an AAA label on untested, unseasoned and ultimately deeply flawed models and assets, we now urge for discrimination between structured finance products that have functioned well over time and those that should never have made their way into the investment grade world.
Back to top
Dow Jones Daily Bankruptcy Review
October 10, 2007
Valuation With A Capital V
Over the last couple of years, valuation seemed to be a dying discipline. After all, in endlessly rising markets where everyone seemed to be making money, there weren't too many arguments over valuation anyway. It was all good. Now, however the recent enthusiasm in equity markets notwithstanding, it seems that what we at Miller Mathis fondly refer to as the days of "surreal valuation" are gone - and good riddance too. The huge surge of liquidity flooding into financial assets over the last few years contributed to asset bubbles in real estate and private equity, as well as in structured finance vehicles based on those assets (even just bets on the performance of assets).
Somewhere along the way, price became disconnected from value, the divergence facilitated by the fact that, more than any other time in the history of modern financial markets, so much money was invested in illiquid and/or opaque vehicles whose value relied more on the say-so of vested interests than it did on the independent analysis of a multitude of players in an active market.
Back to top
September 27, 2007
Finding a Way Out of the Rating Agency Morass
Prepared Statement Submitted to the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises of The House Committee on Financial Services Regarding The Role of Credit Rating Agencies in the Structured Finance Market
Back to top
Dow Jones Daily Bankruptcy Review
July 11, 2007
Restructuring Structured Finance
In the aftermath of the Amaranth meltdown, we've seen a few more hedge funds destroyed when their mark-to-model valuations proved to be out of sync with something as crass as the actual market. Notwithstanding the tendency of financial players to dismiss every meltdown as just another hiccup, the recent struggles of a pair of turbo-leveraged Bear Stearns hedge funds are raising concerns that all the happy chatter may have been just that.
Certainly, Bear Stearns' miserable experience with subprime securitizations and derivatives is another reminder of the risks of investing in hedge funds specializing in illiquid, opaque investments. But it has even more ominous implications for fiduciaries across the country who may have more pain coming their way then they ever realized. Why? Because the big revelation in this latest crisis is the significant modeling imperfections of the rated structured-finance world. The enormous recent ramp-up of securitized assets based on new products, unvetted structures and models that collectively are behaving in ways unanticipated by the rating agencies is increasing scrutiny of the agencies' efficacy, and even our entire ratings system.
Back to top
Dow Jones Daily Bankruptcy Review
April 11, 2007
Private Equity - Rethinking Trouble
Cynics that we are, we assume that the current private equity boom will end in tears for at least a few dealmakers. It's just the nature of any boom that some people will make money and others will make mistakes. But having done workouts through numerous cycles, even we are a little daunted by what we believe will be the challenges characterizing any future PE downturn.
Back to top
Dow Jones Daily Bankruptcy Review
August 6, 2009
Doughnuts and Delusions
Tim Hortons, the doughnut king of Canada, is storming New York. Not only is the raider from the North daring to confront local favorite Dunkin’ Donuts in its own backyard, in a slap to the American giant’s face it’s planting its flag at 12 former Dunkin’ Donut sites. I’m thinking this is not exactly what the U.S. franchisor needs, not at all.
Back to top
Dow Jones Daily Bankruptcy Review
January 31, 2007
Viewpoint- Credit Default Swaps-Let the Games Begin
The enormous growth of the credit default swap (“CDS”) market has been well documented. From notional principal outstanding of a little over $2 trillion in 2002 to $26 trillion by midyear ’06 (a more than 50% increase from year-end 2005 alone), the explosion of CDS activity is unlikely to halt soon. The obvious benefits to lenders and investors who want to precisely (they hope) tune their credit exposures and the just-too-good-to-be true fee opportunity jumped on by many protection-sellers is sure to keep this market humming. Interestingly, while credit default swaps are purported to reduce the risk of the economy – by diversifying risk among many players – the untrammeled expansion of CDS products may have actually injected risk and instability into the system while adding new uncertainties to the restructuring process of CDS credits when they become distressed.
Back to top
February 9, 2009: Los Angeles Times. Wanted: Private buyers for toxic assets. See Uncle Sam