Credit Crisis

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Any number of banks in the United States have been courting, in a desultory sort of way, the covered bond. The Street has been scratching its head for many years trying to determine whether a U.S. covered bond could be done and, if so, whether it would be good. Congressman Garrett, who certainly can’t be faulted for lack of effort, has repeatedly introduced covered bond legislation, the most recent one of which was captioned the United States Covered Bond Act of 2011. As those with nothing better to do than follow the covered bond sausage-making know, an effective U.S. covered bond market really does require enabling legislation, which we do not have for a number of reasons, including the unremittant hostility of the FDIC.Continue Reading As Covered Bond Markets Retreat

Back to Europe and the Euro.

To misquote President Clinton, it’s the math, stupid. OK, that’s a bit of an exaggeration, as there are political prescriptions that could change the outcome of this tale of woe. As I write this, everyone continues to celebrate the result of the most recent Summit and the alleged breakthrough for the European Union and the Spanish and maybe Italian banks. The announcement that the European Financial Stability Facility, or the European Stability Mechanism, will actually lend directly to the banks in Spain and Italy was a bit of an overachievement for this body and, as I write this, stock markets are surging across the world on the news and spreads are coming in a smidge on the periphery. But, as usual, no details, and I’m not buying it. My bet is that the bloom will come off this rose just as it’s come off following other Summits, promising coordination of fiscal policies leading to a mutualization of the debt. Continue Reading It’s the Math, Stupid

Following up on last week’s cheerful exegesis into the data which is the dropping of the impending European banking and sovereign meltdown, I recommend Dechert’s Euro Crisis Website. It contains a series of Dechert OnPoints and White Papers providing in-depth analysis of the impact of Grexit and the rest on asset managers and other financial players. Shocking but true, it’s now time to say that every financial market participant needs to develop executable contingency plans for the possibility of one or more exits from the Eurozone. (See the very good article "Europe must prepare an emergency plan" by Robert Zoellick in the Financial Times on June 1 about lenders’ need to get ready to “break the glass” on contingency planning.) Maybe some sort of fix, temporary or otherwise, will be embraced at the edge of the precipice to keep Greece in the Eurozone and prevent contagion. Maybe we bump along and somehow oodles of liquidity, a promise of a bit of structural reform and a little growth will let us skate over the broken ice, but I think not. Grexit happens, several other countries will follow Greece out the door and the EU banking system will be profoundly damaged. A deep EU recession will result and international banking functionality will be impaired. (See the article "Banks Park Record Funds with ECB" by Todd Buell in the Wall Street Journal on January 5 on the rapid retreat of the interbank lending market.)Continue Reading The Eurozone: Opportunities During the Impending Troubles

So after another bad news week in Europe, I’m a bit gloomy about the future of the capital markets. As we try to run a business and help our clients, I’ve got this narrative running through my head about Europe. I keep running this movie back and forth in my head hoping it will help me tease out what will be in the last reel. Look, we try to make these blogs contain some bon mots of immediate utility. I’m not sure what follows has any immediate utility, but I hope someone will tell me what I’m missing here.Continue Reading ROME’S BURNING: WHAT AM I MISSING?

For the last few weeks, I’ve been writing about investing in distressed bank assets, with a particular focus on the European markets. As you know, we think there are huge opportunities as the European banks disintermediate to meet capital thresholds, while the economy in Europe grinds slower and slower. Last week in this blog we talked about considerations on the sell side. Now, near and dear to my heart; the buy side.

First, we can start by thinking about everything said in last week’s article on the sell side and turn it over and look at it from the buy side. The asset pools will continue to be heterodox. The collateral, the loan documents, the economic terms of the loans will all be heterodox. Notwithstanding my plea to the sell side to get their house in order before pools are exposed to the marketplace, you should anticipate that pools will not be cleaned up for prime time before being exposed for sale. Files and data tapes will be incomplete and will be corrupt, documents will be missing, and underwriting information will be woefully hard to come by.

That’s what it is, get over it. We play the cards we’ve been dealt and we bid on what we got.Continue Reading The European Bank De-Risking Continued: The Buy Side

Last week, I spoke in London at a conference, “Investing in Bank Assets” sponsored by the Association of Financial Markets in Europe (AFME). The Conference had a titillating, if a tad alarming, subtitle “The European Purge Begins”.

The question is, of course, is it true?  The purge, I mean.   Is there a European purge afoot, and are there massive opportunities to invest in European bank assets? I, for one, certainly hope so. 

Let’s test the case. Those who read this blog regularly will be aware we’ve been chirping about these opportunities for quite some time. Having participated on one side or another in most of the recent European banks’ initiatives to dispose of dollar denominated US assets, we’ve become quite fond of this nascent trend. And, not to bury the lead, we think there is a very large opportunity in the disintermediation from European banks, and a particularly large opportunity with respect to US commercial mortgage loan assets held by our European friends over the next 12 to 24 months. By the way, kudos to AFME, Gilbey Strub, Managing Director for Resolutions and Crisis Management at AFME and her colleagues for putting on a terrific show. It was co-sponsored by Dechert and by Alvarez & Marsal.Continue Reading MORE ON OPPORTUNITIES IN EU BANKLAND

We’ve been writing a lot recently about the likelihood that European banks and, to a lesser extent, U.S. banks would be strongly incented to sell assets to improve capital ratios. We had a client briefing in New York on the Eurobank crisis a few weeks ago. We brought together our North American and European regulatory and transactional counsel to cover a wide range of issues from the sale of assets to rescue capital. We had a lively conversation on the panel and with the audience about asset sales. It was pretty clear to one and all that if assets are not disintermediated, bankers will be defenestrated. Given the choice, we are pretty sure the banks will sell assets.

De-risking of banks’ balance sheets might be less than terrific macroeconomic policy at a time when economic activity is weak and could be very bad if it touches off a powerful credit contraction and a descent into a continent full of zombie banks. That’s bad. But, always look on the bright side of life, in a Life of Brian sort of way. In the short to medium run, the velocity of transactional activity around financial assets will go up. Indeed, we have been very busy since mid-year buying, selling or financing pools of loans bereft of the love of the bank who made ‘em.Continue Reading Learning to Love Disintermediation

It’s that time of year when we’re forced to think about budgets and business plans. The pointy headed types from the accounting department want to know exactly what we’ll be doing the second week of next May and, as I’m sure every one of you have said (or thought) when confronted with such bureaucratic insanity: If I knew exactly what I’d be doing and what the business environment would look like next year, I would (A) not tell you, and (B) stop doing this. But with that said, and notwithstanding my crystal ball is as opaque as the bottom of a Stygian cave, we need to plan.

So, I’ve been thinking. What the heck are we going to do next year? Is the CMBS market irrevocably broken? Was Credit Suisse trigger happy or prescient, stepping away from the market? Will investors buy bonds? Will European banks sell assets like it is the last hour of a bake sale? How about the US banks? Will banks make loans? Will we pare down the list of eager CMBS lenders to 10? Will the life companies replicate their boisterous 2010-2011? Will we finally see the bubble of refinancing we have been predicting to occur in two years for the past five, actually happen in 2012?    Will investors commit enough money to the high yield sector and will the mezzanine market really be hot? Will we ever do a covered bond? Will we ever do a CRE CDO (like I’ve been prattling along about for quite a while now)?   Live in hope; die in despair, as my daddy-in-law used to say. Will real estate people actually build new stuff and launch new projects? Do you think China would lend us a construction crane or two just for a while? Will risk retention arrive? Reg AB 2.0? What about the Volcker Rule? Will the rating agencies continue to conduct business as usual? What will the elections bring? Will the Greeks sell the Parthenon? Will the Italians sell the Tower of Pisa? Will haughty France play the poodle to Mrs. Merkel? What ultimately about Germany? Will the Europeans continue to support their champion national banks while they compete for a starring role in the next Night of the Living Dead movie? Forever?Continue Reading THE NEW NORMAL / A THEORY OF GOOD NEWS: 2012

While Europe is sorting through Dexia’s assets, it is worth exploring Dexia’s fall in light of Basel III. As mentioned here previously, Dexia had been reporting Tier I capital of roughly 10%. Well done! That would clearly meet the proposed capital requirements to be phased in over the next year. So what went wrong?

Dexia had pursued a strategy of aiming to be the largest player in municipal financing. It owned gobs of sovereign debt. Down-grades and write-downs of that sovereign debt have now left Dexia well short of its Tier I capital requirements (to the tune of 1.7 billion Euros).

This is hardly a man bites dog story. The Gnomes of Basel, and pretty much everyone else, misjudged the perceived credit risks of sovereign debt. Basel I (and, to be honest, II and III) encouraged the holding of sovereign debt by assigning the lowest risk-weight to such assets, meaning a reduced capital requirement. So, the banks bulked up and then: Off the cliff we all go! Is there still a warm glow of knowing one had met international norms?Continue Reading Dexia / Soros – Basel III and the Importance of Faith