Tag Archives: Mortgage-backed security

Fabrice Tourre: The Last (Gold)Man Standing

While most Goldman Sachs employes are busy starting new hedge funds or preparing for new jobs, like central bank president or chief economist for a major European bank, Fabrice Tourre stands as the only Goldman banker to face a trail.  However, something strange happened recently, something that may spin the case in an unexpected direction.

“It’s impossible that only one person was involved with fraudulent activities in connection to the sales of these mortgage securities.”

G. Oliver Koppell

Yeah, yeah…we know that… The “Fabulous Fab” is just a trader who carried out the order of his superiors. An order that was very simple and impossible to misunderstand: “Make money!” It is, however, harder to figure out how a newspaper accidentally gets hold of a laptop, accidentally found in the trash, accidentally containing crucial evidence.

I won’t waste any time speculation about something I’m sure I’ll never find out.

But that seems to be the case at moment – the mysterious laptop, that is.

The New York Times published recently a long article about Fabrice Tourre, who as of now stands as the only Goldman Sachs employee charged individually in the firm’s CDO follies.

Tourre appears to be keen on fighting the civil charges in court, something that, according to US financial media, has caused a little bit nervousness amongst the top Goldman Sachs executives.

Many have suggested that Tourre in fact has little choice but to engage in a  scorched earth defense in an attempt to make it clear that many people are to blame for the scandal, besides himself.

Fingers have been pointing at his boss, Jonathon Egol, and questions raised on why he was not charged.

But the article in NYT is built new information that arrived in a reporters hands in a rather odd way.

The article explain that a New York filmmaker was  given a laptop by a friend who claimed it had been found in the trash.

Amazingly, it had many email to Fabrice Tourre on it. Including several emails from Egol that suggest he had a dire view of the market, one that Tourre didn’t necessarily share.

And even more amazing – the emails continues to stream in.

Based on those emails, the NYT concludes that Tourre’s legal team will focus on the fact that he was in fact a small player, and cannot alone be held accountable for the entire ABACUS fiasco.

According to Fierce Finance, it is likely that others will be drawn into the center stage.

Indeed, it would be remarkable  if Tourre alone is found guilty. That would mean that one single trader is capable of taking down the whole global economy!

The NYT  indicates that Tourre has been made a scapegoat, and that other Goldman executives should be charged.

One interview suggests that Tourre was targeted because he was prone to logorrhea, unlike his colleagues.

Anyway, he has hired a legal team that (also amazing) do not have ties to Goldman Sachs.

Everything is set for a very interesting case. But a case built on email is not necessarily a strong one.

“Perhaps, the SEC should make one final push to settle,” Fierce Finance writes.


Of course! Now, I get it….

Related articles:
Why Goldman should be hoping that SEC drops Fab case
Fabrice Tourre, a minor player in larger CDO drama


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Filed under Laws and Regulations, National Economic Politics, Philosophy

Large US Banks Could Loose Between 17 And 42 Billion On GSE

Fitch estimates the four largest U.S. banks have received pending repurchase requests totaling $19.1 billion with $10.7 billion related to requests from the main housing Government Sponsored Enterprises (GSE). Fitch believes the expected loss for the four largest banks could be about $17 billion, the rating agency says in a statement.

“Using a more moderate loss scenario, whereby the put-back rate goes to 35% and recovery rate drops to 55%, Fitch believes losses could come in around $27 billion.”

Fitch Ratings

“Recently, the main housing government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, have been actively exercising their right to put back to the original lenders a considerable amount of the troubled mortgages in their portfolios. To some extent, this has been expected given the significantly larger volume of troubled mortgages sitting on the housing GSE’s books,” Fitch says.

Major banks have effectively acknowledged this development and have increased their representation and warranty reserves as requests for deficient loan repurchases expand.

“Based on data through the second quarter of 2010, Fitch estimates the four largest U.S. banks have received pending repurchase requests totaling $19.1 billion with $10.7 billion related to requests from the main housing GSEs. To date, these institutions have established $8.3 billion of representation and warranty reserves. A large sum, but one that Fitch would view as manageable within each firm’s inherent earnings capacity,” the statement says.

Purchasers of residential mortgage loans, such as the housing GSEs, have had the right under specific representations and warranties to require the seller/servicers of mortgages to repurchase loans or foreclosed properties or reimburse the investor for losses if the foreclosed property is sold if it is determined that the mortgage loan did not meet the investors’ underwriting and eligibility standards.

“Historically, Fitch has viewed purchasers of mortgages or mortgage-backed securities (MBS) as being fairly judicious in exercising their representation and warranty rights on troubled loans or foreclosed properties. More specifically, prior to the beginning of the mortgage crisis, mortgage losses were very manageable and the housing GSEs used to compete actively against one another to gain market share from the major bank originators. Accordingly, the housing GSEs likely weighed the costs and benefits of exercising their repurchase rights under representation and warranty provisions with originators with whom they had maintained long-standing relationships.”

Fitch says it is now undertaking a review to assess whether these increased reserves are just a part of the flood of current troubled mortgages or whether investors, such as the housing GSEs, have expanded their interpretation of what constitutes a mortgage that would be eligible to be repurchased under existing representation and warranty provisions.

“Fitch is concerned that a more aggressive request for loan repurchases could potentially expose banks with large mortgage origination operations to future losses that have not been previously incorporated into Fitch’s existing exposures, and effectively into current ratings. As of June 30, 2010, the housing GSEs combined had troubled mortgages (delinquent mortgages and real estate owned) of $354.5 billion.”

Losses Between 17 And 42 Billion Dollar

In assessing potential exposure, Fitch is concentrating on the four largest U.S. banks (JP Morgan & Co., Citigroup, Inc., Bank of America Corp., and Wells Fargo & Co.), given the likelihood of materiality, in absolute terms, since they collectively service approximately 50% of the GSE’s portfolio.

“This concern, however, is not isolated to only the four largest banks. Any bank or other entity that has been actively engaged in mortgage lending could feel the impact of this development, and to some degree on a relative basis, could be affected to a greater degree. In assuming an extremely adverse scenario where all of the existing GSE’s troubled mortgages were at risk of being repurchased based on market share, it is conceivable that the pool of “at-risk” loans eligible to be repurchased by the four largest banks could total about $175 billion-$180 billion. Fitch anticipates that a focal point of repurchase requests will be reduced documentation loans (sometimes known as Alt-A loans). The actual amount of repurchase requests will ultimately depend on key variables such as quality of the originator’s underwriting, documentation standards, and foreclosure rates, while losses will be a function of “cure” rates and home prices.”

“Under a mild loss scenario, where the GSEs collectively and successfully put back 25% of the current outstanding inventory of seriously delinquent loans, and assuming recovery rates of 60%, Fitch believes the expected loss for the four largest banks could be about $17 billion.”

“Using a more moderate loss scenario, whereby the put-back rate goes to 35% and recovery rate drops to 55%, Fitch believes losses could come in around $27 billion.”

“Finally, under a more adverse but less likely scenario, if repurchase requests were to run at 50% of delinquent loans, and recovery rates fall to 50%, then losses are about $42 billion.”

Fitch emphasize that  these figures do not incorporate the ability to cure deficiencies in loans, thus ultimate realized losses could be lower than these figures.

“To put these figures in perspective, these institutions had annualized pre-provision net revenues and net income of $164 billion and $54 billion, respectively, in aggregate and $391 billion of tangible common equity.”

Fitch believes that any of the scenarios listed above is a possibility,

However, for purposes of current bank rating analysis, Fitch is assuming the more moderate cases are the most likely outcome.

Fitch also notes that the repurchase scenarios listed above do not include any potential risk of buybacks on troubled mortgages situated in existing private-label MBS transactions.

“At the present time, there are a number of legal suits outstanding against the originators of private-label MBS deals. In addition, our assumptions do not incorporate any potential financial liabilities that may result from the recent subpoenas issued by the Federal Housing Financing Agency (FHFA) in July 2010 against a number of mortgage originators,” the rating agency points out.

Ratings In Danger

Recognizing this potential risk, Fitch in the near term will be monitoring the on-going developments between the banks and the GSEs related to mortgage loan repurchases. Fitch will also consider other mortgage investors such as private mortgage insurance companies and private-label MBS investors, the statement says.

“If these investors are successful in putting back a sizeable portion of the troubled loans presently in inventory, Fitch believes the existing bank Individual and Issuer Default Ratings (IDR) not already at their Support Floor (i.e. Bank of America and Citigroup are the only two U.S. banks active in mortgage lending that are currently at their Support floors) could be susceptible to a downgrade in the future.”

Full Press Release Here.


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The US FED Launch The QE2 – Beta Version

The US Federal Reserve announced Tuesday that it would spend a relatively small amount of money – about $10 billion a month, economists estimate – buying government debt in an attempt to lower interest rates and boost the alleged economic recovery. Just two months ago, the FED sounded optimistic about the economy. Now the central bank is clearly more worried, and economists say there’s not much more it can do to help.

“In our view, this marks a “baby step” toward renewed quantitative easing later this year.”

Goldman Sachs

In a statement after a one-day meeting, the FED says the pace of the recovery “has slowed in recent months.” After its last meeting in late June, the FED was a lot rosier, saying that the recovery was “proceeding” and the job market actually improving. We’ve heard that one a few times over the last six to 12 months, and as the Econotwist’ Blog and others have pointed out; it is just not true. However, today’s move it’s just a little trial version before the full release of the second round of massive quantitative easing.

The decision to buy government debt, using proceeds from FED investments in mortgage bonds, was a shift from earlier this year, when the US central bank was laying out plans to roll back some of the measures it took during the financial crisis.

At that time, the FED was also preparing a strategy to begin raising interest rates again, a step taken to keep a growing economy from overheating.

The FOMC Meeting

Now, however, the FED has decided to keep its benchmark interest rate near zero.

Other aspects of the statement reinforce the sense of increased uncertainty about economic prospects.

“I don’t think they are going to raise interest rates until it is very clear that unemployment is moving definitively lower and that doesn’t look likely until late 2011,” says Mark Zandi, chief economist at Moody’s Analytics, according to the Washington Post.

Economists points out that buying $10 billion of government debt in a $14 trillion economy is a relatively small move, and they say they do not expect it to have a dramatic impact.

“The FED talked loudly but carried a small stick,” Joel Naroff, president of Naroff Economic Advisors, says.

Adding that while the financial system has the money to lend, banks are unwilling or unable to find suitable loans to make.

Until they do, he says, “the recovery will be softer than anyone hoped for and there may be little the FED can do about it.”

Baby Step Toward The Real  QE2

Analysts ar Goldman Sachs says the FOMC takes a “baby step” toward renewed quantitative easing by deciding to reinvest principal repayments of agency and mortgage-backed securities.

Here’s the main points in Goldman’s comments:

1. The Federal Open Market Committee downgraded its assessment of US growth prospects and reacted, as we thought they might, by deciding to hold the size of their portfolio fixed by reinvesting principal repayments of agency and mortgage-backed securities in “longer-term Treasury securities.” (They already roll existing holdings of Treasury securities.) In an accompanying statement, the New York Fed’s Open Market Desk indicated that purchases would be concentrated in the 2- to 10-year sectors of both nominal coupons and TIPS.

2. In our view, this marks a “baby step” toward renewed quantitative easing later this year or early next, as discussed more fully in last Friday’s US Economics Analyst, though this obviously depends on a view that the economy remains as sluggish as we forecast . Technically, the step marks the removal of a slight bias toward tightening in the sense that it keeps the balance sheet fixed rather than letting it shrink over time. In March, Brian Sack, Manager of the Open Market Desk, indicated that this shrinkage would be in the neighborhood of $200bn from that time through the end of 2011 (roughly a 21-month period, so just short of $10bn per month), though of course this figure may have risen as lower interest rates would have instigated more mortgage refinancing. To our knowledge, the FED has not provided an updated estimate of this run-off.

3. This part of the decision has obscured other changes in the statement, most of which were in the direction anticipated. In particular, the opening statement recognizes a slowing in the pace of recover of both output and employment, the increase in equipment and software is downgraded to “rising” from “has risen significantly,” and the last sentence is revised to recognize that the pace of recovery is apt to be “more modest …. than had been anticipated.” On the other hand, the committee removed the statement that “financial conditions have become less supportive of economic growth.”

4. Changes in the inflation paragraph were inconsequential, removing references to declines in prices of energy and other commodities but continuing to note “measures of underlying inflation have trended lower.” The main thing to note here is that the committee chose to keep this idea in the statement despite upward revisions to the core PCE index. Those revisions preserve the sense of disinflation, but from a slightly higher position than previously.

5. Kansas City President Thomas Hoenig renewed his dissent to the “rate commitment language,” which remained unchanged word for word, and extended the objection to the decision to reinvest.

(Source: Zero Hedge)

FED Have Lost Confidence

Barclays’ analysts, who was among them who believed there were no chance in hell the the FED would don anything, says in today’s statement that the action shows that FOMC is loosing confidence in the strength of the recovery.

Here’s the statement from Barclays:

* Changes to the FOMC statement indicate that the Fed has lost some confidence in the strength of the recovery. In order to “help support the economic recovery,” the Committee voted to keep the Fed’s holdings of securities at its current level by “reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.” The statement, as expected, also retained the language indicating that the federal funds rate is likely to remain exceptionally low for an extended time.

* In respose to the incoming data received since the last meeting, the FOMC indicated that “the pace of recovery in output and employment has slowed in recent months.” The Committee continued to indicate that business spending remains robust while household spending remains constrained by “high unemployment, modest income growth, lower housing wealth, and tight credit.” The FOMC expressed its unease in the state of events by noting that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” In other words, the Fed does not appear to view the recent slowing of activity as simply a soft patch in the recovery.

* On the inflation front, the statement removed the language suggesting that lower energy and commodity prices were pushing inflation lower in favor of past language stating that inflation is likely to remain subdued and with stable inflation expectations.

* The statement noted that the maturing principal and interest from agency debt and agency mortgage-backed securities will be reinvested into “longer-term” Treasuries. Subsequent guidance provided to the Open Market Desk at the FRBNY indicates that the Fed will concentrate its purchases in the two- to ten-year portion of the curve. This is similar to the operating procedures put in place under the original Treasury purchase program, which amounted to $300bn. Furthermore, the directive states that the Desk should keep holdings of securities at current levels, which was $2.054trn as of August 4, according to the most recent H.4.1 data.

* Finally, if the FED has indeed lost a measure of confidence in the strength of the recovery, the change in strategy towards keeping the balance sheet at an elevated level will likely lead to increased speculation about additional asset purchases at coming meetings. Our view is that simply reinvesting the proceeds from maturing agency securities will not provide much additional stimulus and, should the outlook continue to worsen, then the FED will likely initiate a new round of asset purchases, most likely in Treasury securities.

Oh yes, baby! There’s a big boat coming….

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Fitch: Banks Need More Capital Than Stress Test Shows

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Filed under International Econnomic Politics, National Economic Politics