Grant's Interest Rate Observer on the fragility of the CDO market (2007)

We are the first to admit our shortcomings in knowledge about structured mortage finance. But, then, we have found - colleague Dan Gertner, our man on the case, can attest to it - that ignorance about CDOs and ABS is far-reaching. In fact, it reaches far into the population of CDO investors. A subscriber who has made a study of the subprime market - he is a long-short equity investor by trade - e-mails to share his observation that "somewhere in the neighborhood of 70% of CDO buyers rely almost entirely on the ratings because they don't have the time or expertise to evaluate the underlying collateral and structure." It follows, our reader points out, that "once the rating agency integrity is gone, so is the CDO market, it would seem."

~ Grant's Interest Rate Observer, "Wheezing CDO machine," March 9, 2007

RBS Securities analyst on the return of synthetic CDOs

Synthetic CDOs are sort of the natural evolution, and in many respects the final frontier, of investors’ search for yield against a backdrop of historically low interest rates. I think the big takeaway here is, ironically, the Fed and regulators are forcing investors to the darkest corners of the structured finance market and the structured credit market to find yield.

~ Richard Hill, RBS Securities analyst, "Behold the Ghosts of Bubbles Past," Bloomberg Businessweek, April 1, 2013

Alexander Rekeda (structured finance expert) on the 2007 vintage of RMBS

The 2007 vintage of residential mortgage-backed securities is looking to be one of the best vintages in 10 years.

~ Alexander Rekeda, Mizuho Financial Group, interview with Dow Jones Newswires, April 2007

(Quote was cited in WSJ article, "How Mizuho Loved and Lost in CDOs," May 14, 2008, p. C1. "Looking to charge into the red-hot business of subprime debt two years ago, Mizuho Financial Group Inc.'s brokerage poached 11 bankers, traders and salespeople, headed by structured finance ace Alexander Rekeda, from investment bank Calyon.)

Bill Laggner on subprime securities

Without the accounting it becomes a confidence game.

~ "Navigating Subprime Securities," Fortune, August 23, 2007

XL Capital Assurance on the beneficial role of the bond insurers in the CDO market (2002)

Monoline insurers not only benefit the investors and sponsors of CDOs but are often the key to the successful execution of innovative transactions... Monoline insurers have the resources, expertise, and financial wherewithal to understand underlying assets, conduct due diligence, provide feedback to the structuring institutions, interact with rating agencies and work for long periods on newer and more innovative transaction structures.

~ Iftikhar Hyder, XL Capital Assurance Inc., "Collateralised Debt Obligations and the Role of Monoline Insurers," September 24, 2002

Bill Laggner on structured finance

I think you're going to get this constant flow of hits going forward, spread out over multiple quarters. A lot of people think that it doesn't matter what happens, that the Fed will rush in and find some way to save some of these larger institutions and the various assets that they own but I don't see how there's going to be a market for a lot of this paper for a long, long time.

~ Bill Laggner, Bearing Asset Management, "Dow Hits Record Despite Losses At Big Banks", Wall Street Journal, October 2, 2007

Rod Dubitsky on structured finance

Derivatives, or synthetics are like wearing a seatbelt that allows you to drive faster. The total dollar amount of losses, all these losses you're seeing, are from synthetics. No question, it changed the game dramatically.

~ Rod Dubitsky, Director asset-backed research, Credit Suisse, "Subprime Securities Began as Group of Five", December 17, 2007

Goldman Sachs analysts on Merrill Lynch's 1st quarter results

These results should alleviate most investor concerns that Merrill is overly exposed to deteriorating subprime mortgage markets and challenging CDO/CLO markets.

~ Goldman Sachs analysts, from a Tuesday research report, "Merrill Lynch's profit rises 31%," MarketWatch, July 17, 2007

David Tice on the credit engine shutting down

Structured finance, which has been the key to this credit bubble, has broken down. We believe that confidence in structures, ratings, collateral, issuers, counterparties, etc., has all been lost. Therefore we are in a very precarious position. Credit has driven the economy and has driven markets. Credit has to grow year-over-year in this credit bubble environment in order for the economy to grow. With structured finance having broken down, in our opinion, there is no way that credit will grow year-over-year any longer.

... We are living in very different times than the ones we've experienced over the last 20 years. What has to be recognized, in our opinion, is that it's truly different this time. We see this as being the end of credit expansion.

~ David Tice

David Calderwood: Days of securitization alchemy are over

Conditions that occurred the past five years were both unprecedented and extremely unlikely to repeat. The ability to repackage weak debt and get it rated AAA is gone, not to return until after those with burned fingers today are retired or dead.

~ David Calderwood, "What Gives?," LewRockwell.com, December 1, 2007

KKR Financial: "It's a great time to invest in CLOs"

We have the liquidity, we have the financing, more importantly we've got the investment opportunities. It's a great time to invest [in CLOs], and we've got all the raw materials necessary to take advantage of it.

~ David Netjes, chief operating officer, KKR Financial, "Greed Trumps Fear as KKR Gets Banks to Arrange CLOs," Bloomberg.com, November 20, 2007

(KKR Financial shares fell 1 cent to $14.44 in New York Stock Exchange composite trading as of 10:22 a.m. The stock has lost about 45 percent this year.)

Law firms with large structured finance practices hardest hit

Two specialized [law] firms with large structured finance practices, New York's Thacher Proffitt & Wood and McKee Nelson, have been hit the hardest.

At Thacher Proffitt, about a dozen associates from the group, which accounts for about 40 percent of the firm's lawyers, have moved to other practice areas, said Chairman Paul Tvetenstrand.

When asked if the firm would lay off associates, Tvetenstrand paused for at least 10 seconds before answering, "We have to constantly monitor the situation.''

"We're working to rebuild the business, looking for more signs of activity in our client base, looking for attrition in the associate ranks to hopefully get us where we need to be,'' he said.

~ Bloomberg.com, "Credit Market Collapse Claims Victims as Lawyers Exit," November 20, 2007

Jim Grant on role of rating agencies in structured mortgage products

Moody's et al. did not just pass judgment on the safety and soundness of structured mortgage products. They were partners in designing them.

~ Jim Grant, "Sell Moody's again," Grant's Interest Rate Observer, March 9, 2007

Jim Grant on CDO market's dependency on ratings

A subscriber who has made a study of the subprime market - he is a long/short equity investor by trade - e-mails to share his observation that "somewhere in the neighborhood of 70% of CDO buyers rely almost entirely on the ratings because they don't have the time or expertise to evaluate the underlying collateral or structure." It follows, our reader points out, that "once the rating agency integrity is gone, so is the CDO market, it would seem."

~ Jim Grant, "Wheezing CDO machine," Grant's Interest Rate Observer, March 9, 2007

Forbes: Goldman Sachs setting its own derivatives rules

[Goldman Sachs] is the only one allowed to set its own margin requirements – rather than have them imposed by regulators – for highly volatile derivatives trading.

~ Forbes, May 15, 2000