March 13, 2008 TCM Observations
As readers of this Toomre Capital Markets LLC ("TCM") Insights section might have noticed, there has been some time since Lars Toomre last settled down to write here on a consistent basis. Lars' professional life has become especially busy and there has been very limited time to devote to writing each day, especially after all of the prospect and client meetings, work on specific client projects, the significant period dedicated each day to telephone calls and professional education, and various other administrative tasks. When working for larger organizations, Lars does not recall that his days at Lehman Brothers, Citigroup, UBS, MetLife or even Munich Re were this full.
However, in the last week, two long-time acquaintances (and now TCM clients) have implored Lars to share some of his more private observations in a more public way. In short, they have requested that I (Lars Toomre) share some of the topics that have caught my attention and (why quite frankly) I am concerned or excited about this or that. Hence, after reflecting for a few days on how to squeeze yet one more obligation into my busy professional life, I have decided to somewhat modify the format of the TCM Insights section. Rather than just post longer items that sometimes take as long as several hours to compose, I will also try to post what I have come to think about as observations. These are likely to be little more than a shortly explanation of why I thought something was interesting and a link to where the reader can find more information. Of course, I do reserve the right to elaborate on such observations and I could see such elaborations expanding to more than a few paragraphs! These observation posts will always be included on the main page and also have a reference to a new category entitled Observations. I hope that you find this new type of posting equally valuable and continue to welcome your feedback.
- Carlyle Capital is in default on over $400 million of margin debt and likely will be bankrupt before the end of the day. Apparently approximately fifteen large investment and global banks extended margin loans to Carlyle Capital so that it could finance a leveraged portfolio of FNMA and FHLMC pass-throughs. Carlyle Capital's leverage (before the recent widening of mortgage spreads that started in early February) was approximately twenty-one times its equity capital. There is nothing like $21+ billion in securities hitting an illiquid market to push agency (and hence all residential) mortgage spreads wider!
- The key question is whether Wall Street has any more capacity to absorb mortgage positions, especially as other hedge funds, private equity firms and leverage investment funds are likely to be forced to at minimum deleverage as well. Yes, the new Treasury facility can help Wall Street investment banks fund over the short term of a few months. However, how is Wall Street suppose to deal with a market that essentially has turned all sellers and there is no thrift industry to be long term holders of mortgage debt?
- Wow… Bear Stearns closed last night at $61.58. Just a few minutes ago $50.50… Unless my numbers are wrong, that is a loss of more than 18% on the day. Simply wow… Maybe there really is something to the rumors that Bear Stearns is facing liquidity crisis issues, particularly around its prime brokerage business and the many whispers of hedge fund troubles.
- Curious who Debra J. Perry is and how qualified she is to assist MBIA refine and implement that bond insurer's risk management strategy. The Wall Street Journal reports that Ms. Perry is stepping down from the MBIA Board of Directors to take on this new assignment. She apparently is a frequent speaker on topics related to enterprise risk management and audit-committee oversight in the new GRC environment. Ms. Perry apparently worked for Moody's from 1992 to 2004 where she had responsibility for several ratings groups and before that was a director in fixed income research in what now is known as Credit Suisse.
- Drake Management LLC, a hedge-fund firm run by Anthony Faillace and Steve Luttrell, is mulling options that include shutting its largest fund after losses and redemption requests from some investors, according to a letter sent to the firm's clients on March 12, 2008. Drake's Global Opportunities fund, which oversaw almost $4 billion in October, lost more than 20% in 2007. Some investors asked to withdraw their money, but turmoil in credit markets made it difficult for the firm to meet those redemption requests without selling assets at depressed prices and possibly incurring more losses.