Wednesday, August 01, 2007
Lenders Flambe
Last week, we took our turn at throwing up a bit of a smoke signal about the tender state of the US credit markets. Tigerhawk was kind enough to observe that the timing of the post was, well, interesting, inasmuch as the equity markets proceeded to get trounced the following day.
So here we are, a week later, and the situation has become a bit more dire. Bear Stearns, a fine firm which went unmentioned in my original post, is suffering through the indignity of its third mortgage-related hedge fund debacle in an embarrassingly short period of time. Its stock has fallen from a high of $172 per share in January to about $115 per share today. Ouch. Let's leave aside the notion that, while they managed to lose gobs of client money invested in these funds, they're probably making quite a bit of it themselves trading these volatile markets.
Sowood Capital, a reputable hedge fund started by a talented former money manager for Harvard University's endowment, has been devastated (down 50%?) by the current illiquidity and the need to dispose of its positions rapidly to meet margin and capital calls. The beneficiary? Citadel Capital, another promiment hedge fund, which bought Sowood's positions last weekend at a very attractive discount.
Where there are losers, there are always a few winners as well. At least when it comes to finance.
The prominent lenders currently holding the bagful of soon-to-be-drawn underwater bridge loans continue to see their stocks suffer as well. Goldman, in my last post, was trading around $200-$202 per share. As we sit here today, it is down to $185. That's kind of a bad week. By contrast B of A isn't doing so badly, at around $47 per share. Citi is only down another $2. Likewise JPM.
It seems that the more aggressive, risk oriented financial services firms without retail banking have suffered quite a bit more than the traditional money center banks. That makes a degree of intuitive sense, as the larger firms have presumably greater financial stability deriving from their retail franchises and larger balance sheets with which to absorb credit losses.
But in this there may lurk opportunity. Goldman now trades at about 8.7x trailing earnings, Bear at 8.2x. Citi, Bof A and JPM hover between 9.5x and 10.5x earnings. All of their multiples to book value have compressed down to less than 2.5x (Bear is quite low, at 1.3x).
By historical standards, and understanding completely that prospective earnings and book value of their capital may suffer, these things are beginning to seem quite interesting. The great unknown is where the bottom may lie. Ah, if only we knew...
Some things to ponder: as these financial institutions approach the end of the year, they will want to clean up their balance sheets. This will prompt some yearend asset disposals --even if it means absorbing significant losses. Until then, the credit markets are pretty much on hold. The marginal buyer of credit -- a structured "Thing" called a CLO -- has been taken out of the market. That means there will be very sparse creation of new credit until at least this purge is complete.
Fun Fun.
Oh, and one should not hold one's breath awaiting the arrival of the Fed to rescue the financial market participants. It would need to get much worse for that. Much worse.
So here we are, a week later, and the situation has become a bit more dire. Bear Stearns, a fine firm which went unmentioned in my original post, is suffering through the indignity of its third mortgage-related hedge fund debacle in an embarrassingly short period of time. Its stock has fallen from a high of $172 per share in January to about $115 per share today. Ouch. Let's leave aside the notion that, while they managed to lose gobs of client money invested in these funds, they're probably making quite a bit of it themselves trading these volatile markets.
Sowood Capital, a reputable hedge fund started by a talented former money manager for Harvard University's endowment, has been devastated (down 50%?) by the current illiquidity and the need to dispose of its positions rapidly to meet margin and capital calls. The beneficiary? Citadel Capital, another promiment hedge fund, which bought Sowood's positions last weekend at a very attractive discount.
Where there are losers, there are always a few winners as well. At least when it comes to finance.
The prominent lenders currently holding the bagful of soon-to-be-drawn underwater bridge loans continue to see their stocks suffer as well. Goldman, in my last post, was trading around $200-$202 per share. As we sit here today, it is down to $185. That's kind of a bad week. By contrast B of A isn't doing so badly, at around $47 per share. Citi is only down another $2. Likewise JPM.
It seems that the more aggressive, risk oriented financial services firms without retail banking have suffered quite a bit more than the traditional money center banks. That makes a degree of intuitive sense, as the larger firms have presumably greater financial stability deriving from their retail franchises and larger balance sheets with which to absorb credit losses.
But in this there may lurk opportunity. Goldman now trades at about 8.7x trailing earnings, Bear at 8.2x. Citi, Bof A and JPM hover between 9.5x and 10.5x earnings. All of their multiples to book value have compressed down to less than 2.5x (Bear is quite low, at 1.3x).
By historical standards, and understanding completely that prospective earnings and book value of their capital may suffer, these things are beginning to seem quite interesting. The great unknown is where the bottom may lie. Ah, if only we knew...
Some things to ponder: as these financial institutions approach the end of the year, they will want to clean up their balance sheets. This will prompt some yearend asset disposals --even if it means absorbing significant losses. Until then, the credit markets are pretty much on hold. The marginal buyer of credit -- a structured "Thing" called a CLO -- has been taken out of the market. That means there will be very sparse creation of new credit until at least this purge is complete.
Fun Fun.
Oh, and one should not hold one's breath awaiting the arrival of the Fed to rescue the financial market participants. It would need to get much worse for that. Much worse.
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