Merrill Lynch what were you thinking (or not)?

Portfolio.com

The WSJ has a wonderful narrative today of how Merrill Lynch managed to get so badly hit by the mortgage-bond crisis: apparently it's going to take even more write-downs in the first quarter, making an unprecedented three successive quarterly losses. So much for the kitchen sink theory.

The story in short:

Merrill was making a lot of money structuring mortgage-backed bonds. The junky bits were popular, the super-senior tranches at the top of the waterfall, less so, and the risk there had to be laid off to insurer AIG. But at the end of 2005, AIG said it didn't want that risk any more. What did Merrill do? It simply self-insured, keeping those super-senior tranches for itself. That was the first mistake.

The MBS business was now riskier than ever for Merrill, because it was putting its own balance sheet at risk with each deal. So how did Merrill respond to the extra risk? By doing even more deals. That was mistake number two.

With all the new deals, Merrill's internal risk officers started getting worried. And how did Merrill respond to such concerns? By overruling the risk officers. Mistake three.

It wasn't just the risk officers who were worried, however: the bond desk was worried too. Merrill's response bond traders and executives like Jeffrey Kronthal who wanted to throttle back on the MBS business? It fired them. Mistake four.

Eventually, the MBS market started falling, and Merrill started "de-risking". Except instead of just selling risky assets, Merrill decided that the smart move would be to bundle them up into CDOs, sell off the risker tranches of the CDOs, and hold on to the safer bits. Mistake five.

When the CDO market dried up, Merrill moved to Plan B: simply insuring its assets against default. But its counterparty of choice, XL Capital, didn't want the business. And neither did MBIA. So Merrill turned to tiny ACA, an insurer with just $400 million of capital underpinning $60 billion of insured securities. Mistake six.

And that's just the big mistakes which managed to make it into the WSJ's story. Yes, it's a catalogue of incomeptence and nearsightedness and greed. But it's also a cautionary tale: if this can happen to Merrill, it can, realistically, happen to any investment bank. Financial services is a risky business to be in.

IMF: credit crisis will result in $1 trillion in writeoffs

Moishe thinks this is a glass half empty scenario but what does he know?

Bloomberg News

Tuesday, April 8, 2008

WASHINGTON: The International Monetary Fund said Tuesday that financial losses stemming from the U.S. mortgage crisis might approach $1 trillion, citing a "collective failure" to predict the breadth of the crisis.

Falling U.S. house prices and rising delinquencies may lead to $565 billion in mortgage-market losses, the IMF said in its annual Global Financial Stability report, released in Washington. Total losses, including the securities tied to commercial real estate and loans to consumers and companies, may reach $945 billion, the fund said.

The forecast signals the worst of the credit crunch may be yet to come, because banks and securities firms so far have posted $232 billion in asset writedowns and credit losses. Policy makers, concerned that lenders' deteriorating balance sheets will hobble economic growth, are pushing companies to raise capital.

"The current turmoil is more than simply a liquidity event, reflecting deep-seated balance-sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted," the report said. The fund warned of the risk of "a serious funding and confidence crisis that threatens to continue for a significant period."

The report comes days before finance ministers and central bank governors from the IMF's 185 members gather in Washington for spring meetings of the fund and World Bank. Group of Seven policy makers meet April 11.

The fund, which predicted a year ago that any ripple effects from a subprime mortgage crisis would be limited, blamed lax regulations and a lack of understanding about the risks in structured financial products for the crisis.

The IMF's estimate exceeds those by most other economists, including analysts at UBS, who projected in February that financial firms may lose $600 billion. A unit of the French insurance AXA said Tuesday that the number could reach €400 billion, or $629 billion.

While financial innovations have brought some benefits, "the events of the past eight months have also shown that there are costs," the IMF said. At the same time, the fund urged governments against a rush to increase regulation, especially changes that "unduly stifle innovation or that could exacerbate the effects of the current credit squeeze."

Banks should improve disclosure and take writedowns "as soon as reasonable estimates of their size can be established," the fund said. It also urged stronger supervision of capital adequacy, and said policy makers should prepare for further disruptions, the IMF said.

"Authorities may wish to prepare contingency plans for dealing with large stocks of impaired assets if writedowns lead to disruptive dynamics and significant negative effects on the real economy," the report said.

The fund added that policy makers should "stand ready to promptly address strains within troubled financial institutions."

Federal Reserve officials prevented a disorderly failure of Bear Stearns last month by agreeing to lend against $30 billion of the company's assets, as part of a takeover agreement with JPMorgan Chase.

The fund noted in the report that while "risks to financial stability remain elevated" worldwide, emerging market economies "have been broadly resilient." Still, the lender highlighted the risk of faster inflation should the subprime rout cause the dollar's slump to accelerate.

"Further downward pressure on the dollar, particularly if it" comes "from subprime or similar shocks, could boost liquidity and lead to an intensification of inflationary pressures in some emerging markets," the fund said.

The IMF managing director, Dominique Strauss-Kahn, who took office in November, has conceded that the fund was not as vocal as it could have been about the risks that a subprime collapse posed for the global financial system.

In April 2007, the fund said there was little risk of a "serious systemic threat." It also said that "stress-tests conducted by investment banks show that, even under scenarios of nationwide house price declines that are historically unprecedented, most investors with exposure to subprime mortgages through securitization will not face losses."

At least 14 banks and securities firms have sought cash from outside investors in the past year.

Since credit markets seized up in the U.S. in August, the Standard & Poor's 500 stock index is down about 7 percent, the trade-weighted dollar index has dropped more than 9 percent and the yield on two-year U.S. Treasury notes has fallen to 1.88 percent. Home prices tracked by S&P Case-Shiller have slumped in every month.

"There was a collective failure to appreciate the extent of leverage taken on by a wide range of institutions - banks, monoline insurers, government-sponsored entities, hedge funds - and the associated risks of a disorderly unwinding," the IMF concluded in the report.

wamu gets mad loot

smells like we may be getting close to a bottom - the smart money is coming in and starting to put values on this stuff.

Washington Mutual's Kerry Killinger called in a few friends from the past to help salvage the largest U.S. thrift, and possibly his job.

The Seattle company, battered by the credit crisis, said Tuesday it will have a greater than expected $1.1 billion first-quarter loss, after taking a $3.5 billion provision for loan losses and $1.4 billion in charge-offs for bad loans. It is closing its stand-alone home lending offices and its business of lending to mortgage brokers. It reduced its dividend to 1 cent a quarter, from 15 cents, which will save $490 million annually.

Killinger, 58, and the company's CEO since 1990, is battling a coalition of unions that are demanding the ouster of two board members and asking tough questions about whether WaMu (nyse: WM - news - people ) took the right steps early enough to protect shareholders from a downturn in the mortgage markets.

He's also battling an image problem, with critics accusing him of poor strategic vision in the face of a credit meltdown. Shares of WaMu have tumbled 70% in the last year and were down another 9% on Tuesday.

Like many other financial companies, the bank's been looking to raise new capital, but at least it hasn't had to resort to overseas investment funds or general stock sales. On Tuesday, it announced plans to sell $7 billion worth of securities to Texas Pacific Group and other "long-time" institutional investors, an amount that was more than expected. The price at $8.75 is a 33% discount to WaMu's closing price Monday.

David Bonderman, founder of Texas Pacific Group, will rejoin the board of WaMu, where he was a director until 2002. He's bringing a friend with him, Larry Kellner, chief executive of Continental Airlines (nyse: CAL - news - people ), who knows a thing or two about turning around a struggling company. Because Texas Pacific Group was allowed only one board seat, Kellner's role will be to participate as an "observer."

Offloading the crap assets (or are they crap?)

April 3 (Bloomberg) -- Lehman Brothers Holdings Inc., seeking to get high-risk, high-yield loans off its books, created a $2.8 billion collateralized loan obligation.

Freedom CLO contains 66 loans, including debt the fourth- largest U.S. securities firm underwrote for buyouts, according to the indenture filed last week. New York-based Lehman will hold a piece of the $565 million subordinated note, the riskiest portion, according to the term sheet. The bank sold $2.2 billion of bonds with investment-grade ratings.

Lehman joins Deutsche Bank AG and Credit Suisse Group in creating CLOs to reduce loans on their books without selling them in the open market. Banks have $200 billion of buyout debt they can't easily sell after the price of leveraged loans tumbled to 88.8 cents on the dollar from 100 cents on the dollar last June, according to Standard & Poor's.

``Banks are focused on managing their exposure,'' said J. Paul Forrester, the Chicago-based head of the collateralized debt obligation practice at law firm Mayer Brown LLP. ``Balance sheet CLOs allow them to reduce the risk to the size of the subordinated tranche they are holding.''

A Lehman spokesman in New York, Randall Whitestone, declined to comment.

Deutsche Bank created two balance sheet CLOs, both named Genesis, in September and November, according to Bloomberg data. Credit Suisse formed the $1.7 billion Integral Funding in September.

First Data, TXU

Freedom contains loans to buyouts including KKR's First Data Corp., the Greenwood Village, Colorado-based payment processor, and power producer TXU Corp. of Dallas, purchased by KKR and TPG Inc. TXU was renamed Energy Future Holdings Corp.

The portfolio also has loans that couldn't be sold to investors, including Sequa Corp., purchased in December by the Carlyle Group, and bank lines for companies such as Countrywide Financial Corp., the largest U.S. mortgage lender, and Imperial Tobacco Group Plc, the maker of Davidoff and West cigarettes, according to the prospectus.

Loans for First Data trade below 90 cents on the dollar. The Countrywide five-year revolving bank line is priced at 79.5 cents on the dollar, according to the prospectus.

Freedom CLO sold the bonds in a private placement. The $2.2 billion in notes will pay interest of 2.25 percentage points above the three-month London interbank offered rate. That debt is rated A2 by Moody's Investors Service, the sixth level of investment grade, and an equivalent A from Standard & Poor's.

Private Equity

The unrated subordinated note pays interest generated by investments in the loans after the rated debt has been repaid. The loans pay an average coupon of 3.5 percentage points above three-month Libor, currently 2.73 percent.

Blackstone Group, Apollo Management LP and Kohlberg, Kravis Roberts & Co., all based in New York, were among the private equity firms that negotiated more than $370 billion in financing to back acquisitions before losses on subprime-related mortgage securities spread to loans, bonds and CDOs.

CDOs, which have helped fuel $232 billion in bank writedowns since the beginning of 2007, repackage assets into new securities with varying risks. CLOs, a type of CDO, repackage buyout loans into new securities.

CLOs bought 60 percent of buyout loans before credit markets froze last year, said Mark Shafir, the global co-head of mergers and acquisitions at Lehman, in an interview last week on Bloomberg Television.

Debt Backlog

Unable to sell primarily to CLOs, banks have reduced the buyout debt backlog by selling loans at discounts to face value to hedge funds and private-equity firms. Several transactions have also failed, such as J.C. Flowers & Co.'s $25.3 billion acquisition of SLM Corp., also known as Sallie Mae. An acquisition of San Antonio-based Clear Channel Communications Inc. may be canceled over a dispute about bank financing.

This year, banks have sold $28.5 billion of CDOs backed by high-yield, high-risk loans, versus $62 billion for the first quarter of last year, according to JPMorgan Chase & Co. data. Lehman's CLO accounted for 40 percent of total March volume, according to an April 2 report from Wachovia Corp. analysts led by Brian McManus.

Lehman reduced its LBO backlog by $6.1 billion to $17.8 billion since the beginning of the year, Chief Financial Officer Erin Callan said on a conference call with investors on March 18. The bank booked losses of $500 million on leveraged loans during the quarter, she said.

Lehman this week sold $4 billion of convertible preferred shares to shore up capital depleted by the U.S. housing slump.

A Good Sign for the Real Estate Market

A bottom needs to be found, and this should help. From Bloomberg

Blackstone Raises Record $10.9 Billion Property Fund (Update1)

By Hui-yong Yu and Jason Kelly

April 1 (Bloomberg) -- Blackstone Group LP, manager of the world's biggest leveraged buyout fund, raised a record $10.9 billion to invest in property as the U.S. housing slump pushes global real-estate prices lower.

The fund, the New York-based firm's ninth property pool, brings to $25.7 billion the capital it has raised to buy real estate since 1992, New York-based Blackstone said in a statement today. The company is raising a separate fund of more than $1 billion for Western Europe.

``There should be attractive investment opportunities for this capital, given the market dislocation that exists today,'' Jonathan Gray, senior managing director and co-head of Blackstone's real-estate group, said in the statement.

Blackstone is expanding real estate investing as the market for corporate buyouts remains all but frozen. Its real-estate funds have delivered an average annual return of 31 percent after fees since 1992, higher than private equity or hedge funds, the firm said in government filings prepared for its initial public offering last year.

The firm, led by Stephen Schwarzman, last year completed the biggest-ever buyouts in the real estate and hotel industries. It acquired Sam Zell's Equity Office Properties Trust for $39 billion including debt in February 2007 and quickly resold more than $28 billion of the buildings to pay down debt. Blackstone bought Hilton Hotels Corp. for $26 billion with assumed debt last October...

I hope this doomsayer is wrong

March 31 (Bloomberg) -- Be it ever so devalued, $1 trillion is a lot of dough.

That's roughly on a par with the Russian economy. More than double the market value of Exxon Mobil Corp. About nine times the combined wealth of Warren Buffett and Bill Gates.

Yet $1 trillion is the amount of defaults and writedowns Americans will likely witness before they emerge at the far side of the bursting credit bubble, estimates Charles R. Morris in his shrewd primer, ``The Trillion Dollar Meltdown.'' That calculation assumes an orderly unwinding, which he doesn't expect.

``The sad truth,'' he writes, ``is that subprime is just the first big boulder in an avalanche of asset writedowns that will rattle on through much of 2008.''

great piece on the bear sterns bailout (naked capitalism)

Bear Bailout: Is No One Too Small to Fail?

The news that Bear had to run to the Fed for help with its rapidly deteriorating cash position, and JP Morgan has been muscled into assisting in the rescue is a sign that Bear was deemed too big to fail. The Fed is lending against Bear's collateral (I haven't seen an estimate as to how large this operation is).

First Countrywide, now Bear. Why did the Fed not let Bear collapse? You can attribute it to the Fed's tendency to take responsibility for problems it can't and shouldn't fix, but this one is a trickier call than Countrywide.

Bear is a large prime broker, which means it lends to hedge funds. It is also a significant counterparty in enough different credit markets that its collapse would have at a minimum caused panic as to who might have been hurt. You'd have a further scramble for liquidity and reluctance to lend, which is precisely the condition the Fed has been trying to alleviate.

In particular, according to Bloomberg, Bear was the second largest underwriter of mortgage bonds, The lead manager (I'm assuming Bear was also a significant lead manager) is the only one who knows where the bonds went and is thus in the best position to trade them. So Bear's role as an important market-maker may have played into the calculus.

But the answer to the question of whether Bear should have been allowed to tank depends on how long it would take the crisis to pass. Swap spreads were elevated a full year after the LTCM rescue, but here the relevant metric would be how long the acute phase might take. If it was two weeks or a month, and no one save maybe some middling sized hedge funds (or a lot of teeny ones) would fail, that would have been acceptable. But the Fed couldn't assess this in a 24 hour period. (However, some parties believe that the Fed's $200 million TLSF was in part to assist Bear; if so, they've had at least a week to evaluate this risk. But in that case, I'm not certain they asked the right questions).

I still think Bear should have been permitted to fail. Now every the same size or larger knows the Fed will ride into the rescue. This is a terrible precedent. It also increases the odds of the Fed running out of firepower long before the crisis is over.

I also wonder what Bear employees were paid in bonuses last year (I assume the checks went out in late December or January) and whether cutting that number by 50% would have saved Bear's hide. (CEO Alan Schwartz's blaming the crisis on "market rumors is classic and should be heavily discounted, although one also has to wonder if Bear would have survived if the TSLF had been operational this week).

Analysts believe that JP Morgan may wind up owning parts or all of Bear. It isn't easy to hive off pieces of trading firms, which Bear is. As we have said before, Bear has such a sharp-elbowed, entrepreneurial culture that it's difficult imagining that anyone could manage it successfully, This bailout (which is almost certain to leave the banks owning Bear, given the dearth of other capable and interested parties) has high odds of being a value destroying exercise for JP Morgan.

For the curious, Bloomberg also describes how the Fed has the authority to rescue a non-bank:

The loan to Bear Stearns required a vote today by the Fed's Board of Governors because the company isn't a bank, Fed staff officials said. The central bank is taking on the credit risk from Bear Stearns collateral, lending the funds through JPMorgan Chase & Co. because it's operationally simpler to accomplish than a direct loan, the staff said on condition of anonymity.

Bernanke took advantage of little-used parts of Fed law, added in the 1930s and last utilized in the 1960s, that allows it to loan to corporations and private partnerships with a special Board vote. The Fed chief probably sought to stave off a deeper blow to the financial system from a Bear Stearns collapse, former Fed researcher Keith Hembre said.

``The Fed really doesn't have any obligation to help a non- bank aside from its role or responsibility to keep the financial markets functioning,'' said Hembre, who helps oversee $107 billion as chief economist at FAF Advisors Inc. in Minneapolis. ``They made a judgment, probably an accurate one, that they're not going to function very well if you've got a full-blown crisis with a major Wall Street firm.''

Moishe: Let's make an offer

From Bloomberg.

March 4 (Bloomberg) -- Nothing has done more to disturb financial markets in recent months than the huge writedowns in the value of bank assets related to subprime mortgages. Some of them may have gone too far.

Federal Reserve Chairman Ben S. Bernanke said in congressional testimony on Feb. 28 that accounting rules may be forcing banks to put artificially low values on little-traded assets when they mark them to market.

The inability to value such assets on the basis of actual trades, Bernanke said, is ``one of the major problems that we have in the current environment. I don't know how to fix it. I don't know what to do about it.''

Writedowns in the tens of billions of dollars have forced some large institutions, including Citigroup Inc., to raise new capital to offset losses and perhaps made them less willing to extend credit, hurting economic activity.

Some analysts, such as Richard Bove of Punk Ziegel & Co., say the tools banks are using to value their assets ``don't reflect the real world.''

``This mark-to-market accounting forces banks to mark their portfolios against indexes that aren't representative of what's going on in the markets at all,'' Bove said in a Feb. 28 interview.

One index banks use ``shows something like an 8 percent potential loss in commercial real estate in the United States,'' he said. ``Do you know what the actual loss is right now? One quarter of 1 percent.''

`Fallacious Indexes'

In other words, banks are marking their securities against an index that suggests the losses will be 32 times worse than the actual loss experience, Bove said.

``We're marking against fallacious indexes,'' he said, ``and that's creating more problems than necessary.''

A key issue is that with many investors shunning risk, an asset that in the future might have substantial value may have few if any buyers now.

Great interview with CEO of AMBAC in WSJ

Moishe found most interesting his comment, that the downgrades being contemplated are a result of repricing of risk under the most extreme conservative cases assuming losses (that haven't occurred yet) at crazy levels. Take it with a grain of salt but makes sense.

Being a pilot, going back to his days in the Marine Corps, Michael Callen knows how to navigate through dicey situations. Now, the interim chief executive of Ambac Financial Group Inc. will be putting his skills to a new test.

The 67-year-old Georgetown University professor and former banking executive is trying to help Ambac dodge further credit-ratings downgrades. Fitch Ratings, a unit of Fimalac SA of Paris, has cut the bond insurer's coveted triple-A rating to double-A.

Many people have a lot riding on whether Mr. Callen succeeds. Ordinary investors who hold municipal bonds insured by Ambac could see the ...

More People Morty Does Not Stay Up at Night Worrying About...

Follow up to Moishe's post. From the NY Times.

LAS VEGAS — It was Monday night on the Strip, and John Devaney was giving a party for himself and fellow connoisseurs of risk who have seen their hot hands go cold.
In a gilded ballroom at the Venetian, the revelers sipped cabernet, dined on surf and turf and crowed as the Blue Man Group put on a private show.

The partygoers had traveled to Sin City this week — Mr. Devaney by chartered jet — for an event that before the current credit squeeze might have been called the Predators’ Ball of this era.

This time, with mortgage securities replacing the junk bonds of the 1980s, the gathering felt more like group therapy.

The occasion was, officially, the 5th annual conference of the American Securitization Forum, a celebration of the financial wizardry that supposedly turns risky mortgages and other loans into gilt-edged securities but, as Mr. Devaney belatedly discovered, does not always make them safe. Mr. Devaney, a 37-year-old money manager, lost big on bond investments last year. This week, in Las Vegas fashion, he said he was doubling down.

The four-day event at the Venetian drew more than 6,500 financial professionals from across the country. Many came in search of ways to ride out — or better yet, to profit from — the mortgage mess their industry helped to create.
...

Builders offering price protection - what's next free massagie's with every house???

Builders Try to Construct Buyer Confidence with Price Protection, Auctions

The housing slump has spooked consumers. Wachovia Corp. forecasts that nationwide home values could fall as much as 20% this year, Dawn Wotapka points out in today’s Journal. With home sales plunging, how can skittish buyers assure themselves that they’re getting a good deal?

Wotapka reports that some home builders are offering reassurance in the form of ‘price protection.’ KB Home is preparing to roll out such a program in 35 markets this month. And Ryland Group now offers price protection to any buyer who asks. Under these guarantees if the cost of a comparable home drops before closing, you get the lower price. However, as Ms. Wotapka points out, longer-term price declines could still leave buyers owing more than the house is worth.

Meanwhile, in a different story in today’s WSJ, Jilian Mincer reports on another way builders are trying to lure buyers: real-estate auctions. While still only a small percentage of housing sales, the real-estate auction market climbed 5.3% in 2007, generating $58.4 billion, according to a report from the National Auctioneers Association, which is cited in the article.

Buyers have been “paralyzed” says one one home builder quoted in the article. “They don’t know what’s a good deal and what’s not.” An auctioneer quoted in the piece says that auctions give buyers confidence that they are paying a fair price.

Readers: Are you considering purchasing a new home? Considering the uncertainty of the housing market, would buying via auction or with a “price protection” offer make you feel more comfortable about making a purchase? – Emily Friedlander

Genius - Lennar makes lemonade out of lemon's

As reported in today's Wall Street Journal

Lennar’s $800 Million Tax Refund
By DAVID REILLY
February 6, 2008; Page C3

Lennar Corp. has found a way to salvage something from the huge losses it incurred by overpaying for land during the housing boom.

Late last year, the Miami-based home builder sold a big swath of land — about 11,000 home sites — for $525 million to a partnership that it formed with Morgan Stanley. At first glance, the deal seemed terrible for Lennar, which had the land valued on its books at about $1.3 billion.

But the deal’s structure allowed Lennar to recognize a big loss that it applied against taxes paid the previous two years. The result: Lennar is expecting a tax refund of more than $800 million, according to the company’s annual results filed in late January.

As an added bonus, because of the way Lennar and Morgan Stanley structured their partnership, Lennar still effectively owns 20% of the land, according to the company. It also has a 50% voting interest in the partnership, meaning it will have a say in how the land is developed.

‘The Holy Grail’

That means Lennar gets the tax loss, but still holds an interest in the land on its books. “That’s the holy grail,” said Robert Willens, president of tax and accounting advisory firm Robert Willens LLC. “The accounting is saying that they’re not really selling it, whereas the taxes are more formal in the way they look at it.”

In honor of this weeks American Securitization Forum - we present John Devaney - thanks Wall Street Folly

keep one thing in mind, this guy was buying securitized pools of airplane leases post 9/11 and made an absolute fortune, he understands risk and is willing to bet big. I wouldn't count him out just yet.

From: wallstfolly.typepad.com

John Devaney, skipper of United Capital Markets Holdings Inc., and former skipper of "Positive Carry", one of the two yachts he was forced to sell last year after he was nearly sunk by bad sub-prime bets, thinks it's time to test the waters again.

The chief executive officer of United Capital Markets Holdings Inc., who lost more than 35 percent for at least one client last year and prevented investors from withdrawing their cash, says bonds derived from subprime mortgages are a bargain after falling as low as 10 cents on the dollar. TCW Group Inc. and Pacific Investment Management Co. are also betting that prices will recover.

``Just because I lost money doesn't mean I will quit, no way,'' Devaney, who sold his boat ``Positive Carry'' and Gulfstream IV, said in a telephone interview from Key Biscayne, Florida. ``Prices have collapsed and this is the best opportunity I've seen in my career.''

Losses, mainly from mortgage bonds and CDOs, forced Devaney to sell his 142-foot (43 meter) yacht, the jet and real estate. ``We took a bad loss,'' Devaney said. ``Selling the boats and planes helped reduce overhead and raised money to put back into the business.''

Devaney's call to buy coincides with the American Securitization Forum, a big annual conference being held in Las Vegas beginning tomorrow at the Venetian. 5,700 attendees are scheduled to be there, including speakers from Countrywide Financial and Bear Stearns that have had their own well publicized problems with sub-prime.

Devaney, 38, paid for comedians Jay Leno and David Spade to perform in previous years. This time, he's sponsoring dinner and a show by the Blue Man Group, a theatrical troupe that sprays paint on the audience and vomits fake food.

Many people seem to be complacent in this subprime debacle

Small Law Firm’s Big Role in Bundling Mortgages

By LYNNLEY BROWNING

In recent years, as subprime lending proliferated, a small law firm played a big role on Wall Street.

The young firm, McKee Nelson, helped investment banks and mortgage lenders bundle home loans into securities — lots of them. Since 2000, McKee has been involved in almost 3,300 deals totaling $2.7 trillion, according to Asset Backed Alert, an industry newsletter.

The Wall Street banks and lenders hired McKee Nelson, which is based in Washington and New York, to write or review prospectuses for the securities. It was a lucrative arrangement, helping to generate $202.5 million for the firm in 2006, the latest year for which figures are available.

Now, with losses on bad mortgage investments exceeding $135 billion, questions are growing about whether prospectuses like these adequately disclosed the risks to investors.

Mark H. Adelson, a co-founder of Adelson & Jacob Consulting, a securitization and real estate consulting firm, said offering documents in general lacked clear warnings about the deteriorating quality of home loans. “That’s what was missing,” Mr. Adelson said. Most of these documents, however, did detail the mechanics of the investments and the kinds of loans backing the securities, he said.

Reed D. Auerbach, a structured finance partner at McKee Nelson, stands by the firm’s work.

“We get paid to write good disclosure,” Mr. Auerbach said. “We think that the offering documents we’ve written disclosed all the risks to investors.”

New York state prosecutors are investigating whether Wall Street banks withheld crucial information from investors about the risks posed by subprime loans. McKee Nelson has not been subpoenaed in the investigation or accused of any wrongdoing.

But as investors’ losses mount, companies across the financial services industry are coming under scrutiny. Bankers, auditors and lawyers are bracing for a wave of lawsuits. One law firm, Cadwalader Wickersham & Taft, is already fighting a $70 million malpractice suit over its mortgage securities work.

“Anybody who touched the security in the process of creating or selling it is going to be subject to litigation,” said Joseph A. Grundfest, a business and law professor at Stanford and a former commissioner of the Securities and Exchange Commission.

The Internal Revenue Service, meantime, recently opened an inquiry into the special trusts that are typically used to issue mortgage securities. A McKee Nelson spokeswoman declined to comment.

McKee Nelson burst onto the scene in 1999 and quickly grabbed lucrative Wall Street work from long-established rivals. William F. Nelson, one of its co-founders, said the firm, which is known for its sophisticated tax work, did not employ any special legal maneuvers to outflank its competitors. “There’s no secret, magic elixir that we sprinkled,” Mr. Nelson said.

In any case, the mortgage turmoil is now hitting the highly regarded McKee Nelson hard. The firm recently pared its structured finance department to 80 lawyers from about 115 through buyouts, sabbaticals and transfers to other departments. More cuts are unlikely, a spokeswoman said.

Across Wall Street, the structured finance industry is hurting. Just this week Merrill Lynch, which has lost billions of dollars on mortgage investments, said it would pull back from the business.

But after profiting from the mortgage boom, McKee Nelson is now positioning itself to profit from the bust by riding the coming wave of lawsuits. In January, the firm flew its partners and their spouses to Charleston, S.C., aboard four Delta commuter jets, to map out its strategy.

ok Clayton Holdings,you are a better informant then Pussy on Sopranos

From the Wall Street Journal:

The New York attorney general's office, pursuing an investigation into whether Wall Street firms improperly packaged and sold mortgage securities, is latching onto a powerful regulatory tool: the 1921 Martin Act.

The state law, considered one of the most potent legal tools in the nation, spells out a broad definition of securities fraud without requiring that prosecutors prove intent to defraud. As a result, the act has become an influential hammer in recent years for New York state prosecutors in cracking down on securities manipulation, improper allocation of initial public offerings of stock and misleading stock research on Wall Street....

The development comes as the attorney general's office has gained the cooperation of Clayton Holdings Inc., a company that provides due diligence on pools of mortgages for Wall Street firms. At issue is whether the Wall Street firms failed to disclose adequately the warnings they received from Clayton and other due-diligence providers about "exceptions," or mortgages that didn't meet minimum lending standards.

Such disclosures could have prompted credit-ratings firms to judge certain mortgage-backed securities as riskier investments, making them more difficult to sell, these people said. The attorney general is examining, among other things, whether some Wall Street firms concealed information about the exceptions from the credit-rating concerns, these people said, in a bid to bolster ratings of mortgage securities and make them more attractive to buyers, such as pension funds, which often required AAA, or investment grade, ratings on potential investments in securities containing risky mortgages.

The attorney general's office has issued Martin Act subpoenas, which don't spell out whether matters are civil or criminal in nature, according to people familiar with the matter. So far, the recipients include financial firms Bear Stearns Cos., Deutsche Bank AG, Morgan Stanley, Merrill Lynch & Co., and Lehman Brothers Holdings Inc., possibly among others. Representatives of Bear, Deutsche, Morgan, and Lehman declined to comment on the investigation. A Merrill spokesman said, "We cooperate with regulators when they ask us to," but declined to elaborate....

With data provided by Clayton, Mr. Cuomo's office is seeking to gather more information on how Wall Street firms purchased home loans that had been singled out as "exception loans" -- that is, loans that didn't meet the originator's lending standards. Data from Clayton, for instance, indicates that in 2005 and 2006, years in which the mortgage-securitization business was going full throttle, some investment banks acting as underwriters were purchasing large numbers of loans that had been flagged as having exceptions, these people said.

In 2006, according to the data, as much as 30% of the pool of exception loans was purchased by some securities firms, these people said. One likely reason: Flawed loans could be purchased more cheaply than standard loans could be, lowering a firm's costs as it sought to compile enough mortgages for a new security.

SRM Global Fund is Not as Big a Fan of Bottom Feeding as You and I Are, Moishe

We call it resolution to a financial crisis, they call it less than half book value.

Countrywide Holder Calls Bank of America Bid Too Low (Update2)

By David Mildenberg

Jan. 31 (Bloomberg) -- Bank of America Corp.'s offer of about $4 billion for Countrywide Financial Corp., the biggest U.S. home lender, is too low, according to one of the mortgage company's biggest stakeholders.

``The merger agreement does not provide sufficient value'' to shareholders of Calabasas, California-based Countrywide, according to a regulatory filing today by SRM Global Fund, a private investment firm based in the Cayman Islands. SRM, which controls a 5.2 percent stake, plans to vote against the merger and wants to contact the company and other shareholders.

SRM's filing may revive doubt that the takeover will be completed on the original terms. Investors have speculated Bank of America might demand an even lower price or walk away because of continued losses at Countrywide. The bank affirmed earlier this week that it will proceed with the purchase.

``The board of Countrywide and its advisers should fully explain to shareholders the reasons why they have agreed to recommend the transaction to shareholders at less than half of the company's book value,'' SRM said in a statement. ``The company is strong and will rapidly return to profit on a stand- alone basis.''

Clayton Holdings Dropping Dimes like Huggy Bear

Jan. 27 (Bloomberg) -- Clayton Holdings Inc., the Connecticut company that conducts due diligence for banks on pools of loans, is cooperating with a New York probe of whether Wall Street firms failed to sufficiently disclose risks tied to subprime lending.

Clayton will receive immunity from civil and criminal prosecution in New York, Jeffrey Lerner, a spokesman for New York Attorney General Andrew Cuomo, confirmed today in an e-mail. In exchange, Clayton will provide documents and testimony from officers, directors and other employees.

``We have complied with a subpoena to produce due diligence reports on various pools of loans that we had reviewed for issuers of mortgage-backed securities,'' Clayton Chief Executive Officer Frank Filipps said in an e-mailed statement.

Clayton, based in Shelton, was subpoenaed in June, Filipps said. New York is among a handful of states, along with the U.S. Securities and Exchange Commission, probing the mortgage industry as foreclosures have risen nationwide. Banks including Citigroup Inc. and Merrill Lynch & Co. that packaged subprime loans as investments have written down the value of the securities by billions of dollars.

The agreement between New York and Clayton was first reported today in The New York Times. Clayton is the largest provider of mortgage-related due diligence to Wall Street firms, the company said in its statement.

Another high ranking Merrill Lynch Axing - Ahmass Fakahany, co-president, Peace out

Merrill officials had no immediate comment, but Fakahany is widely regarded as one of the key architects of Merrill's strategy of ramping up balance sheet risk by holding risky bonds packed with subprime mortgages that led to its writedown of more than $14 billion.

Meanwhile, CNBC has learned that the firm is now looking to cut costs. Merrill's Brokerage Department Chief Robert McCann is conducting a massive review of the brokerage-department's costs that will likely lead to layoffs in the department, according to one person with knowledge of the matter. The layoffs, however, aren't expected to touch at least initially the firm's 16,610 brokers, but will focus on other personnel, this person said.