September 16, 2008

Merrill take-over by BofA, an informed decision?

Posted in bank, credit risk, operational risk, risk tagged , , , , , , , , , , at 7:51 pm by peter@riskfriends.net

Yesterday I expressed my concerns regarding the rational behind the take-over of Merrill Lynch. Today several commentators are wondering why BofA is willing to pay much more than the market value. It seems obvious there is more to it than the public at this moment knows. What is in it for BofA? Maybe there is a reason to share this with BofA’s shareholders? The initial view of analysts is that it probably is a forced deal and I’m inclined to agree with this. One day after the “deal” the is a general concern whether or not BofA can absorb Merrill’s troubles. It is almost impossible to make an informed decision on such a short notice. What guarantees have been given to BofA to take this risky jump in the dark? Another interesting question is whether or not it is possible to manage two take-overs in a period that is causing serious problems for every company in the financial industry.

From a BofA perspective a Lehman take-over would have been much more transparent. Although the risk management of Lehman proved to be inadequate, the management of Lehman in general has a much better track record when you look at business ethics or management integrity.

In the past year Merrill has been accused of many things except high moral standards. I’m really curious how many billion dollar surprises will emerge once BofA really takes over control. Revisiting the credit crisis events show that a reduced level of management integrity proved to be a reliable key risk indicator of corporate failure in difficult economic times. To substantiate this I’ve included a list of Merrill events covering the last 12 months. This list was extracted from the Riskfriends guided analysis. BofA shareholder read and think again!

Date

Event

Detail

2008-09-14

Take over

Bank of America did take over Merrill although it was
published as a merger. No surprise here, this is less a surprise than Lehman
given the pattern of incidents.

2008-08-21

Law suits

Agreed to buy back $ 12 billion of ARS and pay a fine of $
125 million.

2008-08-04

Integrity concerns

Merrill suspected of colluding with UBS manipulating the
auction rate security market by selling short term investments as cash like,
by knowingly keeping a market alive while it was in trouble since 2006.

2008-07-29

Capital ratio recovery

Planning to raise another $ 8.5 billion

2008-07-29

Investment lost

Lone Star Funds buys CDO’s from
Merrill for a purchase price of $6.7 billion. (Notational $ 30 billion, 1st
quarter value $ 11.1 billion).

2008-07-23

Law suits

Los Angeles
accusation of fraud and antitrust

2008-07-18

Capital ratio recovery

Sold Bloomberg part back to the company for $ 4.4 billion.

2008-07-18

Write off

Totaling $ 9.4 billion, 30 percent CDO, 30 percent credit
valuation adjustments, 20 percent investments in US banks and the rest in
real-estate exposure

2008-07-07

Capital ratio recovery

Selling parts of Bloomberg and Blackrock to raise another $17
billon

2008-06-26

Prediction

$ 4.2 billion write off predicted for the second quarter

2008-04-18

Law suits

Pension fund CtW investment
group will start a campaign against banks due to subprime related losses.

2008-04-18

Job cuts

2900 jobs in reaction to write down

2008-04-17

Write off

$9.5 bllion

2008-04-02

Capital ratio recovery

$12.2 billion raised so far

2008-03-18

Liquidity issues

Wachovia states that the exposure of Merrill is 3.3 the
industries average. Subprime CDO totals to 30.4 billion dollars.

2008-03-11

Integrity concerns

Congress questions Stanley O’neal
about his compensation after bringing his company to its knees.

2008-03-06

Job cuts

Merrill Lynch said that it would stop making subprime
mortgages through its First Franklin Financial unit and would eliminate 650
jobs

2008-02-27

Investment lost

Auction rate securities from Merrill
frozen making it impossible for individuals to withdraw their savings.

2008-02-26

Management leaves

CEO O’Neal steps down

2008-02-08

Investigation

SEC received request for information from the federal
prosecutors gathering information in the Merrill activities in mortgage
securities.

2008-02-07

Integrity concerns

Accused by Massachusetts

of fraud

2008-02-01

Investment lost

Merrill buying back $ 14 million of CDO’s
from the city of Springfield.
These CDO’s lost 90% of value.

2008-01-16

Write off

$ 9.8 billion loss, write down $14.1

2008-01-15

Capital ratio recovery

$ 6.6 billion cash raised issueing
preferred shares

2008-01-14

Integrity concerns

Finra investigating possible
front running

2008-01-11

Portfolio deterioration

$15 billion write down expected

2008-01-04

Integrity concerns

Accused from hiding losses while merger was pending

2007-12-24

Capital ratio recovery

$ 7.5 billion acquired selling shares 13% below market
value.

2007-11-08

Integrity concerns

SEC starts investigation investments

2007-11-07

Portfolio deterioration

Expected write offs 4th quarter another $9.4 according to CreditSights

2007-11-03

Integrity concerns

Merril not aware of
inappropriate transactions, not denying it.

2007-10-31

Law suits

Lawsuits by shareholders

September 7, 2008

Fannie Mae and Freddie Mac history!

Posted in bank, credit risk, risk tagged , , , , , , , , , , , at 8:06 pm by peter@riskfriends.net

This sunday will become in retrospect a remarkable financial date. The American government takes over control of two financial companies and replaces their CEO’s. The intention is to calm down the US financial market. The intervention signals great concerns and I wonder how the markets will react. The investors that once thought they were investing in shares with a low risk profile by now have learned a very expensive lesson. Fannie and Freddie lost over $ 120 billion in share value since October 2007.

When you want to view the Fannie and Freddie events that led to this historical event, just look here for Fannie and here for Freddie .  Follow the OLDER link when you want travel back in time. You can initiate directed searches yourself, for instance by typing in “paulson freddie” without the quotes in the search box.

This event was also a signal to update the guided analysis. This covers by now over 500 credit crisis events! You can use this facility to analyze the credit crisis categorized events yourself.

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July 18, 2008

Credit crisis, regulators total failure?

Posted in business risk, enterprise risk, operational risk, risk, Uncategorized tagged , , , , , , , , , , at 9:24 pm by peter@riskfriends.net

When you track the credit crisis it is impossible to ignore the total failure of the supervising authorities. These regulators are there to ensure financial institutions remain within the boundaries of law and balance earning money with servicing investors and customers. The credit crisis uncovers the modi operandi within the American financial sector and I wonder what the supervisors have been doing besides burning tax payers money. It is not even the more complex tasks like understanding and validating risk modeling practices of complex products as used by rating agencies and bond and insurance mortgage companies. No, it is the simple task of gaining insight in day-to-day operational activities within financial institutions and enforcement of minimal business ethics. During the last months many incidents were reported that show a total disrespect from these companies for their customers, their investors and the law. Let me give some examples:

  • Countrywide accused in a lawsuit of forging documents
  • Countrywide fined after destroying customer checks resulting in increased rates and additional charges for legal costs
  • Insurance companies finding evidence of forged collateral’s
  • Rating agencies not managing conflicts of interests
  • Banks falsely presenting auction rate products as save and easy to cash
  • Mortgage selling practices that have little to do with serving customers
  • Hedge funds advising customers while acting themselves contradictorily

These are just a few examples to illustrate how easy it should be identify improper business practices. All you have to do is track lawsuits, actively invite customers and investors to file complaints or check product information. Who will investigate the regulators and evaluate their contribution to the current crisis. What steps will be taken to improve their performance?

July 4, 2008

Credit crisis interactive analysis

Posted in analytics, bank, credit risk, liquidity risk, operational risk tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , at 11:17 am by peter@riskfriends.net

After presenting the subprime parade for a while, I wanted to improve the user experience. You can find the credit crisis interactive analysis here. Having an idea is nice, but realizing it is something different. At some point in time I was afraid that improving the user experience would take longer than the credit crisis itself. However the credit crisis is still here and I’m happy that I’ve implemented my idea.

The credit crisis interactive analysis covers more than 350 credit crisis or subprime events and the functionality allows you to investigate it from different angels. I’ve been using it myself and some interesting patterns show up. It has been tested with Explore and Firefox 3.0. It works on both, but Firefox is much faster.