This liquidation of a Credit Suisse CDO, Adams Square Funding I (which I missed and a reader called to my attention) isn’t significant in financial terms (it had issued less than $500 million in securities) but shows investor lack of faith in the likelihood of recovery in the underlying assets.
In Adam Square’s case, the liquidation was forced by the AAA holders. They decided they were better off taking what they could now, despite the fact that there is likely to be little demand for the CDO’s assets, rather than letting the CDO continue to operate. That suggests that they believed defaults could rise high enough to reduce payments even to the AAA holders. As the Wall Street Journal explains, this is only the second time an event-of-default notice for a CDO has led to a decision to liquidate.
From the Wall Street Journal:
Bond-rating firm Standard & Poor’s said late Tuesday it had been informed that the controlling investors in Adams Square Funding I Ltd., a collateralized-debt obligation, had directed the sale of mortgage-backed securities held by the investment vehicle.
CDOs are investment vehicles that hold pools of mortgages and other assets and issue bonds to investors with different levels of risk and return. The controlling class in a CDO is the group of investors who hold the highest-rated securities issued by the CDO. In some circumstances, they can force liquidation to recoup their investment.
Adams, which had issued $487 million in notes to investors, is managed by Credit Suisse Alternative Capital Inc. S&P was notified Nov. 16. Two weeks earlier, a larger CDO known as Carina notified the rating firm that it was liquidating. As a manager, the Credit Suisse Group unit didn’t suffer losses in the CDO, according to a person familiar with the matter, but it could forgo fees it would have earned for managing the product. It isn’t clear who were the controlling investors that forced the liquidation.
The winding down of CDOs marks a new phase of the mortgage-securities crisis. The liquidations follow “events of default” that occur when certain terms of the CDO are breached. A breach can be caused when rating services like S&P downgrade their assessment of mortgage-backed securities held by the CDOs, undermining their standing as collateral. Since the summer, S&P, a unit of McGraw-Hill Cos., and Moody’s Corp.’s Moody’s Investors Service have slashed ratings on thousands of mortgage-backed securities and CDOs.
Adams’s liquidation notice prompted S&P to slash its ratings on several classes of securities associated with the CDO, some by as much as 18 notches. Two classes of the CDO previously rated triple-A were dropped to junk-bond levels, with one going from triple-A to triple-C-minus, a level associated with a high risk of default.
Such liquidations represent a decision by senior CDO noteholders that the best course is to wind down the CDO by selling underlying assets and keeping the proceeds, a sign of low confidence in the market.
Since mid-October, S&P has received event-of-default notices for 28 such CDOs, ranging in value from $285 million to $2.3 billion. Two have indicated they will proceed to liquidate.
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where does the collateral for assets-backed or linked secuities come from?
Ho about your ERISA??
Re: In Interpretative Letter 84-16, the CFTC staff found that nonspeculative futures trading conducted by a nondepository trust company as fiduciary for corporate employee benefit plans and collective trust funds was “solely incidental” to its activities to a trust company and in its capacity as a fiduciary of the trusts.
One might ask whether the limitation of the no-action relief to hedging activities is appropriate at this time (assuming that it ever was). As we move from the “prudent man” rule to the “prudent expert” rule and investing in futures and other nontraditional vehicles is becoming more acceptable, it is, at the least, arguable that a bank should be able to advise a customer to commit x percent of his or her assets to futures or, if acting in a fiduciary capacity, to allocate y percent of an entity’s assets to futures trading without having to register as a CTA.
Even if a bank cannot avail itself of the “solely incidental” exclusion, CFTC Regulation § 4.14(a)(8) exempts a bank from registration as a CTA provided that the bank’s commodity interest trading advice is directed solely to an investment company registered as such under the Investment Company Act of 1940, an insurance company separate account or an ERISA plan and it renders such advice solely incidental to its business of providing securities advice to such entity and it uses only risk-reduction activities consistent with CFTC Regulation § 4.5.
To avail itself of this exemption, the bank must file a notice of exemption with the commission under Regulation § 4.14(a)(8).
Where do CDOs come from??
http://www.abanet.org/buslaw/blt/7-6bank.html
Banks enter a new age
Do their products come under the Commodity Exchange Act?
By STEPHEN F. SELIG
Selig is counsel to Baer Marks & Upham LLP in New York City.
Let’s face it: Banks are getting into new games. Either directly or through affiliates, as banks engage in a broader range of activities under newly granted regulatory authority, they may find themselves — perhaps inadvertently — subject to the jurisdiction of the Commodity Futures Trading Commission (CFTC or the commission) an independent federal agency analogous to the SEC.
To put this in perspective, we’ll first outline the nature and scope of the commission’s regulatory authority under the Commodity Exchange Act (act) and then discusses the impact of such regulatory authority on a bank’s proprietary trading activities, advisory activities and brokerage activities. Obviously, even if the commission has jurisdiction with respect to a bank’s activities, that jurisdiction does not replace the jurisdiction of the bank’s primary regulators. This article does not address the relations between a bank and its primary regulators.
Under the act, the commission has, subject to certain significant exceptions, “exclusive jurisdiction” with respect to “accounts, agreements (including any transaction which is in the character of, or is commonly known to the trade as, an option . . ., and transactions involving contracts of sale of a commodity for future delivery, traded or executed on a contract market . . . or any other board of trade, exchange, or market . . .” Section 2(a)(1)(A)(i).
DOL has authority to grant exemptions related to $2 Trillion in pensions, 401ks…….money mkts…
http://www.abanet.org/buslaw/blt/7-6bank.html
Banks enter a new age
Do their products come under the Commodity Exchange Act?
By STEPHEN F. SELIG
Selig is counsel to Baer Marks & Upham LLP in New York City.
Let’s face it: Banks are getting into new games. Either directly or through affiliates, as banks engage in a broader range of activities under newly granted regulatory authority, they may find themselves — perhaps inadvertently — subject to the jurisdiction of the Commodity Futures Trading Commission (CFTC or the commission) an independent federal agency analogous to the SEC.
To put this in perspective, we’ll first outline the nature and scope of the commission’s regulatory authority under the Commodity Exchange Act (act) and then discusses the impact of such regulatory authority on a bank’s proprietary trading activities, advisory activities and brokerage activities. Obviously, even if the commission has jurisdiction with respect to a bank’s activities, that jurisdiction does not replace the jurisdiction of the bank’s primary regulators. This article does not address the relations between a bank and its primary regulators.
Under the act, the commission has, subject to certain significant exceptions, “exclusive jurisdiction” with respect to “accounts, agreements (including any transaction which is in the character of, or is commonly known to the trade as, an option . . ., and transactions involving contracts of sale of a commodity for future delivery, traded or executed on a contract market . . . or any other board of trade, exchange, or market . . .” Section 2(a)(1)(A)(i).
Anon of 2:37 and 2:42 PM,
CDO collateral does not “come from” ERISA in any way, shape, or form. The CDO assets are credit market instruments, tranches of structured finance deals (often residential real estate, but also commercial real estate and collateralized loan obligations) and whole loans (i.e., mortgages).
The CFTC has nothing to do with CDOs.
You have left a number of long and unrelated ERISA comments on recent posts. This blog is not a venue for you to sound off on pet issues. All future off-topic ERISA comments will be deleted.
If you want a platform for this issue, I suggest you start your own blog.
Can you explain Countrywide Financing then:
Sponsor and Seller
Countrywide Home Loans Servicing LP
Master Servicer
CWABS Asset-Backed Certificates Trust 2007-12
Issuing Entity
Asset-Backed Certificates, Series 2007-12
You obviously have no clue as to what you are pumping!
Go on, explain how this ERISA-linked-trust is not linked by CDO swaps:
21-May-2007
Other Events, Financial Statements and Exhibits
Item 8.01. Other Events.
On May 4, 2007, CWABS, Inc. (the “Company”) entered into a Pooling and Servicing Agreement (the “Pooling and Servicing Agreement”) dated as of April 1, 2007, by and among the Company, as depositor, Countrywide Home Loans, Inc. (“CHL”), as a seller, Park Monaco Inc., as a seller, Park Sienna LLC, as a seller, Countrywide Home Loans Servicing LP, as master servicer, The Bank of New York, as trustee (the “Trustee”), and The Bank of New York Trust Company, N.A., as co-trustee, providing for the issuance of the Company’s Asset-Backed Certificates, Series 2007-7 (the “Certificates”). The Certificates were issued on May 4, 2007. Capitalized terms used but not otherwise defined herein shall have the respective meanings assigned to them in the Pooling and Servicing Agreement.
The tables annexed as Exhibit 99.1 hereto describe characteristics of the Initial Mortgage Loans as of the Initial Cut-off Date. All percentages set forth below have been calculated based on the principal balance of the Initial Mortgage Loans as of the Initial Cut-off Date. The sum of the columns may not equal the respective totals due to rounding.
On May 4, 2007, CHL entered into an interest rate swap contract (the “Swap Contract”), dated as of May 4, 2007, as evidenced by a Confirmation (the “Swap Contract Confirmation”) between CHL and BNP Paribas (the “Swap Counterparty”). The Swap Contract Confirmation is annexed hereto as Exhibit 99.2.
On May 4, 2007, the Swap Counterparty and the Trustee, in its capacity as the Swap Contract Administrator and as the Corridor Contract Administrator, each as defined below, entered into an ISDA Master Agreement (the “ISDA Master Agreement”), dated as of May 4, 2007. The ISDA Master Agreement is annexed hereto as Exhibit 99.3.
On May 4, 2007, the Swap Counterparty and the Trustee, in its capacity as the Swap Contract Administrator and as the Corridor Contract Administrator, entered into a schedule to the ISDA Master Agreement (the “Schedule”), dated as of May 4, 2007. The Schedule is annexed hereto as Exhibit 99.4.
On May 4, 2007, the Swap Counterparty and the Trustee, in its capacity as the Swap Contract Administrator and as the Corridor Contract Administrator, entered into an ISDA Credit Support Annex (the “Credit Support Annex”), dated as of May 4, 2007. The Credit Support Annex is annexed hereto as Exhibit 99.5.
On May 4, 2007, CHL entered into a Swap Contract Assignment Agreement (the “Swap Contract Assignment Agreement”), dated as of May 4, 2007, by and among CHL, The Bank of New York, as Swap Contract Administrator for the Trust and the Swap Counterparty, pursuant to which CHL assigned all of its rights and delegated all of its duties and obligations under the Swap Contract to the Swap Contract Administrator. The Swap Contract Assignment Agreement is annexed hereto as Exhibit 99.6.
——————————————————————————–
On May 4, 2007, CHL entered into a Swap Contract Administration Agreement (the “Swap Contract Administration Agreement”), dated as of May 4, 2007, by and among CHL and The Bank of New York, as Swap Contract Administrator (in such capacity, the “Swap Contract Administrator”) and as Trustee, under the Pooling and Servicing Agreement. The Swap Contract Administration Agreement is annexed hereto as Exhibit 99.7.
On May 4, 2007, CHL entered into an interest rate corridor contract with respect to the Class 1-A Certificates (the “Class 1-A Corridor Contract”), dated as of May 4, 2007, as evidenced by a Confirmation (the “Class 1-A Corridor Contract Confirmation”) between CHL and BNP Paribas (the “Corridor Contract Counterparty”). The Class 1-A Corridor Contract Confirmation is annexed hereto as Exhibit 99.8.
On May 4, 2007, CHL entered into an interest rate corridor contract with respect to the Class 2-A Certificates (the “Class 2-A Corridor Contract”), dated as of May 4, 2007, as evidenced by a Confirmation (the “Class 2-A Corridor Contract Confirmation”) between CHL and the Corridor Contract Counterparty. The Class 2-A Corridor Contract Confirmation is annexed hereto as Exhibit 99.9.
On May 4, 2007, CHL entered into an interest rate corridor contract with respect to the Floating Rate Subordinate Certificates (the “Floating Rate Subordinate Corridor Contract”), dated as of May 4, 2007, as evidenced by a Confirmation (the “Floating Rate Subordinate Corridor Contract Confirmation”) between CHL and the Corridor Contract Counterparty. The Floating Rate Subordinate Corridor Contract Confirmation is annexed hereto as Exhibit 99.10.
On May 4, 2007, CHL entered into a Corridor Contract Assignment Agreement (the “Corridor Contract Assignment Agreement”), dated as of May 4, 2007, by and among CHL, The Bank of New York, as Corridor Contract Administrator for the Trust and the Corridor Counterparty, pursuant to which CHL assigned all of its rights and delegated all of its duties and obligations under the Class 1-A Corridor Contract, the Class 2-A Corridor Contract and the Floating Rate Subordinate Corridor Contract to the Corridor Contract Administrator. The Corridor Contract Assignment Agreement is annexed hereto as Exhibit 99.11.
On May 4, 2007, CHL entered into a Corridor Contract Administration Agreement (the “Corridor Contract Administration Agreement”), dated as of May 4, 2007, by and among CHL and The Bank of New York, as Corridor Contract Administrator (in such capacity, the “Corridor Contract Administrator”) and as Trustee, under the Pooling and Servicing Agreement. The Corridor Contract Administration Agreement is annexed hereto as Exhibit 99.12.
On May 4, 2007, the Company obtained a mortgage insurance policy issued by United Guaranty Mortgage Indemnity Company covering certain of the Mortgage Loans. The mortgage insurance policy and the related endorsements (collectively, the “United Guaranty Mortgage Insurance Policy”) are annexed hereto as Exhibit 99.13.
——————————————————————————–
On May 4, 2007, the Company obtained a mortgage insurance policy issued by Mortgage Guaranty Insurance Corporation covering certain of the Mortgage Loans. The mortgage insurance policy and the related endorsements (collectively, the “MGIC Mortgage Insurance Policy”) are annexed hereto as Exhibit 99.14.
I dare yah!
The question related to ERISA accts, is the availability of pension cash which is used in derivative swaps; perhaps suggesting it is collateral is technically wrong, but then in regard to swaps, what percent of pension assets is exempt to be used as swap bait, i.e., how often do banks use pensions in derivative swaps……and how safe are these funds. I plan to ask people like Galvin:
Ual Corp/DE · 11-K · For 12/31/06
SEC FORM 11-K
United Airlines Pilot Directed Account Plan
Benefits Administration — WHQHR
United Air Lines, Inc.
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
AS OF DECEMBER 31, 2006 AND 2005
(In millions)
4. DERIVATIVE FINANCIAL INSTRUMENTS
The Plan allows certain investment managers to reduce the funds’ exposure to foreign currency fluctuations through the use of foreign currency forwards, options and credit derivatives. The Plan authorizes certain investment managers to earn equity returns on the funds’ cash position through equity index future contracts. Additionally, other investment managers use interest rate futures and money market futures to replicate government bond positions and manage interest rate exposure. Credit default swaps may be used by investment managers to effectively increase or decrease their exposure to individual corporate bond issues or baskets of corporate bond issues. They may also be used to effectively replicate corporate bond positions and manage overall credit risk. The Plan prohibits investment managers from being a party to any leveraged derivatives. All derivative positions are stated at fair value as determined by exchange quoted market prices or through other valuation techniques.
5. EXEMPT PARTY-IN-INTEREST TRANSACTIONS
The Plan holds investments managed by Russell. Russell is the trustee as defined by the Plan, and, therefore, these transactions qualify as party-in-interest transactions. Total fees and commissions paid by the Plan to Russell for plan year 2006 totaled $13,513,948.
The Plan invested in shares of UAL common stock. UAL is the parent company of United and, as such, investment activity related to the UAL common stock qualifies as exempt party-in-interest transactions.
Re: RECONCILIATION OF SCHEDULE H, LINE 4i—SCHEDULE OF ASSETS (HELD AT END OF YEAR)
TO NET ASSETS AVAILABLE FOR BENEFITS
AS OF DECEMBER 31, 2006
(In millions)
Re: alue of Interest in Registered Investment Companies Total
$
540,861,661.19
$
564,194,568.25
Grand Total
$
2,498,493,192.76
$
2,827,903,367.62
COUNTRYWIDE FINL CORP MEDIUM TERM NTS BOTRANCHE # TR 00059 5.5 DUE 08-15-2007
$
10,000.00
$
10,008.15
CWABS INC SER 2005-17 CL 1AF1 FLT RT 06-25-2025 REG
$
326,621.30
$
326,786.90
There’s more fallout from the subprime mortgage debacle. The NewsVisual article on Freddie Mac http://www.newsvisual.com/newsvisual/2007/11/knowledge-map-s.html talks about the company’s plan to issue $5 billion in preferred stock in order to raise capital the company requires to offset its huge losses in the subprime market.