Banks withstanding the Sub-prime meltdown?
Just saw UBS take a huge hit this morning and I was wondering if anyone had any insight as to why some banks are getting smeared and others aren't. I know all (or most) of the banks have been buying into the mortgage backed securities market so why are banks like Citi, ML, UBS getting hit so hard and a bank like Lehman Brothers is not?
Just wondering if anyone had any insight. I've done some research but maybe you guys have some ideas.
My understanding is that Citi, UBS, ML and Bear are more heavily leveraged in their MBS than Goldman. Lehman was also hit pretty hard, but didn't make too much (-)noise b/c the lost was "less than expected by analysts." Their emerging market revenue (over 60%) pretty much saved them from embarrassment where as Bear ( emerging mrkt rev. is only a quarter of their total). Goldman was hit hard too, but one of their deals came through last minute that saved them from the negative headline ordeal.
All in all, most banks where hit, some were saved by deals/revenue last minute and from emerging markets.
What i don't understand is how the top bankers who are so smart didn't see this coming...
Citi and ML have been the two largest CDO underwriters for the past several years, which definitely contributed to them being hit the hardest. Before a CDO deal closes, the underlying portfolio of assets (MBS, among other asset tyeps) is still being assembled ("warehoused") on the bank's balance sheet. These banks were warehousing several deals when the credit crunch hit this summer. In addition, large CDO underwriters also tended to keep more CDO debt on their books.
GS and Lehman supposedly hedged their CDO and MBS holdings much more than any of the other banks did. There has been a lot written in the press lately about how Goldman apparently saw this coming a long time ago and went net short on mortgages...
I agree to a large extent with what's been posted so far, but I also think these banks (ML especially) have been extremely conservative in their valuations and have thus sustained huge comparative writedowns so far. IMO there are huge losses yet to be incurred by the banks that have so far seemed to not have been hit (except for Goldman).
BostonChica, can you explain a bit more about "warehousing"?
Does this simply mean that they take the entire loss since it is still under their wing?
Sorry to sound like an idiot, still a student.
No worries - say ML is working on a CDO deal with an asset manager. For a typical CLO deal (for example), the target size of the portfolio would be around $500 million. The manager already has a portion of that $500mm that it would like to include in the CLO. The remaining assets are bought in the weeks leading up to, and usually up to six months after, the deal closes. ML and the asset manager would work together on selecting the loans that would go into the CLO. While assets are being purchased for the purpose of being included in the CLO, the deal is said to be ramping up. The ramped assets are held in a special purpose entity (warehouse).
The underwriter and manager enter into warehouse risk-sharing agreements before they start ramping deals. These days, underwriters have learned from the lessons of the past few months and are opening warehouses with managers on much more conservative terms (ie taking less risk on them).
I'm wondering why other banks didn't hedge their positions more... would have made a lot of sense and saved the current agony that they're facing.
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