In light of surveillance process changes and the continued deterioration in the mortgage market, Standard & Poor’s expects negative rating actions on rated RMBS transactions to continue.
In February 2009, Standard & Poor’s Ratings Services announced that, in the interest of enhancing transparency, we would review our surveillance criteria for rated U.S. residential mortgage-backed securities (RMBS) and issue a series of publications to explain our criteria for rating transactions backed by various types of mortgage collateral.
By applying updated criteria and the assumptions in other previously published criteria, S&P has taken more than
125,000 rating actions.
These actions have yielded approximately 204 upgrades, approximately 53,000 downgrades, and more than 72,000 affirmations.
S&P said it will continue to prioritize surveillance reviews based on a number of relevant indicators, including:
- Criteria changes for recent vintages;
- The amount of time since we previously reviewed a class (for older transactions);
- The CreditWatch status of a particular transaction or class;
- Whether a rated class has experienced a principal write-down; and
- The dependence of a class or rating on a bond insurer.
For details, see Standard & Poor’s Provides Update On U.S. RMBS Surveillance Process
Contrary to expectations, the international financial crisis appears to have had a positive impact not only on the popularity of many Latin American governments but also attitudes towards democracy.
Guest Post by Oxford Analytica
In its latest report, the UN Economic Commission for Latin America and the Caribbean (ECLAC) estimates that, after six years of uninterrupted growth, the region’s GDP contracted 1.8% in 2009. This compares to a 0.8% contraction in 2002, the last recession in Latin America and the Caribbean (LAC).
However, the impact of the international financial crisis has been muted compared to 2002:
- Unemployment reached an estimated 8.3% in 2009. However, this remains below its level in 2006 and compares positively with the rate of seen in 2002 and 2003.
- In an earlier report, ECLAC estimated that LAC’s poverty rate would reach 34.1% in 2009. However, it also indicated that this increase was smaller than would have been anticipated on the basis of previous crises.
- Recovery in the second half of 2009 has been faster than expected and ECLAC now anticipates that regional GDP will expand 4.1% in 2010.
This better-than-feared economic performance is also apparent in perceptions as measured in the latest Latinobarometro annual poll. Taken in late September and October, it found that the percentage of Latin Americans with a negative perception of the economic situation had risen to 40%, from 35% in 2008, but showed a smaller increase than in 2008. Moreover, despite the crisis, the percentage that considers their country to be progressing increased to 36%, from 33% in 2008. However, the poll found wide variations between countries.
Nonetheless, in one of the key challenges for consumer demand recovery, fear of unemployment remains strong. This is in line with ECLAC’s forecast of only small drop in unemployment, probably to around 8.0%, in 2010.
In comparison to the previous recession, the 2009 economic contraction clearly was exogenous to LAC. Moreover, thanks to better macroeconomic and, particularly, fiscal management, many governments were able to take significant measures to mitigate its impact, with results that are reflected in public attitudes:
- Approval ratings. According to Latinobarometro, 48% of Latin Americans approve of their government’s response to the crisis. As a result, the popularity of many of the region’s presidents has increased.
- Election results. The economic downturn has not produced a clear shift in power. Three of the six presidential elections that took place in 2009 were won by the incumbent. Moreover, according to Latinobarometro, the changes of government that took place were the result of political, rather than economic, factors.
Counter-cyclical fiscal policies appear to have increased confidence in the ability of the state to solve problems. However, this does not mean that they have become more statist:
- The percentage that considers a market economy best for their country increased from 52% in 2008 to 59% in 2009.
- In 2009, 61% considered private companies essential for a country’s development.
Similarly, trust in and satisfaction with democracy increased in 2009, though there are wide variations between countries:
- In the latest Latinobarometro poll, 59% identified democracy as preferable to any other form of government.
- In a question included for the first time, 54% stated that democratic governments are best prepared to manage economic crisis while 62 agreed that, in democracy, the economic system generally works well.
- The largest increase was in satisfaction with democracy, reflecting satisfaction with handling of the economic crisis.
Many Latin Americans are relieved that 2009 was not worse and grateful for their governments’ ability to mitigate the effects of the crisis.
However, beyond economic rebound expected in 2010, governments will face the challenge of delivering a level of growth that satisfies expectations of a better future.
McKinsey makes the case for a “bad bank” solution to dealing with toxic assets in a new paper. However, the choices entailed are not straightforward.
McKinsey notes that after two years, the fallout from the financial crisis continues to afflict most banks, particularly those with significant levels of illiquid and difficult-to-sell securities—the so-called toxic assets, and especially collateralized mortgage obligations (CMOs), collateralized debt obligations (CDOs), and collateralized loan obligations (CLOs) With these assets still on the balance sheet, banks are finding it difficult to raise funds from wholesale markets or capital from equity investors. Short-term funding spreads are slowly returning to precrisis levels, but they are still well above the levels seen in the early part of this decade—this despite the still-significant support (including quantitative easing, repurchase programs, loan guarantees, liberalized collateral requirements, and so on) from the central banks.
Finding funds will soon get more difficult. Regulators are preparing new capital requirements and other changes that will impose fearsome new burdens on banks.
In response, banks are pursuing several channels. Most obviously, they are getting out of capital-intensive and structured businesses—in a word, deleveraging. They are pulling back from international operations to concentrate on domestic business. And they are dramatically overhauling their risk functions. All these steps are necessary and proper—but they may be insufficient. Capital is still scarce. Banks are still overleveraged, and unsalable assets still carry too much risk. Confidence is still wanting; so long as the illiquid assets sit on banks’ shelves, investors will be wary.
Hence the return of the bad bank. Dividing in two can help stricken institutions ring-fence their core businesses and keep them separate from the contamination of toxic assets. The separation allows the bank to lower its risk and to deleverage as first steps toward creating a sound business model for the future. A more efficient and focused management with clear incentives for portfolio reduction can maximize the value of bad assets. And the clear separation of good from bad can help banks regain the trust of investors, by providing more transparency into the core business and lowering investors’ “monitoring costs.” All these benefits do not, however, come for free: there are still economic losses and risks on the balance sheet that must be shared between the good-bank and bad-bank investors.
In sorting through the various structures banks are using today, we have identified five sets of choices that go a long way toward determining the bad bank’s structure and operations and eventual success. The paper explores each of these five variables here.
A new paper from the International Monetary Fund (not official policy) looks at the impact of lobbying by financial institutions.
Excerpts from A Fistful of Dollars: Lobbying and the Financial Crisis
- We show that lenders that lobby more intensively on these specific issues have (i) more lax lending standards measured by loan-to-income ratio, (ii) greater tendency to securitize, and (iii) faster growing mortgage loan portfolios.
- Ex post, delinquency rates are higher in areas in which lobbying lenders’ mortgage lending grew faster, and, during key events of the crisis, these lenders experienced negative abnormal stock returns.
- These findings seem to be consistent with a moral hazard interpretation whereby financial intermediaries lobby to obtain private benefits, making loans under less stringent terms. Moral hazard could emerge because they expect to be bailed out when losses amount during a financial crisis or because they privilege short-term gains over long-term profits. Under such an interpretation, specialized rent-seeking and short-termism might justify reining in lobbying activities or public oversight of optimal contracts in the financial industry.
Yet, it cannot be ruled out that lenders lobby to inform the policymaker and shocks out of their control lead to riskier lending and undesirable outcomes.
Under this interpretation, lobbying by the financial industry can be an integral part of informed policymaking. With the caveat that empirical evidence cannot single out one interpretation as the true explanation, our analysis suggests that the political influence of the financial industry can be a source of systemic risk. Therefore, it provides some support to the view that the prevention of future crises might require weakening political influence of the financial industry or closer monitoring of lobbying activities to understand the incentives behind better.
The annual rate of decline in U.S. home prices improved for the ninth straight month in October, according to the S&P/Case-Shiller Home Price Indices. However, monthly returns flattened out in most markets.
The annual returns of the 10-City and 20-City Composite Home Price Indices, declined 6.4% and 7.3%, respectively, in October compared to the same month last year. All 20 metro areas and both Composites showed an improvement in the annual rates of decline with October’s readings compared to September.
The turn-around in home prices seen in the Spring and Summer has faded with only seven of the 20 cities seeing month-to-month gains, although all 20 continue to show improvements on a year-over-year basis. All in all, this report should be described as flat. – David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s.
“Coming after a series of solid gains, these data are likely to spark worries that home prices are about to take a second dip. Before jumping to conclusions, recognize that the one time that happened at the beginning of the 1980s, Fed policy saw dramatic reversals, which is very different from the stable and consistent Fed policy we have today. Further, sales of existing homes – those included in the S&P/Case-Shiller Home Price Indices – have been very strong in recent months, working off the inventories of houses for sale. At the same time, housing starts remain weak, fears that the market will be swamped by a wave of foreclosures are heard and government programs aimed at the housing market will expire in the first half of 2010.”
As of October 2009, average home prices across the United States are at similar levels to where they were in the autumn of 2003. From the peak in the second quarter of 2006 through the trough in April 2009, the 10-City Composite is down 33.5% and the 20-City Composite is down 32.6%. With the relative improvement of the past few months, the peak-to-date figures through October 2009 are -29.8% and -29.0%, respectively.
The level of exchange rates and exchange rate volatility are having a large, and growing, negative effect on profits and investment decision making, according to a McKinsey survey of global executives.
Some 21 percent of respondents report that exchange rate uncertainty has reduced their planned investment over the next two years. And 29 percent of respondents report that exchange rates have an “extremely” or “very” significant effect on company profits.
However, Mckinsey’s research finds that reserve currency status has two benefits. The first benefit is seigniorage revenue—the effective interest-free loan generated by issuing additional currency to nonresidents that hold U.S. notes and coins—that generates an estimated $10 billion. The second benefit is that the United States can raise capital more cheaply due to large purchases of U.S. Treasury securities by foreign governments and government agencies. “We estimate that these purchases have reduced the U.S. borrowing rate by 50 to 60 basis points in recent years, generating a financial benefit of $90 billion.”
The major cost is that the dollar exchange rate is an estimated 5 to 10 percent higher than it would otherwise be because the reserve currency is a magnet to the world’s official reserves and liquid assets. This harms the competitiveness of U.S. exporting companies and companies that compete with imports, imposing a net cost of an estimated $30 billion to $60 billion.
This raises an interesting question, McKinsey says. “Mindful of the only modest benefits of reserve currency status, will the United States continue to prioritize its domestic growth and jobs agenda over its implicit responsibility to maintain global financial stability, causing greater volatility that threatens the competitiveness of economies and corporations? MGI’s analysis suggests that the United States may not be inclined to tighten its fiscal and monetary policy to safeguard its dominant reserve currency position, even if it perceives that status to be at genuine risk.”
And yet MGI finds that there is no realistic prospect of a near-term successor to the dollar. Although the euro is already a secondary reserve currency, MGI finds that the eurozone has little incentive to push for the euro to become a more prominent reserve currency over the next decade.
The full paper is available here (free with registration).
Guest Post by Oxford Analytica
Delegates on December 7-18 met in Copenhagen for the 15th Conference of Parties to the UN Framework Convention on Climate Change (COP-15). Hopes were set high that the meeting might produce a significant global agreement on climate change, which addressed specific emissions commitments from the key emitting countries — including the United States, China, and India. Delegates and heads of state failed to produce this. Instead, a small group of key countries agreed on a ‘Copenhagen Accord’, which establishes consensus on specific provisions.
Farcical conference. The conference itself was a self-parody of the logistical and negotiating impotence of international meetings:
- Tens of thousands of observer delegates were left standing in freezing weather and subsequently locked out of the conference centre for the final days.
- Leaked texts, such as a draft from host country Denmark in the first week, clearly were not vetted well beforehand and several times caused melodramatic walkouts and posturing from many sides.
- Damage control for several such mistakes cannibalised valuable days from talks; this approach to delicate negotiations slowed progress considerably.
Copenhagen Accord. As such, when heads of state arrived in the final two days of the conference, they had almost no agreed text to work with. Many ministers and then even heads of state began negotiating directly and at length with each other, seeking to find consensus on even a few topics to avoid abject failure. Such efforts to a small extent paid off, as negotiations among a small group of key emitters (in particular the United States, China, India, Brazil) produced a skeletal Copenhagen Accord, which, while not the broad agreement that had been sought, represents several notable points of progress:
Global warming threshold. The agreement sets forth a consensus global warming threshold of two-degrees Celsius, which represents the point at which risks of climate change are judged to become unreasonably high, is a fundamental element in establishing what global emissions levels might have to be over the next decades.
International monitoring and verification. The agreement establishes the principle of international monitoring and verification of actions taken at national level. This element, while seemingly somewhat technical, was a key point of disagreement between the United States and China both during negotiations and for months before.
The consensus is that an eventual treaty should enable countries to make a commitment to specific quantitative targets, which they then implement fully and independently via domestic actions.
Progress on this, which Obama pursued vigorously, will be helpful in the US congressional debate on climate legislation that is expected in early 2010. At this stage, the administration can point to the existence of an agreement on monitoring and verification of commitments to assuage — at least partly — congressional concerns about potential free-ridership of other large emitters.
Unaddressed points. However, despite small successes, the Accord does not address a number of points that had been expected. In particular, it does not:
- set a goal for global emissions reductions by 2050;
- give details on international carbon market mechanisms, such as much-needed reform of the Clean Development Mechanism, beyond;
- specify mechanisms for technology transfer;
- specify procedures for reducing deforestation in tropical countries; and/or
- set out a timeline for concluding a larger treaty
Some of these areas by most accounts were close to consensus even before the Copenhagen conference began. Therefore, lack of agreement underscores the unfortunate consequences of the ‘all or nothing’ approach that seems to have infected negotiations especially in the early days.
Outlook. The Copenhagen meeting on climate change was a fiasco that only the determination of ministers and heads of state in final days rescued. This is noteworthy in that it underscores the priority accorded to international climate policy. The Copenhagen Accord falls far short of a broad agreement, but it provides the basis for future negotiations and potentially progress in US domestic legislation.
Guest Post by Ben Lando of OilPrice.com
What was once considered a pipe-dream could become reality: after decades of dictatorship, war and international sanctions, Iraq’s massive oil reserves are set to be tapped properly and the country once known for two overflowing rivers could be crowned oil king.
If the seven oil projects awarded to foreign oil companies this weekend, and the three from an auction earlier this year, develop as planned, within eight years, Iraq will see its oil production capacity leap to more than 12 million barrels per day (bpd). “We think it is a big victory for Iraq to be able to be a leader in the world,” Iraqi Oil Minister, Hussain al-Shahristani, said after the auction.
Saudi Arabia, the world’s largest producer at 8.18 million bpd, has a capacity of just over 11 million bpd today, after slower demand growth halted plans to expand to 12.5 million bpd by the end of this year.
Iraq – behind Saudi Arabia and Iran – has the world’s third largest proven oil reserves, with potentially more remaining to be found. Currently, however, its 115 billion barrels below ground pump at just 2.4 million bpd, with production hampered by political, structural and security problems that could moot the enthusiasm from this weekend’s auction.
Out of the 10 oil projects on offer during the two-day auction, seven were awarded to a dozen companies. Three fields up for grabs in a June 30 auction were awarded, with one deal already finalized. And there are more than 60 fields discovered but not yet developed. These include two that the ministry is negotiating directly with foreign companies outside of an auction process.
Currently, Iraq relies on oil revenue for 95 percent of its revenue. This will increase if the fields develop as planned. Only after, however, Iraq reimburses companies for their investment and pays them a relatively small fee per barrel of increased output.
But this is Iraq, where, aside from this weekend’s bidding round, it seems nothing goes according to schedule.
Since late 2006, a new oil law to replace current oil governance – an often vague and conflicting mix of the 2005 Constitution and laws left from previous eras – has been delayed by political squabbles. Laws reestablishing the national oil company, reorganizing the oil ministry and formalizing revenue redistribution, are also languishing.
Iraq’s Kurds, who favor heavy decentralization, and nationalist Arabs, who want strong state control, have both questioned Shahristani’s oil deals. Some have called them illegal.
In press conferences and speeches before the auction, both Prime Minister Nouri al-Maliki and Oil Minister Shahristani, reiterated the government’s pledge that the deals would remain valid – no matter what happens in the March 7 national election.
Legal cover has been as much of a concern to foreign oil companies as physical security. Three days before the first field was put on the block, five bombs killed more than 120 people. Iraq’s northern export pipeline was offline for a week, during both October and November, due to sabotage.
“The contract specifies very clearly the responsibilities of the companies and the security for the fields is the responsibility of the Iraqi government but if the oil companies require specific security for their personnel or their activities, that is their responsibility,” said Shahristani.
“We will make necessary precautions to deal with it,” said Torgeir Kydland, the senior vice president for Iraq at Statoil, the Norwegian firm which partnered with Russia’s Lukoil to increase production at the West Qurna-Phase 2 project from nearly nothing now to 1.8 million bpd.
That additional crude, however, now needs somewhere to go. And throughout the value chain, there are missing links. Iraq needs to upgrade refineries, build more storage units, and create a larger capacity transport infrastructure. Following wars and sanctions, everything needs repair and modern technology.
Iraq cannot export much more than it does already; depending on which segment of the pipeline system, either repairs have not been made or an increase in oil flow risks all-out rupture.
“The amount of work required for the infrastructure to handle such a massive production and to transport it and to export it is huge,” said Shahristani. He said a pipeline and export master plan will be completed soon after assessing the needs of the fields awarded for development.
“There will be another port there and also a network of pipelines extended from the north of Iraq to the south and from the east to the west of Iraq to export oil from different areas,” he said. Such a move will diversify recipients, increase delivery to those already served, and allow it to separate the different qualities of crude instead of selling it as a concoction of one.
And when it makes significant gains in production, it will have to find its place within OPEC’s quota system, which Iraq – a founding member – has been excused from because capacity was cut by wars and sanctions. Shahristani said the 12 million bpd target will merely be Iraq’s capacity, and that actual output will be based on market demands and aligned with OPEC. There is language in the contracts that compensates foreign companies if production is reduced, he said.
Iraq is considered by Transparency International as one of the most corrupt countries in the world. And the influx of potentially hundreds of billion dollars of foreign investment into an as yet unproven government of struggling institutions is a volatile concoction producing in other developing yet resource-rich nations what has come to be known as the “resource curse.”
That is, when oil revenues aren’t used to benefit the citizens of the producing country but, rather, the elite. Investor companies are often enablers if not complicit, and their home nations approving.
The result is a populace lacking basic services and a polluted environment that soon turns into violence, destabilizing both oil operations and government. The resource curse in Iraq, however, is not inevitable. And although history is a bad indicator, in Iraq and in most oil producers, such a trend can be slowed and reversed.
“That’s why we’re glad it’s not coming on line all in one day,” said a senior U.S. official. The ministry’s Inspector General’s office is considered to be both progressive and aggressive.
The companies are expected to reach an initial agreement with the ministry by the end of the year.
“They will give us a work plan about the numbers of the fields to be developed, the expected costs, the invested money, and the number of the workers,” said Shahristani.
This is then followed by Cabinet approval and the final signing. Thirty days later the companies must pay the signature bonus, which is no less than $100 million, depending on the field. And it’s non-recoverable, as opposed to the first round where the much larger signing bonus was given as a loan.
OilPrice.com focuses on Fossil Fuels, Alternative Energy, Metals, Oil Prices and Geopolitics.
The number of global corporate debt issuers poised for downgrades continued its decline this month to 824 issuers from 869 issuers last month, according to Standard & Poor’s. This is the lowest tally in the last 14 months. This decrease is largely because of an increase in the number of companies downgraded and assigned stable outlooks.
Potential downgrades are defined as entities that have either a negative outlook or ratings on CreditWatch with negative implications across rating categories ‘AAA’ to ‘B-’. This month, we note the following key points:
- The automotive and media and entertainment sectors showed the largest change in negative bias, narrowing 4% each since last month.
- Consumer products and retail and restaurants followed a similar trend, with a 3% decline in negative bias over last month.
- Although there were downgrades in all sectors, banks displayed the highest downgrade propensity, closely followed by media and entertainment, insurance, consumer products, and utilities.
For details see Credit Trends: Downgrade Potential Across Credit Grades And Sectors. (Premium)
Morgan Stanley expects single-digit gains in global developed equity markets in 2010, as well as a bounce in the dollar and uneven credit markets.
Highlights from Morgan Stanley’s Global Macro Preview 2010:
- Global GDP growth of 4% with 2% in G-20 countries and 6.5% in emerging economies.
- Credit markets to outperform risk-free interest rates as risk diminishes
- US and Canadian Dollars to rally as Pound and yen weaken.
- Single-digit gains for developed country equities.
- Overweight Japan and Asia, neutral North America and underweight UK and Europe.
- Crude oil may rise, gold well supported, corn has 15% potential upside.
The full 76-page report is available here.