Audit Roundup: Wall Street Assembly Line

Bloomberg digs into securitization; WSJ on Trump's latest woes; etc.

Bloomberg has a nice, long look at securitization (part of a series on Wall Street’s debt-making). Particularly interesting is what it reports was the role of money-market funds in funding the securities that created the crisis:

Starting around 2005, securitization began to rely more on short-term money-market funds for financing. This was especially true for securities made by pooling other bonds, known as collateralized debt obligations, or CDOs. Investors were loath to buy long-term debt of issuers that didn’t have a track record, so new issuers sold asset-backed commercial paper that matured in less than a year. While money markets are the cheapest way to finance, they can also be the most dangerous for borrowers because they can mature as soon as the next day…

Once money-market funds began to be tapped for financing, Ocampo said, “it created a huge appetite for high-yield assets, far more than could be originated on a sound basis.”

To accommodate the demand, banks funded more subprime mortgages, with an average life of seven years, replacing car loans with an average life of three years and credit-card bonds paid off within 18 months.
Among conservative lenders, that rang an alarm: Bankers are taught to avoid such mismatched funding, in which a lender has to pay back money before the borrower has to pay the principal.

“Most of the terrible things happening now are because of the presence of money-market assets, taking what used to be long-term funding and making it short-term,” Bruce Bent, 71, who started the first money-market fund in 1970, said in an interview in July.

Good stuff. I’ll just question the Pravda-esque headline: “Evil Wall Street Exports Boomed With `Fools’ Born to Buy Debt.”

The Journal is good this morning with a story about a Trump project being in big trouble. His 92-story condo and hotel tower in Chicago has sold far fewer units than it needs to break even and the market is, of course, now toast.

Most urgently, to stay current on the project’s biggest piece of debt, a $640 million senior construction loan, originated by Deutsche Bank AG, Mr. Trump must negotiate by Nov. 1 to exercise an extension provision contained in the original loan that he took out in 2005. To extend the loan, Mr. Trump must prepay additional interest charges to Deutsche Bank. Deutsche Bank declined to comment other than to say it syndicated the loan to several other banks and that its exposure is less than $50 million. Mr. Trump is confident that the extension will be agreed upon.

This is excellent context:

Mr. Trump’s challenges highlight the dangers of building very tall buildings. Because they take years to build, markets can change and leave developers in dire situations. In fact, very few supertall skyscrapers have been profitable for their original developers. The Empire State Building was dubbed the “empty state building,” when tenants didn’t move in. The Twin Towers of the World Trade Center required heavy taxpayer subsidy to stay occupied through the 1970s and 1980s.

The WSJ looks at the astonishing recent events with Volkswagen’s stock, which the mother of all “short squeezes” has artificially boosted to being the world’s second-most valuable company, just behind Exxon Mobil. The paper says the shocking rise—which more than quadrupled the price in two days—has dealt a “punishing blow” to an already wobbly hedge-fund industry.

Steven Pearlstein comes out against a bailout of the Big Three and says it needs bankruptcy restructuring.

The Journal surveys top economists to find out when the crisis will end. A better survey might ask them why they were almost all wrong, Roubini excepted, in missing the thing before it got here. Let’s face it, at this point, the economists have been discredited and you might as well ask me when the clouds will part.

The Times tosses off a story on the impending credit-card crisis, something BusinessWeek wrote three weeks ago.

Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.

This assertion could use some evidence:

The depth of the financial crisis has shocked a credit-hooked nation into rethinking its habits. Many families once content to buy now and pay later are eager to trim their reliance on credit cards.

The NYT’s David Leonhardt is good today in exploring whether stocks are cheap. Warren Buffett and John Bogle think so, but this guy, James Melcher, who predicted the bust, is not:

He went on: “In the last 20 years — and particularly in the last six or seven — you had the most massive creation of liquidity the world has ever known.” Consumers went ever deeper into debt, thanks to loose lending standards, and a shadow banking system, made up of hedge funds and investment banks, allowed Wall Street to do the same. All that debt lifted economic growth and stock returns.

“It was a nice party,” Mr. Melcher said. “The problem is that all the bills are coming due at the same time.” He thinks stocks could easily fall an additional 20 percent and maybe 35 percent before hitting bottom.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.