Asset-Backed Debt Gets Riskier As Crisis Eases: Moody’s

Posted on March 21, 2012 by victor.hatley

Asset-Backed debt, like car loans, student loans, and credit cards, is becoming increasingly riskier as the banking crisis eases it’s hold on the global economy, according to Moody’s. This is due in part to the loosening of the underwriting standards, structures becoming more intricate, and untested market participants.

Underwriting Requirements Easing Off

With the underwriting standards being backed off in areas such as auto loans, and other riskier ventures, the credit rating companies need to pay heed to the standards, and start assigning appropriate rating levels to these bonds. For the weaker securities, there should be features to offset the risks before the much sought after triple A rating can be assigned to the bonds in question.

Claire Robinson, the new-issue structured finance ratings head at Moody’s, and author of the report that was published, said that “We want to make sure that the credit protections that investors have keep pace with the evolution of the market.” She went on to explain that the loosening of the standards is a natural reaction to the recovery from the credit crisis, but as the credit eases, investor protections must be protected.

Credit Easing Off – But High Ratings Still Prevail

If the nature of the cycle is realized, then the credit easing will keep going on into 2012. And while originators are easing the requirements, areas like the sub-prime auto loan secularization are steadily returning to pre-recession normal levels. Loan pools backing up auto ABS are bound to start seeing more losses. But investors can offset these with the standard methods of credit enhancements, and buffers.

In spite of the ongoing recovery and Congressional scrutiny, Moody’s competitors are still issuing unwarranted AAA’s. One sub-prime transaction issued by Exeter Finance Corp received higher ratings than Moody’s would have given it…and even these high ratings didn’t agree with each other. The S&P rated the deal at AA, while DBRS rated it at AAA. On Feb 23rd the deal priced at $200 million. All the while Moody’s claimed that, “The resulting potential for volatility in asset performance makes high invest-grade ratings inappropriate.”

Other Bad Ratings – According To Moody’s

But that wasn’t the only credit ratings that were issued recently that Moody’s considers flawed. Credit card bonds sponsored by senior issuers like World Financial Network, Cabela’s, and 1st Financial wouldn’t deserve the AAA rating. Also on the list was the entry of hedge funds, investment banks, and private equity funds into the sub-prime mortgage and auto business is a large red flag.

The Good News

The good news is that the year-to-date volume is up by approximately $15 billion to $45 from the 2011 figure of about $30 billion. This puts the market on a course to complete the year over lasts years final of $125 billion. Also, at least 4 deals were up-sized this last week because of demand or over-subscriptions, and there was larger than expected bid lists, increasing trading in the secondary markets. If investors are careful, then trends are suggesting that the ABS market is set for stronger growth…the first growth of the ABS market since the onset of the crisis.

Let us know what you are thinking about these late developments. Send us a tweet to: @managedaccts.

The Greek Bailout – Two Sides Of The Coin

Posted on March 18, 2012 by victor.hatley

Last Thursday the International Monetary Fund (IMF) and the European Union (EU) announced a Greek bailout, a $171 billion affair that the IMF claimed Greece had earned in the last months by their attempts to skirt full blown bankruptcy. The investors were standing to lose more than $130 billion from the debt swap that had been initiated to ease off the public sector burdens.

Interview With The BOG Governor

With €50 billion set aside by the EU and IMF for the refunding of the banks, the Bank Of Greece’s governor, George Provopoulos said in an interview Saturday that “I believe that the available amount will not need to be fully exhausted,” then continued with “The recapitalization of the banks will be completed by September 2012.” He did state though that he expected that there would be mergers taking place in spite of the Alpha Bank’s planned shareholder meeting to discuss scrapping their merger with EFG Eurobank Ergasias, one of the largest Greek bank mergers in years.

Investors Worried Anyways

The governor is set to testify Monday at the Bank of Greece’s monetary report to discuss the banking system, the economic recovery, and the difficulties that they face in the near and mid-term future…a subject still considered up for debate. The IMF warned that the bailout would have to be managed very carefully and that it left little room for error, and that Greece was still “accident prone.” A sentiment that many investors are seemingly echoing. In the report released on Friday, the IMF staff wrote that the package relies on very ambitious privatization and fiscal goals. But, mainly n the bringing new life to the structural reforms. If policies fail, or fail to be implemented, then a second bail out could become necessary.

May Take Second Bailout

This is that part that has investors concerned. Investors worry that the bailout may not be enough, in spite of the governors statement. Investors worry that if the Greek plan goes off track that the EU may have to backstop the country’s liquidity while coming up with another plan to boost the Greek economy. As it stands now, they had to agree to massive further spending cuts in order to obtain the loans. The plan also calls for a move to private industry, away from the public enterprise, in order to make the economy more competitive globally.

The Climb of Retail Forex

Posted on March 11, 2012 by admin

One of the amazing changes in the currency markets has been the recent accent of liquidity for retail investors over the past 10 years. The Forex markets have been actively traded by the investor community since the early 1980′s mainly existing on the institutional level amongst what was known as the money center banks.

History of Forex Trading

Banks and Investment banks provided liquidity in the currency markets to treasuries of corporations. These companies would need to hedge currency exposure for a number of reasons. Corporations needed to sell profits in local currency before bringing the funds back into their home currency. This process created a market which eventually lead into speculation.

Other clients initially to the currency desks where mutual funds who would also need to purchase and sell currency when transacting in foreign equities. The creating of currency desks at financial institutions, lead to the creating of Forex trading desks at hedge funds, where investors would initiate risk on the macro direction of the a currency pair.

Currency desks would make money by market making which is the process of buying on the bid, and selling on the offer. This spread over time would generate income, as the traders hedge the majority of their risks. A good market maker, would see market flow on both sides of the market, as well as, have the capability to always transact at the mid price.

Occasionally, market makers would take risk, if they believed the market would continue to go in the direction they purchased or sold. The concept of making markets to branched off into making markets in the retail space.

At first, large financial institutions such as Chase Manhattan Bank and Duetsche Bank created online facilities which allowed some of their retail clients to transact in the currency markets. This was for speculation as well as for hedging. Eventually the process spread to a number of ECN’s and brokers who were willing to offset retail risk, by taking opposing positions in the market place.

Retail Forex

The retail space is now littered with multitudes of brokers who are active in the currency market. The majority of these retail outfits are regulated entities. In the US, having regulation is a most, and most brokers have a separate regulated entity that transacts for US citizens.

Outside the US, regulations are less onerous, but the investor is less protected. Most brokers offer a platform that facilitates transactions as well as offer a number of tools to enhance trading returns. Some brokers offer education in the currency markets, as well as charting tools and back testing software.

Many of the better brokers offer investors a demonstration account. Within these types of accounts, investors can trade demo money, and trade the markets in the same style they would trade real capital. A demonstration account, gives investors the opportunity to trade the markets and get used to the volatility and movements associated with the forex markets. Additionally, a new trader can get comfortable with how markets are quoted and which currency is a home currency and which is the counter currency.

The demo account will also allow a trader to test their skills using charting and technical analysis tools. It is much easier to paper trade a market as opposed to trading a market in real time, when quick changes occur that are not expected. A demo account, will allow a new trader to feel the “fear and greed” associated with trading and find a system that fits their risk reward profile.

The retail space in the Forex market has created a world of online investments that is even broader than the Forex markets, including indexes and commodities, which has broaden trading throughout the globe.

Retail Forex traders will often use manage forex accounts so that they do not have to learn how to trade for themselves. These accounts are owned by the investor but the trades are directed by professional managers. The key for success with managed forex accounts is to choose a company which can produce solid evidence of their trading history.

Managed Account Review

Valuable Information on Managed Forex Accounts

Tag Archives: forex