1、Anatomy of a Credit Collapse,Confidential,Presentation to: Kellogg Business School,November 13th, 2007,The Market and Macro Economic Fallout of the Sub Prime Mess,Lehman Brothers MBS and Rates Research,Agenda,Laying the blame Underwriting practices The changing intermediation process Reaping the whi
2、rlwind The magnitude of losses The entities at risk ABCP and SIVs Will bank losses exacerbate the economic weakness?,The Altered Origination Landscape,$2.35trn Sub-Prime and Alt-A / B Mortgages,Composition of the Aggregate Mortgage Universe, $bn,_ Source: Loan Performance, Inside B&C Lending, Lehman
3、 Brothers.,1,Excess Capacity in the Origination Industry Led to Loose Underwriting Standards,Origination volumes in late 2005 / 2006 remained high despite the fall in rate incentive The share of high CLTV and lim-doc loans increased significantly Contrary to popular perception, the share of investor
4、 properties didnt change much,Origination Volumes $bn,Characteristics of Non-Agencies 1,_ Source: MBA, Loan performance and Lehman Brothers 1. Includes prime jumbo, alt-A and subprime loans.,2, Risky Lending Practices Continued,% Originations to Borrowers with Layered Risks,_ Source: Lehman Brothers
5、. Layered Risk is defined as loans with Limited Documentation, 45% DTI and 95% CLTV.,3,Helped by a Strong Housing Market,National Quarterly Home Price Appreciation (HPA), Annualized,_ Source: OFHEO.,4,Most inv-grade subordinates created in recent years have been by absorbed by CDOs The rate impact o
6、f CDO demand for borrowers was limited The more important effect was the commoditization of credit,Issuance in ABS CDOs $bn,Change in Borrowing Costs,_ Source: Lehman Brothers 1. The 2007 numbers are YTD estimates, but there should be no issuance for the rest of the year.,Securitizations Let Origina
7、tors Layoff Most of the Risk,(1),5,Unlike previous episodes, credit score has proved less important than equity Rating agency assumptions around loans with piggyback seconds were rather benign,Cumulative Non-Performers (1)at 12 WALA,Rating Agency Assumptions in 2006 (2),The Markets Underestimated th
8、e Importance of Equity as an Attribute Driving Performance,_ Cumulative non-performers include 60 day + delinquencies (OTS style) and any cum. defaults. We show numbers for 06 originations Reprint from the 2006 Securitized Conference.,6,In 2000 Orig.,In 2006 Orig.,CNP across FICO / CLTV 2006,CNP acr
9、oss FICO / CLTV 2000,Credit Score Has Become Less Relevant,12,Buyout requirements created significant problems for subprime originators In recent months, liquidity in the capital markets has dried significantly Rates for non-conforming borrowers are now 100300bp wider,Pricing of the Active ABX Indic
10、es (1),Rates Available to Borrowers (2),Originator Problems and a Highly Visible ABX Index Hastened the Inevitable,Subprime Originator Problems,BSAMs Hedge Funds and ABCP Issues,_ We show the most current ABX index pricing. We used 2007-1 as the current index through out 2007. Lehman Brothers estima
11、tes,7,CDOs the New Intermediation Technology,The ABS CDO Market Grew Dramatically in 05/06,Issuance in New ABS CDO Deals $bn,11,What Exactly Do ABS CDOs Hold?,High grade CDOs own AA/A assets while Mezzanine CDOs own BBB/BBB- assets A large part of the A exposure in high-grade CDOs is other CDO liabi
12、lities,Balance Sheets of ABS CDOs,12,The Underlying Assets in ABS CDOs Will Likely See Significant Losses,Estimated Price of the ABX Across HPA Scenarios,HPA and Losses Implied by ABX07-1 Pricing,13,Most of these Losses Will be Borne by AAA CDO Holders,Distribution of Losses by Rating,Losses on ABS
13、CDOs ($bn) 1,Even assuming sequential payments, AAA CDOs take significant losses Our projections here are lower bounds since we dont account for CDOs in CDOs (most applicable to high-grade CDOs),14,Who Owns AAA CDOs?,Estimated Holdings of AAA CDOs,Composition of Bond Insurer Portfolios,The largest h
14、olders of AAAs are bond insurers Their loss exposures in stress scenarios could be high in relation to capitalization(1),_ Source: Based on 10-Qs of AMBAC, MBIA, ACA, XLCA, FGIC and rating agency reports on bond insurers. The total capitalization of the bond insurance sector is about $18bn.,Total Po
15、rtfolio Size: $1,600bn,Total AAA ABS CDOs: $360bn,15,Who will Eat the Loss?,Aggregate Residential Mortgage Losses Can be as Much as $250bn in Stress Scenarios ,This Appears Manageable in Itself,Expected Losses Across Housing Scenarios ($bn),The Timing of Losses on Residential Mortgages ($bn),_ Sourc
16、e: Lehman Brothers Estimates.,8, the Risk Is that Large Holders of Credit Exposure Are Not Sufficiently Capitalized,Who Owns Residential Credit Exposure?,14 Family Residential Mortgages $9,000bn,9,The Largest Loan Holders Look Okay Except for MI Providers,The GSEs and commercial banks are rather wel
17、l capitalized vs. loss expectationsMI companies look susceptible there are some offsets from slowing speedsSecuritizations house most of the losses in residential mortgage,Projected Losses Across Major Sectors,_ Includes non-agency and subprime deals. Excludes any deals consolidated on balance sheet
18、s to avoid double-counting. Is the book value of equity for all entities except securities. For securities, we show the size of subordinates and equity pieces. 2006 estimates of net revenues associated with just their mortgage portfolio.,10,ABCP Conduits and SIVs,_ Source: Based on Moodys and S&P re
19、ports on ABCP conduits / SIVs. As of August 6, 2007 1. SIVs have 100bn in ABCP and 250bn in MTNs,The Various Flavors of ABCP Conduits,Multi-seller and single-seller vehicles are loan conduits In ABS CDOs about $60bn in AAAs are financed as ABCP,16,_ Source: Based on Moodys and S&P reports on ABCP co
20、nduits / SIVs. As of August 6, 2007. SIVs have 100bn in ABCP and 250bn in MTNs,What Exactly Do ABCP Vehicles Hold?,Multi-Seller Conduits (680bn),Sec-Arb Conduits (195bn),Single-Seller Conduits (190bn),SIVs (350bn),17,Concerns around ABCP Conduits and SIVs,Outstanding Balance of ABCP, $bn,Two key que
21、stionsWill CP roll in coming months?In the event CP doesnt roll, is there risk of asset sales?,_ Source: Federal Reserve. We quote the non-seasonally adjusted balance.,18,ABCP Conduits with Significant Mortgage/CDO exposure Saw Roll Problems and in Some Cases, Asset Sales,Problems have so far been c
22、oncentrated in single-seller and sec-arb conduits These vehicles have the greatest concentration of mortgages and ABS CDOs,_ Based on data from rating agency reports on ABCP conduits and the Federal Reserve. The change in balance across sectors are estimates from Lehman Brothers. Extendable vehicles
23、 usually have a market value swap provider who assumes the market risk of current loans.,Outstanding Balance in ABCP and the Liquidity Provisions,19,Asset Distribution of SIVs(1),Estimated Maturity of Liabilties(1),MTM Losses and The Lack of a Liquidity Backstop Have Made SIVs a Source of Concern,To
24、tal Assets: $350bn,_ Based on rating agency reports. MTM losses are based on spread changes from 6/30 to 10/05.,20,Buyers of Last Resort : Do Banks have Enough Balance Sheet,FOMC September Meeting Minutes “Given existing commitments to customers and the increased resistance of investors to purchasin
25、g some securitized products, banks might need to take a large volume of assets onto their balance sheets over coming weeks, including leveraged loans, asset-backed commercial paper, and some types of mortgages. Banks concerns about the implications of rapid growth in their balance sheets for their c
26、apital ratios and for their liquidity, as well as the recent deterioration in various term funding markets, might well lead banks to tighten the availability of credit to households and firms”,1,Banks are significant for credit creation,Banks are significant for Credit creation Average growth in US
27、bank financial assets over 2004-06 = $600bn Share of bank asset growth in overall (non-financial) credit growth is around 25% Asset growth at banks had slowed in the first two quarters,Large share of credit creation,_ Source: Flow of Funds Data; Only US Chartered Commercial banks. Left Panel: Share
28、of banks computed as ratio of average 3-year growth in bank financial assets versus that in domestic non-financial debt. Right panel: y-o-y growth in %,Bank asset growth had slowed,2,Banks are as significant as in the early 1990s,Banks are at least as significant in overall credit creation By sector
29、 Less significant in consumer debt Slightly less significant in corporate More significant in household mortgage debt,Banks are slightly more significant than in 1990,_ Source: Flow of Funds Left Panel: Ratio of US chartered commercial banks financial assets to total domestic non-financial debt. Rig
30、ht panel: Proportion of debt owed by various entities which rests on bank balance sheets,Less in consumer loans, more in mortgages,11,And have had to take on additional assets,Assets HY Bond/Loan pipeline not yet brought to market Liquidity puts on ABCP assets Additional assets and potential losses
31、on these are significant compared with typical asset growth / earnings,Additional assets & losses,_ Source: Lehman Brothers; Left panel: HY loans/bonds notional estimated using pipeline and league table share of US banks in 2007. ABCP notional estimated from amount of decline in ABCP and US banks sh
32、are of liquidity puts. Losses assumed at 5% of notional. Right panel: financial assets of banks from flow of funds data. Earnings from FDIC.,Not trivial,3,Capital ratios matter for asset growth,Desire to remain better than “adequately capitalized” Capital Ratios constrained growth in the early 1990s
33、 A 1 pp reduction in capital ratio slowed asset growth by 2.6%,Capital ratios matter for asset growth,_ Source: Bernanke & Lown, “The Credit Crunch”, Brookings papers on economic activity, 2:1991. . Table is only for New Jersey Banks, 2.6% figure is for banks nationwide.,6,Large banks are reasonably
34、 well capitalized,Focus on Large banks They have most of the additional exposure Their capital ratios were more affected in the early 1990s Capital ratios of large banks healthier versus history Last time we saw a significant deterioration in capital ratios was in 1990-92,But large banks have more h
35、ealthy capital ratios,_ Source: Left panel: FDIC data for all commercial banks. Right panel: Lehman Brothers Equity Research, top 30 banks by assets,Capital ratio for banking system is lower than averages,7,But effect on large banks is still significant,Banks are reasonably well capitalized to begin
36、 with, though their ratios have reduced over the past year Taking on HY/ABCP assets has two implications for ratios Increases the asset base Losses from these assets reduce capital Banks could take additional losses from mortgage exposure,Reasonably well capitalized to begin with,_ Source: Left pane
37、l: Lehman Brothers equity research, top 30 banks by assets; Right panel: HY loans/bonds notional estimated using pipeline and league table share of US banks in 2007. ABCP notional estimated from amount of decline in ABCP and US banks share of liquidity puts. Losses assumed at 5% of notional. Potenti
38、al losses from mortgage assets as estimated by the Mortgage Strategy group under a -12% HPA scenario.,Additional assets and losses,8,And could reduce asset growth appreciably,Banks would like tier-1 ratio to remain above 7.5 - 8% Immediate deterioration in ratios is significant, but not catastrophic
39、 No need to sell assets immediately; more likely a slowing in future asset growth To maintain ratios at 8%, a $250 billion reduction in asset growth is necessary,Immediate deterioration in ratios is significant,_ Source: Lehman Brothers, Lehman Brothers Equity Research. Assets/capital as of June 200
40、7 for top 30 banks. Forecast asset growth at 7.7%,And could entail a large reduction in asset growth,9,Disclaimer,Analyst Certification The views expressed in this report accurately reflect the personal views of Kurush Mistry 212-526-3173) or clients may go to https:/ Company-Specific Disclosures Le
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