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U.S. Watchdog Warns Distress in Junk Bonds Could Spread

Submitted by jhartgen@abi.org on Wed, 2015-12-16 00:00

A U.S. financial watchdog warned that distress in the junk-bond market could spread to other parts of the financial system, a finding likely to raise eyebrows during a period of market volatility, the Wall Street Journal reported today. The U.S. Office of Financial Research in a report yesterday found that “elevated and rising credit risks” among nonfinancial businesses and emerging-market borrowers, and it said that a significant shock that further impairs credit quality “could potentially threaten U.S. financial stability.” The agency’s first-annual financial stability report pointed to a long period of increased borrowing by U.S. companies, in many cases at borrower-friendly terms that include fewer protections for lenders if borrowers get in trouble. Also, 2015 is set to be a record year for corporate debt issuance, and the ratio of that debt to gross domestic product is at its highest level since the financial crisis, the OFR report said.

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Finance and Banking

Investment Banking

Stone Lion Capital Partners Suspends Redemptions in Credit Hedge Funds

Submitted by jhartgen@abi.org on Tue, 2015-12-15 00:00

Stone Lion Capital Partners L.P. said that it suspended redemptions in its credit hedge funds after many investors asked for their money back, the Wall Street Journal reported today. The move, nearly unprecedented in the hedge-fund industry since the financial crisis, is the latest example of the sudden crunch facing traders across Wall Street looking to sell beaten-down positions. On Thursday, Third Avenue Management LLC stunned investors with the announcement that it was barring withdrawals while it liquidates a high-yield bond mutual fund, a move that intensified a selloff sweeping the junk-bond world. Stone Lion, founded in 2008 by Bear Stearns & Co. Inc. veterans Gregory Hanley and Alan Mintz, is in a similar malaise, facing heavy losses on so-called distressed investments including junk bonds, post reorganization equities and other special situations.

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Finance and Banking

Investment Banking

U.S. Banks Said to Hold $10tn of ‘Risky’ Trades

Submitted by ckanon@abi.org on Wed, 2015-11-11 00:00

The repeal of part of the Dodd-Frank financial reforms has left big U.S. banks holding ten trillion dollars of “risky” derivatives trades on their books, the Financial Times reported yesterday. Senator Elizabeth Warren said that the repeal, which sparked a firestorm when it was slipped into a budget bill in December 2014, had left federally insured banks exposed to dangerous swaps trades. The rollback of the relevant rule, which followed almost no congressional debate, sparked stinging criticism of Wall Street and cemented perceptions of the pernicious influence of bank lobbyists on Capitol Hill. The rule would have required banks to “push out” swaps trades to entities that are not insured with taxpayer funds. On Tuesday, Sen. Warren cited figures from bank regulators indicating that about $10tn of those contracts remained on banks’ books, the first such estimates. Sheila Bair, former chair of the Federal Deposit Insurance Corp. and now president of Washington College in Maryland has stated that the swaps repeal was a “classic backroom deal.” “There’s no way this would have passed muster if people had openly debated it, so [the banks] had to sneak it on to a must-pass funding bill,” Bair said. “For an industry that purports to want to regain public trust, it was an extraordinary thing to do.”

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Finance and Banking

Investment Banking

Wednesday, November 11, 2015 - 12:00

Credit Suisse, Goldman Said Mulling Plan to Promote CDS Clearing

Submitted by ckanon@abi.org on Tue, 2015-11-10 00:00

Two of Wall Street’s biggest credit-default swaps dealers are considering plans that could help revive trading in a key part of the market — just as an increase in corporate failures is boosting demand for loss insurance, BloombergBusiness reported today. Credit Suisse Group AG and Goldman Sachs Group Inc. may offer better pricing to clients that agree to settle their transactions through a clearinghouse, which can lower the cost of the trades for the banks. Because post-crisis regulations have left the clearing option voluntary in that part of the market, investors have had few incentives to change their practice. That’s caused dealers to increasingly pull back, with Deutsche Bank AG saying last year that it would exit most of the so-called single-name market. The moves by the dealers, which they are making separately, come amid a broader industry push to jump-start a market that’s shrunk 59 percent since the 2008 financial crisis. As part of the changes, the banks are looking to offer a narrower gap between the price at which they agree to sell credit insurance and where they’ll buy it — a difference known as the bid-ask spread. The wider the spread, the harder it is for investors to trade the contracts, and ultimately profit from the trades. Credit Suisse could start offering different pricing for cleared and uncleared swaps as early as January.

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Investment Banking

Tuesday, November 10, 2015 - 12:00

Survey: Economists Still See Fed Rate Increase in 2015

Submitted by ckanon@abi.org on Mon, 2015-11-09 00:00

Economists are taking Federal Reserve officials at their word — the first interest-rate increase will come this year, The Wall Street Journal reported yesterday. About 64 percent of respondents to The Wall Street Journal’s monthly survey of economists now say that the Fed’s Dec. 15-16 meeting will culminate with the first rate rise in nearly a decade. Just two months ago, 82 percent of economists polled thought the central bank would raise its benchmark short-term interest rate in September. But then the stock market tumbled, and an array of reports from overseas suggested the global economy was slowing down. The central bank kept rates near zero at its meeting last month, citing the risk that “global economic and financial developments may restrain economic activity” and push the inflation rate even lower. Since that meeting, however, Fed officials including Chairwoman Janet Yellen have said that they still expect the central bank’s Federal Open Market Committee to raise rates this year. Despite assurances, many investors in financial markets remain skeptical. Futures contracts in Chicago imply just a 39 percent probability that the central bank will raise rates this year, according to data from CME Group.

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Investment Banking

Monday, November 9, 2015 - 12:00

JP Morgan Ramps Up “Risky” Loan Purchases from Smaller Lenders

Submitted by ckanon@abi.org on Thu, 2015-10-08 00:00

JP Morgan Chase & Co., looking to stem falling revenue in its mortgage business as fewer Americans refinance, is increasingly buying loans from smaller lenders, a practice that competitors including Bank of America view as risky, Reuters reported yesterday. In the first half of 2015, the bank bought 62 percent of the $58 billion in home loans it added to its books, compared with 56 percent in 2014 and 37 percent in 2011. While other big banks buy mortgages from other lenders, known as correspondents, JP Morgan has racked up the biggest increase among its peers in the proportion of loans it buys from others, according to data from trade publication Inside Mortgage Finance. JP Morgan is fighting for business in what has been a shrinking market. Its willingness to buy loans from correspondent banks is a sign that banks are comfortable taking more risk in the mortgage market, nearly a decade after the housing bubble popped.

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Mortgage

Investment Banking

Thursday, October 8, 2015 - 12:00