After a tumultuous summer in the subprime mortgage market sapped CDO liquidity, market participants are now faced with the challenge of salvaging earnings, which includes trimming down the payroll.

Real Estate Investment Trust Luminent Mortgage Capital recently laid off 30% of its workforce, including Jim Doyle, who headed up the firm's CDO platform as well as other members of its CDO team. Doyle was hired in 2006 from Declaration Management & Research. "We are engaged in an appropriate amount of employee downsizing of approximately 30% of our workforce across the organization. These cuts will help stabilize the company's cost structure as we move forward," said a Luminent spokesperson. Calls and an e-mail to Doyle for comment were not returned by press time.

These layoffs come on the heels of a recent agreement with Arco Capital Corp. to provide Luminent with access to approximately $60 million in additional capital through repurchase agreements or secured credit arrangements. The company recently cancelled a dividend payment, announcing it has experienced a significant increase in margin calls.

Luminent also received notices of default from two repo lenders (ASR, 8/13/07). Arco was issued warrants by Luminent to purchase up to a 49% voting equity stake and a 51% economic interest in the company.

Meanwhile, there have been other recent departures in CDO land. RBS Greenwich Capital cut almost half of its 20-person CDO team, including Managing Director and Co-Head of CDOs Rick Caplan.

Also, Edward Cahill, director of Dublin-based finance firm Euro Matrix Fund, resigned as head of European CDOs at Barclays Capital on Aug. 20. He was responsible for investments in the U.S. subprime mortgage market, including structuring SIV-lite transactions that have recently suffered a liquidity crisis.

While significant layoffs have not hit banking executives at most of the major firms just yet, banks have had a hard time selling paper, which translates into lower profits. The structured market has been rampant with speculation of impending layoffs as a result.

Several dealers are expected to report August-end results in September, including Bear Stearns, Lehman Brothers and Merrill Lynch, according to a recent Barclays Capital report. Barclays predicted that some banks would be reporting worse-than-expected numbers.

Additionally, there has been a lot of talk about the effects of market illiquidity. "Panic is driving a lot of the pricing and lack of confidence is painting all assets - good and bad - with the same broad brush so that, in some cases, even good collateral cannot be sold or financed at anything approaching its true value," Christopher Mahoney, vice chairman at Moody's Investors Service, said in a recent report on illiquidity in the credit markets.

Citigroup, Lehman Brothers, and Bear Stearns were all recently downgraded to "neutral" from "buy" by Merrill Lynch analyst Guy Moszkowski, as a result of their dependence on the troubled debt markets.

Bear Stearns is likely to produce is lowest return on equity, around 7%, in the third quarter, Moszkowski said.

The rumor mill is churning out potential ousters at Merrill Lynch, which has the reputation of "overhiring and overfiring when things get dicey," as one source put it. Speculation is that layoffs would most likely be real estate related, including CRE CDOs. Merrill Lynch declined to comment but a source close to the firm said rumors about specific groups being laid off were inaccurate.

Another source expected 15% layoffs in structured finance across the board, ranging from hedge funds to major investment banks.

Slower Ratings

Rating agencies have also been a target of speculation for market participants as a result of the lack of CDO deals coming into the market as well as less market confidence in the ratings themselves. "Overall public confidence in the rating agencies is at an all-time low," said a market participant, who expected layoffs to occur at a senior level. "The people who are really going to get hit hard are the ones who allowed [the misratings] to happen, not the analysts who were just doing their jobs."

Indeed, Standard & Poor's President Kathleen Corbet recently left to "pursue other opportunities." McGraw-Hill executive Deven Sharma, who has been at S&P for the past year, will replace Corbet.

Although there is talk about potential layoffs at rating agencies in general, some market sources singled out Moody's Investors Service's CDO team as an example. Moody's currently has approximately 120 members in its U.S. CDO team, according to a source familiar with the company. "Those numbers cannot be sustained with less than five deals being rated per month," the source said.

With the heightened risk aversion, there will also be a decrease in more complex CDO structures, which have added additional liquidity to the market. This will, in turn, reduce the rating agency's ability to raise money, the source said. A Moody's spokesman declined to comment on the potential layoffs or confirm the amount of employees in the CDO group. No layoffs have yet been made.

Some market participants were more optimistic about the breadth of layoffs, expecting to see more employees shifted around internally. However, they agreed that most employees will get a lower bonus this year, if any.

For those who might be given the boot, some market players were not overly concerned.

"These are smart guys who got caught up doing some very complicated transactions. It is a good time to weed out some of the stronger candidates from weaker ones," the market participant said. "Maybe this year will not be as fruitful, but they are going to find opportunities." He cited potential placement for CDO structurers at private equity firms or hedge funds that deal in distressed portfolios.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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