It is a reasonable assumption that during Thanksgiving dinner, thousands in the ABS business returned to the tradition of going around the feast table and counting their blessings.
True enough, the ABS industry had at least some reason for good cheer. Despite being forced to write off $1.8 billion ($2.6 billion) in losses as a result of the credit crunch, Barclays reportedly will expand its business in the U.S. and Asia and recruit more than 1,500 additional people to man that effort. The bank would not confirm those reports.
The public sector also provided a reason for hope. The Labor Department reported that new applications for unemployment insurance dropped by a seasonally adjusted 11,000 for the week that ended Nov. 17. That was the lowest level since the beginning of November, and some economists and credit market professionals are hopeful that it could moderate some negative expectations for consumer spending and housing.
Sure, ABS professionals will have survived the air travel trauma and mall madness that typically mark the start of the holiday season. But they return to nagging uncertainties and fresher concerns about the credit markets.
On Nov. 14, bond insurance provider ACA Capital Holdings said it would delay filing its third-quarter earnings report with the SEC. Last week, one of the company's wrapped deals, the $1 billion Lancer Funding II, reportedly defaulted.
Market professionals expect that such defaults will happen with more regularity. As one hedge fund portfolio manager noted, more than $350 billion in ARMs are due to reset in the next 12 months. If employment numbers drop and economic activity peters out, then the credit markets could potentially face another disaster.
Although the subprime MBS market has endured the most suffering since the initial shock in February, the hedge fund manager points out that delinquencies among option ARMs, Alt-A and prime mortgages are beginning to increase.
Poorly performing securities underpinned by poorly performing mortgages have already taxed liquidity providers. Now observers are calling the well-being of monoline insurers into question. Down the line, the servicers could find themselves squeezed between devalued mortgages and the costs involved in keeping such portfolios performing adequately, the hedge fund manager said. "Is 50 basis points enough to sustain profitability in servicers?" he asked. "Could we see servicer defaults?"
With the amount of resets coming next year, the market will have to confront those questions soon enough. Still, there is reason for some cheer.
Concerns about the health of the monoline insurance business fail to adequately consider that some large monoline insurers, such as Ambac and MBIA, routinely reinsure their risk, says another asset manager. "What they insure is not due on demand," he said. "All they're obligated [to insure] is interest when scheduled, and the ultimate repayment of principal."
The way he sees it, misguided devaluing of monoline companies could make their stocks attractive buys. The same goes for MBS. "Just let spreads widen and become a wasteland, then begin to pick and choose assets."
That might sound like a cold, unsentimental assessment, but who have survived several credit market upsets favor that outlook. So, ABS professionals spending the next four weeks swaying to Christmas carols, Hanukkah songs and company party beer choruses, can add this line, courtesy of a veteran analyst/investor: "There is no such thing as a bad bond, just a bad trade."
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