CDOs

While even a couple of weeks ago European loan market participants were hoping for their market (which has barely seen a drop in the way of primary issuance over the past month) to get going in September, the word is now that it will take longer, much longer than that for new loans to be structured and priced. And when fresh transactions do come, sources say they will be vastly different from the funky stuff that Europe has so recently been witness to.

A small handful of home equity loan deals, a credit card transaction and a pending auto deal kept the ABS market from coming to a complete standstill in the last couple of weeks.

About this time last year, all signs indicated that the market for structured investment vehicles (SIVs) was up and coming. In the second half of 2006, the sector had about $250 billion in debt under management. According to Moody's Investors Service, that jumped to $400 billion by a week or so ago. The rating agency estimated that SIV-lites, a less closely managed and slightly simpler version of SIVs, had about $12 billion outstanding by the same date.

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.

The subprime mortgage meltdown has had a much deeper impact on the jumbo loan market than many thought it would, leaving analysts to wonder what the best solution is for galvanizing the slumping sector. While many economists believe help will come from the Federal Reserve, some lawmakers want Fannie Mae's and Freddie Mac's loan restrictions loosened to aid the jumbo market.

When the CPDO structure was first introduced, with the launch of ABN Amro's SURF deal in August 2006, there was concern that the structures might not hold up in a volatile market, given that they are highly levered and market sensitive.

President George Bush's proposal to allow a certain segment of subprime borrowers to refinance into loans insured by the Federal Housing Administration is being seen as a measured first step to help troubled borrowers, although one that will likely only have a limited impact. The FHA modernization steps are expected to help about 240,000 homeowners refinance and avoid foreclosure, but it is considered a drop in the bucket when more than a million loans could default.

The flight to quality in the credit markets has made pricing in the area a difficult issue, and has brought buyers and sellers of risk instruments to an impasse as to the value of structured products, according to a report by Moody's Investors Service. The ratings agency says, furthermore, that this process of untangling prices could take months to work through. "Before the credit markets can resume normal functioning, the creation of a new price consensus between (and among) buyers and sellers of risk instruments will be required," says the report, which was co-authored by Vice Chairman Christopher Mahoney. This won't happen quickly, according to the report, because many capital market participants are facing inventory problems with structured finance securities such as subprime, Alt-A-related RMBS, CDOs, and certain leveraged loans. The holders of these loans are not willing to dip to bargain basement sales, and meanwhile, on the other side of the fence, the buyers won't touch the offered prices because they think prices are still erratic and could erode further. The report focuses on what's missing from the market, says Mahoney, "which is fluidity, a readiness to engage and trade." As a result, he says, he thinks a more robust secondary market will develop, as levered players will be forced to sell illiquid securities at low prices. The report is called "From Illiquidity to Liquidity: The Path Toward Credit Market Normalization." It is the first in a series of planned reports in which Moody's will discuss systemic problems revealed by the subprime meltdown.

JPMorgan Chase restructured its 17-year-old ABCP program, called Jupiter Securitization Co., not - say sources familiar with the situation - as a defensive move against the currently volatile ABCP market, but so its sellers could avail itself of accounting procedures under FAS 46.

Much of the trouble proliferating through the major indices last week could, in part, be traced back to the ABS industry. This is where fast money and high-risk structures fed a long period of growth in the housing market, which many market participants now concede was unsustainable.

Liquidity issues that destabilized the delicately balanced ABCP market in recent weeks migrated north into Canada. Similar to problems that unfolded in the U.S. ABCP market, lack of investor confidence in the debt capital and credit markets widened spreads on all types of Canadian ABCP.

(The is the second installment of a two-part series. The first installment discussed the valuation challenges presented by the current difficult supbrime mortgage environment. This installment focuses on the other valuation complications resulting from troubles in the sector. )

The upsurge in housing over the past few years has given way to an unprecedented amount of questionable activity in the mortgage market, including fraud. And while regulators have ramped up their combative efforts, fraud's growing breadth has proved to be alarming for U.S. RMBS.

The dizzying rate at which Countrywide Financial Corp.'s prospects are changing from bad to worse can make one forget that two weeks ago Washington Mutual's own struggles were sharing headlines. What a difference several days, hours and minutes make in the dramatic downturn of America's biggest mortgage lender.

U.S. RMBS trouble is brewing for Bermuda-based Taberna Capital Management.

Fannie Mae acknowledged that 2006 was a tough year for financial results on its 10-K-related conference call last Thursday, announcing that net income declined to $4.1 billion, compared with $6.3 billion in 2005.

In the shadow of an unfriendly and overhung credit market, Sallie Mae shareholders approved a buyout last week that would add as much as $16.5 billion to the leveraged finance pipeline. But don't consider the deal closed just yet. In light of government subsidy cuts, the private equity group let it be known that they may scuttle the deal altogether. Are the buyers really looking for an out, or are they making noise to help squeeze a better deal from the beleaguered student loan provider?

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Wachovia Securities 7,948.09 1 16.98 11 JP Morgan Securities Inc. 5,503.0 2 11.757 12 Banc of America Securities LLC 5,059.6 3 10.809 9 Citigroup Global Markets, Inc. 3,342.4 4 7.141 7 Credit Suisse Securities (USA) LLC 3,319.7 5 7.092 6 ABN AMRO Incorporated 2,783.0 6 5.946 5 Merrill Lynch, Pierce, Fenner & Smith Inc 2,726.4 7 5.825 5 Deutsche Bank Securities, Inc. 2,509.2 8 5.361 6 Barclays Capital 2,384.3 9 5.094 5 RBS Greenwich Capital 2,374.5 10 5.073 5 Industry Total 46,807.6 - 100.0 50 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Citigroup Global Markets 34,211.9 1 15.4 46 Merrill Lynch 31,645.6 2 14.3 38 Wachovia Securities 16,546.7 3 7.5 28 JPMorgan Securities 14,866.9 4 6.7 25 Banc of America Securities 14,629.0 5 6.6 19 Deutsche Bank Securities 13,609.7 6 6.1 29 Morgan Stanley 13,053.5 7 5.9 61 Bear Stearns 11,721.3 8 5.3 23 UBS 11,148.3 9 5.0 26 Lehman Brothers 10,594.0 10 4.8 23 Industry Total 221,972.5 - 100.0 397 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues JP Morgan Securities 15,980.0 1 27.937 26 Banc of America Securities 11,573.3 2 20.233 21 Citigroup Global Markets 9,165.0 3 16.023 13 Morgan Stanley 5,052.6 4 8.833 8 Credit Suisse 2,721.3 5 4.757 8 Deutsche Bank Securities 2,195.8 6 3.839 10 Barclays Capital 2,175.0 7 3.802 5 RBS Greenwich Capital 2,128.3 8 3.721 3 HSBC Securities 1,750.0 9 3.059 9 Wachovia Securities 1,337.5 10 2.338 4 Industry Total 57,200.3 - 100.0 87 Source: Thomson Financial