The Donohue Company

Secretary Paulson has been able to cobble together three large banks (Citigroup, B of A and J.P. Morgan Chase) to fund a new special-purpose entity, the Master-Liquidity Enhancement Conduit (M-LEC). With $80B the M-LEC will buy commercial paper issued by structured investment vehicles (SIVs) which invested in various debt instruments. A great majority of the SIVs are “off balance sheet” entities created by the major banks. Citigroup, for example, created at least 7 SIVs: Beta, Centauri, Dorada, Sedna, Five Financial, Zeda and Vetra which are reported to have $400B in debt instruments. The M-LEC fund, which is not financed or guaranteed by the Treasury, is scheduled to begin operations by Jan. 2008. Read More »

The fractional banking system once limited the amount of loans which a bank could make to 90% of total deposits on hand. Once that limit was reached, the bank could extend no further credit. But since banks discovered they could sweep overnight deposits into their reserve accounts, and since they have been able to create “off balance sheet” structured investment vehicles (SIVs), the effectiveness of reserve requirements in limiting credit has all but evaporated. The governing Fed has looked the other way at SIVs.

These practices are widespread in the U.S., as well as in the U.K. The Northern Rock bank, the fifth largest mortgage lender in the U.K., recently experienced a run on the bank by depositors seeking to withdraw funds. Northern Rock, which had issued mortgages 3.1 times its deposit base, was forced to call on the Bank of England for a £4.0M ($6.0M) bailout. Read More »

Bill Gross – in his most recent Investment Outlook –(www.pimco.com/TopNav/Home/Default.htm) calls attention to his recent 63rd birthday (Happy Birthday, Bill) and to the fact that his approach to the market is now much simpler than that of “youthful financial engineers trained to exploit cheap money and leverage who show(ed) no fear.”

Bill’s solution to the sub-prime mortgage fallout is Read More »

Why, pray tell, would the fifth largest investment banker in the United States, Bear Stearns, register its hedge funds in the Cayman Islands? For the same reason that an estimated 75% of all global hedge funds are registered in the Caymans: to limit creditors’ access to assets in the event of failure. Read More »

Just when the investing public is becoming more risk-conscious, if not risk-averse, the Financial Accounting Standards Board (FASB) announced its intention to require all off-balance sheet leases to be moved onto the balance sheet. The change will have significant effects on the risk valuation of many real estate triple net leases, and perhaps have a considerable dampening effect on sale-leaseback transactions. Read More »

The two hedge funds at Bear Stearns which were unable to meet margin calls from creditors and requests for redemptions from investors have thrown in the towel. In a letter to its investors on July 18th, BS stated that “…there is effectively no value left for the investors in the Enhanced Leverage Fund and very little left for the investors in the High Grade Fund as of June 30, 2007.”

What is striking is the rapidity with which these funds collapsed. As of March 31 the enhanced fund had $638M of capital on hand and had borrowed $11B for additional investments. The larger funds which had $925M on hand had borrowed $9B. Thus the total at risk was more than Read More »

The most frequently used method to arrive at the value of an income property is the capitalization of income method, sometimes called the "income approach to value." Application is simplicity itself: the property’s net operating income (NOI) is divided by a desired rate of return. The result is the investment value to the investor who selected the rate. This method is also know as direct capitalization .

The net operating income is the amount of cash left after deducting all operating expenses from the collected rent. The operating expenses include all expenses required to be paid to generate the income, but the list does not include deductions for depreciation and amortization of loan fees, nor the cost of servicing any debt.

For example, a property’s annual NOI of $300,000 and capitalized at 8.0% would indicate an investment value of Read More »

The impact of the subprime mortgage meltdown is just beginning to be felt but by October it is expected that more than $100B subprimes will reset. Meanwhile the big banks involved in the subprime market are pulling out all stops to postpone what will surely be a financial crisis in the United States.

When Bear Stearns’ hedge funds collapsed, Merrill Lynch, on June 20th, took possession of an estimated $850M in assets and began to auction them off to the highest bidder. When Merrill received bids as low as 50% of the nominal value, other creditors such as JP Morgan Chase and Deutsche Bank prevailed on Merrill to stop the auction until a more orderly ‘repositioning’ could take place. To have continued, the holders of these CDOs (Collateralized Debt Obligations) would have been forced to reprice them to their present worth. Read More »

It is very probable that the failure of Bear Stearns’ two hedge funds is just the tip of a sub-prime iceberg very likely to create a major crisis in the financial markets. On Friday, after first refusing to come to the aid of its funds, Bear Stearns announced that it was lending $3.2B to its High-Grade Structured Credit Strategies Fund. The outlook for its other fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund is still in doubt.

Both hedge funds have managed a total of $20B in Collateralized Debt Obligations (CDOs), a substantial portion of which is in the form of bonds securitized by sub-prime mortgages and other forms of debt derivatives. Read More »

It’s been some years now since we discontinued using private exchange accommodators to hold exchange funds. What prompted our decision was the disappearance of a Huntington Beach (CA) escrow officer who, acting as an exchange accommodator, or Qualified Intermediary (QI), collected $10M in exchange funds and absconded to who knows where. She has never been found.

This was a painful experience for the exchange investors since they not only lost their cash but Read More »