PrefBlog

Today’s big news was the downgrade of ACA Financial by S&P, the subject of speculation on December 13. According to the S&P Press release:

The rating actions were prompted by worsening expectations for the performance of insured nonprime residential mortgage backed securities and CDOs of asset backed securities. Based upon current stress test analysis, the details of which are being published simultaneously with this release, the affected companies may experience claims and/or capital consumptive negative rating transitions such that their capital resources may no longer be sufficient at their respective rating levels. Another consideration in the analysis, if there is a capital shortfall, is the magnitude of the shortfall and the extent to which the company has raised or is planning to raise new capital, and the viability of that capital plan.
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Standard & Poor’s will host a teleconference today at 3 p.m. EST.
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Replay Numbers:
US/Canada: 1-866-455-0459
All Others: 1-203-369-1259
Replay will expire on Jan. 16, 2008

CIBC had this to say:

Following Standard and Poor’s announcement today that it had reduced the credit rating of ACA Financial Guaranty Corp. from “A” to “CCC”, CIBC confirmed that ACA is a hedge counterparty to CIBC in respect
of approximately U.S. $3.5 billion of its U.S. subprime real estate exposure.

    It is not known whether ACA will continue as a viable counterparty to CIBC. Although CIBC believes it is premature to predict the outcome, CIBC believes there is a reasonably high probability that it will incur a large charge in its financial results for the First Quarter ending January 31, 2008.

    As CIBC disclosed on page 52 of its Investor Presentation dated December 6, 2007, the mark of the hedge protection from the “A-rated” counterparty (ACA) as at October 31, 2007 was U.S. $1.71 billion. As at November 30, 2007, this mark was US$2.0 billion. If the charge in the First Quarter were to be U.S. $2.0 billion (US$1.3 billion after tax) CIBC currently projects its Tier 1 capital ratio to remain in excess of 9% as at January 31, 2008.

Exciting times for CIBC! I have previously examined their capitalization and later compared it to the other Canadian banks.

Morgan Stanley had another example of sub-prime related write-offs:

Morgan Stanley wrote down its subprime-infected mortgage holdings by a greater-than-expected $9.4 billion and received a $5 billion cash infusion from state- controlled China Investment Corp.

To put those numbers into perspective, have a look at the actual quarterly report:

Total capital as of November 30, 2007 was $193.7 billion, including $36.1 billion of common shareholders’ equity, preferred equity and junior subordinated debt issued to capital trusts. Book value per common share was $28.56, based on 1.1 billion shares outstanding.

The $36.1-billion figure is what would usually be referred to a “equity capital”, the rest is simply long-term subordinated debt.

I mentioned Bloomberg’s story about the antics at a Californian sub-prime origination office yesterday. They continue the series today with the story of Hayman Capital Partners that bet against them and made a fortune. Fascinating stuff!

Funny day today. Trading continued fast and furious – next Monday, Dec. 24, is the last day for tax loss selling – and there were some very strange moves. The market was down again – with the suddenly dubious Canadian Imperial Bank of Commerce greatly over-represented in the losers’ list.

There were forty-seven other index-included $25.00-equivalent issues trading over 10,000 shares today.

This entry was posted on Wednesday, December 19th, 2007 at 9:48 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.