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Industry Leaders Speak Out: ABS 2009 and Beyond: Will the Market Adapt, Evolve, Survive and How?

Industry Leaders Speak Out: ABS 2009 and Beyond: Will the Market Adapt, Evolve, Survive and How?. Hollywood, Florida October 2008. Panelists. Claire J. Mezzanotte, Managing Director, DBRS, Moderator John Devaney, CEO, UNITED CAPITAL MARKETS Ed Gainor, Partner, MCKEE NELSON LLP

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Industry Leaders Speak Out: ABS 2009 and Beyond: Will the Market Adapt, Evolve, Survive and How?

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  1. Industry Leaders Speak Out: ABS 2009 and Beyond: Will the Market Adapt, Evolve, Survive and How? Hollywood, FloridaOctober 2008

  2. Panelists • Claire J. Mezzanotte, Managing Director, DBRS, Moderator • John Devaney, CEO, UNITED CAPITAL MARKETS • Ed Gainor, Partner, MCKEE NELSON LLP • Richard Johns, Vice President – Treasury, CAPITAL ONE • Andrew Peisch, Managing Director, Head of ABS Banking- Americas, DEUTSCHE BANK • Paul Colonna, Head of Fixed Income, GE ASSET MANAGEMENT

  3. ABS Market Update • What Just Happened? • Secondary Market Trading • New Issue Market

  4. ABS Market Overview ABS Market Growth • Note: “Other” includes Equipment, Student Loans (1996-1999), CDOs (1996-1998) and other esoteric assets. • As of Q3, 2008

  5. ABS Market Overview • Note: “Other” includes Equipment, Student Loans (1996-1999), CDOs (1996-1998) and other esoteric assets. • As of Q3, 2008

  6. SA The 15 year cumulative impairment rate (i.e. downgraded to double- C or lower) X X Source: Using data compiled from Moody’s, S&P, and Fitch

  7. SA Downgrade to Upgrade Ratio 2008 YTD: Performance Related Only ($ billions) Downgrades to Upgrades.xls / A and B X Source: Deutsche Bank using data compiled from Moody’s, S&P, and Fitch

  8. SA 2008 Performance-related Downgrades as a % of Outstanding Downgrades to Upgrades.xls / A and B X Source: Deutsche Bank using data compiled from Moody’s, S&P, and Fitch. Outstanding data based on SIFMA.

  9. Downgrade to Upgrade Ratio for core ABS sector still Consistent with Historical Experience Source: Using data compiled from Moody’s, S&P, and Fitch. Outstanding data from SIFMA.

  10. Securities Market Overview Estimated Outstanding U.S. Fixed Income Securities – $36.2 Trillion Estimated Outstanding U.S. Equities by Sector –$14.5 Trillion $2.5 Trillion Aggregate size of ABS/MBS/CMO market = $10 Trillion Source: FactSet, as of September 16, 2008 Source: Securities Industry and Financial Markets Association as of Q2 2008, and the Bureau of the Public Debt as of Q3 2008.

  11. Impact of CMOs on Mortgage Costs 30 Year Mortgage Benchmark vs. 30 Year Treasury Benchmark and Swaps Advent of Early CMO’s Average Spread Before CMO’s: 286 bps Average Spread After CMO’s: 136 bps Source: Freddie Mac & Bloomberg, as of August 29, 2008

  12. MBS Market Overview • The now $9.9 trillion asset backed market began with mortgage securitizations in the early 1990’s. • The housing boom in the early 2000’s led to rapid growth in the MBS market. • Sub-prime issuance came to a halt with the onset of the credit crisis of 2007; however agency issuance has remained robust. MBS Market Growth • As of August 29, 2008

  13. RMBS Price Declines • The trajectory of RMBS pricing has been a steady march downward throughout 2007 and 2008, as evidenced by the ABX 2007-1 index graphed below. ABCP facilities have trouble “rolling” 7/12/07 – 7/19/07 Rating Agencies downgrade (1st lien subprime; 2nd lien) 3/16/2008 JPM acquires Bear Stearns with Fed financing 10/15/07 – 10/19/07 Rating Agencies announce downgrades Feb 07 EPDs rise;Nervous investors begin large amount of hedging 4/2/07 NCEN files for BK; 9/15/2008 Lehman files for Bankruptcy; BofA acquires ML. 8/8/07 AHM Files for BK 6/22/07 Two BSAM funds face large margin calls; forced to liquidate Summer 2008: Unemployment rises, financial sector continues writedowns/poor earnings 1/11/2008 BofA announces acquisition of CFC

  14. ABS AAA Spreads Widen 2 Year AAA Student Loan, Credit Card and Auto Spreads Source: DataQuant as of October 3, 2008

  15. Federal Response • Emergency Economic Stabilization Act • Recapitalize Banks • Troubled Asset Relief Program - TARP

  16. State and Future of the U.S. Consumer • The U.S. consumer is now weakened: • Stock market volatility • Virtual end to cash out refis • Annual house price declines of 16% to 18% • Unemployment rate at 6.1% for September • Savings rate up 1% in August • Household debt is 14 trillion – 100% of GDP • Household net worth dropped $2 trillion to $56 trillion • Volatile – albeit – moderating commodity prices • Revolving credit rose 5.7% in from 8/08 from 8/07 • Retail sales dropped by -1.4% – department store sales down -5.3%, autos sales down – 20% since last year • Consumer confidence is down • Tightened underwriting criteria • Collateral Performance • Will the U.S. consumer come back?

  17. Q & A

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