Subprime Update: Sovereign Wealth Funds Trying Again? [Housing Tracker]

 |  Includes: BAC, LEH, MER
by: Judy Weil

Subprime Fallout 

Merrill CEO May Meet Korean Sovereign Fund Chief; Lehman Nearly Got $5 Bln In Funds From Korea. “Merrill Lynch (MER) chief John Thain will have meetings with South Korea's sovereign wealth fund and key government officials during a visit to the country in the third week of September, Korean officials said Wednesday. Korea Investment Corp., the country's sovereign wealth fund, owns a 4.7% stake in Merrill Lynch. Lehman Brothers (LEH) nearly reached a deal to raise almost $5 billion from South Korean wealth funds and institutions, but the pact disintegrated.” (MarketWatch, Aug. 20) 

Banks' Returns Come Back To Earth, Maybe For Good. “Boston Consulting Group: In 2006, the top 10 banking ROEs [Return on Equity] ranged from 23.9%-35.5%, with the average ROE at 13.6%... Last year… banks' after-tax profits fell for the first time since 2003 and their average ROE declined to 13%, but that was propped up by exceptional returns at some banks, mostly from emerging markets… Regulators will [now] require banks to set aside more capital than before for risks other than that of default, such as potential losses due to a credit rating agency downgrade or due to a change in the price of an equity instrument.” (Guardian UK, Aug. 20) 

How Low Interest Rates Contributed to the Credit Crisis. “A low-interest rate environment reduces the absolute level of returns that are available to investors. This had significant implications for the [coming] wave of baby boomers… [The pension-fund industry] estimated… that baby boomer [retirement] investments need to yield a minimum of 8% per annum… [With] our most recent low-rate period, [and] with U.S. Treasuries yielding 4% and below, achieving 8% became quite a challenge… With a large portion of pension-fund asset allocations directed toward fixed-income investments that were yielding closer to 4%, the pressure to achieve an overall 8% on their portfolios drove investment managers to allocate large pools of capital to the strategies that promised higher returns.” (WSJ, Aug. 18) 

Judge Rejects Countrywide Settlement. “Pittsburgh Federal bankruptcy Judge Thomas P. Agresti of the Federal Bankruptcy Court rejected a settlement involving the Countrywide Financial Corporation, saying… it was [un]fair to nearly 300 borrowers who claimed to have been hurt by the company’s abusive practices. The settlement called for Countrywide, acquired by Bank of America (NYSE:BAC) last month, to pay $325,000 to the Chapter 13 bankruptcy trustee in Pittsburgh, Ronda J. Winnecour, to cover costs and settle litigation in 293 separate cases… Ms. Winnecour said that in dealing with the borrowers, Countrywide had made inaccurate claims, filed unnecessary court papers, demanded improper fees and charges, [and] lost or destroyed more than $500,000 in checks paid by homeowners in foreclosure.” (NY Times, Aug. 15)


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