Blackstone and The Sale of Citigroup s Loan Portfolio Essay

The company’s finance department had the chance to reduce the company’s weight in mortgage-backed securities. However, it chooses not to. The company’s financial adviser did not evaluate any risk that would emerge in the economic sector of the U.S during that year. Furthermore, the company had an opportunity to identify the consequence that would result due to the falling mortgages; somewhat the company neglected this risk and increased in value of portfolio.

Since mid 1990s, the subprime mortgage market has grown rapidly experiencing a phenomenal 23% compound annual growth rate to 2006. The total subprime loan originations increased from $65 billion in 1995 to $613 billion in 2006. The subprime sector has become a significant sub-sector of the total residential market accounting for 21% of all residential mortgage originations in 2006. Similarly, by year-end 2006, total outstanding balance of subprime loans grew to $1.2 trillion, approximately 12.6% of all outstanding mortgage debt.

The recent mortgage crisis in the US was unprecedented. It led to a massive clampdown of financial institutions, occasioning one of the worst financial melt-downs the US has ever faced (Jaffe, 2008). Quite naturally, it would be necessary to examine the cause of the crisis in order to draft prophylactic measures that would prevent the same financial disaster in the future. This paper will discuss the events that led to the mortgage crisis.

c. The First National Bank of San Francisco offers CDs with an 8.4 percent nominal (stated)

The beginning of the crisis: From the early to the mid-2000’s, high-risk mortgages became available from lenders who funded mortgages by repackaging them into pools that were sold to investors. New financial products were used to apportion these risks, with private-label mortgage-backed securities providing most of the funding of subprime mortgages. The less

In 2008 the United States economy faced it most serious economic downturn since the great depression. This crisis began in 2006 when the subprime mortgage market showed an increase in mortgage defaults. This would lead to the decline of the U.S. housing market after a decade of high growth. The problems in the mortgage market where able to spread to other sectors of the economy especially in financial markets because of Collateralized Mortgage Obligations or CMOs. CMOs where mortgage backed securities that where given out by investment banks and where not regulated by the government. These securities fell as did mortgages due to increasing default rates. Because of CMOs companies bought Credit Default swaps or CDSs. These CDSs where nominally

market began to slow and consumers began to spend less of their disposable income. Contractors continued building homes and Countrywide continued loaning money (Ferrell, et al, 2013). Accordingly, many homes were on the market for sale with a decreased number of buyers. By late 2007 and early 2008, foreclosure rates were rising and borrowers and investors were dealing with the aftermath of high-risk loans (Ferrell, et al, 2013). New homes sat vacant with no buyers in sighy, homeowners were unable to continue paying, some in part due to increased payments accrued from variable interest rates, and banks were feeling the strain. By 2008, Countrywide accrued over $8 billion in subprime loans with seven percent delinquent, while the industry average was nearly five percent deliquent (Ferrell, et al, 2013). By this time, Countrywide was facing a serious trouble.

2. If 11% is the market rate, what would the repurchase of the 5% bonds have cost General Host?

As of December 2007, the United States fell into the worst economic recession seen in 60 years. This recession was caused by banks’ risky investments that were then were purchased and sold by investors without the customers knowing. This was a violation of the Glass –Stiegel Act. Even though so many corporations were practicing these shady deals, none were punished even though laws were being broken. Loans were given to people whether the bank thought they could pay it back or not. This became a huge problem for the banks because so many people were not able to repay the money that they borrowed. Banks were losing more money than what was coming in at the time. As less and less money was coming into the banks, they began struggling to stay

The day Bear Stearns fell was one of the worse financial upsets of our time. As a major American investment company, they ran out of money. Bear Stearns was definitely one of the most exposed to the subprime mortgage crisis after being hit hard in the summer of 2007 when two of its hedge funds crashed. The Federal Reserve and JP Morgan Chase orchestrated an extraordinary rescue attempt that allowed Bear Stearns to borrow emergency money to stay alive and steady. Consequently, in an effort to prevent a crisis on Wall Street.

In the early-2000s, Moody’s, one of the leading credit rating agencies in the world, evaluated thousands of bonds backed by so-called “subprime” residential mortgages—home loans made to those with both low incomes and poor credit scores. When housing prices began to fall in 2006, the value of these bonds disintegrated, and Moody’s was compelled to downgrade them significantly. In late 2008, several commercial banks, investment banks, and mortgage lenders that had been

Quickly these corporations became known as the Fallen Angels and they were looking to rebound in any way possible. Operating managers at the time believed the corporations would rebound fairly easily because corporations would have no choice but to put all their attention on controlling their debt. However, in a situation such as this, close precision and execution is required otherwise the smallest mistake can lead to failure. According to Warren Buffet, “a plan that requires dodging them all is a plan for disaster.” The accumulation of debt continued to rise and not even the healthiest of corporations could obtain the capital to finance it. Even though businesses continued to suffer from accumulating debt, Investment Bankers noted that researchers found over time “higher interest rates received from low grade bonds had more than compensated for their higher rate of default.” From this information, Investment Bankers saw this accumulation of debt as an opportunity for investors. They concluded it was beneficial to have a diversified portfolio of junk bonds because the returns would be higher than a portfolio of high grade bonds. However Warren Buffet disagrees and discovered a hole in this fundamental approach by the Investment Bankers.

The ‘sub-prime’ crisis triggered by the meltdown of the US mortgage backed-securities market in 2007 was a precursor to the global financial crisis. It would drastically change the competitive landscape for all firms in the financial services sector, including Campbell and Bailyn (C&B), one of the world’s five largest investment banks.

In relation to the increase in house’s price, the rise of financial agreements such as mortgage-backed securities (MBS) and collateralized debt obligations (CDO) encouraged investors to invest in the U.S housing market (Krugman, 2009). When housing price declined in the U.S, many financial institutions that borrowed and invested in subprime mortgage reported losses. In addition, the fall of housing price resulted in default and foreclosure and that began to exhaust consumer’s wealth and

Citigroup’s leveraged loan exposure is composed of two main risks. First, holding these leveraged loans could be costly from a regulatory capital perspective because they hold a 100 percent risk weight. Citigroup would need $80 million of capital for every billion dollars of leverage loan. By selling these leveraged loans, Citigroup would reduce capital requirement. Second, a decline in the leveraged loan index (LCDX) value from 97 cents on the dollar to 92 cents on the dollar posed a $1.5 billion loss on its leveraged loan portfolio for the fiscal year ending on December 31, 2007.