Goldman Subprime Conference Call

HenryTo · Posted: Tue Jul 10, 2007 9:56 am Post subject: Goldman Subprime Conference Call

Goldman Sachs Subprime Market Conference Call - July 10, 2007

* Subprime has historically had a default rate that is six times higher than prime

* 87% LTV vs. 75% LTV; and where 72% is ARM vs. 45%

* Subprime loans consolidated into home equity loan (HEL) ABS; a large percentage of which is then converted into HEL ABS Mezzanie Tranches, where all of these are rated A or below. These securities are then further tranched into CDOs - from AAA all the way down to Unrated

* A lot of these CDOs are held by Asian and European financial institutions

* Subprime turning from a virtuous cycle spanning from 2003 to 2006 (where demand for ABS CDOs created a huge incentive to make loans, which led to higher home prices, which led to higher demand for ABS CDOs, etc) which led into a vicious cycle that will last for another year at the very least

* California housing prices declined for the first time in 10 years during the 1Q. Expects U.S. to follow

* 12% of 2006 vintage loans are now delinquent for 60 days or more. Will continue to rise going forward

* Believes a significant amount of 2007 CDO issues remains unsold and are still awaiting buyers

* Originators representing approximately 25% of 2006 volume have either filed for bankruptcy or have exited the business

* Bank lending standards for subprime mortgages have become much tighter

* A significant amount of subprime ARMs will reset from a "teaser" rate of 7% to 8% to 11% or so over the next 18 months. About $15 billion a month in the beginning of 2007 but now at about $20 billion a month. Should increase to $30 billion by this Fall and around $40 billion a month by the beginning of next year.

* Many of these subprime borrowers will have nowhere to turn to as bank lending standards have become much tighter

* Looming ARM resets will further strain subprime borrowers, due to:
1) Higher interest rates,
2) Slowing home price growth,
3) Tighter lending standards, and
4) Limited refinancing options.

* Loan defaults and tighter credit conditions may prolong housing market weakness, resulting in additional credit losses.

* Believes current pricing in these CDOs still reflect overly optimistic assumptions about home price growth going forward. Should not bottom until at least another year.

* Rating agencies have only downgraded or put on watch 3% of 2006 vintage of CDOs. Goldman expects this to increase to nearly 100% going forward.

* S&P just downgraded approximately $12 billion or subprime mortgage backed bonds, and should downgrade and act quicker to downgrade CDOs going forward. This is only the beginning of a trend - and will most probably impact A or A- rated securities as well. Goldman expects some AAA rated CDOs to be impacted as well.

* Believes spillover effects will affect other asset classes but not in a major way, but believes housing market to have a negative impact on the economy. However, Goldman is still positive on U.S. economy - and doesn't see any increase in corporate risks, etc.

rffrydr · Posted: Tue Jul 10, 2007 10:04 am Post subject:

That about covers it.

They appear to be mum concerning it's EFFECT. Does goldman think it will be contained to residential RE? The not-so-obvious parallels to corporate debt have begun to be explored and the spillover to Ratings Agencies (tipped here at the end of Dec. Wink

) brought up. I'm interested now in that the great bagholder of investment lore: the japanese investor.

Befitting their interest in REITs, pensions etc in the CDOs they've done so well last year and have been shielded by yen-depreciation and huge carry advantage they've only begun to feel this fallout. Of the three "C's" of a bear turn I'd say they're just in the late stages of the first: complacency.

You've got a keen eye there, Master H. More will be needed. Eastern Europe, Korea must be watched in this regard.
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Today is the Tomorrow you worried about Yesterday!

HenryTo · Posted: Tue Jul 10, 2007 10:13 am Post subject:

Yes, you're dead-on with regards to the spillover effects. The bullet point regarding the potential spillover effects came as a response to a question about spillover effects, and thus wasn't something that they wanted to talk about. While the guys on the call (CIO of Global Fixed Income and Head of Mortgage Backed Securities at GSAM) are experts in their own fields, I wouldn't expect them to make a (negative) comment about something that they are not comfortable in.

If you talk to the king of high yields, Marty Fridson, about high yield corporate bonds, you will think that the sky will be falling tomorrow:

http://www.fridsonvision.com/about_us.asp

HenryTo · Posted: Tue Jul 10, 2007 10:14 am Post subject:

By the way, that was a great call with regards to the rating agencies!

rffrydr · Posted: Tue Jul 10, 2007 12:34 pm Post subject:

No, they know what side of their bread is buttered. But there's solace in other's misery: then it's beyond their control--and maybe not past redemption.

Moody's now trading firmly below it's March spike lows.

I want to be a billionaire too, there's nothing on "FrisonVision"--you subscribe???? Tha high-yield closed-end funds have been leading this selloff.
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Today is the Tomorrow you worried about Yesterday!

HenryTo · Posted: Tue Jul 10, 2007 1:41 pm Post subject:

Unfortunately, no. I haven't enquired but I would guess that is outside of our budget! In the meantime, I am evaluating a bunch of data vendors so I could at least get the kind of global data that I will need, especially since etrade is now allowing its customers to invest in foreign local markets.

Marty Fridson was in LA early June and he gave a talk on high yields at the local CFA Society lunch meeting.

rffrydr · Posted: Tue Jul 10, 2007 3:10 pm Post subject:

I'm with Etrade: their currency translation fees are no good. Open an "Etrade" futures, do a spread in the currency you're looking to get into and transfer back into stock account.
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Today is the Tomorrow you worried about Yesterday!

HenryTo · Posted: Wed Jul 11, 2007 5:13 am Post subject:

Subprime Losses Drub Debt Securities as Credit Ratings Decline

http://www.bloomberg.com/apps/news?pid=20601087&sid=aEesd87v7m8U&refer=home

A few quotes:

rffrydr · Posted: Wed Jul 11, 2007 9:32 am Post subject:

ABX "indices" pinning lows:

http://today.reuters.com/news/articleinvesting.aspx?type=bondsNews&storyID=2007-07-11T143042Z_01_N11283856_RTRIDST_0_USA-SUBPRIME-BOND-INDEX-UPDATE-1.XML
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Today is the Tomorrow you worried about Yesterday!