Late last week and during the weekend of April 12^th 2008, the G-7 Finance ministers met in Washington. Rarely are commercial interests part of these meetings. However, on Friday evening the finance ministers and central bankers invited representatives of some investment and global banks to join them for dinner. Deutsche Bank, Mizuho Corporate Bank, Citigroup, Lehman Brothers, JP Morgan and Bank of America were rumored to be among the ten or so global institutions invited. According to The London Telegraph, the focus of the dinner was to warn them that more regulations are inevitable in wake of the financial credit crisis.

The just concluded week of April 11^th 2008 ended on a down note. The earnings announcement (and considerable disappointment therein) by General Electric caught many by surprise and resulted in the largest one day decline in the GE common share price since the 1987 market crash. Perhaps one of the most widely held common stocks, General Electric was thought to be relatively immune to the on-going credit crunch due to its strong balance sheet (and "true" AAA/Aaa ratings), its diversified portfolio of short and long-cycle businesses and its truly global market exposure where more than half of its earnings resulted from activities outside of the United States. Yet even GE disappointed. The chief culprit was attributed to the global credit crisis and weaker American economy. According to The Wall Street Journal, CEO Jeffrey Immelt said, "We assume the economy is going to be very tough and remain very tough." Accordingly, he lowered GE's earnings growth rate to at most 5% for the year. That was a far cry from his pronouncement on December 12^th 2007 that "10% earnings growth next year is 'in the bag'", which also partly explains the sharp share price sell off.

As readers of this Insights section many recall, Toomre Capital Markets LLC ("TCM") has been warning that this credit crunch triggered by the American subprime mortgage default crisis will take far longer to work out than many in this near-instantaneous world of communication might fully appreciate. Many in the financial markets are buffeted by the 24x7 news cycle and feel compelled to react to the latest change(s) in this or that stock, credit, commodity or foreign-exchange price. Is it any wonder then that volatility as a whole as sharply increased from early 2007 levels, many are now decrying "complexity" and most are extremely fatigued? This credit crunch will take yet further time to work out. The key question is, though, Are we at the beginning of the end or just at the end of the beginning of the credit crisis?

Tomorrow, on Wednesday April 2^nd 2008, Federal Reserve Chairman Ben Bernanke is scheduled to testify before the U.S. Senate Banking Committee. His testimony last July 19^th resulted in headlines like Subprime losses could hit $100 billion: Bernanke. After today's whopper of a $19 billion write-down from UBS, Bloomberg is now tallying total sub-prime losses at approximately $232 billion. What will tomorrow's headline be? Perhaps Chairman Bernanke might suggest that the subprime losses might hit $500 billion or even more?

Back on July 21, 2007, Toomre Capital Markets LLC ("TCM") created the post Does $50 Billion in Sub-Prime Losses Mean Anything? At the end of that post, Lars Toomre concluded with:

TCM worries that many investors do not fully appreciate how much the investment game of the past several years is changing. Liquidity is going to be a much more valuable commodity than many realize or appreciate. Perhaps the Great Unwind is truly approaching?

The Great Unwind reference was to the provocative research piece that Stefan-Michael Staimann and Susanne Knips at Dresdner Kleinwort put out in early 2007 detailing how closely hedge funds were linked to the investment banking industry and how that business model was likely unsustainable. They strongly declared:

We believe that the great unwind is inevitable, but impossible to time. It looks like the process of building up leveraged spread bets has already run quite far. Risk premia in many markets are very low, making it increasingly difficult to find spread bets for new money. Market volatility has been driven to record lows (remember: selling a put is like shorting volatility). The process may not have much more room to run and may start to be more sensitive to factors that could threaten its delicate balance (such as a deterioration of corporate credit risk).

While Lars Toomre at Toomre Capital Markets LLC was preparing the following post about Lehman Brothers being concerned about its liquidity amidst the Bear Stearns liquidity fallout, the United States Federal Reserve has stepped forward to attempt to settle the Capital Markets ahead of Monday's possible St. Patrick's Day Massacre. Specifically, the Federal Reserve has done the following:

1. Immediately cut the primary lending rate from 3.50% to 3.25%, and
2. Authorized the New York Federal Reserve Bank to create a new lending program for primary dealers to provide funding for those involved in the securitization markets.

This second step clearly is intended to keep the likes of Morgan Stanley, Merrill Lynch, Goldman Sachs and Lehman Brothers liquid in the event that the critical repurchase market seizes up further (like it was starting to do on last Thursday and Friday). This second move likely will somewhat ease the pressure that the major investment banks were going to be feeling on Monday morning. The critical question is Will this be enough in a world where the markets truly go to an all sellers state???

Lehman Brothers is a former employer of both Aldon Hynes and Lars Toomre. At one point, Lars reported directly to Joe Gregory who has gone on to become President of the much larger firm that Lehman Brothers Kuhn Loeb has evolved into today. Aldon in fact was being wooed by Joe Gregory and Christopher Pettit when the new story ran across the scrolling Dow Jones News boards that Lars had left the company. Many people commented at the time that they never remembered a time in the previous decade when the fixed-income trading floor simply went deathly silent. During that same period in the late 1980s, Dick Fuld still was very intimately involved in the growth of the mortgage business and how its contribution to the larger Lehman Commercial Paper Inc. helped propel the Lehman management team to eventually take over all of the Capital Markets operations hence completing the 1984 Shearson American Express / Lehman Brothers Kuhn Loeb merger.

Over the past several days, there has been considerable speculation about what other firms might be impacted by the liquidity concerns that befell Bear Stearns in the past week. Much of that speculation has centered on Lehman Brothers since that global investment bank was the largest underwriter of residential mortgage-backed securities ("RMBS") during the 2005-2007 boom years and it also has a substantial commercial mortgage-backed securities business ("CMBS"). The CMBS underwriting business has also dramatically slowed and with the announcement of its fourth quarter results, Lehman Brothers has admitted that it has been caught with a decidedly large commercial mortgage inventory.

In its coverage about the Bear Stearns purchase by JPMorgan for the surprising low price of $2 per share, The Wall Street Journal in the article J.P. Morgan Rescues Bear Stearns reveals the following about Lehman Brothers:

In recent days, what Toomre Capital Markets LLC ("TCM") considers to be two of the most challenging Chief Risk Officer ("CRO") roles in the financial services sector have been filled. Both JP Morgan Chase with its considerable Credit Default Swap ("CDS"), leveraged loan and other large derivative exposures and Citigroup with its kitchen-sink collection of issues have named new CROs.

On Monday November 26th 2007, JPMorgan Chase announced that former Goldman Sachs managing director and chief administrative officer, Mr. Barry Zubrow, had been hired as its Chief Risk Officer. Starting December 1st, Mr. Zubrow will be reporting directly to CEO Jamie Dimon and will be a member of JP Morgan's Operating Committee. Earlier in his career, Mr. Zubrow was Chief Credit Officer and co-head of the Goldman Sachs risk committee that oversaw that investment bank's strong risk culture which is credited with helping Goldman Sachs steer clear of much of the losses associated with this year's subprime meltdown.

Apparently, CEO JPMorgan Jamie Dimon had been fulfilling this role for the bank since former CRO Don Wilson retired at the end of 2006. JPMorgan's recent performance during the credit market turmoil suggests that, unlike former Merrill Lynch CEO Stan O'Neal who apparently was off playing golf on many business days during the summer seizures, Jamie DImon was very much hands on (like Goldman Sachs CEO Lloyd Blankfein and Lehman Brothers CEO Dick Fuld were widely reported to be). Is it any wonder then that JPMorgan, Goldman Sachs and Lehman Brothers have fared relatively well during the mortgage credit crunch, especially when compared to Citigroup, Merrill Lynch, and Bear Stearns?

The Stamford, Connecticut chapter of the Professional Risk Managers' International Association ("PRMIA") held a very informative meeting on Wednesday, November 7th 2007 entitled "The Emperors' New Clothes?: After the Credit Crunch, What's the Future of Structured Credit, Financial Guarantors and Rating Agencies". Toomre Capital Markets LLC ("TCM") thought this was one of the most informative industry events yet and strongly recommends that the reader pay close attention to the incestuous circle of structured credit, financial guarantors and rating agencies. The speakers were:

• James Chanos – Managing Partner, Kynikos Assocaiates
• William Ackman – Managing Member, Pershing Sqaure Capital
• Edward Grebeck – CEO, Tempus Advisors

Some readers no doubt will recognize James Chanos and his fund Kynikos Associates as one of the most prominent short-seller hedge funds. Bill Ackman and his hedge fund Pershing Square Capital are primarily focused on the long side, but does have substantial short interest in the financial institution, rating agency and financial guarantor sectors. Bill is perhaps most well known for his excellent (and very negative) research report on MBIA from several years ago. The FORTUNE magazine article from May 16, 2005 entitled The Mystery of The $890 Billion Insurer has more information.

During the trading hours of November 7th, equities in the financial sector were under considerable pressure. This pressure is primarily tied to the great uncertainty about just what are Collateralized Debt Obligations worth, where the resulting large losses are buried and what are the secondary repercussions of the sub-prime meltdown, such as SIVs, option ARMs, and commercial mortgage credit-worthiness. After the close, American International Group ("AIG") reported 3rd quarter results that fell short of expectations primarily due to their losses from the mortgage markets. Then, Morgan Stanley ("MS") pre-announced that it be taking a $3.7 billion in losses in its proprietary trading businesses tied to principal investments in CDOs and other sub-prime mortgage-backed securities. (This amount may change over the balance of November until the end of Morgan Stanley's year end.)

Against this backdrop, James Chanos and William Ackman suggested that the markets are still in the early innings of this mortgage credit crunch process. Whereas some analysts have been suggesting as many as 1.5 to 2.0 million families may lose their residencies due to foreclosure in this mortgage credit cycle, their collective view is that the base level of foreclosures will be much worse, perhaps approaching 3.5 million or even 4.0 million incidents. They suggested that the collective market does not yet appreciate that things could get that bad nor have financial professionals begun to fully appreciate some of the national political repercussions of so many people losing their homes.

Toomre Capital Markets LLC ("TCM") has been extremely concerned about the Structured Investment Vehicle ("SIVs") and their large holdings in supposedly safe collateral such as Super Senior, AAA-rated and AA-rated Collateralized Debt Obligations ("CDOs"). On Wednesday November 7th 2007, Moody's started the final crash of the SIV market with ratings action on $33 billion in SIVs, including several SIVs affiliated with Citigroup.

According to this news article, "'SIV senior note ratings continue to be vulnerable to the unprecedented large and sustained declines in portfolio value combined with a prolonged inability to refinance maturing debt,' Moody's said. … SIVs would be hurt by 'further deterioration in the market value of the portfolio,' resulting in losses on capital and senior notes if they have to sell holdings in an unfavorable market."

Specifically, Moody's downgraded the SIV called Victoria Finance Ltd. Further, Moody's placed on review for possible downgrade several other SIVs including:

• Harrier Finance Funding Ltd.
• Orion Finance Corp.
• Carrera Capital Finance Ltd.
• Beta Finance Corp.
• Centauri Corp.
• Dorada Corp.
• Tango Finance Ltd.
• Asscher Finance Ltd.
• Cullinan Finance Ltd.
• White Pine Corp.
• Hudson-Thames Capital Ltd.
• Nightingale Finance Ltd.
• Links Finance Corp. and
• Premier Asset Collateralized Entity Ltd.

The SIVs Beta, Centauri and Dorada are three of the seven SIVs that Citigroup manages and were placed on credit watch for possible (and likely probable) downgrade. The reader should remember that Citigroup had pledged that it would provide up to $10 billion in credit support to its SIVs. According to this Bloomberg article, Citigroup already has drawn down $7.6 billion of this credit support facility as of month-end October.

Toomre Capital Markets LLC is a specialist in structured finance and risk management. Any potential clients or service providers (like fiduciaries, accountants and/or legal advisors) are welcome to contact TCM at the information below for how Lars Toomre or Aldon Hynes can help your organization in these times of extreme stress. Please feel free to contact us or leave any thoughts or comments.

Reuters is reporting the obvious on Monday, November 5th, 2007: Cantor CEO says big CDO market has shut down. Apparently Cantor Fitzgerald LP Chairman and Chief Executive Howard Lutnick publicly has stated what Toomre Capital Markets LLC ("TCM") and many others have been saying for several weeks now: There are effectively no buyers and what people and organizations own on their books in CDO format, sub-prime mortgage format or just as general collateral has one place to go: DOWN.

The complete CDO market seizure means that there still are tremendous losses to come for those financial intermediaries that retained CDO bond classes, those investment portfolios that invested in them and, perhaps most importantly, all of those organizations that put on CDO "arbitrage" strategies. Perhaps people have not fully appreciated the full impact of this credit crisis? Maybe $25 Billion of the originally estimated $100 Billion dollars in losses have been reported by investment banks and global banking institutions. Where is that $75 Billion in other losses lurking? And assumes that the original $100 Billion number was even conservative enough… Some are already speculating that the total losses from CDO investments may total more than $250 Billion.

"The big CDO market is gone," Lutnick told the Reuters Finance Summit. "You'll see all the banks step out of it because they just can't do (the deals anymore) because they won't be able to churn them out to the buyers because the buyers are gone." Lutnick, whose firm controls one of the world's largest bond brokerages, said the easy buyers of CDOs have left the market. That leaves what he described as sophisticated buyers, who are willing to do their own math and find their own value for distressed CDOs. That will spawn a market for packaging the securities in a way that appeals to those investors, Lutnick said.

"The (CDO) repackaging business will be there, and it will grow enormously," Lutnick said. "No one is going to believe anybody anymore (about CDOs)," Lutnick said. "It's not just about the rating. You have to run your own math and come to your own view."

Well at least Stan O'Neal is now gone from the head of Merrill Lynch. Why it took a week after the release of the horrendous 3rd quarter earnings report remains a puzzle. Just how one can be so incompetent to build such a enormous trading position in CDOs and subprime loans that resulted in more than $8 billion in losses remains to be explained. Toomre Capital Markets LLC ("TCM") remains puzzled why it took more than a week for Merrill Lynch to announce the "retirement" of its absolutely incompetent Chairman and CEO.

Lehman Brothers and its Chairman and CEO, Dick Fuld, are the focus of an article entitled The Survivor written by Jenny Anderson in the Sunday October 28th 2007 edition of The New York Times. Toomre Capital Markets LLC ("TCM") got its professional start on the fixed-income trading floors of Lehman Brothers where first Lew Glucksman, and then Dick Fuld, Joe Gregory and Christopher Pettit roamed among the traders and sales personnel. The sale of Lehman Brothers Kuhn Loeb to Shearson American Express in 1984 led to the integration of the Lehman Brothers' scrappy fixed-income trading personnel with the more relaxed fixed-income specialists from Shearson. To put it politely, there was a revolt at the thought of the Lehman Brothers traders reporting into Shearson American Express fixed-income management, and hence for several years, the Shearson Lehman Brothers fixed-income division was in essence divided into two parts. An entity run by Dick Fuld called Lehman Commercial Paper Inc. ("LCPI") controlled the repo desk portion of central funding, the entire and very significant commercial paper operations, the government bond trading and sales operation and the relatively small group that was called the mortgage department. The rest of fixed-income reported into management from the former Shearson entity.

The mantra of the old Lehman Commercial Paper Inc. ("LCPI") division was "Every day is a battle: think about the firm, do the right thing, protect your client, protect the firm, be a good team member and most importantly, Be in the Game, BE IN IT." Lars Toomre is smiling this morning as he reads very much those same thoughts being shared some twenty plus years later. The old LCPI culture was incredibly strong and now apparently permeates much of the other segments of the firm, both in the New York City headquarters and in the branch offices around the world. Congratulations to Dick Fuld, Joe Gregory (Lars' former direct boss and now Lehman's President) and the rest of the Lehman Brothers management team on transforming a very successful bond operation into a truly global firm.

This New York Times article includes significant information that explains why Lehman Brothers escaped relatively unscathed from this summer's credit crunch. Lehman Brothers truly has strong risk management and survived this round of stress so that it can play in the game of fixed-income another day. Whereas many associated with Merrill Lynch, the old Salomon Brothers division within Citigroup, and Bear Stearns are questioning just how badly are their firms wounded, will there be jobs there for them in the future, and if so, just what type of risk appetite will there be in those future days?

At present, it appears that the true kings of the fixed-income world are Lehman Brothers and Goldman Sachs. The interesting challenge will be if they remain in the game as the mortgage market meltdown continues to evolve and the challenges of globalization, electronic trading, increased compliance, and illiquidity put further stresses on the global fixed-income (and FICC) divisions.

The Wall Street Journal reported on October 26th 2007 in a story entitled Bond Raters Get Subpoenas that Connecticut's Attorney General Richard Blumenthal issued subpoenas to the three largest debt-rating firms as part of an anti-trust investigation. Apparently Standard & Poor's Ratings Service, Moody's Investors Service and Fitch Ratings Service were served with the subpoenas on October 10th. "Standard & Poor's ("S&P"), a unit of McGraw-Hill Cos., and Moody's, part of Moody's Corp., control about 80% of the debt-rating market, which assesses the ability of corporations, banks, mortgage firms, governments and other borrowers to pay back a loan. Fitch is a unit of Fimalac SA of Paris."

This WSJ article continues with the following key information: "My investigation seeks to determine whether credit-rating agencies may be exploiting their dominant positions to unfairly raise prices or exclude competitors. Assuring debt ratings are honest and untainted is vital to investors, companies and government," Mr. Blumenthal said. The focus of the investigation includes three key areas: so-called unsolicited ratings, so-called notching and the concept of exclusive contracts. "There are allegations that some raters conduct an unsolicited rating and then demand the issuer pay for it or face a possible poor rating," the attorney general said. Notching is when raters allegedly threaten to downgrade an issuer's debt unless they get a contract to rate the issuer's entire debt pool, even if parts already have been assessed by another agency. Exclusive contracts give issuers discounts for having all their debt rated by a single agency. "Such agreements may hinder competition by locking out other debt raters," the attorney general said.

Toomre Capital Markets LLC ("TCM") cannot testify whether unsolicited ratings, notching or exclusive contracts are applicable to recent structured finance transactions in areas such as Asset-Backed Securities ("ABS"), non-agency Collateralized Mortgage Obligations ("CMOs"), Commercial Mortgage-Backed Securities ("CMBS"), adjustable-rate mortgage ("ARM") pass-throughs, Collateralized Debt Obligations ("CDOs"), or Asset-Backed Commercial Paper ("ABCP"). However, Lars Toomre can directly testify to how Moody's used unsolicited ratings and notching to establish some supposed credibility in rating residential mortgage-backed securities ("RMBS") in the first place.

On the evening of Friday, October 26th 2007, numerous news organizations are reporting that Stan O'Neal, the chief executive and chairman of Merrill Lynch, is on the hot seat with that firm's Board of Directors and could well lose his position as the autocratic head of "mother Merrill" before the end of the forthcoming weekend. Toomre Capital Markets LLC ("TCM") has only one simple query: "COULD????? Is there any friggin doubt about Stan O'Neal's absolute incompetence as head of this investment bank? How the heck does one manage to lose approximately $8.4 billion on a position of $35 billion??? Why has not this chief executive been summarily fired even before the quarterly earnings announcements were made earlier this week???"

TCM truly wonders if the Merrill Lynch Board of Directors even has a clue of how difficult it is to lose such a large amount of money in structured finance. And that is not even asking the question in the first place of why did Stan O'Neal allow Merrill Lynch to accumulate such a large position in CDOs and intended collateral in the first place? How much turnover in the trading positions were they executing each day? A half billion? Maybe a billion? So maybe three percent of the holding were turning over daily? Did anyone at Merrill Lynch ever think to look at the aged inventory report and ask whether the marks on those particular aged securities were anywhere close to where they could be sold, let alone where they last had an indication of true third-party interest?? Where the heck was simple "walk around" risk management??? Didn't Stan O'Neal's management have a clue their whole CDO position and business was way out of whack relative to what they could distribute to institutional investors?

The Times of London in a story by Suzy Jagger out of New York City reports Merrill Lynch Could Oust Stan O'Neal After Merger Telephone Call. The thrust of this article is that Wall Street is bracing for its first chief executive casualty after the credit turmoil that started with the meltdown of two Bear Stearns hedge funds. The article concludes with "Laurence Fink, chairman and chief executive of BlackRock, the investment firm partly owned by Merrill Lynch, was identified as a possible successor to Mr O’Neal. John Thain, chief executive of the New York Stock Exchange, and an internal candidate, Robert McCann, senior executive overseeing the bank’s 16,000 brokers, were also cited. Mr McCann, who is president of Merrill Lynch’s global private client operation, runs a business that has been insulated from the credit-loss turmoil. The prospect of a disgruntled board, an ousted chief executive and widening losses arising from investments made in sub-prime mortgage-backed debt, led to speculation that the investment bank may also be vulnerable to a takeover. The stock has fallen by as much as a third since the beginning of the year."

On Tuesday October 23rd 2007, The Telegraph newspaper out of the United Kingdom states in an article written by Ambrose Evans-Pritchard that a New Credit Crunch Looms. The article suggests that fresh turmoil in the global debt markets has set off sharp falls in commodity prices and higher-risk assets as investors scrambled for the safety of relative safer investments.

In one of the most dramatic currency moves of the year, the dollar soared as US investors liquidated foreign holdings, ending at $1.4129 against the euro and £2.0276 against the pound. Libor spreads in Europe's interbank market jumped to 64 basis points, roughly the level that set off the credit crisis last summer and prompted a liquidity rescue by the European Central Bank. The iTraxx Crossover index that measures spreads on corporate bonds has jumped 100 basis points since last week to 364 bp yesterday.

"It's the summer that won't end," said Peter Berezin, a strategist at Goldman Sachs. He said investors were shaken by last week's drop in US home-builder sentiment to an all-time low and by fresh falls in the ABX index for sub-prime debt. "We continue to learn that it pays to respect the sell-offs in ABX and housing-related credit. This has elements of the February and August sell-offs, where credit markets signaled problems," he said. The lowest tier of ABX debt has fallen to a record low of 20.72 – from par of 100 – pointing to huge losses that have yet to surface.

Toomre Capital Markets LLC ("TCM") has been very concerned about the evolution of this credit crunch and has privately argued that it is very much like a slow motion train wreck. Unlike some of the market sectors like United States equities where the markets seemingly quickly react to market moving news, the credit markets, and particularly the primary mortgage market which is composed of many, many local markets, react much more slowly. It takes considerable time for the delinquencies to first appear and then the stress of missed payments to turn into actual foreclosure actions. It also takes some time for individual homeowners to realize that the prices of their homes may not longer be appreciating, and seemingly often most recently, the value of the homes has in fact declined. It is psychologically hard to sell an asset at a loss and TCM suspects that many homeowners will hold off on selling homes in which they have a loss. Hence, the true state of both the magnitudes of the delinquencies/foreclosures as well as the losses given default are not likely to be known for some weeks and even months to come.

Maybe Toomre Capital Markets LLC ("TCM") is a bit naïve. After all, who really will miss a fifty or two? Fifty Billion or Hundred Billion in losses, that is? Maybe the reader can pay this structured finance bill due to sub-prime and Collateralized Debt Obligations ("CDOs") valuation mark-downs from his or her wallet, but the Toomre Capital Market's wallet is likely to be more than a few dollars short on this monsterous tab!!