Anatomy of Morgan Stanley Panic

Two days after Lehman Brothers Holdings Inc. sought bankruptcy protection, an explosive rumor spread that another big Wall Street firm, Morgan Stanley, was on the brink of failure. The chatter on trading desks that Sept. 17 was that Deutsche Bank AG had yanked a $25 billion credit line to the firm

That wasn't true, but it helped trigger a cascade of bearish bets against Morgan Stanley. Chief Executive Officer John Mack complained bitterly that profit-hungry traders were sowing panic. Yet he lacked a critical piece of information: Who exactly was behind those damaging trades?

Trading records reviewed by The Wall Street Journal now provide a partial answer. It turns out that some of the biggest names on Wall Street -- Merrill Lynch & Co., Citigroup Inc., Deutsche Bank and UBS AG -- were placing large bets against Morgan Stanley, the records indicate. They did so using complicated financial instruments called credit-default swaps, a form of insurance against losses on loans and bonds.

A close examination by the Journal of that trading also reveals that the swaps played a critical role in magnifying bearish sentiment about Morgan Stanley, in turn prompting traders to bet against the firm's stock by selling it short. The interplay between swaps trading and short selling accelerated the firm's downward spiral.

This account was pieced together from the trading documents and more than six dozen interviews with Wall Street executives, traders, brokers, hedge-fund managers, regulators and investigators.

For years, sales of credit-default swaps were a profit gold mine for Wall Street. But ironically, during those tumultuous few days in mid-September, the swaps market turned on Morgan Stanley like a financial Frankenstein. The market became a highly visible barometer of the Panic of 2008, fueling the crisis that ultimately prompted the government to intervene.

Are you saying that IndyMac was not a dead bank walking propped up by the Fed ? If you think they were a viable well-capitalized bank then you haven’t looked at their loan portfolio. Your comments are a prime example of short bus thinking - you never dug into the bank fundamentals so you accuse short sellers of doing the same.

News flash - short sellers were short because the bank was going down sooner or later.

Ever heard of a short squeeze ? The action goes both ways.

Do some research: http://mrmortgage.ml-implode.com/2008/07/08/indymac-one-more-lie-for-the-roadconsumers-mortgage-brokers-beware/

IndyMac: One More Lie For the Road…Consumers & Mortgage Brokers Beware

Posted on July 8th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage’s Personal Opinions/Research

In my breaking story Sunday afternoon about IndyMac potentially going down on Monday July 7th, I was highly critical of IndyMac’s CEO Mike Perry. I said “last year when things fell apart seeing Perry immediately resort to what seems to me as stretching the truth, doing everything possible to manage the stock price and not the company, blaming short sellers, always guiding higher after earnings and missing, releasing fluff press releases in order to drive the stock price higher etc, it showed me his true colors.” In the story I gave specific examples of these things.

Now, in one last attempt to spin the news, IndyMac has been caught in another half truth that significantly impacts consumers and mortgage brokers, the two constituencies that I try my hardest to serve. CONTINUED…

In Perry’s letter to stock holders released today in which he tells the tale and likely fate of Indy, he says “We plan to honor all of our existing rate-locked loans and will continue to fund these loans in the coming weeks.” Many cheered IndyMac for ‘doing the right thing’.

IS THIS TRUE MIKE?

IndyMac will indeed fund all loans in its pipeline that qualify, which could be in excess of $1 billion. But it comes at a hefty price to the borrowers. In order to fund your loan there as they wind down their mortgage business, they are charging an extra 1% of the loan amount or 1 ‘point’. On a $417k Fannie Mae loan this is an extra $4,170.00. If you wanted to build that hit into your rate it could raise your rate as much as 1/2 percent.

Below is an excerpt talking about it. Please note that I do not know if this applies to retail but it sure seems like it applies across the board. This move make no sense to me, To me it means either they are a failed bank or committing extortion. (full email from IndyMac at bottom of page)

“In order to protect your rate locks, we will require a 1% cash deposit to convert these loans to mandatory delivery. All fees must be received by the end of business on Thursday, July 10th, or your rate locks are subject to cancellation. These fees are fully refundable in the event IMB declines the loan. This fee requirement is all inclusive. You must protect the entire pipeline as part of this process. If you do not submit the required fee for any individual loan as part of this process, all of your rate locks will be subject to cancellation.”

In my opinion, this looks awfully shady. As far as I have always known, ‘mandatory delivery’ comes at a BETTER rate that ‘best efforts’, therefore why ask for 1% to change to ‘mandatory’ from ‘best efforts’? And why tell the brokers their ENTIRE pipeline must be paid for and not on a loan-specific basis? Remember, they clearly state they ‘will only refund the amount if the loan is declined’.

Many of these loans have been in process for weeks and many are purchases. No doubt a large number of the purchase loans will have no choice but to close the loans there and take the penalty hit or risk losing their deposit and home. Refi’s can be moved to a different lender but that comes at the expense of having all the paperwork including the appraisal put into the new lenders name and taking down another rate lock at a potentially higher rate. The processing and paperwork change can cost roughly $750. A higher rate lock can cost $10s of thousands over the life of a 30-yr fixed loan.

This is absurd. WHAT A RIP-OFF! Is this even legal?!? This tells me either they just plan to stick it to everyone on their way out or really have no money or lines on which to fund these loans and someone else is putting up the funding capacity at a hefty price.

If they don’t have the funding capacity all of a sudden that begs to question whether or not IndyMac is really voluntarily shutting down its mortgage operation or is this how the FDIC and other regulatory bodies will operate from now on when banks fail.

If they would have come out with news today that IndyMac had been seized, that could have started a run on other regional banks with heavy Pay Option ARM, Alt-A or HELOC exposure, which are the very loan types that led to their demise.

As a matter of fact, this morning Schumer said ‘IndyMac’s troubles to not extend to other regional banks’. That also goes in-line with my theory this is simply an FDIC seizure cover-up.

I believe there is more to this story than we have been told. But despite that, charging borrowers 1 point to close a loan already in process that may need to close at the rate initially promised or it will cause significant financial hardship to the borrower, is nothing more than plain old extortion. -Best Mr Mortgage

BELOW IS THE FULL LETTER TO MORTGAGE BROKERS ACROSS THE NATION BY DREW BUCCINO, CEO OF THE MORTGAGE PROFESSIONALS GROUP AT INDYMAC BANK

This does not sound like a company who voluntarily is ‘winding it down’.

Dear Indymac Mortgage Banker or Broker,A few months ago, when WaMu made the decision to exit wholesale lending, we wrote to let you know that we were committed to all of our mortgage professional customers, and that we were working hard to rebuild our business model. Since then, our employees have worked tirelessly and professionally to rebuild our production model and I am very thankful for their service and their unwavering commitment under the most difficult of circumstances. We have successfully transformed ourselves into a competitive Agency and Government lender, and for this we should all be very proud.

However, with the continued very difficult and challenging environment, we are taking steps to continue to protect Indymac’s safety and soundness, and have made the difficult decision to cease production of new mortgages, which includes exiting the third-party lending business altogether. Going forward, Indymac will be focused on operating its Southern California retail banking business, offering reverse mortgages through Financial Freedom and operating our home loan servicing and opportunistically growing these groups over time as market conditions permit.

Our decision to exit third-party lending is effective immediately, however, the following timeframes and guidelines are in effect:

Effective immediately we will no longer accept any new rate locks.

Effective immediately we will no longer accept new credit package submissions (either in physical form or through e-FlowSM functionality) for loans that do not have a valid rate lock.

The last day to fund refinance transactions will be July 31, 2008.

The last day to fund purchase transactions will be August 15, 2008.
Important Message About Protecting Your Rate Locks:

In order to protect your rate locks, we will require a 1% cash deposit to convert these loans to mandatory delivery. All fees must be received by the end of business on Thursday, July 10th, or your rate locks are subject to cancellation. These fees are fully refundable in the event IMB declines the loan. This fee requirement is all inclusive. You must protect the entire pipeline as part of this process. If you do not submit the required fee for any individual loan as part of this process, all of your rate locks will be subject to cancellation.

Please understand that all of our regional operating centers will be closed. Your regional mortgage production team will be in contact with you to ensure a smooth transition over the coming weeks and facilitate timely processing of your loan pipeline. Additionally, we will keep our Pasadena regional office open for a limited time, until we have cleared out our entire pipeline of loans.All of these actions are necessary and are designed to keep Indymac Bank as an institution safe and sound; we believe they are the necessary steps we must take to ensure the company’s survival during this turbulent period.

On behalf of the roughly 800 employees of Indymac’s Mortgage Professionals Group, I want to thank you for your business and support of Indymac Bank over the past 15 years.
Sincerely,

Drew Buccino CMB
CEO Mortgage Professionals Group
Indymac Bank

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