Thursday, October 18, 2007

Update on Fairfax's CDS Portfolio

Fairfax Financial owns a large portfolio of Credit Default Swaps (CDS) on several mortgage and financial companies. These contracts protect the principal value of the debt of these financial companies in case they default. But Fairfax does not own the debt of any of these companies, so it is not being used as a hedge. Rather, the CDS portfolio is a large (18 billion notional amount) bet that these companies will face credit difficulties. Back in August, I gave a list of the companies in their portfolio. Below is an update on what has been happening to some of the companies since then.

1. Countrywide Financial
Stock Since August (1st): -39%
Countrywide to Book Restructuring Charge
Struggling mortgage lender Countrywide Financial Corp. expects to book a pretax charge ranging from $125 million to $150 million related to its plan to slash thousands of jobs amid rising defaults and foreclosures.

Last week, Countrywide disclosed its mortgage fundings for September fell 44 percent from the same period a year ago.

Countrywide also reported a higher percentage of delinquencies between August and September in its loan servicing portfolio, which accounts for nearly 14 percent of all mortgage debt in the U.S., along with a higher number of loans in foreclosure.

Note that this charge doesn't even deal with provisions or loan write-downs. This is just for severance expenses. I'm looking forward to the 3rd Quarter report on October 26th.

2. PMI Group
Stock Since August: -32%
PMI Group to Swing to Loss in 3Q
Mortgage insurer PMI Group Inc. said Thursday it expects to report a net loss of $1.05 per share for the third quarter due its weakening mortgage insurance business and writedowns on derivatives.

3. Washington Mutual
Stock Since August: -19%
WaMu profit sinks 72%, sees more housing slump
From Calculated Risk:
"This is perhaps the most challenging cycle for housing that we've seen in many decades," WaMu Chief Executive Kerry Killinger said in an interview. He and other WaMu executives said they don't see any improvement in the near term.

"I have never seen housing credit conditions change so significantly over such a short period of time, nor can I remember a period when there was less clarity about near-term housing and credit trends," [Chief Financial Officer Tom] Casey said

4. MGIC Investment
Stock Since August: -30%
MGIC Investment Swings to 3Q Loss
Without a decline in loss severity or improved cure rate in the coming months and because of expected paid losses, MGIC projects it will not post net income in the fourth quarter or for the full year in 2008.
5. Ambac Financial
Stock Since August: -7%
Ambac Expects 3Q Loss
Ambac Financial Group Inc., an insurer of corporate and public bonds, said Wednesday it expects to post a third-quarter loss of up to $3.50 per share, as a result of a "mark-to-market" adjustment for its credit derivative portfolio.


Nick said...

Any idea where the CDS is trading or if they monetized any of it?

Nnejad said...

Unfortunately, news about default spreads has not been really available since the panic in August. But people were doubting that the subprime problem would get any worse- that is impossible to say now.
Fairfax said last quarter that they viewed these hedges as more long term holdings, but if prices were right they would sell. So I can't really comment on whether they monetized yet or not, but I think a lot of these companies will go insolvent and I believe Fairfax is thinking the same thing.