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A SPRING ISSUE - MARCH - tviNews Events -106 - TVInews hedges its Spring 2007 Issure with CDO financing, YouTube, Movie Madness, Marathons, China # -- and the AirBus.
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FEATURE STORY
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200704TopCDOsGary46w.jpgSPRING MADNESS - CDOS
SPRING MADNESS - 01 / FICO
SPRING MADNESS - 02 / Tricks
SPRING MADNESS - 03 / Hedge Funds
SPRING MADNESS - 04 / HNMA
TVInews hedges its Spring madness Issure with CDO financing, YouTube, Movie and Money Tricks, Marathons, and China $s are making a difference in $$ for U.S. Mortgages

.1. Photo: Above: TVInews Gary Sunkin, covers the LAX Airbus landing. DOWN AT 9:30A.M. ON MONDAY MORNING THERE WHERE ABOUT 3,000 SPECTATORS HUDDLED ON HILLTOPS AND PARKING GARAGE ROOFS TO WITNESS AVAIATION HISTORY MONDAY AS THE WORLD LARGEST PASSENGER PLANE BROKE THROUGH THE HAZE AND SETTLED ONTO A RUNWAY AT THE LOS ANGELES INTERNATIONAL AIRPORT IT TOUCHED Down. THE AIR BUS contains 15 TOILETS. - MORE STORY


Feature Story / Bonds Tied To Loan POOLS. Collateralized debt obligations with a home mortgage, or CDOs, have been a hot product with many big investors for many years: says Troy Cory-Stubblefield, co-author of "BOA, The Tortfeasors"
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200704TopCDOsGary300w.jpgCollateralized debt obligations with a home mortgage, or CDOs, have been a hot product with many big investors for many years: says Troy Cory-Stubblefield, co-author of "BOA, The Tortfeasors" -- with the late "king of torts" lawyer, Melvin Belli. SEE MORE STORY.
••• CDOs - "Collateralized Debt Obligations", or MORTGAGE POOLS are home mortgages used as collateral, and in the 80s created a $600million dollar fiasco, which sent many mortage heads to prison. "Getting a handle on CDOs is a complex challenge," reports the LA Times on March 18, 2007
••• For TCW, a big seller of mortgage-backed paper, the question is how its investors will fare March 18 2007
••• The housing market boom of the last few years also has been a boom for Wall Street firms that have played a crucial role as conduits -- linking home buyers and investors by packaging mortgages and selling bonds backed by the loan payments.
••• Now, with mortgage defaults surging, it's clear that some of those investors are going to lose money.
••• And that is shining a bright light on the Wall Street middlemen, including Los Angeles-based TCW Group Inc., which has been one of the biggest names in mortgage investment products.
••• TCW, parent of Trust Co. of the West, could emerge as a hero or a villain to the hedge funds, insurance companies and wealthy investors worldwide that have been avid buyers of the firm's complex mortgage securities.
••• The company says it is the global leader in managing collateralized debt obligations, or CDOs. These are investments that are backed by pools of loans or other assets. The simple idea: The investors get interest and principal payments from the pools passed through to them. (Related story: The complex challenge of CDOs)
••• But in reality, CDOs aren't simple at all. They are a creation of cutting-edge financial engineering. That engineering can turn part of a portfolio of high-risk securities into new securities that, in theory, carry low risk but still provide above-average returns.
••• The acid test for that seeming alchemy now looms. Much of what backs up CDO pools are securities tied to mortgages. And specifically, bonds backed by sub-prime mortgages -- loans to people with poor credit histories or high debt burdens -- are the core of many CDOs.
••• One CDO Hedge fund, who asked to be anonymous for obvious reasons, manages $48 billion in CDO portfolios for investors. Of that total, $15 billion, or about one-third of the CDO asset pool, is in securities backed by sub-prime mortgages. An additional $3.9 billion of loans behind the firm's CDOs are "Alt-A," or mortgages to people who didn't qualify as top-quality borrowers but were viewed as better risks than sub-prime borrowers.
••• The question facing the anonymous fund and other investors in higher-risk mortgages: Who's going to take the biggest hit from loans that go bad?
••• Jitters over the growing troubles of sub-prime borrowers have been rocking financial markets for weeks. Lenders' shares slumped further last week after the Mortgage Bankers Assn. said more than 13% of sub-prime loans had fallen behind on payments, up from 12.6% in the third quarter and 10.6% two years ago.
••• One chief investment officer, of the anonymous fund states the firm isn't stunned by what's happening with sub-prime loans.
••• But they are pessimistic about the U.S. economy for much of the last year, and has predicted that a weakening housing market would be the final blow to cash-strapped consumers. A recession would more than likely result, he has said.
••• "Our strategy all along has been, let's put together a portfolio that will hold up better when the defaults come," he said.
••• Financial LegalCorps team leader for mortgage CDOs says: "It's not that we're arrogant, or that we've got a lot of hubris, but we think we've got the position and the talent in place to be able to analyze and manage through this period."
••• The author of BofA, The Tortfeasor said, "that those who innovated the the CDO investment business have sharp opinions about mortgage securities. The book's online pages studies that sector since the 1980s.
••• The book updates those funds that have carried on the Loan Pooling theory since the late 1990s and those who havedeveloped the computer programs to monitor mortgage securities and other asset-backed bonds.
••• Mortgage CDOs are just one piece of Financial LegalCorp's business. But its focus on those mortgages that have put CDO firms in the right position in recent years to feed investors' voracious appetite for investments backed by home loans.
••• Relatively low interest rates since 2001 on Treasury bonds and other high-quality securities left many investors starved for decent yields. As home sales and prices surged, Wall Street was thrilled to ride in as the boom's financier.
••• Securitizing mortgages -- packaging the loans for sale to investors via bonds -- has provided borrowers with the funding they need and investors with securities that have paid them more than many other bonds.
••• Securitization isn't new, but the market had never seen anything on the scale of the rush to securitize mortgages in recent years.
Part 02 - The China Connection / Collateralized debt obligations became the natural buyers for mortgage bonds. Wall Street previously had used CDOs for investments such as corporate "junk" bonds and manufactured-housing loans. Some of those pools ended badly for investors. But mortgage bonds, traditionally a stable asset, seemed a perfect fit for CDOs.
••• CDOs offered investors the option of picking the specific levels of risk and return they wanted from a loan portfolio. That's where financial engineering by firms like TCW came in.
••• A CDO creator could take a pool of mostly sub-prime mortgage-backed bonds and cut it into tranches (French for "slices"). At the top of that stack of slices would be the highest-quality tranches, which offered modest yields but (theoretically) no risk of principal loss.
••• The investors in the lower tranches would earn higher yields while also agreeing to absorb any losses suffered by the loan pool, if necessary.
••• At the very bottom would be the so-called equity tranche holders, who would get paid only if everything worked out well.
••• Investors wildly embraced the CDO concept: Global sales reached a record $476 billion last year, nearly six times what was sold in 2001.
••• As a CDO manager, the anonymy of most funds, find their roles -- not only to construct the tranches but also to manage the underlying assets. For that, its investors are paying fees of up to 0.5% of assets yearly.
••• The crucial questions ahead for most CDO managers: How many of the mortgage loans in their pools will fall victim to default, and then foreclosure? How big will the losses on those loans be? How high up the tranche food chain will the losses reach?
••• Whatever happens, it won't be overnight. For one thing, CDO pools are designed to be long-term investments, maturing in years, not months. Likewise, it also can take a long time for a home to be placed in foreclosure, and for the lender to find out whether the home value covers the loan or falls short.
••• For a China mortgage CDO Hedge fund player, the risk of a slew of problems in its mortgage portfolios doesn't seem to bother their portfolios of obvious issue of angry clients.
••• The foreign firm's own money is invested in its portfolios, protected by mortgages in areas they wish to own.

Part 03 / The California Public Employees' Retirement System, for example, has steered clear of CDOs in recent years, said Curtis Ishi, a senior investment officer at the pension fund.
••• "We need to understand the management and how they produce returns," Ishi said. CDOs, he said, require "quite a bit of analysis."
••• These typically aren't investments that mutual funds buy. Los Angeles-based TCW Group, one of the biggest manager of CDOs, says none of its retail mutual funds owns CDOs.
••• The central idea of a CDO is to take a pool of assets, such as mortgage-backed securities, and carve it into slices that offer varying levels of risk and return.
••• That involves a lot of financial modeling about how the underlying assets will fare.
••• The background of people who work on CDOs says something about the complexity of the products: Pete Nolan, who analyzes the portfolios for money manager Smith Breeden Associates in Chapel Hill, N.C., has a Ph.D. in sub-molecular physics.
••• Because of CDOs' complexity, analysts say, many institutional investors simply relied on the quality grades that major bond rating firms gave to CDO slices. If a rating firm said a CDO slice was of good quality, that may have been enough justification for an investor to own it.
••• "They were buying a rating," said Scott Simon, a mortgage expert and money manager at Pacific Investment Management Co. in Newport Beach.
••• Now, amid rising mortgage defaults and deepening fear about widespread fraud in loan underwriting during the housing boom, the rating firms are under pressure to review their upbeat CDO grades.
••• Relatively few of the CDOs sold in recent years have been downgraded.
••• "No one can say we're not aware of the risks," said Kevin Kendra, an analyst at rating firm Derivative Fitch. "It just hasn't materialized yet" in the structure of CDOs, he said.
••• Yet many analysts say the market prices of the diciest mortgage bonds, those backed by so-called sub-prime loans, indicate that still-rosy CDO ratings aren't reflecting reality.
••• Some mortgage bonds rated BBB, the lowest investment-grade rating, "are going to see real losses of principal soon," predicted Janet Tavakoli, head of Tavakoli Structured Finance Inc., a consulting firm.
••• What happens if investors are shocked to see their CDO slices downgraded in quality, and fear worse to come? Because CDOs are private pools, selling out isn't necessarily a snap.
••• Investors either could go to Wall Street to try to sell their piece of the pie, or back to the CDO manager. Either way, the risk is that investors would end up selling at fire-sale prices -- and add more fuel to the meltdown already well underway in many mortgage securities.

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