Small Bang Time as GGP Takes Control

I have got far too little time at the moment with the Time Wasting Insolvency initiative nearing its crescendo - hence the lack of entries. Still it's the weekend, it's not like L had plans that might involve taking up more time with wedding preparations surely...

General Growth Properties Extension
A very big plus this week was the news on Tuesday that GGP got the hoped for time extension for the exclusion period to file a restructuring plan, along with a less important extension to the time allowed to file schedules of assets and liabilities.

So what does this actually mean? To Absolutely Confidential's question, yes the commentator you mention did get carried away with regards to General Growth Properties now spending the next six months piling up cash.
General Growth proposed in the original cash collateral motion back in mid-May to continue their prepetition cash management practices. Unless the SPE inclusion decision is overturned - still no formal news on this, but the extension suggests this has been made - then this means GGP has committed to the following as part of the ruling:

• continue the practice of a centralised cash sweep from its various sub-entities into the central firm accounts
• provide 'adequate protection' of creditors cash collateral by providing a replacement lien on intercompany loans - this is the notion of ensuring there is no substantive consolidation of CMBS
• continue to pay interest on CMBS loans at the non-default contract rate
  

It looks like somebody else made the same point in the comments, including referencing back to the Cadwalader court commentary. Sullivan's response: "correct but there is approx. $5B in default that is now another 7 months from being resolved and I believe another $8b that will fall into default during that time frame.."

Just because more loans will fall into default during the next period does not mean they will be treated differently from those pre-bankruptcy. Presumptuous at best, although in most cases firms within Chapter 11 cannot service debts and so do use this period as an effective 'breather' (a significant criticism of Chapter 11, since it can provide weak companies with an unfair competitive advantage during the process).

However GGP have committed to not doing so, partly to illustrate the viability of the existing business model and add credence to extensions being a viable solution.

Regardless this is excellent news for the stock in increasing incentives of creditors to negotiate - and was rightly reflected in a 10% upturn in share price since the announcement. It is striking that every bit of news since General Growth filed for Chapter 11 has been positive.

Industry Changes to Structured Credit Products
Related to changes in the credit markets that I have mentioned previously are the industry protocol updates made by the International Swaps and Derivative Association (ISDA) for restructuring events of credit derivatives. Firstly there was the release of the Big Bang protocol in April 2009, which has been designed to add certainty for investors when defaults occur. Something as we are seeing in recent months has been a significant grey area with existing products when finally tested with a default event.

Big Bang was the final step in a process known in the industry as 'hardwiring', which has crucially incorporated auction settlement terms into standard CDS documentation for the first time. The big bang protocol includes the following:

1. Introduces auction settlement as a means of settling transactions - eliminates the need for defining credit event protocols for every potential scenario to cash settle Credit Default Swaps.
2. Makes resolutions of the Determinations Committees binding by adding into standard CDS contracts - for issues including i) dispute on whether a credit event has occurred, ii) whether obligations are deliverable, iii) whether an auction should be held.
3. Adds credit and succession events (aka backstop 'look back' provisions) into the CDS documentation - to provide a common standard effective date for CDS transactions.
   

Further refinement to resolving restructuring disputes has been added by Small Bang, which took effect on Friday, details of which are covered in this ISDA web presentation. Key additions are to provide buyers with a five day window (sellers with two days) to trigger a credit event after a restructuring has taken place. Once triggered the evidence is then presented to the Determinations Committee to argue the case - a combined arbitrator and judge in the process.

It is all about clarifying how credit derivatives will work in future, and ensuring that buyers and sellers have a clearer idea of what protection (and liability) they are entering into. For those interested in finding out more about what credit companies companies will be entering into over the coming years, and how disputes will be handled, take a look at this analysis.

Additional Reading on re-REMIC's
For recommended additional reading on how structured products are evolving and what are impacting the recovery of the credit market this Bloomberg article illustrates how re-REMIC's are being used by the banks to refinance real estate. This article by Deloitte into re-REMIC's is dry but provides a very detailed examination of how these function and their impact.

Finally this report by Andrew Cuomo into bankers bonuses has to be the least surprising set of observations since the credit crisis of October 2008 plunged the world into recession, although this is the choice quote:

"When the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well."

Welcome to my world Andy...

Tough Times On The Milk Round

No sign of any movement today regarding job cuts, although a chap in Synthetics mentioned earlier that he has already cleared his desk and gone so far as to draft a goodbye letter to his team in readiness. Optimism seems to be but a distant memory, although with unemployment in the UK forecast to spiral upwards by 1 million in 2009, perhaps that is justified.

The spectre of unemployment is something all of us in the City are having to live with right now. I must admit, I am feeling a bit guilty about all the rumour spreading now. Oh well, I'm preparing them mentally for the big push when it happens - and I heard from another source just now that the cull has merely been postponed for a week. I suppose it partly depends on the firm, role and all manner of other factors. There is no harm in me divulging more interesting detail at some point - after all nobody is reading this anyway I expect.

To my surprise who should have wandered past me on the Desk this morning but Shriek herself. I've been lucky enough to never meet her before, and so it took somebody to point her out. In this world of globalisation, it is quite impressive how daily working relationships can be by voice alone, such that you can pass that person without even recognising them. Fortunately that worked both ways, as Shriek does not seem to know me either. She is a real oddity, with bright red (dyed) hair, and seems to have a botox habit judging by the size of her lips. In person, she seems quite different from the aggressive avatar I have known through various phone arguments, and appears to whisper rather than speak.

As such I made a sharp exit from the office before anybody noticed - the last thing I wanted to do was get dragged along to lunch with her. Obviously the 'dodgy dossier' being compiled against her can't be too serious if they've authorised travel expenses for her over to London this week.

I have been asked to take part in some graduate recruitment for the bank. As the Boss explained, this cannot impinge upon market hours, and so instead he seems to be looking for me to show enthusiasm by giving up free time on this. If the cull had already taken place, I might be tempted to show my true colours - instead I said I would be thrilled to make a positive contribution.. saracasm missed.

These are certainly tough times for graduates entering the job market for the first time in 2009. The cut back in graduate employment is in a range of sectors, and it goes without saying that banking is no exception. Many graduates interviewing with top firms now, who would have been a shoe-in for jobs in the past, are unfortunately going to get the 'small envelope' reply. That's the one which reads: 'Thank you for attending the interview, regrettably we will not be pursuing your application further at this time.'

Before feeling too sorry for graduates, they might just be the luckiest generation since the City 'talent drain' first began after Big Bang. They have a genuine chance to ask themselves that all-important question: 'what should I do in life?', without the financial opportunity cost that tempted so many of us to the devil's path.

"Why exactly do you want to go into finance?" is often my first question in interviews. I have interviewed many grads over the years, and the response is usually vague; at best recycling meangingless PR waffle from the corporate website, at worst you might get a grunt from the less communicative ones.

As somebody on the inside, I would suggest that graduates strongly consider other options. They will probably have no choice in many cases anyway - including L's little brother, who is actively looking now. Although financial services will undoubtedly recover, it is likely that compensation will take years to ever regain the levels previously seen, and a whole shake-up of the bonus culture is underway. As such, graduates today face working longer hours for less reward, which doesn't make sense to me.

As I mentioned in my first ever post, I am really looking to find a way out of this industry sooner rather than later and have always dreamed of setting up my own business. On that subject, I have a web-based business idea brewing that seems to be an excellent synergy between my skill set, experience and where there might be future demand. It's just finding the time to turn that into reality that is the biggest challenge right now.