Lipper HedgeWorld Staff.
For many in the investment management world, 2007 couldn’t end fast enough. Credit markets were crumbling, stock prices were stumbling and the economy was sputtering — at least in the United States.
It was a quarter during which we became familiar with some uncomfortable terms like ‘write-down’ and ‘sovereign wealth fund’, and re-acquainted ourselves with ‘liquidation’. The quarter, it seemed, was dominated by news of major investment banks posting huge losses as a result of exposure to sub-prime assets, including mortgages and pools of mortgages, and other debt that turned out to not be worth what many — including the rating agencies — thought they were.
And yet, amid all the gloom, some profited and others saw opportunity to profit in the future. The world didn’t end, although there were a couple days when people in the financial industry probably thought they could see the end from where they were. We will probably look back on the fourth quarter of 2007 as the point where it all started heading south… or not. Maybe it will be where we saw what was ahead and changed course. Time will tell. In the meantime, here’s a look back at the quarter that was.
The bad news
Citigroup disclosed on 4 November that it would write down between $8 billion and $11 billion in exposure to sub-prime mortgage assets. Citi’s chairman and chief executive, Chuck Prince, resigned. The write-downs were related to US sub-prime mortgage exposure.
In a statement made in November, Morgan Stanley said that it had $12.3 billion in US sub-prime related balance sheet exposure at the end of August. Morgan Stanley also reported losing $2.5 billion in fourth-quarter profits, due to losses incurred in two months (from the end of August to the end of October). As a result of the market decline since August, Morgan Stanley’s revenues for those two months were reduced by $3.7 billion. This represents a decline of approximately $2.5 billion in net income on an after-tax basis, the bank said in the statement.
Merrill Lynch also reported the biggest quarterly loss in its history on 24 October after writing down $8.4 billion, mostly from bad investments related to risky sub-prime mortgages. ‘The bottom line is we got it wrong by being over exposed to sub-prime’, Merrill Lynch chairman and chief executive, Stan O’Neal, said on a conference call.
The first of a new round of investor claims was filed against Bear Stearns Cos. on 5 December for its role in managing two mortgage hedge funds that collapsed earlier this year, securities lawyers said. The claims, which will be submitted to the Financial Industry Regulatory Authority for arbitration, represent more legal challenges for Bear Stearns, which recorded losses this summer. The first of at least 11 new claims involves an unidentified Cayman Islands fund of hedge funds manager that lost $1 million in the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund.