Housing: 2007 Thread.

[Vic]

Originally posted by: Slew Foot

Originally posted by: dullard
Existing home sales plummet again to multi-year lows, June 2007. But this is important, prices are just below the all time high. Inventory of homes also shrank. Possible cause: people got frustrated with sales, and pulled the houses OFF the market that weren't getting offers up to expectations. Net result: lower sales, lower inventory, and higher average price of those that did sell.

Also note that subprimers who typically buy cheaper homes arent buying homes anymore, thus the median price of homes that actually sell, is higher. Median/sqft would be a better estimate of home prices.

Well, like I said, there are a ton of factors that are going to work to keep values up. Pulled listings and reduced activity in certain sectors are just part of that (however, keep in mind that median is not the same as average, so your example doesn't actually work).
Another factor is incentives, i.e. homebuilders throwing in AC and tile "for free" and sellers doing repairs or offering home warranties.
Sure, it's a buyer's market, but the seller needs his price and is going to be willing to throw some incentives into the deal in order to get it.

 

[LegendKiller]

Originally posted by: Vic

Originally posted by: LegendKiller
Again, they were the first and second line of defense. They were the ones extending the credit and many did so fraudulently.

I am not the one crying foul here. You accuse people of name-calling, yet resort to it yourself. You try to browbeat others using some sort of special status you have here, to say that if they attack you, you're going to get them banned. Yet, you resort to the same activities yourself.

I do not do that. If somebody wants to hurl insults, I'm not going to go crying, or call them unfair when I do it myself. I don't play that little whiny girl game.

Except that's what you're doing right now, whining like a little girl. You really should save this kind of thing for PM. But... because you had to air it out...

Look, I never went to the mods with any particular complaint against you, so I'm not sure what you're talking about. Nor have I abused my Elite status anyway (except to explain the irony of how I got it in context to your comments about me in this thread).

My issue with you here was simple: you crossed a definitive line. Personal attacks are one thing. This internet message board is a fantasy discussion. You can say as many nasty things about "Vic the ATPN poster" as you want, I scarcely care except to fire some flames back against "LegendKiller the ATPN poster." That's all in fun. However, you start talking lies about the professional ethics of my real life self, and you've gone too far.
Is this really that hard for you to figure out? And was it really so shocking to you when I fired back the same at you?

Ahh yes, calling people scum isn't going too far. You're just as guilty as anybody else. Frankly, I don't care what you call me or what you insinuate. I just find it funny that you try to brow-beat me but then use the same tactics. What was especially funny was when you called me an "e-thug" or something like that. After you said you would get me banned. LOL! Please...don't be a hypocrite.

I'm not whining, just saying that you shouldn't really be calling people out for attacks and then doing so yourself.


Back to the main topic. Credit is drying up everywhere, you're going to see the fallout of that in the next few weeks as all of these LBOs hit the crapper. This whole economy has been chugging along on housing, that's done, so LBOs and M&A were saving the day, now that's peetered out. What's next? Ummm...nothing!

Contagion is now the word on the street.

 

[theeedude]

http://biz.yahoo.com/ap/070726/economy.html?.v=15

Sales of New Homes Plunge by the Largest Amount in 5 Months

WASHINGTON (AP) -- Sales of new homes fell in June by the largest amount in five months as the housing industry continued to struggle with its worst downturn in 16 years. The median home price also fell...

Stick a fork in RE.

 

[dullard]

Originally posted by: senseamp
Stick a fork in RE.

Actually, stick a fork in the home builders. Ouch. Nearly $1B lost in a quarter.

 

[Trianon]

crazy day on Wall Street today, got rocked by housing market concerns

 

[mshan]

Billions and billions of dollars of DERIVATIVES getting slowly unwound.

I would guess right now this is a correction as market is being repriced for increased cost of borrowing money.

Thing that could really create a worldwide financial meltdown would be some unforseen even that causes so many of these highly leverage derivative bets to be unwound suddenly and some really big players all being on the losing end of a highly leveraged derivative bet.

http://en.wikipedia.org/wiki/Derivative_(finance)


EDIT: Ron Insana said there is actually $750 trillion dollars of market derivatives around the world. Gotta hope that bad leveraged derivative market bets are unwound slowly and in an orderly manner.

 

[GrGr]

Subprime could create global crisis, economist says

World is one "Bear-like' event away from liquidity freeze, Zandi warns
By Rex Nutting, MarketWatch

Last Update: 4:07 PM ET Jul 26, 2007


WASHINGTON (MarketWatch) -- The problems in the U.S. subprime mortgage market could spiral out of control into a global financial crisis, economist Mark Zandi said Thursday.

With a "high level of angst" in the financial markets about who will take the losses from more than $1 trillion in risky mortgages, we could be just one hedge-fund collapse away from a global liquidity crisis, said Zandi, chief economist for Moody's Economy.com.

A global meltdown is not likely, but the risks are growing, Zandi emphasized in a conference call with reporters following the release of a new study on subprime debt that concludes that the housing crisis could be deeper and last longer than investors now believe. Read the latest data on home sales.

And it could spread. "Mounting mortgage delinquencies and defaults now pose the most serious threat to the global financial system and economy," Zandi said in his report.
"If there is a fault line in the global financial system, it runs through the U.S. housing and mortgage markets," he said.

Zandi's comments came as U.S. financial markets reeled from a growing credit crunch, centered not in the subprime arena, but in the leveraged corporate debt market.
On Thursday, Tyco became the latest multinational company to pull a deal because the buyers have fled. U.S. stock markets plunged Thursday, while U.S. Treasurys benefited from a flight to quality. See Market Snapshot.

Treasury Secretary Henry Paulson, an old Wall Street hand himself, tried to reassure markets with a mid-afternoon televised pep talk. Lenders and borrowers should exercise more "discipline," he said, and he repeated his view that any problems in the subprime market would be "largely contained."

But Zandi and others say the problems are only beginning.
In a note to clients on Wednesday, Goldman Sachs chief economist Jan Hatzius said the housing correction could be less than half over, if history is any guide.
"The dramatic deterioration in the mortgage market suggests at least the possibility that the credit crunch in the mortgage finance industry could become as bad as in the bad old days of the 1970s and 1980s," Hatzius wrote.

Zandi used another historical comparison: the Asian financial crisis of the late 1990s.
"Unlike the financial crisis of a decade ago, however, global capital would likely flow away from U.S. markets, not to them, as the genesis for the crisis lies within the U.S. financial system."

After Bear Stearns was forced to write off the value of two large hedge funds that had invested heavily in securities backed by subprime debt, it could take just one more "Bear-like event" for the financial system to freeze up,
"If there's another major hedge fund that does stumble, that could elicit a crisis of confidence and a global shock," Zandi said. The potential "is quite high," he said. He gave it a one-in-five chance.

Zandi said global financial conditions have been supported by strong growth and substantial liquidity, supercharged by "unprecedented risk tolerance." But that's changing. Global liquidity is drying up, with central banks tightening. And risk is being re-priced.
"The credit window is now closed," wrote strategist Barry Ritholtz in his blog.

As for the U.S. housing market, Zandi expects a lot more pain, but not a recession.
Here are some highlights of his forecast, based on a study using anonymous data collected by consumer credit agency Equifax:

Home prices will fall 10% from the peak nationally, more in the bubble regions in California, Florida, Nevada, Arizona and Washington, D.C.
Home sales could bottom later this year, home construction could bottom early next year, and house prices could bottom late next year. It'll be 2010 before the housing market could be termed "normal."

About 17% of total mortgage debt is at risk, totaling about $2.5 trillion in subprime, Alt-A and jumbo debt. About $1.4 trillion is at serious risk of default. Investors will lose about $113 billion as $460 billion worth of mortgages default.

About 20% of the subprime loans written in the last half of 2006 will fail, with the peak of the defaults not coming until 2011. A "significant number" of these borrowers never made a single payment.

More than 2.5 million first mortgages will default this year and next year. Subprime borrowers will experience significant financial distress.
The U.S. economy will grow less than 3% annualized through the middle of 2009. A healthy job market should prevent a recession, although the jobless rate will likely rise to 5% from 4.5% by the end of the year.

Consumer spending has already slowed and will slow further.

Rex Nutting is Washington bureau chief of MarketWatch.

The Hedge Fund managers one and all have the happy smilie faces on but beneath the facades the blood bath is spreading.

 

[GrGr]

From Bloomberg:

Fannie Mae declined $1.21 to $59.39. The largest provider of money for U.S. home loans said in an e-mail that it held $47.2 billion of securities backed by subprime mortgages at the end of June . Citigroup Inc. analysts said in a report that the subprime mortgage bonds Fannie Mae and Freddie Mac hold may have lost $4.7 billion in value, the Wall Street Journal reported today.

So the government is buying these crappy subprime mortages with taxpayer money. More wellfare for Wall Street looks like to me.

 

[OS]

American Home Mortgage says faces margin calls

American Home Mortgage Investment Corp. (AHM.N: Quote, Profile, Research) said its banks are demanding it put up more cash after the mortgage lender wrote down the value of its loan and security portfolios significantly.

The company said in a statement released late Friday that as a result of the margin calls from lenders, it has delayed paying dividends on its common stock, and plans to delay payments on its preferred shares.

 

[Trianon]

Originally posted by: OS
American Home Mortgage says faces margin calls

American Home Mortgage Investment Corp. (AHM.N: Quote, Profile, Research) said its banks are demanding it put up more cash after the mortgage lender wrote down the value of its loan and security portfolios significantly.

The company said in a statement released late Friday that as a result of the margin calls from lenders, it has delayed paying dividends on its common stock, and plans to delay payments on its preferred shares.

Continuation of this story, I think this is the news that still pulling the market down today, inspite of other, mostly good, news.

American Home can't fund loans

By Jonathan Stempel 9 minutes ago

American Home Mortgage Investment Corp (AHM.N), a large U.S. mortgage provider, said on Tuesday it can no longer fund home loans and may liquidate assets, putting its survival in doubt.

The Melville, New York-based real estate investment trust retained Milestone Advisors and Lazard to help it evaluate options and advise "with respect to the sourcing of additional liquidity including the orderly liquidation of its assets."

Shares of American Home, which had not traded since Friday, sank $9.15, or 87.4 percent, to $1.32, after the announcement. They traded as high as $36.36 in December.

American Home's announcement shows how concerns about credit quality and homeowner defaults have spread beyond subprime lenders, which lend to people with weaker credit, to lenders that make higher-quality loans.

"The chances are pretty high that the company either goes bankrupt or materially restructures, leaving little value for shareholders," said Bose George, an analyst at Keefe Bruyette & Woods Inc. in New York.

"The business model of non-bank, mortgage lenders is challenging, and may be unstable, because they are so dependent on the willingness of the capital markets to fund operations," he added.

Mary Feder, a spokeswoman for American Home, did not immediately return an e-mail seeking comment. Her telephone mailbox was not accepting messages.

The company also did not return calls on Monday, after it delayed paying a scheduled common stock dividend and announced "major" writedowns.

Many U.S. mortgage providers have struggled with a housing slump that has caused home prices to stall, borrowing costs to rise and defaults to soar. Dozens have tightened lending policies, quit the industry, or gone bankrupt.

American Home has specialized in prime and near-prime loans. It has, however, made many loans that allow borrowers to produce little documentation of income or assets. It recently commanded about 2.5 percent of the U.S. mortgage market.

MARGIN CALLS

In its statement, American Home said it was unable to fund $300 million of loans on Monday and did not expect to fund $450 million to $500 million on Tuesday.

It also said it could not borrow from its credit lines, and had "substantial" unpaid margin calls pending to lenders, even after meeting "very significant" calls in the last three weeks.

American Home relies on bank financing to help fund home loans. At the end of March, it had $4.01 billion in "warehouse" lines of credit, and $836.9 million of cash and equivalents.

If it sought bankruptcy protection, American Home would join New Century Financial Corp (NEWCQ.PK) and several other home lenders in seeking protection from creditors this year. Most of those lenders, however, catered to subprime borrowers, rather than borrowers considered better credit risks.

LINK

 

[LegendKiller]

Originally posted by: GrGr

From Bloomberg:

Fannie Mae declined $1.21 to $59.39. The largest provider of money for U.S. home loans said in an e-mail that it held $47.2 billion of securities backed by subprime mortgages at the end of June . Citigroup Inc. analysts said in a report that the subprime mortgage bonds Fannie Mae and Freddie Mac hold may have lost $4.7 billion in value, the Wall Street Journal reported today.

So the government is buying these crappy subprime mortages with taxpayer money. More wellfare for Wall Street looks like to me.

These companies are fully funded by public equity and debt and are *not* funded by taxpayers. They raise debt/equity just like any normal corporation and participate in the issuance of MBS paper like any normal public corporation. The significant difference is that they have a charter which limits the operations which they can undertake. There is no federal guarantee for performance of the company. Thus, there is no taxpayer subsidy.

Know before you speak.

 

[LegendKiller]

Originally posted by: Trianon American Home...

This is also pulling a lot of bank stocks down as people realize the banks may have over-extended themselves in these areas.

 

[Vic]

AHM is not a bank. It's a REIT. It's pending collapse is an example of the banks strenghtening their positions and squeezing out the conduits due to current market conditions. In other words, the banks are re-taking control of the mortgage business while conduits, correspondents, and brokers are going bye-bye. By next year or so, it'll be back to the days of having to go to your bank or credit union (read: CU's are the new S&L) in order to get a mortgage loan.

 

[LegendKiller]

Originally posted by: Vic
AHM is not a bank. It's a REIT. It's pending collapse is an example of the banks strenghtening their positions and squeezing out the conduits due to current market conditions. In other words, the banks are re-taking control of the mortgage business while conduits, correspondents, and brokers are going bye-bye. By next year or so, it'll be back to the days of having to go to your bank or credit union (read: CU's are the new S&L) in order to get a mortgage loan.

Don't think anybody ever said it was a bank. Banks were extending it conduit lines. However, those conduit lines have several conditions to them, including leverage ratios, debt service coverage ratios, delinuency, default, or any other number of things including cross default language. Provided a company operates in a responsible way and can maintain it's current solvency they are fine.

However, once defaults or delinquencies tick up, then many of the mortgages will fall out of the borrowing base for the conduit line, meaning that the company will have to wire funds into the conduit to pay down commercial paper that isn't covered by the assets. Additionally, the financial covenants can reduce the advance rate, further tightening the cashflow of the company.

Naturally, somebody like you would say that this is because the banks want to grab more money. However, these loans are funded by ABCP, which provides over $2TR in cheap liquidity. If the CP market were to sustain losses, the CP conduit would be locked out of funding, forever. The bank itself would be blackballed and it's short-term ratings would plummet. In order to open up a new conduit it would have to advance a ton of capital in a Letter of Credit + Liquidity Agreement to ensure the CP conduit wouldn't sustain losses.

Essentially, if the CP market were to take a hit you would see the meltdown of the entire short-term lending system and a freeze of the credit markets in general. The reason why financial covenants are strong in these deals is to ensure that CP conduits do not take losses. Thus, the collateral funded is severely limited in times of duress. It's an automatic breaker to ensure the rest of the system works. That's the nature of secured lending and that's why it's liquid and cheap.

You can try and spin it any way you want, but you're still wrong with what you are trying to say.

 

[Vic]

:roll:

It's amazing how you spin something simple like their warehouse line got cut into something far more complex and fantastical than it actually is, and then claim I'm the one doing the spinning.

 

[LegendKiller]

Originally posted by: Vic
:roll:

It's amazing how you spin something simple like their warehouse line got cut into something far more complex and fantastical than it actually is, and then claim I'm the one doing the spinning.

Just like you can claim that it's as simple as banks trying to grab more power?

It's never as simple as somebody who doesn't know anything about the process can make it seem. That's the simplicity in conspiracy theories. You don't have to know anything about the process to make it seem conspiratorial, evil, and sucker people who know nothing about the process into it.

It's not as simple as you said and I added the complexity in to show that it isn't. There is far more at stake here than some company who has crap loans. It's amazing that you don't know that while claiming that all of this liquidity was great for middle-america to improve their home ownership.

 

[Vic]

Originally posted by: LegendKiller

Originally posted by: Vic
:roll:

It's amazing how you spin something simple like their warehouse line got cut into something far more complex and fantastical than it actually is, and then claim I'm the one doing the spinning.

Just like you can claim that it's as simple as banks trying to grab more power?

It's never as simple as somebody who doesn't know anything about the process can make it seem. That's the simplicity in conspiracy theories. You don't have to know anything about the process to make it seem conspiratorial, evil, and sucker people who know nothing about the process into it.

It's not as simple as you said and I added the complexity in to show that it isn't. There is far more at stake here than some company who has crap loans. It's amazing that you don't know that while claiming that all of this liquidity was great for middle-america to improve their home ownership.

And it's amazing that you can keep claiming that I make claims that I've never even fsckin' made (like the bolded). Do you have any other argument besides straw man? Or are you going to continue being an asshole here forever?

I've never said this liquidity was great. For the 3 millionth time, I have ALWAYS been against the housing boom here. How many times do I have to say the same time over and over again while you keeping acting like your hero dmcowen674 and pretending I'm saying something else? Get a fsckin clue.

Nor did I present any conspiracy theory. Market shakeups always result in consolidation of business. It's sometimes jokingly referred to as the "Forrest Gump Rule" (because Forrest got rich in the shrimp business just by weathering the storm). In this case, market forces are causing the banks to squeeze out the middlemen. How is that a conspiracy?

Just keep making sh!t up, internet cage fighter! You look oh so cool.

 

[Starbuck1975]

What amazes me is recent news that a substantial number of home buyers with more than decent credit scores will also be facing foreclosure in the coming months.

The reality is setting in...the housing bubble of the past 7 years was a Ponzi scheme on a national scale, fueled by a greed infused pathology that home prices would appreciate indefinitely at 10% to 20% a year.

Sure, some investment bears who knew what they are doing, and have experience reading market conditions, made a killing on real estate...especially those who invested in 2000 and 2001.

But the speculators and bandwagon mentality of the past 3 years created artificial demand and drove home prices skyward, built on a credit bubble house of cards.

Well boys and girls, the house of cards is about to come tumbling down.

 

[theeedude]

RE issue is spreading. First it's subprime, now it's alt-A, soon it's going to be prime borrowers telling the lenders to keep the devalued houses and go FOAD.
People who are still in denial or thinking it's well contained are going to be shaken back to reality the hard way.

 

[Slew Foot]

F***. I was about to buy puts in AHM after GrGr posted that. Their stock was down 90% today.

 

[GrGr]

Originally posted by: LegendKiller

Originally posted by: GrGr

From Bloomberg:

Fannie Mae declined $1.21 to $59.39. The largest provider of money for U.S. home loans said in an e-mail that it held $47.2 billion of securities backed by subprime mortgages at the end of June . Citigroup Inc. analysts said in a report that the subprime mortgage bonds Fannie Mae and Freddie Mac hold may have lost $4.7 billion in value, the Wall Street Journal reported today.

So the government is buying these crappy subprime mortages with taxpayer money. More wellfare for Wall Street looks like to me.

These companies are fully funded by public equity and debt and are *not* funded by taxpayers. They raise debt/equity just like any normal corporation and participate in the issuance of MBS paper like any normal public corporation. The significant difference is that they have a charter which limits the operations which they can undertake. There is no federal guarantee for performance of the company. Thus, there is no taxpayer subsidy.

Know before you speak.

Ah ok, I am happy to learn

 

[LegendKiller]

Originally posted by: Vic

Originally posted by: LegendKiller

Originally posted by: Vic
:roll:

It's amazing how you spin something simple like their warehouse line got cut into something far more complex and fantastical than it actually is, and then claim I'm the one doing the spinning.

Just like you can claim that it's as simple as banks trying to grab more power?

It's never as simple as somebody who doesn't know anything about the process can make it seem. That's the simplicity in conspiracy theories. You don't have to know anything about the process to make it seem conspiratorial, evil, and sucker people who know nothing about the process into it.

It's not as simple as you said and I added the complexity in to show that it isn't. There is far more at stake here than some company who has crap loans. It's amazing that you don't know that while claiming that all of this liquidity was great for middle-america to improve their home ownership.

And it's amazing that you can keep claiming that I make claims that I've never even fsckin' made (like the bolded). Do you have any other argument besides straw man? Or are you going to continue being an asshole here forever?

I've never said this liquidity was great. For the 3 millionth time, I have ALWAYS been against the housing boom here. How many times do I have to say the same time over and over again while you keeping acting like your hero dmcowen674 and pretending I'm saying something else? Get a fsckin clue.

Nor did I present any conspiracy theory. Market shakeups always result in consolidation of business. It's sometimes jokingly referred to as the "Forrest Gump Rule" (because Forrest got rich in the shrimp business just by weathering the storm). In this case, market forces are causing the banks to squeeze out the middlemen. How is that a conspiracy?

Just keep making sh!t up, internet cage fighter! You look oh so cool.

I have seen on here plenty of times where you keep whining about how this will hurt all of those poor innocent home owners. Spare me the further righteous indignation schtick. Part of their ownership was through liquidity.

The middlemen squeezed themselves out when they kept originating trash. The middlemen who didn't do that will weather this just fine. As far as the others, they can sit and spin for all I care.

I told my boss today that in 3-5 months this is going to be a ripe buying time for us. My bank had barely any exposure to this trash and they unloaded early. What remains is deminimis. That means our powder is dry and ready to scoup this stuff up at great prices. It's going to be a feeding frenzy for those who have the capital.

 

[dmcowen674]

A few weeks ago I predicted Countrywide and Wells Fargo will bite the dust.

Today more signs I will be right:

7-31-07 Shares of American Home Mortgage Investment Corp. plunged 90 percent Tuesday after the company raised fears it may become insolvent

The struggling mortgage lender said its financial backers have essentially pulled the plug. The Wall Street banks that lend American Home Mortgage money for home loans ? which include firms like UBS AG, Bear Stearns Cos., and JPMorgan Chase & Co. ? will not extend the company any more money, and some have demanded back the money they have lent.

American Home shares, which were halted all day Monday, plummeted when trading finally began at about 2 p.m. EDT and ended the day at $1.04 a share, down from $10.47 on Friday before the company first disclosed the depths of its financial woes.

Last year, the lender sold two-fifths of its loans to Countrywide Financial Corp., Deutsche Bank AG, and Wells Fargo & Co.

Dozens of mortgage lenders have gone bankrupt this year as more people miss payments on home loans, housing prices sag and skittish investors flee risky mortgage debt.

But while most of the bankrupt lenders catered to "subprime" borrowers ? or borrowers with checkered credit histories ? almost none of American Home Mortgage's $58.9 billion in loans last year were classified as subprime.

 

[LegendKiller]

Originally posted by: dmcowen674
A few weeks ago I predicted Countrywide and Wells Fargo will bite the dust.

Today more signs I will be right:

7-31-07 Shares of American Home Mortgage Investment Corp. plunged 90 percent Tuesday after the company raised fears it may become insolvent

The struggling mortgage lender said its financial backers have essentially pulled the plug. The Wall Street banks that lend American Home Mortgage money for home loans ? which include firms like UBS AG, Bear Stearns Cos., and JPMorgan Chase & Co. ? will not extend the company any more money, and some have demanded back the money they have lent.

American Home shares, which were halted all day Monday, plummeted when trading finally began at about 2 p.m. EDT and ended the day at $1.04 a share, down from $10.47 on Friday before the company first disclosed the depths of its financial woes.

Last year, the lender sold two-fifths of its loans to Countrywide Financial Corp., Deutsche Bank AG, and Wells Fargo & Co.

Dozens of mortgage lenders have gone bankrupt this year as more people miss payments on home loans, housing prices sag and skittish investors flee risky mortgage debt.

But while most of the bankrupt lenders catered to "subprime" borrowers ? or borrowers with checkered credit histories ? almost none of American Home Mortgage's $58.9 billion in loans last year were classified as subprime.

Yeah Dave, you and your "stock shorting = company gone" knowledge just make us all bow down to your superior intellect about finance and economics.

 

[Trianon]

Why Harvard Is Smarting
Bet on Former Manager,
Faulted for High Pay,
Leads to Crimson Loss
By CRAIG KARMIN and GREGORY ZUCKERMAN
August 1, 2007; Page C1

Harvard University's endowment fund has graduated some of the most sought-after money managers in the hedge-fund world.

Now one of those stars is teaching Harvard a lesson of its own.

In the past month, the university lost about $350 million through an investment in Sowood Capital Management, a hedge-fund firm founded by Jeffrey Larson. Mr. Larson managed Harvard's foreign-stock holdings until 2004, when he left to set up Sowood, which recently lost more than 50% of its value amid bad bond investments.

Mr. Larson isn't the only high-profile former Harvard-endowment manager with a mixed record since leaving the ivory tower. Jack Meyer, Harvard's former top investment manager, last year raised a $6 billion hedge fund, Convexity Capital, including an initial $500 million investment from Harvard. While Convexity's returns were subpar early on, its performance has improved lately, according to people familiar with the figures.

University spokesman John Longbrake said the school doesn't discuss individual endowment investments. Mr. Meyer, and a representative from Sowood, declined to comment.

While $350 million is a relatively small hit for the $29 billion Harvard endowment, the nation's largest, it highlights the risks as colleges nationwide embrace nontraditional investments such as hedge funds and private equity. Investments like these are less regulated than more traditional options, and often engage in the risky practice of investing borrowed money in hopes of amplifying their returns.

Along with Yale University -- where the roughly $18 billion endowment has achieved annual returns of about 17% in the past decade -- Harvard was among the first universities to embrace such alternative investments. The goal is to seek good returns that don't move in tandem with stock and bond markets, thereby giving diversity to the overall portfolio.

The strategy worked particularly well in the 2000-2002 period, when hedge funds generally did a much better job than other investments in protecting their clients' money from losses in the aftermath of the dot-com stock bust. That subsequently helped to spark new interest from institutional investors.

Sowood chalked up three years of gains for Harvard. But recently, it ran into difficulties navigating troubles in the bond market, suffering losses last month that cut the firm's assets in half, to $1.5 billon. This week, big Chicago hedge fund Citadel Investment Group agreed to buy much of Sowood's investment portfolio.

Harvard Management Co., which manages the endowment, has long been viewed as one of the nation's more successful and trailblazing investment-management firms. It boasts an annualized return of 15.2% in the past 10 years through June 2006. That compares with an 8.9% median return for endowments and foundations over that time period, according to Wilshire Trust Universe Comparison Service.

As Harvard's returns grew, so did its money managers' paychecks, which soared into the millions of dollars a year. That sparked controversy among alumni and others associated with the university, who argued that investment managers shouldn't be paid better than the school's Nobel Laureate professors, or its deans.

Mr. Larson's $17.3 million in payments in 2003 from Harvard were among the large salaries that drew complaints from alumni several years ago.

In 2005, Mr. Meyer and some of his top staff left the university amid complaints about their pay. Harvard hired Mohamed El-Erian from giant bond house Pacific Investment Management Co., an Allianz AG unit better known as Pimco, to run the university's investments.

Mr. El-Erian received compensation of $2.3 million for the fiscal year ended June 2006, and a portion of his pay is tied to investment performance. Mr. El-Erian couldn't be reached to comment yesterday.

For some detractors, Harvard's Sowood losses serve as proof that the money managers didn't merit their compensation. "We felt it was inappropriate then, and we don't feel it's appropriate now," says William Strauss, an author and Harvard graduate who is an outspoken critic of the salaries at Harvard Management.

"This is not a mutual fund," says Mr. Strauss. "Harvard needs to set limits on what it pays fund managers."

Nationwide, university endowments continue to show a greater risk appetite than pension funds and other large institutional investors. The top 53 university endowments, with nearly $217 billion in assets, have invested about 18% of their money in hedge funds, according to data provider HedgeFund Intelligence. The average public pension fund has only about 5% in hedge funds.

Kevin Lynch, a managing director at consulting firm RogersCasey, says there are at least two good reasons why universities have more readily welcomed hedge funds and private equity. Unlike public or corporate pension plans, which make annual payouts to beneficiaries, endowments have longer-term investment horizons, and therefore are more comfortable with the fact that alternative investments generally require investors to stay in for years.

Universities are also less worried about so-called headline risk, where news of a bad investment may be splashed across the front page, Mr. Lynch says. "The larger endowments often have hedge-fund people on their boards or committees," he says. "They are not as taken aback by a blowout."

Write to Craig Karmin at craig.karmin@wsj.com3 and Gregory Zuckerman at gregory.zuckerman@wsj.com4

Hmmm, I guess even Ivy League will feel some hurt from current situation

and Deutsche Bank is making good profit on put options:

Deutsche Bank Profit Rises 31%, Spurred by Trading

By Elena Logutenkova and Aaron Kirchfeld
Enlarge Image
The headquarters of Deutsche Bank AG

Aug. 1 (Bloomberg) -- Deutsche Bank AG, Germany's biggest bank, said profit rose 31 percent, beating analysts' estimates, as second-quarter trading revenue surged to a record.

Net income climbed to 1.78 billion euros ($2.43 billion), or 3.60 euros a share, from 1.35 billion euros, or 2.44 euros, a year earlier, the Frankfurt-based bank said on its Web site today. That beat the 1.61 billion-euro median forecast of 19 analysts surveyed by Bloomberg. The shares fell on concerns that declining credit markets may upset future earnings.

Deutsche Bank's sales and trading unit, run by Anshu Jain, accounted for almost half of the company's 8.8 billion euros of revenue. The bank said it benefited from ``favorable market positioning'' in credit trading as U.S. housing suffered the worst slump in 16 years. By contrast, Goldman Sachs Group Inc. had its biggest quarterly drop in fixed-income revenue in almost four years.

``The bank posted very positive results for the current environment,'' said Dieter Ewald, who helps manage $19 billion at Frankfurt Trust, including Deutsche Bank shares. ``There had been a lot of speculation regarding the subprime crisis.''

Deutsche Bank's shares fell 1.8 percent to 99.06 euros at 1 p.m. in Frankfurt. The Bloomberg Europe Banks and Financial Services Index slipped 2.2 percent after Macquarie Bank Ltd. of Australia and Bear Stearns Cos. said funds may post losses because of investments tied to subprime mortgages.

`Challenging Market Conditions'

``The second quarter was a successful quarter for us, despite market conditions that remain very challenging,'' Chief Financial Officer Anthony di Iorio told analysts on a conference call today. ``We're happy with sales and trading business in July, which includes collateralized debt obligation activity.''

Pretax profit gained 32 percent to 2.7 billion euros, led by a 30 percent increase to 1.8 billion euros at the securities unit, run by Jain and Michael Cohrs. Consumer-banking profit increased 18 percent to 297 million euros, while asset management gained 21 percent to 292 million euros and transaction banking was up 24 percent to 247 million euros.

``All the divisions performed better than I expected,'' said Andreas Weese, a Munich-based analyst at UniCredit SpA, who recommends investors ``buy'' Deutsche Bank shares.

The German bank outpaced the 15 percent average profit advance at the seven biggest U.S. investment banks, including Goldman. BNP Paribas SA, France's biggest bank by market value, said today second-quarter net income rose 20 percent to 2.28 billion euros, boosted by interest-rate and equity derivatives. Zurich-based Credit Suisse Group may say tomorrow that profit rose 5 percent, the median estimate of 14 analysts shows.

UBS Subprime Losses

UBS AG will probably say on Aug. 14 that profit fell 7.5 percent, excluding one-time gains, according to estimates by Matthew Clark, a London-based analyst at Keefe, Bruyette & Woods Ltd. The biggest Swiss bank said in May it will close its Dillon Read Capital Management LLC hedge fund after more than $120 million of losses related to U.S. subprime mortgage holdings.

Deutsche Bank's profit in the quarter was also boosted by a 126 million-euro gain from the sale in May of its North American headquarters at 60 Wall Street in New York. The bank will book another 194 million euros from the sale in the second half.

The company aims to raise pretax profit excluding one-time gains and costs to 8.4 billion euros in 2008 by expanding what Chief Executive Officer Josef Ackermann called ``stable'' businesses of consumer banking and money management. The bank yesterday agreed to pay 1.45 billion euros for Abbey Life, the life-insurance unit of London-based Lloyds TSB Group Plc that has been closed for new business since 2000.

`Ongoing Turbulence'

Fixed-income revenue, the biggest single contributor, increased 18 percent to 2.9 billion euros. The bank said it posted ``particularly strong'' growth in credit trading from handling client orders and from ``favorable market positioning through a volatile quarter, despite ongoing turbulence in the U.S. residential mortgage-backed securities market.''

Deutsche Bank may have made about 200 million euros from selling derivative contracts on the ABX index, which is tied to mortgage-backed bonds and has fallen more than 60 percent since January, according to estimates by ABN Amro Holding NV analyst Kinner Lakhani in London.

Late payments and defaults among subprime borrowers, who have poor credit or high debt, are at a 10-year high, according to Friedman Billings Ramsey Group.

Equities sales and trading revenue rose 89 percent to 1.4 billion euros in the second quarter, helped by a rebound in trading with the bank's own money from a loss a year ago.

Trading Risk Rises

The trading units' average value-at-risk, a measure of how much the firm estimates it could lose in one day, rose to 83.6 million euros in the quarter from 67.6 million euros a year ago.

``Trading must have profited from high volatility,'' said Dirk Bartsch, who helps manage about $75 billion at Frankfurt- based Cominvest Asset Management, including Deutsche Bank shares. ``Confidence in the sustainability of earnings is waning.''

Fees from mergers advice and underwriting of stocks and bonds rose 23 percent to 895 million euros. The bank has said it ranks third by fees from financial sponsors and controls 7.8 percent of the 10.5 billion-euro global market.

Credit markets ``may continue to experience turbulent conditions,'' Ackermann, 59, said in today's statement. ``We have consistently adopted a prudent approach to risk-taking, and the current environment is no exception. We firmly believe that these qualities will enable us to continue to perform strongly.''

CDOs, Subprime

Revenue from debt underwriting fell 9 percent to 339 million euros in the quarter, the bank said. Last month, Deutsche Bank was among banks forced to hold on to 5 billion pounds ($10.1 billion) of loans for Kohlberg Kravis Roberts & Co.'s purchase of U.K.-based pharmacy chain Alliance Boots Plc.

The bank expects lower revenues from leveraged finance in the coming quarters, CFO Di Iorio said. The company trades rather than invests in collateralized debt obligations, which repackage loans, bonds and other assets into new securities, he said.

``Any subprime exposure is currently relatively flat,'' Di Iorio said.

To contact the reporters on this story: Elena Logutenkova in Frankfurt at elogutenkova@bloomberg.net ; Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net .