HIGHLY CONFIDENTIAL FCIC-AIG0015658
DejJO~ls S~lUleliShUil Aco\1nt~ nepO~lt" TI1iql1ir1A"<et~ Most liquid least patient Accountii.l:'avable Liquidity Pool Unsecured Short • The liquidity pool, in theory, Termnebt supports short-term liabilities and Term contingencies ~ shock absorber Drot Rect1vable ShoJtSaleii • Less liquid asset, and haircuts, on liquid assets are funded by Kon-CoreBank "cash capitaL" • Liquidity and capital adequacy Long Term Debt should be viewed on a time continuum: liquidity ratios for "Core'" Bank short term, capital ratios for longer Preferred Eql.lity term. Commonl',qll1ty BS comfXJnenfs nof dra"ohn fo scale HIGHLY CONFIDENTIAL FCIC-AIG0015659
Rdurll On Equity (mulluIliLed) Total Assets TohllEqllU) TntlllJ,illhilitirs Trading revenues have always made up the bulk of total net revenues among the four investment banks, so as their trading revenues go, so goes their total revenues. OT.talA"e! -", HIGHLY CONFIDENTIAL FCIC-AIG0015660
the While rather simplistic, insights that may be gained Include" • Are any of the firms funding their balance sheet overwhelmingly with anyone particular liability? Potential vulnerabilities? • Which balance sheets appear at least on the surface to be more liquid I flexible? • Off-balance sheet: Do any of the firms have significant off-balance sheet exposure that may need to be brought onto their consolidated balance sheet? • X-factors: Are their any factors either on or off balance sheet that one firm reports that the others do not that may expose the firm more so than the others? Potential Views • Asset Composition • liability Composition • AlP as % of Total Assets • Collateralized Financing as % of Total Assets • Short Term Debt as % of Total Assets • 'Repoable Assets as % of Total Assets • illiquid Assets as % of Total Assets HIGHLY CONFIDENTIAL FCIC-AIG0015661
With the most liquid items at the top and the more illiquid toward the bottom, one might gain a reasonable snapshot of the firms' balance sheet liquidity! flexibility potential. HIGHLY CONFIDENTIAL FCIC-AIG0015662
Lehman Brothers Trading Assets Trading assets make a large portion of the Securities firms' total assets ... Trad,ngA •• eha.a%ofTotaIA •• et. HIGHLY CONFIDENTIAL FCIC-AIG0015663
Il~c~usn EI~dl.!l"UfTlwlilgA»"lJyL","1 Confd Level 3 Assets 1 Q08 ... Looking at the size and breakdown of level 3 trading assets, the most illiquid, can help determine the ability of a broker- dealer to shed more illiquid, risky - ------ assets. --I- --!II -- Level 3 Assets 2Q08 DCorpDeIJt and Bank lo,"" - & HIGHLY CONFIDENTIAL FCIC-AIG0015664
HIGHLY CONFIDENTIAL FCIC-AIG0015665
41~o 12~o }1~1l. Funding Funding Maturity LEH MER CS P<>riod F! E it' T .... II E uit Total F! T .... F1 E uit' Total AS%. ::;"1% .00. 199" "10% "16% 11% 18<% 54'" 44% 48°,,, 34% 43% 55Qrb 12% '70,(, 11)01:. Pencd 1 LEH=3,14/I)S, hER = 5/3C1CS, Mf: =:Y:'1,O), G3 =4118/08 E..xlensiollS of Secure.d }I.'unding Term Structure Pen;ent Maturil1g.;> 30 Days LEH MER 1\1$0 GS Pt-rlud F1 uil Total H Equil Tutal F1 11: ull ToW F1 E oitYI Total 18%, 21% 12% 12% 65% 52%, 2 13% 11% 12% 57% 75% 66°'0 28% HIGHLY CONFIDENTIAL FCIC-AIG0015666
An this ___ ~ Time Horizon _________ ....-------- ---------.. Short (- 1 manti)) Long (- 1 year) Liquidity Ratio: Capital Ratio: Liquidity Pool Cash Capital Scheduled debt maturities + f (Repoable Risk weighted assets assets) + operational cash outflows + prime brokerage cash outflows Capital Ratio Notes: Liquidity Ratio Notes: • Risk weighted assets accountfor market, • f (repoable assets) = 1 - cash equivalent credit and operational risk Higher charges for haircut; protects against haircut Increases. illiquid assets modest charges for repoable assets and liquidity pool. • Operational cash outflows include delay or slowdown In receipt of payments • Operational risk takes Into account the firms' (derivatives and AIR), Increased collateral operational risk requirement as per the CSE requirement on derivative positions, etc calculation. HIGHLY CONFIDENTIAL FCIC-AIG0015667
Purpose: Assess the adequacy of a dealer's liquidity pool relative to its balance sheet exposure, particularly with respect to exposure to a short-term funding shock While we don t know what a "good" number is, these ratios provide a framework for comparison across the different dealers. • Liquidity Pool as % of Unsecured Short Term Debt • Liquidity Pool as % of Medium Stressed Haircuts • Liquidity Pool as % of Risk Weighted Assets • Liquidity Pool as % of Short Term Debt, Stressed Haircuts, flAiR} and f{denvative positions) HIGHLY CONFIDENTIAL FCIC-AIG0015668
Liquidity Pool is there to cover .... • Disappearance of unsecured creditors • Haircut surprises and / or disappearance of secured creditors LIquidity Po,)l Compared A:::ainst l\IediumStress Haircuu LiquMitJ Pool % ofUl~eCUl'ed Sbort Term Debt HIGHLY CONFIDENTIAL FCIC-AIG0015669
T.lquidityPnl~s Adequacy of liquidity pool looks different when compared to current portion of unsecured debt, haircuts on secured debt, risk weighted assets, "all-in" liquidity ratio Liquidity Pool as % of ST Debt. Medium Stress Haircuts and FlUlction of AIR and Derivatives % nfRW<I. 4T.3rgp<tSpmritip<Firm< HIGHLY CONFIDENTIAL FCIC-AIG0015670
Purpose: Assess the solvency of the broker dealer balance sheets. How leveraged are the broker dealers? How much patient money IS available to cover IlliqUid assets? How suffiCient IS the capital base relative to potential write-dawn's on assets? Leverage Ratio Solvency Ratios Tangible Equity I Total Assets Tier I Capital Ratio Total Capital Ratio Cash Capital Ralios Cash Capital as % of Risk Weighted Assets Cash Capital as % of Illiquid Assets HIGHLY CONFIDENTIAL FCIC-AIG0015671
-GoldJlanSarhs-Morg"~iaJt!ey"-\lernULynrh-'L'ltmanlrotiters FEENY AdjurtedLeverage' Leverage ratios are crude, but hard to manipulate Tangible Equity % of TotalA~d~ CSE ratios, now public, are a step closer to economic capital, but full of judgment • GS uses CSE as ECap HIGHLY CONFIDENTIAL FCIC-AIG0015672
Ca~b Ideally, cash capital, generally defined as long term debt, total equity and a portion of deposits, is used to fund the illiquid portion of the balance sheet • You'd like cash capital to cover illiquid assets (at least?) CapitallJ<u of TotalA~et~ Cash Capital % of Risk 'Weighted Assets HIGHLY CONFIDENTIAL FCIC-AIG0015673
R~k ,,.. , ... '" " Merrill L nCh Mor anstanl 4 18 Total MktShare MktShare MktShare Rook MktShare I, Total Corporate Bonds jj 41 t 4J j High-Yield Bonds 51 53 5' 5 Investment Grade Bonds " 4C MBS 58 ABS 25 Il CashCDOs 0' 11 11 Syndicated Loans [allJ )1 11 30 Leveraged Syndicated Loans 12 10 l' " Equities 40 HIGHLY CONFIDENTIAL FCIC-AIG0015674
Tangible Equity Common and preferred equity less rntangible assets Cash Capital Tangible Equity + Long Term debt + 50% of bank deposits Repoable Assets Secuntles Purchased under Agreement to Resell + Secuntles Borrowed + Sec unties Received as Collateral ( to the extent already financed) + a portion of the dealer's non-derivative trading asset inventory (full credit for Level 1 assets, partial credit for Level 2 assets no credit for Level 3 assets. Adjusted Assets Total Assets - segregated cash reverse repos, sec borrowed, derivative shorts, Intangible assets plus lotal securities sold short. Illiquid Assets Total Assets less (Repoable Assets plus Total Cash) f (Accounts Receivable) 20% of total Accounts Receivable f (Derivative positions) 20% of Derivative Assets f (Repoable Assets) derived for moderate stress and very stressed scenarios HIGHLY CONFIDENTIAL FCIC-AIG0015675
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