Archive for the 'Uncategorized' Category

Wall Street to Invest Heavily in Risk Analytics, But the Fat Tail Remains

From Wall Street & Technology, a short article on one of the big focuses for Wall Street IT spending in 2008, risk management systems.

From the article:

Integrating data and risk practices across a financial institution is pricey and difficult, especially in “Wall Street” time, where things are measured quarter to quarter. However, the price tag for even the most complex data and risk management integration at the largest financial institution will pale in comparison to the billions that have been lost due to inaccurate CDO calculations.

While the article makes sense overall, the idea that billions have been lost on “inaccurate” CDO calculations is not entirely accurate.  I’m sure that happened in some cases, but these models are driven by assumptions and there is still risk from the fat tail.  The current housing default rates were simply not seen as even remotely probable when the subprime securitizations were structured.

Accident Insurance by Text Message

I came across Cover2go’s South African micro-insurance product this afternoon after seeing the write-up at textually.org. The summary:

One SMS to 38858 gives you instant accidental death cover – no visits to brokers, no medical tests, and no forms. A once-off charge of R 10 [US$1.43], from your airtime, gives you a full 30 day accidental death cover to the value of R 15 000 [US$2,143].

This is not life insurance and only covers accidents, but it appears to be offered at a reasonable rate through an incredibly low cost distribution channel.

From the write-up:

“Every day, a large majority of South Africans have to board minibus taxis, many of which are notoriously unsafe. For people travelling over the most dangerous periods such as the Easter weekend, the risk to the wellbeing of their families is very real – 276 people died this past Easter holiday. Unfortunately, the common perception is that life assurance is a luxury that’s unaffordable and complicated to obtain. With Cover2go, people can get basic cover instantly, at very affordable prices, when they need it most,” says Derek Pead, CEO of Cover2go, a division of Metropolitan Life.

This is the process of signing up:

  1. SMS your name and date of birth (ddmmyyyy) to 38858
  2. You will then get an SMS back with your policy number
  3. Tell the beneficiary who will receive the money in the case of your accidental death that you have the policy. Cover2go will pay out a claim to beneficiaries in the following order: your spouse or life partner, your children, your parents, or your Estate. At claims stage we will ensure that the correct person gets the money. It’s best to let the beneficiary know that you have the policy, so that they know to contact us to claim.
  4. Also tell them about the Claim Line: 0860 COVER2GO (0860 2683 7246)

The product is being offered by Metropolitan. The company description from Hoovers:

Metropolitan takes a decidedly national approach to insurance and financial services. Born in 1898, the company is one of the largest financial services conglomerates in South Africa serving the lower- and middle-income markets. Metropolitan provides life insurance to some 4.3 million residents, making it the country’s fourth largest life insurer. Its life products are distributed directly and through preferred intermediaries, direct marketing, brokers, and via voluntary group schemes. Metropolitan additionally offers retirement fund benefits, acts as asset manager, and supplies medical aid and managed health-care administration.

WiMax, Why Care?

The demise of the agreement between Clearwire and Sprint may appear, on the surface, to be irrelevant to the financial services industry as does the debate around net neutrality and Google’s Android effort. Actually, all are quite important to when a new set of innovations will arrive.

First a brief detour into the land of mobile payments. Let’s look at two of the leading contenders in this space in the US, Firethorn and Obopay. Grossly over-simplifying, Firethorn is making its bet on the carrier side. They are providing the tools for Verizon, ATT and the rest to monetize the channel by managing the application. Obopay is lining up on the handset side, with their on-phone app written in BREW for Qualcomm handsets. Each of these approaches makes good sense for a startup. Find a powerful incumbent and spin up operations.

In contrast, the promise of WiMax and Android is the ability to put any device on the end of the pipe and connect it to any service. This model is independent of what the carriers or the incumbent handset manufacturers want. The demise of the Clearwire deal with Sprint means that a true 3G / 4G network with open access is that much further away. No pipe. No new apps. And the rest of the world just gets that much further ahead of us.

Market Pain

A phenomenally painful day in the financial sector where Chinese comments on diversifying out of the dollar, investigations by New York’s State’s Attorney General that include WaMu, speculation regarding Morgan Stanley write-downs (later announced after the market close) and oil price volatility combined to push stocks sharply lower.
WaMu Stock Chart

“Unlikely Mortgage Winner” from the WSJ

Interesting article from the WSJ (subscription) earlier in the month. The key sentence:

For loans more than 90 days in arrears, ITIN mortgages have a delinquency rate of about 0.5%, according to independent estimates. That compares with 1% for prime mortgages and 9.3% for subprime mortgages extended to those with spotty credit histories.

Other highlights from the article:

“Our default level is almost zero,” says Scott Hastings, director of marketing for Citizens Home Loan Inc., a Charlotte, N.C.-based lender that is active in 33 states. The bank has been originating ITIN mortgages for almost two years, and the loans now make up about 20% of the institution’s mortgage business. “It’s an absolutely promising market. These Hispanic families will pay their mortgage before anything else.”

A few months ago, Hispanic National Mortgage Association, a privately held company nicknamed “Hannie Mae,” began buying ITIN mortgages from lenders. Once it has bought the loans, HNMA packages them into securities for investors. HNMA, which is based in San Diego, puts the ITIN mortgage market potential at $85 billion. But it estimates that the niche market has generated only $2 billion in loans overall because relatively few banks offer them.

Despite the high-yield potential of ITIN mortgages, the majority of players in the ITIN-mortgage segment are small banks rather than large national institutions. Concern over the controversy that can erupt over serving the illegal-immigrant community is widely regarded as preventing big banks interested in the Hispanic market from joining the fray.

Mortgage Flu Continues

Not a good day yesterday for insurers in the credit derivatives and mortgage insurance space. Earnings that reflect the August credit market meltdown combined with the negative market tone driven by Merrill’s additional write-offs from a day earlier to send this sector sharply down.

MBIA YTD Performance

MTG YTD Performance