Ugly Aardvarks and Non-Stellar Constellations

Posted on October 28th, 2008 in BREAKING NEWS!
The subprime crisis is catching up fast to Mizuho Financial Group as Japan’s second-largest bank does a 180, going from a share buyback to mulling over raising capital. Don’t be fooled by the feigned denial; the bank has no choice since earnings are souring and they’ve poured $1.2 billion into the black hole known as Merrill Lynch.
Mizuho Financial Group Inc. led Japanese banks lower in Tokyo trading after it was downgraded by JPMorgan Chase & Co. and a report said the lender may delay a share buyback due to lower-than-forecast earnings.
As recently as 2006 Mizuho Financial Group was back on its game, becoming the first Japanese lender to list on the New York Stock Exchange since 1989.
The listing of Mizuho’s ADRs on the NYSE is clear evidence of a new era for Mizuho Financial Group and its return to the world stage,” said Mizuho Financial Group CEO Terunobu Maeda. “It is also a symbol of the revival of the Japanese banking industry, following the long and difficult period of consolidation and reform.
So, after the years of struggle to get back on top, what made the bank decide to jump into the sub prime waters, and what did they want with Merrill Lynch? The standard line is that it was cheap, but an insolvent bank should be cheap since it’s void of earnings. Was it just coincidence that John Thain, who was CEO of the New York Stock Exchange, welcomed Mizuho aboard?
“We welcome Mizuho Financial Group, Inc. to our family of listed companies,” said NYSE Group, Inc. CEO John A. Thain. “It is fitting for Mizuho Financial Group, one of the largest financial institutions in the world, to take its place among the world’s leading companies. We look forward to providing the company and its shareholders with the highest levels of market quality and services.”
Did Thain collect on a favor earned back in the NYSE day? Or did it just enhance his chances to pull Mizuho in? There is no way to know, but what happened next can be viewed as a microcosm of Wall Street’s infinite greed.
It begins with a young but ruthless whiz kid to whom Wall Street’s amoral tenets came easily, as did those of the 144-year-old bank to which he parasitically attached.
Alexander Rekeda, a 34-year-old Ukrainian-born math whiz, turned in his BlackBerry and security card and sent an e-mail to his bosses at Calyon, the investment- banking unit of Credit Agricole SA. Then, along with ten colleagues from the New York structured-finance team, who fired off similar messages, he walked two blocks down the Avenue of the Americas to Mizuho Financial Group Inc.
It was Dec. 8, 2006, and Rekeda’s arrival was a coup for Mizuho, Japan’s second-largest bank by revenue.
Rekeda’s arrival nearly killed Mizuho.
While Mizuho was a newcomer to the CDO market in the U.S., it had experience arranging and selling similar investments in Japan and Europe. The company had ramped up its loan- securitization business, which Japanese banks were able to do without borrowers’ consent after October 1998. Merrill Lynch & Co., Bear Stearns Cos. and Goldman Sachs Group Inc. all helped Japanese banks repackage and market securities backed by corporate loans and mortgages.
That the bank was paying big fees to the Wall Street Godfathers implies that management intended to make its inroads into the CDO trade in the customary manner - with fees, favors, payoffs and kickbacks. When Mizuho decided too widen those inroads, the bank did not intend to rock the boat. But Rekeda had other vastly different ideas: it was the group he led that ran roughshod over Mizuho and its 63-year-old home gardening CEO, Terunobu Maeda.
By the time Rekeda and his cabal were pushing out the CDOs for Mizuho, subprime loans were imploding as Maeda and management were clueless.
On Dec. 11, 2006, the same day Mizuho announced it was setting up an office in the U.S. to create asset-backed debt securities, Fitch Ratings said the outlook for U.S. subprime mortgage bonds was “negative.” It expected delinquencies on those loans to rise by 50 percent.
Rekeda should have stopped pedaling the toxic devices for the bank’s best interests, but we did say that he had vastly different ideas. Witness:
There was also confusion about the hiring deal. The Calyon team turned out to include more than the five people expected by Hitoshi Shimoyama, then deputy president of investment banking unit Mizuho Securities USA Inc., documents in the case allege.
“Mizuho did not even know the number or names of additional persons until shortly before they came,” Shimoyama said in a March 17, 2007, affidavit.
But on Wall Street, profits are religion and 34-year-old whiz kids don’t become billionaires by putting the bank’s or the client’s interests before their own. And so Rekeda and his group went for the fees and sold the dope.
Rekeda’s group priced its first deal within 10 weeks, after the Mortgage Bankers Association reported that the default rate on U.S. subprime loans reached 12.6 percent, the highest level since the first quarter of 2003.
Rekeda planned to bring at least nine more CDO deals to market within six months, the investment newsletter Asset-Backed Alert reported on May 11, 2007. The newsletter quoted him saying the bank had “built up the pipeline.” As of April 1, 2007, Mizuho Securities had amassed more than 550 billion yen in residential mortgage-backed securities and CDOs supported by home loans, according to the bank’s financial statements.
One of those deals made it to market in June 2007: a special-purpose entity called Delphinus 2007-1. Although named after a constellation, its contents were hardly stellar. Three- quarters of its securities were based on subprime mortgages, according to a July 23 Fitch report.
But the one that burst for a $7 billion loss was named for something not so glorious; the CDO was called Aardvark.
The deal was named after a squat animal with a pig-like snout that feeds on ants and termites. Incorporated as a special- purpose company in the Cayman Islands, Aardvark ABS CDO was an ugly concoction: 31 percent of its $1.5 billion of securities were backed by subprime loans, 23 percent by residential mortgages repackaged from other CDO deals, and 33 percent by Alt- A mortgages, a category just above subprime. The remaining 13 percent were prime loans.
So, Mizuho was raided by Rekeda and never saw a Yen, Dollar or Deutsche Mark out of the subprime good times, but
Mizuho expects as much as 20 billion yen in potential further losses on bonds and bad loans related to bankrupt Lehman Brothers Holdings Inc., company spokeswoman Masako Shiono said on Sept. 16. Moody’s Investors Service, citing “questions regarding the effectiveness of Mizuho’s risk management and its risk appetite,” continues to give the bank a negative outlook.
Actually it was Rekeda’s appetite for risk, as he and his grabbed theirs, leaving the bank to fester in radioactive CDO sewage. Eventually two of Bear Stearns CDOs imploded, Mizuho stopped writing CDOs and the whole world would learn about special purpose entities drafted in the Cayman Islands. But that wouldn’t help the old bank left alone to pick up the pieces of its fallen empire.
Mizuho Financial Group spent nearly two lost decades to bring its house to order, but Rekeda needed only a year to wreck it again.
Rekeda, meanwhile, has moved on. He now works for Guggenheim Capital Markets LLC in New York, along with Paolo Torti and Xavier Capdepon, who both followed him from Calyon to Mizuho. Their new jobs: selling distressed CDOs at a discount.
Moved on as they always do, unlike like nature’s parasites who die when they kill their hosts, Rekeda is rich and happy to search for another.