Structured Finance/ABS/MBS/CDO's/CLO's

CMRA and its principals have been involved in structured finance (including CDO's, CLO's, Muni GIC's, conduits, SPV's, SIV's, ABS, MBS and Auction Rate Preferred) for over two decades. CMRA has consulted on a wide range of issues from valuation to best practice to risk management and has been an expert witness in several high profile related matters.

Ms. Rahl is a member of the Board of Directors of the International Association of Financial Engineers (IAFE) and has been called the "Red Adair of Financial Engineering"

Selected Structured Finance/ABS/MBS/CDO's/CLO's Assignments

• Expert in Canadian ABCP litigation
• Valued complex structured products in counterparty bankruptcy for several SPV's
• Advised a major dealer on valuations of over 40K level 2 and level 3 credit and mortgage derivatives in a counterparty bankruptcy
• Evaluated market risk management of Structured Finance business for large European bank
• Consulting expert on hedge fund CDO litigation
• Expert in a litigation related to margin calls, valuation, and events of default on a Total Return Swap on a bespoke portfolio of loans
• Valued a portfolio of 200+ non-agency RMBS and provided an expert report in a regulatory investigation
• Expert in an ABCP litigation
• Vetted many complex pricing models for CDO's, CLO's, etc.
• Valued a portfolio of complex structured investments for a major insurance company planning an acquisition
• Provided an expert report in a inter-dealer dispute over interpretation of asset swap and repo agreements
• Reviewed CDO valuation practices for several institutional clients
• Analyzed CDO's of a large investment manager and recommended structuring and risk management enhancements
• Reviewed the CLO valuation and risk management approach of a major broker/dealer
• Advised a major asset manager in the selection of MBS/CMO pricing and risk management systems
• Analyzed valuations in a litigation relating to margin calls on an MBS hedge fund for a large broker/dealer
• Reviewed the CLO valuation and risk management approach for a major broker/dealer
• Analyzed portfolio of complex and illiquid ABS for a major dealer
• Provided valuation and market practice expert report and testimony in Askin/Granite Funds meltdown
• Provided a "fair value" opinion to a large bank regarding illiquid, structured securities
• Analyzed a complex CLO and provided an expert report in a dealer/investor dispute
• Analyzed CDO's for a large investment manager and recommended structuring enhancements

Recent and Upcoming Speeches
re: Structured Finance/ABS/MBS/CDO's/CLO's

May 2010

January 2010

June 2009

April 2009

March 2009

CMRA in the Press re: Structured Finance/ABS/MBS/CDO's/CLO's

Role of Bond Insurer ACA at Heart of Government's Case
By Serena Ng

A small bond insurance company that imploded after taking on too much exposure to subprime mortgages is at the center at the government's case against Goldman Sachs Group Inc.

"If ACA performed an independent analysis and concluded that the [Abacus] portfolio met ACA's criteria, I'm not sure what the issue is," says Leslie Rahl, president of Capital Markets Risk Advisors, a derivatives and structured finance consultancy in New York.

In essence, "one sophisticated market participant thought that the portfolio was a good 'buy' and another a good 'sell' -- that happens all the time in financial markets and is what makes markets," she adds.
(April 2010)

Mortgages: A market to prop up
By Suzanne Kapner

The market for privately financed mortgages is unpredictable and, as the past couple of years have shown, can dry up. For "jumbo" mortgages – those in excess of $417,000 that are generally too big for Fannie and Freddie to purchase – financing is very difficult to obtain and borrowers are being required to put down as much as half of the loan value

"With less government support, mortgage rates are likely to rise and credit is likely to become less available," says Peter Niculescu of Capital Market Risk Advisors, a financial advisory firm.
(March 2010)

Fed carrying losses from Bear portfolio
By Henny Sender in New York

The US Federal Reserve is sitting on significant paper losses on the real estate assets it acquired in the Bear Stearns rescue, with much of the red ink coming from debt used to back some of the most high profile buy-out deals of the bubble years.

Peter Niculescu, the former chief business officer of Fannie Mae who is now with Capital Markets Risk Advisors, said he nonetheless believed that the Fed could have used more demanding criteria.
(February 2010)

National Mortgage News Online

Pension Funds Have Drawn Back from Mortgages
By Bonnie Sinnock

Individual pension funds have a complex and varied range of involvement in the mortgage space, but under today's market conditions generally they are likely to maintain only a moderate stake in the agency-dominated securitized residential market in the short term, while their participation in the largely distressed nonagency residential and commercial markets is more questionable.

Given the Federal Reserve's mortgage-backed securities purchases and their effect on the market, "this is probably not the time to expand allocations aggressively into agency MBS," Peter Niculescu, partner and Head of Fixed Income Advisory at Capital Markets Risk Advisors, New York, told NMN. When the Fed's involvement ends, pension fund involvement could change.

He said pension funds might be market weighted or underweighted going forward, although they would be unlikely to be underweighted to a great degree. The asset class suits pension funds' needs given the duration of their liabilities, and at times pension funds have been significant agency MBS investors. However, due to current market conditions they are in about the middle of the pack when it comes to market share and influence today.

As for nonagency residential and commercial MBS, the degree of pension fund investment going forward is questionable and likely to be varied because the asset class is considered largely distressed and "the dispersion in prices between recognized pricing services is larger than in a more stable environment and more emphasis is being placed on independent valuation," Leslie Rahl, Founder and Managing Partner of CMRA, told NMN. In addition, there continues to be relatively little agreement on price and on risk factors.

Pension funds will probably make their decisions on these assets on a case-by-case basis depending on which is stronger, the appeal of their low prices or concerns about their distressed nature, Mr. Niculescu said.

There also is so-called headline or reputational risk to consider, something that may be magnified when it comes to public retirement funds. The extent to which pension funds took mortgage-related losses during the recent downturn has varied tremendously with some players heavily exposed and others less exposed, Ms. Rahl said.
(July 2009)

Cover story: How Caisse's Bet on Quants Went Wrong
By Konrad Yakabuski

The entire global financial industry has been transformed in recent years by the intricate models that originated in the 1990s with a group of computer scientists and mathematicians at U.S. investment bank JPMorgan Chase & Co. The models, which fall under a broad category known as Value-at-Risk (VaR), use historical price movements and dozens of other variables to predict the extent and likelihood of potential losses on an investment.

If a typical poll claims accuracy 19 times out of 20, VaR could promise to be right 99 times out of 100. But it was useless in predicting what would happen when that one-in-100 moment arrived, much less a one-in-a-million meltdown.

Most institutions came to employ some form of VaR, but some placed more faith in it than others.

Those who did bank on it may, like the Caisse, be suffering the consequences now. Some experts believe that VaR has caused bigger losses at many financial institutions because it has a built-in bias in favour of highly leveraged investments. And since it assigns such low probabilities to nightmare scenarios, most institutions that relied on it never paused long enough to consider what would happen if the unthinkable arose.

"The failing is not in VaR but in the fact that many people stopped there," says Leslie Rahl, president of New York-based Capital Market Risk Advisors. "The quantitative approach is about one-third of the puzzle. You would also have to take into account a vast number of qualitative factors."

Ms. Rahl, a derivatives expert who has advised the Caisse on risk in the past, recommends that institutions regularly conduct a series of "stress tests" to determine how prepared they would be to deal with sudden strains on liquidity.

"One of the stress tests they should do is [to see] what would happen if margin requirements are increased. I don't know if the Caisse was doing that. Clearly, a lot of people were not," says Ms. Rahl, who joined the board of Canadian Imperial Bank of Commerce in 2007 when the institution, hit hard by the subprime mortgage meltdown, moved to better manage its risk.
(January 2009)

VaR Enough?
Market turbulence tests the limits of Value at Risk
By Irwin Speizer

When an investment bank that is supposed to know better loses billions of dollars betting on subprime mortgages, you have to wonder what happened to the concept of risk management. "You can't rely on VaR as your only metric," says Leslie Rahl, president and founder of New York–based Capital Market Risk Advisors. "We recommend people use three to five different metrics. It's like a doctor ordering an X ray, an MRI and a CAT scan — they all tell you slightly different things."

A veteran of 35 years in the financial industry and a financial engineering pioneer, Rahl ran the derivatives business at Citibank in the 1980s before establishing her consulting firm in 1991. She preaches the importance of rigorous risk analysis and testing to cope with the impact of the types of investments she peddled in her earlier role.

Rahl recommends applying stress tests to see how a portfolio would react to sharp drops, market shifts, unusual situations or changes in underlying assumptions. Stress-testing models, which are included in risk systems, can reveal weaknesses that a simple VaR test misses. But Rahl says too many financial firms continue to rely mostly on VaR. Back in April 2000, Rahl's firm conducted a survey of risk practices and found that 45 percent of financial firms, including hedge funds, were not using stress tests at all. Although she hasn't updated the survey, she says she has noticed only a slight improvement since then.

"In risk management only about a third is quantitative," Rahl says. "A third is still a big part of the puzzle, so it is quite valuable." The remaining two thirds of the puzzle is where good risk managers earn their money. Ultimately, an accurate forecast depends on knowledge, experience and chutzpah.

"It has nothing to do with the computer," Rahl says. "It has to do with wisdom and experience."

And perhaps a bit of luck.
(June 2008)

 
Debtwire
Citibank responds, sues for breach of contract in credit default swap case
By Danielle Reed, New York

Citibank filed a response 23 April and countersued for breach of contract in its ongoing court battle with a hedge fund over a credit default swap.

Whatever the outcome of this particular case, the mere fact that such issues are being litigated highlights a source of concern to longtime derivatives market participants: Namely, the growing participation of hedge funds in the CDS market. "One of the things that has been of great concern to me for a long time is [the] many new entrants to the credit default swap market, especially hedge funds who have not cut their teeth on less complex over-the-counter derivatives...before taking on large sized positions in CDS," said Leslie Rahl, founder and president of Capital Market Risk Advisors. A pioneer in the derivatives market, Rahl said she is "pro-derivatives" but fears that "some of the newer players don't fully understand the differences between a liquid, transparent securities market and the world of over-the-counter derivatives."
(April 28, 2008)

Don't Trust the Wall St rally
By Bethany McLean, Editor at Large

Up till now, all eyes have been on the losses that are hitting the financial sector from the acronym soup of new instruments such as CDOs and SIVs. Everyone is scared, and rightly so of the MUB (Monster Under the Bed) that might be lurking in supposedly safe havens.

The last decade saw the explosion of securitization – the carving up and redistributing of risk-the boom in hedge funds, and the private equity mania.

In a paper published in the fall of 2005, risk management gurus Leslie Rahl and Barbara Lucas of Capital Market Risk Advisors, noted that in the past decade, a lot of things have happened that aren't supposed to happen, from the interest rate hikes of 1994 to the 1998 collapse of LTCM to the 2001 terrorist attacks. Or as the authors put it, "once-in-a-lifetime events seem to occur every few years."
(March 23, 2008)

The Blow-Up
This summer, as a meltdown in the subprime credit market spilled over into other markets, all eyes were on the mathematically trained financial engineers known as "quants." Who are these guys?
By Bryant Urstadt

On Wednesday, August 8, not long after the markets closed, 200 of the smartest people on Wall Street gathered in a conference room at Four World Financial Center, the 34-story headquarters of Merrill Lynch. They were "quants", and they had a lot to talk about, for their work was at the heart of one of the most worrisome summer markets in decades.

The conference sponsored by the International Association of Financial Engineers (IAFE), and its title asked, "is Subprime the Canary in the Mine? "Subprime" borrowers are home buyers whose poor credit history means they don't qualify for market interest rates.

The panel was moderated by Leslie Rahl an MIT graduate and the founder of Capital Market Risk Advisors. Her job is to advise companies on risk and help them understand the products quants invent. But understanding was in short supply in August. Some of the quants' financial products had collapsed in price, with unexpected consequences in another financial sector: the trading of equities.

And was subprime the canary in the mine? Leslie Rahl, for instance, cautiously told me in a follow-up e-mail that it is "looking more and more like the answer is yes." Many signs have suggested so, from job losses to a continuing credit drought to a weakening dollar, but that history has not yet been written.

As a prelude to the panel discussion, Rahl, asked the audience to predict whether credit spreads would shrink or widen in the coming months. She was talking about the difference between the price of a treasury bond and the price of a riskier corporate bond, a standard Wall Street gauge for the health of the economy. A widening credit spread is generally seen as a sign of uncertainty, and a narrow spread as a sign of optimism.

"How many think spreads will widen?" she asked. The hands of about half of the smartest people on Wall Street shot up. "And how many think they'll narrow?" The other half—equally smart—raised their hands. "Well," she said. "That's what makes a market." If they didn't know, nobody could.
(November/December 2007)

Risk Management Decoded
By Liz Peek

"Risk management" has a nice ring to it. Not only does it suggest that a hedge fund team, for instance, has pretty much thought of all the things that could go wrong — it has also, bless its heart, managed those nasty surprises.

Leslie Rahl, founder and president of Capital Market Risk Advisors and a board member of Fannie Mae, has an excellent perch from which to view the unfolding of this latest debacle. According to her Web site, her company is "the preeminent financial advisory firm specializing in risk management, hedge funds, financial forensics, and risk governance."

Ms. Rahl graduated both from the Massachusetts Institute of Technology and its Sloan School of Management and was formerly head of Citibank's derivatives group. She actually understands all those complex formulas that are supposed to identify risk. Numbers are to Ms. Rahl as Cheerios are to the rest of us: uncomplicated and easily consumed.

Her take? "Risk management is all about thinking about two or three standard deviations from the mean. No one ever expects events to fall beyond that. Once in a lifetime events that fall outside that parameter have exponential, not arithmetic, consequences. Risk management is built around models, and models are built around assumptions. The models will work if things behave the way you model them to — but they never actually do. These events are somewhat expected, but we keep forgetting. You can't expect a computer model to anticipate changes. This is the big flaw — I keep reminding clients of this — that their assumptions are not the worst case."

"By definition, most risk people are young quants," Ms. Rahl said. Most, she said, do not carry their modeling back far enough to include similar events, such as the 1994 bankruptcy of Orange County, which she views as somewhat analogous to today's situation. "In 1994, the money funds broke the buck," Ms. Rahl said, referring to the unthinkable: a money market fund that experiences such credit issues with its portfolio that it no longer trades at a dollar. A similar deterioration in shortterm instruments occurred over the past two months, as a few money market funds got into trouble. The credit problems in the early 1990s stemmed from holdings of "inverse floaters" and the "kitchen sinks" — the names given to the leftovers of collateralized mortgage obligations after they had been sliced and diced and the higher-grade parts of the securities had been bought by savvier investors.

At the end of the day, we are reminded of the peril of investing in instruments so complicated that few could really understand them. "Even for me, who loves complex things, it's very complicated," Ms. Rahl said.

That's all we had to know.
(September 13, 2007)

Subprime and Hedge Funds: Hard Lessons to Learn Here?
Emma Trincal, Senior Financial Correspondent

The subprime crisis has sent a jolt this summer through the global financial markets and across stocks, bond markets and even money market funds. But what exactly is the role played by hedge funds in this global shakeout? And what can the marketplace learn from it?

"If CDO and structured products are affected by further downgrades, many of such investors will be forced to sell the paper. This will cause a float of paper that will depress this market," says CMRA's Ms. Rahl. And as a result, hedge funds holding CDOs or MBS will be hit with further losses.

But managing liquidity risk won't be easy.

"We can't really measure liquidity," says Ms. Rahl. "Liquidity can change over time. Something can be very liquid today; then something happens and it becomes illiquid." In an illiquid market, managers will have to decide how much yield they need on any given instrument to compensate for the lack of liquidity. A firm with a lot of cash reserves can afford a margin of error in those risk assessments. A smaller fund with less liquidity can't.

Another way to control liquidity for a hedge fund is to impose longer lock-ups on investors. Opinions vary on this measure. "I don't know if hedge funds will resist the temptation to impose lock-ups, yet they should," says Mr. Easterling. "Longer lock-ups would only apply to new investors and would not impact existing investors. The only way to reduce the liquidity risk of existing investors is to lock-down the fund … and that is a death knell for a fund," he says.

"The trend of longer lock-ups already exists, but it will continue," says Ms. Rahl. "But you won't see extended lock-ups all across the board. There will be maturity ladders." Such a formula allows a manager to offer a fee schedule based on the length of the lock-up with the fees decreasing when investors agree to stay longer.

"People are focused on leverage, but what we're really seeing is embedded leverage," says Leslie Rahl, founder and president of Capital Market Risk Advisors Inc., a New York-based financial advisory firm specializing in risk management. "Some hedge funds have indirect leverage because they are holding structured products that are less liquid and which they can't sell. It's not clear whether leverage ratios are going to decrease as a result of this crisis. Actually, leverage levels are much lower than they were during the 1998 crisis."

Whether the critics are unfair or not, one sure way to protect a portfolio was to be skeptical about everything, including the ratings.
(September 13, 2007)

Market volatility puts risk at forefront
By Jay Cooper

"In general, liquidity doesn't enter into the metrics used by pension funds," said Leslie Rahl, president of Capital Market Risk Advisors, a New York-based financial advisory firm specializing in risk management.

"In times like these, non-quantitative measures need to supplement normal risk reporting. The best defense is asset allocation, manager selection and effective risk due diligence," she added.

As part of their due diligence process, pension fund officials should also be asking managers how they value instruments like CDOs that do not trade on a liquid market, Ms. Rahl said. She said pension executives should be wary of managers who allow the trader to value those securities themselves.
(August 20, 2007)

The Pain Moves Beyond Subprime
By Matthew Goldstein and David Henry

The ultimate worry is that the trouble in the junk-debt markets will spread to the traditional corporate bond market and create a full-fledged credit crunch that would threaten the economy. That scenario may be unfolding. Issuance of investment-grade corporate bonds fell 72% in July from June's level and 34% from July, 2006, according to Dealogic. And some say the subprime-mortgage and leveraged-loan markets are harbingers of wider credit troubles. …Adds Leslie Rahl, president of Capital Market Risk Advisors in New York and former co-head of Citibank's derivatives group: "Nothing stays rosy forever. We've been in a rosy world, with credit spreads at historically tight levels for some time now. But we seem to be leaving it."
(August 2, 2007)

Levered Bear Funds: A Peek into the Black Box
By Chidem Kurdas

"People forget that even when there's careful mark-to-market pricing, portfolio valuation does not necessarily reflect the actual price you'll get at execution," said Leslie Rahl, president of Capital Market Risk Advisors in New York. "There can be a huge difference between honest mark-to-market price and execution price."
(June 26, 2007)

The calm after the storm - or the eye of the hurricane?
By Suzanne McGee

Late February's stock market rout sent the Dow Jones Industrial Average to its largest one-day loss in more than four years, and sent prices on the riskiest kinds of debt into a nosedive.

Then something odd happened: The sky didn't fall.

But an important four-letter word - risk - has crept quietly back into the marketplace once more. Risk-aversion may not be dominating headlines today the same way it did three or four weeks ago, but it is lurking in the background, waiting for another opportunity to surface.

"We can't rewind the clock and go back to the environment where people felt as carefree as they seemed to in the first month or two of 2007," says Leslie Rahl, a founder of Capital Market Risk Advisors, a firm that has advised financial institutions on managing all kinds of risks since the mid-1990s, when the first derivative debacles roiled financial markets.

Rahl isn't fielding calls from clients desperate to extricate themselves from the fallout of a risk misjudgment. Still, she sees the turmoil of late February and early March as the first stage in a global repricing of risk that is long overdue, and she is urging those clients to "stress test" their portfolios in anticipation of more upheaval.

"While I don't sense that the market believes today that this is imminent, there is general agreement that it has to happen; in some markets, risk premia are as tight as they have ever been," Rahl says. "I think the future is more fragile than the market is pricing it today, and the biggest lesson of the subprime market's implosion so far is how quickly risk can be repriced."
(April 9, 2007)

The Synthetic CDO Shell Game Could the hottest market in all of fixed income be a disaster in the making?
By Bill Shepherd

"One of the questions people have to ask themselves is, how will these synthetic instruments behave in times of stress?" says Leslie Rahl, a former Citibank risk expert who now runs Capital Market Risk Advisors, a risk consultancy in New York. Normal risk modeling only approximates normal markets-the real test comes in extreme markets. And as Rahl likes to say, "We have a once-in-a-lifetime crisis every three or four years."

"If you want to get out early, it costs you," says CMRA's Rahl. "People don't fully understand the degree to which, if over-the-counter markets freeze up, there could be substantial differences between what a theoretical model tells you something is worth and where a buyer and a seller are willing to transact."

Even the skimpy historical record may be distorted by the ways that new entrants change market behavior. "There have been significant changes in how the credit markets work," notes Rahl. For instance, "the role of banks in working out bad credits has changed dramatically. Bondholders now play a much more significant role. So looking at data from the 1980s, probably there's little resemblance to the workout patterns and partners of today."
(May 16, 2005)

Grant's Interest Rate Observer
Making a model

"What Red Adair is to oil and gas exploration, CMRA is to financial engineering
(August 12, 1994)