As the implosion of the subprime mortgage market spread unexpectedly last month to wider credit markets, Laurie Goodman, global co-head of fixed-income research for UBS, hastily assembled a conference titled "Sifting Through the Rubble." The New York meeting attracted 120 investors, with 473 more listening via telephone. Her focus then -- and for the foreseeable future -- has been to help clients figure out "how to tell the good investments from the bad," she says. That is an issue Goodman has been discussing with greater urgency since November, when UBS's 11-member structured-products research squad started sounding the alarm about an impending crisis in the U.S. housing market. Few investors listened. They are all listening now.
JPMorgan's clients are listening too. Several months ago Christopher Flanagan, the firm's director of global structured-finance research, initiated a series of conference calls, with the number of participants ranging from several hundred (for calls relating to discussions of asset-backed securities) all the way up to 3,000 (for a call featuring the firm's equity and credit strategists). "For a lot of people, this crisis came out of nowhere," Flanagan says, adding that his firm opted to use conference calls, with transcripts of the discussion posted on JPMorgan's research portal, because they are an efficient way of communicating with a wide range of clients in a very short time but still allow for individual attention to particular clients during question-and-answer sessions.
Fixed-income investors require a lot of individual attention and hand-holding these days, amid the continued fallout from the subprime crisis. According to Ravi Mattu, global head of fixed-income and equity research at Lehman Brothers, "The last few weeks makes the client model even more important." And more challenging. Many firms that refrained from expanding their research departments even as demand for fixed-income investments, notably credit derivatives, soared now find themselves scrambling to assuage clients. Lehman directed its analysts to spend more time on the phone with targeted clients, particularly hedge fund managers, and to keep their reports short, sweet and to the point, Mattu says.
That approach is what investors want: For an eighth consecutive year, Lehman tops Institutional Investor's All-America Fixed-Income Research Team. The firm captures 42 total team positions, eight more than its nearest competitor, JPMorgan, which returns in second place. Banc of America Securities jumps two places to finish in third, with 24 total positions. Falling one notch to fourth is Bear, Stearns & Co., one of the firms hit earliest and hardest by the meltdown; the bank pledged $3.2 billion in June to bail out two of its subprime hedge funds, only to see the funds collapse the following month, prompting the first of what may be many lawsuits against banks involved in the subprime space. Credit Suisse and UBS tie for fifth place, with 16 positions apiece. To determine the winners, II surveyed 1,425 portfolio managers and buy-side analysts from more than 480 firms managing an estimated $8.5 trillion in U.S. fixed-income assets. Polling concluded in June.
Given limited resources, credit markets in turmoil and investors clamoring for up-to-the-minute information, fixed-income analysts have rarely experienced a more difficult environment. "Everybody has more work," says Margaret Cannella, global head of credit research and U.S. corporate strategy at JPMorgan, which has 70 fixed-income researchers. "Analysts have less time to deep think, so there is more need for seasoned analysts with more experience. You have to be relevant every single day." Maintenance research went by the wayside a long time ago, and analysts have had to pare their written output even further to serve the growing number and wider variety of clients. "There's an incredibly increased emphasis on making sure our analysts are commercial," says Cannella. "It's a massive shift from the analyst's job three years ago."
Lehman's Mattu agrees that published research in the fixed-income arena has changed. "The time for long-shelf-life strategic research is by and large gone," he says. Instead, firms are relying more heavily on technology and the Internet to disseminate research swiftly to a wide audience. LehmanLive, which investors rate the best Web-based Analytical Tool, offers not only research reports but also video feeds of conference calls and analyst meetings, as well as benchmarking tools.
BofA's product Lighthouse also provides Web-based portfolio analytics and data analyses. One feature introduced last October, a credit option-adjusted spread model, allows investors to measure the amount of risk they would assume by adding collateralized debt obligations, which can be backed by structured products with subprime exposure, to their portfolios. In February the firm posted on its research portal a report by Jeffrey Rosenberg -- who leads BofA's ten-member Investment-Grade Strategy team from third place to first -- alerting investors to looming danger: "Continued erosion in the subprime market and a lack of spread widening in corporate-credit-related issues heightens our concerns about the potential for subprime problems to spread to the corporate credit market," wrote Rosenberg, the firm's head of credit strategy research, advising investors to be more bearish on the credit market.
Ironically, the seeds of the current derivatives-fueled crisis were sown in an earlier period of turmoil when the use of derivatives helped avert a market meltdown. Two years ago, when Standard & Poor's downgraded Ford Motor Co.'s and General Motors Corp.'s credit to junk status, analysts and market observers predicted panic-selling as investors rushed to rid themselves of $450 billion in corporate bonds. That did not happen, because the derivatives market had anticipated the S&P downgrade and priced credit default swaps accordingly. When investors saw how effectively derivatives could be used as a hedge against risk, demand skyrocketed. Investment banks began working double-time to create new and imaginative derivatives products in response to investors' expectations.
UBS's Goodman, who leads the Mortgage-Backed-Securities Strategy team and co-leads the first-place team in four MBS sectors (and the second-place team in a fifth), says her firm responded to the changing fixed-income marketplace not by adding analysts to its 55-strong team but by shifting personnel toward high-growth areas such as securitized products, structured credit, emerging markets and leveraged finance/high yield. To do so, the firm downsized its high-grade-credit staff. "In a resource-constrained market, you're forced to make choices," she says.
The flurry of new fixed-income products has broadened the sell-sider's role as educator. Lev Dynkin, who leads Lehman's 14-member Quantitative Portfolio team to first place for a second consecutive year, uses real-life client situations as the basis for research that is now finding a wider audience. "Often the answer [to one client's request] is of interest to others, and if it's okay with the original client, we'll publish the results," Dynkin says. Last fall these reports were compiled in a book, Quantitative Management of Bond Portfolios, that is being used by investors and in graduate-level finance classes, he says.
In turbulent markets such as these, high-quality research and good recommendations separate the top-tier research firms from the rest of the pack. "It's a great time for credit research," says JPMorgan's Cannella. "Not a good time for the market, but a great time for credit research."
THE MORTGAGE-BACKED OUTLOOK: LAURIE GOODMAN, UBS
Dark clouds continue to hover over the fixed-income market in general and the subprime mortgage market in particular, but Laurie Goodman sees the silver lining. Goodman, global co-head of fixed-income research for UBS, leader of the top-ranked Mortgage-Backed-Securities Strategy squad on the 2007 All-America Fixed-Income Research Team and co-leader of the first-place teams in four MBS sectors (and the second-place team in a fifth), says the Federal Reserve Board's half-percentage-point reduction in the discount rate last month gave investors confidence that there was support for these markets. That changed "the psychology of the crisis," she says.
Also helping was Bank of America Corp.'s $2 billion infusion last month into beleaguered subprime lender Countrywide Financial Corp., the U.S.'s biggest mortgage lender. BofA's investment brought liquidity back to the MBS market, she explains, and the crisis began to wane.
"MBS got more beaten up than was justified by the fundamentals," says Goodman, who believes the Fed will further help the markets by cutting the federal funds rate at its meeting this month. Such a move would bring even more liquidity to the market, she says, although the full impact of the meltdown has yet to be felt.
She expects early 2008 to bring a slowdown in the real economy, with falling home prices and rising foreclosure rates, especially for subprime mortgages, which proliferated in 2006. "When the dust settles, the mortgage market will look quite different," Goodman wrote in an August 21 report. Among her predictions: Agencies will become more prominent, the subprime industry will be smaller, and consolidation among mortgage originators will be significant. "People know this is going to go on for quite some time," she says.
Still, she is already seeing encouraging signs. Late last month, as the markets appeared to be stabilizing, Goodman says clients were looking for buying opportunities. She recommends a balance of both ends of the capital structure: on the one side the senior AAA-rated nonagency pass-throughs without a credit dimension; on the other distressed securities that are likely to pay but are priced as if they aren't.
Long experience has helped Goodman, 51, gain perspective on the market's behavior. She began her career as a senior economist with the Federal Reserve Bank of New York, spent three years as a mortgage portfolio manager at Eastbridge Capital and held senior fixed-income research positions at Citi; Goldman, Sachs & Co.; and Merrill Lynch before joining PaineWebber in 1993, seven years before its merger with UBS.
THE ASSET-BACKED OUTLOOK: CHRISTOPHER FLANAGAN, JPMORGAN
Christopher Flanagan, head of global structured-finance research for JPMorgan, saw danger looming in the subprime mortgage market a year and a half ago, but even now he wonders if the government comprehends the crisis. "It's still not perfectly clear if the Fed understands the magnitude of what's going on," says Flanagan, 50, who leads or co-leads three top-ranked Asset-Backed Securities squads (and one in second place) on the 2007 All-America Fixed-Income Research Team. "The market is looking for more than just the early August easing," he says, referring to the Federal Reserve Board's half-percentage-point cut in the discount rate last month.
In May 2006 Flanagan published a report warning investors that a downturn in the housing market was on its way. "There is a problem that will take a long time to unfold," he wrote. Last fall, while many other analysts were talking about the markets being awash in liquidity, Flanagan was telling clients to expect big moves in the spreads of the benchmark subprime mortgage ABX indexes. He urged investors to go short and stay that way.
In early January the ABX 07-1 BBB, the index that tracks subprime mortgage loans made in the second half of last year, stood at 98.35 points; by mid-August it had plunged to 33.53. Investors that followed Flanagan's advice have made a bundle, and there may be more to come: He expects the index to trade down to the mid-teens.
In February and March, Flanagan, who has been a fixed-income researcher for more than 20 years, began to draw parallels between conditions in the ABS and collateralized-debt obligations markets. He concluded that what was happening in the former would soon be happening in the latter, and he urged investors to short CDOs, as well.
Last month, in a report titled "After the Fall: Value in ABS, ABX and CDOs," Flanagan expanded on his position. Although he remains short on BBB debt, having concluded that there is little the Fed can do to save the fundamentals of the lower part of the capital structure, he turned bullish on the more senior parts of the ABS markets, specifically the AAA and AA tranches, including autos and credit cards. "We've seen massive spread widening, and now they're oversold," he wrote. (The spreads have since begun to tighten.) "This is once-in-a-lifetime stuff for the bond market."
THE OUTSTANDING ANALYSTS OF THE YEAR
INVESTMENT GRADE
BANKS
Matthew Burnell
Wachovia
SECOND TEAM
Ian Jaffe Bear Stearns
THIRD TEAM
Jonathan Glionna Lehman
RUNNER-UP
Kabir Caprihan JPMorgan
BASIC INDUSTRIES
James Dunn
Wachovia
SECOND TEAM
Gregory Ransom BofA
THIRD TEAM
Keith Wiley Goldman Sachs
CONSUMER PRODUCTS
Todd Duvick
BofA
SECOND TEAM
Eric Miller Lehman
THIRD TEAM
Virginia Chambless JPMorgan
ELECTRIC UTILITIES
Faith Klaus
BofA
SECOND TEAM
Raymond Leung Bear Stearns
THIRD TEAM
Peter Quinn Goldman Sachs
RUNNER-UP
Susan Voorhees JPMorgan
ENERGY
Ted Izatt
Bear Stearns
SECOND TEAM
Dennis Coleman BofA
THIRD TEAM
Harry Mateer Lehman
RUNNER-UP
Vivek Pal UBS
HEALTH CARE
David Peterson
BofA
SECOND TEAM
Arun Kumar JPMorgan
THIRD TEAM
Stanton Neilson Barclays
INSURANCE
Thomas Walsh
Lehman
SECOND TEAM
Gail Golightly Wachovia
THIRD TEAM
David Havens UBS
RUNNERS-UP
Michael Barry BofA; Seth Glasser Barclays; Arun Kumar JPMorgan
MANUFACTURING
Brian Jacoby
Goldman Sachs
SECOND TEAM
Dan Ilany Bear Stearns
THIRD TEAM
Douglas Karson BofA
MEDIA & ENTERTAINMENT
Scott Shiffman
Lehman
SECOND TEAM
Douglas Colandrea Bear Stearns
THIRD TEAM
Scott Marchakitus Goldman Sachs
RUNNER-UP
Robert Schiffman Credit Suisse
NONBANK FINANCIALS
Jonathan Glionna
Lehman
SECOND TEAM
John Guarnera BofA
THIRD TEAM
Matthew Burnell Wachovia
RUNNERS-UP
Van Hesser HSBC; Ian Jaffe Bear Stearns
REAL ESTATE INVESTMENT TRUSTS
Daniel Sullivan
Wachovia
SECOND TEAM
Mark Streeter JPMorgan
THIRD TEAM
Susan Berliner Bear Stearns
RUNNER-UP
Christopher Brown BofA
RETAILING
Eric Miller
Lehman
SECOND TEAM
Virginia Chambless JPMorgan
THIRD TEAM
Frank Henson Bear Stearns
RUNNER-UP
Christopher Brown BofA
TECHNOLOGY
Gregory Chwatko
Goldman Sachs
SECOND TEAM
Dan Ilany Bear Stearns
THIRD TEAM
Scott Shiffman Lehman
TELECOMMUNICATIONS SERVICES
Scott Shiffman
Lehman
SECOND TEAM
Scott Marchakitus Goldman Sachs
THIRD TEAM
Douglas Colandrea Bear Stearns
HIGH YIELD
AUTOS & AUTO PARTS
Jeffrey Skoglund
UBS
SECOND TEAM
Eric Selle JPMorgan
THIRD TEAM
Douglas Karson BofA
RUNNER-UP
Brian Jacoby Goldman Sachs
BROADCASTING & PUBLISHING
Stephen Weiss
BofA
SECOND TEAM
Andrew Finkelstein Lehman
THIRD TEAM
Robert Kricheff Credit Suisse
RUNNER-UP
Avi Steiner KBC
BUILDING
Lawrence Taylor
Credit Suisse
SECOND TEAM
Lee Brading Wachovia
THIRD TEAM
Andrew Brausa BofA
RUNNER-UP
Susan Berliner Bear Stearns
CABLE & SATELLITE
Stephen Weiss
BofA
SECOND TEAM
Michael Pace JPMorgan
THIRD TEAM
Robert Kricheff Credit Suisse
CHEMICALS
David Troyer
Credit Suisse
SECOND TEAM
William Hoffmann UBS
THIRD TEAM
Michael Salshutz Lehman
RUNNER-UP
Roger Spitz Merrill Lynch
CONSUMER PRODUCTS
Reza Vahabzadeh
Lehman
SECOND TEAM
Carla Casella JPMorgan
THIRD TEAM
Reade Kem Merrill Lynch
ELECTRIC UTILITIES
David Silverstein
Merrill Lynch
SECOND TEAM
Peter Quinn Goldman Sachs
THIRD TEAM
Susan Voorhees JPMorgan
ENERGY
Gary Stromberg
Lehman
SECOND TEAM
Adam Leight Credit Suisse
THIRD TEAM
Kelly Krenger BofA
FOOD & BEVERAGES
Reza Vahabzadeh
Lehman
SECOND TEAM
Bryan Hunt Wachovia
THIRD TEAM
Karen Eltrich Goldman Sachs
RUNNER-UP
Zafar Nazim JPMorgan
GAMING & LODGING
David Hargreaves
KBC
SECOND TEAM
James Kayler BofA
THIRD TEAM
Jane Pedreira Lehman
RUNNER-UP
John Maxwell Merrill Lynch
HEALTH CARE
Larry Bland
BofA
SECOND TEAM
Michael Scarangella Merrill Lynch
THIRD TEAM
Henry Reukauf Deutsche
RUNNER-UP
Scott Schimpf Lehman
MANUFACTURING/GENERAL INDUSTRIALS
Sarah Thompson
Lehman
SECOND TEAM
Manish Somaiya BofA
THIRD TEAM
Thomas Klamka Credit Suisse
METALS & MINING
Bruce Klein
Credit Suisse
SECOND TEAM
Justine Fisher Goldman Sachs
THIRD TEAM
Brett Levy Jefferies
RUNNER-UP
Kevin Cohen BofA
PAPER & FOREST PRODUCTS
Bruce Klein
Credit Suisse
SECOND TEAM
Joseph Stivaletti Goldman Sachs
THIRD TEAM
William Hoffmann UBS
RUNNER-UP
Kevin Cohen BofA
RETAILING
Susan Jansen
Lehman
SECOND TEAM
Carla Casella JPMorgan
THIRD TEAM
Karen Eltrich Goldman Sachs
RUNNERS-UP
Christina Boni Credit Suisse; M. Grant Jordan Wachovia; Reade Kem Merrill Lynch
SERVICES
Lawrence Taylor
Credit Suisse
SECOND TEAM
Manish Somaiya BofA
THIRD TEAM
Sarah Thompson Lehman
TECHNOLOGY
Eric Toubin
BofA
SECOND TEAM
Jeffrey Harlib Lehman
THIRD TEAM
Sundar Varadarajan Deutsche
RUNNER-UP
Robert Hopper UBS
TELECOMMUNICATIONS SERVICES
Patrick Dyson
Credit Suisse
SECOND TEAM
David Sharret Lehman
THIRD TEAM
Ana Goshko BofA
RUNNER-UP
Sandy Liang Bear Stearns
TRANSPORTATION
Mark Streeter
JPMorgan
SECOND TEAM
Justine Fisher Goldman Sachs
EMERGING MARKETS
EMERGING-MARKETS SOVEREIGNS & ECONOMICS
Joyce Chang, Luis Oganes & team
JPMorgan
STRUCTURED SECURITIES
ASSET-BACKED SECURITIES/PREPAYMENTS
Christopher Flanagan & team
JPMorgan
SECOND TEAM
Shumin Li, Thomas Zimmerman & team UBS
THIRD TEAM
Steven Bergantino, Dale Westhoff & team Bear Stearns
RUNNERS-UP
Rod Dubitsky, Jay Guo & team Credit Suisse; Dan Mingelgrin & team Lehman
ABS/REAL ESTATE
Christopher Flanagan, Edward Reardon & team
JPMorgan
SECOND TEAM
Rod Dubitsky & team Credit Suisse
THIRD TEAM
Akhil Mago & team Lehman
RUNNERS-UP
Gyan Sinha & team Bear Stearns; Rei Shinozuka, Thomas Zimmerman & team UBS
ABS/OTHER
Mary Kane, Rahul Parulekar & team
Citi
SECOND TEAM
Christopher Flanagan, Amy Sze & team JPMorgan
THIRD TEAM
Theresa O'Neill & team Merrill Lynch
RUNNER-UP
Rajat Bhu, Rod Dubitsky & team Credit Suisse
COLLATERALIZED DEBT OBLIGATIONS
Christopher Flanagan, Kedran Garrison & team
JPMorgan
SECOND TEAM
Claude Laberge, Akhil Mago & team Lehman
THIRD TEAM
Douglas Lucas & team UBS
COMMERCIAL MORTGAGE-BACKED SECURITIES
Darrell Wheeler & team
Citi
SECOND TEAM
Alan Todd & team JPMorgan
THIRD TEAM
Roger Lehman & team Merrill Lynch
RUNNERS-UP
Neil Barve & team Lehman; Lisa Pendergast & team RBS Greenwich
MORTGAGE-BACKED SECURITIES/ADJUSTABLE-RATE MORTGAGES
Laurie Goodman, Gregory Reiter & team
UBS
SECOND TEAM
Matthew Jozoff & team JPMorgan
THIRD TEAM
Desmond Macauley & team RBS Greenwich
RUNNERS-UP
Gyan Sinha & team Bear Stearns; Vikas Shilpiekandula & team Lehman
MBS/AGENCY PASS-THROUGHS
Laurie Goodman, Jeffrey Ho & team
UBS
SECOND TEAM
Matthew Jozoff & team JPMorgan
THIRD TEAM
Alexander Crawford & team RBS Greenwich
RUNNERS-UP
Steven Abrahams & team Bear Stearns; Prasanth Subramanian & team Lehman; Akiva Dickstein & team Merrill Lynch
MBS/AGENCY-STRUCTURED PRODUCTS
Laurie Goodman, Gregory Reiter & team
UBS
SECOND TEAM
Matthew Jozoff & team JPMorgan
THIRD TEAM
Steven Abrahams & team Bear Stearns
RUNNERS-UP
Srinivas Modukuri & team Lehman; Alexander Crawford, Pankaj Jha & team RBS Greenwich
MBS/NONAGENCY-STRUCTURED PRODUCTS
Laurie Goodman, Thomas Zimmerman & team
UBS
SECOND TEAM
Matthew Jozoff & team JPMorgan
THIRD TEAM
Vikas Shilpiekandula & team Lehman
RUNNER-UP
Satish Mansukhani & team Credit Suisse
MBS/PREPAYMENTS
V.S. Srinivasan, Dale Westhoff & team
Bear Stearns
SECOND TEAM
Laurie Goodman, Shumin Li & team UBS
THIRD TEAM
Matthew Jozoff, John Sim & team JPMorgan
RUNNER-UP
Lakhbir Hayre & team Citi
MUNICIPALS
GENERALIST
Peter DeGroot
Lehman
HEALTH CARE
Jerome Solomon
Bear Stearns
SECOND TEAM
Jody Madala First Albany
STRATEGY & ECONOMICS
BOND MARKET INDEXES
Nicholas Gendron & team
Lehman
SECOND TEAM
Philip Galdi & team Merrill Lynch
THIRD TEAM
Thomas Klaffky & team Citi
CREDIT DERIVATIVES
Ashish Shah & team
Lehman
SECOND TEAM
Eric Beinstein & team JPMorgan
THIRD TEAM
Sivan Mahadevan & team Morgan Stanley
ECONOMICS
Maury Harris, James O'Sullivan & team
UBS
SECOND TEAM
Ethan Harris & team Lehman
THIRD TEAM
Bruce Kasman & team JPMorgan
RUNNERS-UP
Barclays; John Ryding & team Bear Stearns; Jan Hatzius & team Goldman Sachs; Ed Hyman & team ISI; David Rosenberg & team Merrill Lynch; Stephen Stanley & team RBS Greenwich
FEDERAL AGENCY DEBT STRATEGY
Margaret Kerins & team
RBS Greenwich
SECOND TEAM
Priya Misra & team Lehman
GENERAL STRATEGY
John Malvey & team
Lehman
SECOND TEAM
Kenneth Hackel & team RBS Greenwich
THIRD TEAM
Barclays
RUNNERS-UP
Steven Abrahams & team Bear Stearns; Terrence Belton, Pavan Wadhwa & team JPMorgan
HIGH-YIELD STRATEGY
Peter Acciavatti & team
JPMorgan
SECOND TEAM
M. Christopher Garman & team Merrill Lynch
THIRD TEAM
Brian Arsenault & team Morgan Stanley
RUNNER-UP
Michael Anderson & team Lehman
INTEREST RATE DERIVATIVES
Terrence Belton, Srini Ramaswamy & team
JPMorgan
SECOND TEAM
Amitabh Arora, Ben Martens & team Lehman
THIRD TEAM
Jon Blumenfeld & team Bear Stearns
INVESTMENT-GRADE STRATEGY
Jeffrey Rosenberg & team
BofA
SECOND TEAM
Edward Marrinan & team JPMorgan
THIRD TEAM
Gregory Peters & team Morgan Stanley
RUNNER-UP
Ashish Shah & team Lehman
MBS STRATEGY
Laurie Goodman & team
UBS
SECOND TEAM
Matthew Jozoff & team JPMorgan
THIRD TEAM
Steven Abrahams, Dale Westhoff & team Bear Stearns
RUNNERS-UP
Srinivas Modukuri & team Lehman; Alexander Crawford & team RBS Greenwich
MUNICIPALS STRATEGY
Peter DeGroot & team
Lehman
SECOND TEAM
Philip Fischer & team Merrill Lynch
THIRD TEAM
George Friedlander & team Citi
RUNNER-UP
Yingchen Li & team JPMorgan
QUANTITATIVE PORTFOLIO
Lev Dynkin & team
Lehman
TECHNICAL ANALYSIS
Michael Krauss & team
JPMorgan
SECOND TEAM
Barclays
U.S. GOVERNMENTS STRATEGY
David Ader & team
RBS Greenwich
SECOND TEAM
Amitabh Arora & team Lehman
