Concentrations of Credit and Liquidity Risk

12 Months Ended

Dec. 31, 2011

Concentrations of Credit and Liquidity Risk

Concentrations of Credit and Liquidity Risk

NOTE 23. Concentrations of Credit and Liquidity Risk

Risks Related to ClearPoint and Other Related Matters

        The residential mortgage lending activities of ClearPoint are subject to concentrations of liquidity risk, as ClearPoint currently relies on a limited number of investors to purchase its originated mortgage loans and a limited number of lenders to finance these activities. If ClearPoint does not sell loans it originates from funds advanced under ClearPoint's mortgage warehouse lines of credit within certain periods of time, the lenders can incrementally curtail, or reduce, such advances. Under these circumstances, ClearPoint would be required to repay the curtailed amounts to the lenders prior to receiving any proceeds from the sale of the loans. In recent months, ClearPoint has experienced liquidity constraints. These have resulted principally from the rapid expansion of ClearPoint's business coupled with an unanticipated slow-down in loan purchases by one of ClearPoint's principal loan purchasers. These factors have combined to lengthen the period of time during which ClearPoint's loan originations have persisted on its warehouse credit lines. The slowdown in purchases has resulted in an increase in curtailment payments and a decrease in the available capacity for funding new loans.

        In addition, as further discussed in Note 29 "Subsequent Events," in order to facilitate the purchase by Citibank of approximately $56 million of loans originated by ClearPoint, on February 29, 2012, ClearPoint agreed to repurchase certain loans if certain conditions regarding documentation, underwriting and similar matters are not resolved favorably within 30 days of the purchase (subject to extensions). Also, if any loan with unresolved conditions fall into borrower default (defined as any payment more than 30 days past due), Citibank may require ClearPoint to repurchase such loan.

        If payments become due to the lenders or Citibank at a time when the related loans cannot be sold quickly for an amount approximating their full principal amount, or at all, ClearPoint could face a liquidity shortfall and may not be able to perform as required under the warehouse and Citibank agreements, breach related covenants and/or incur losses from the sale of the loans at prices below the market value of the loans in order to meet these obligations. This could also adversely impact ClearPoint's ability to satisfy its unfunded loan commitments, as ClearPoint's financing capabilities are limited to the unused capacity of its warehouse facilities.

        In connection with these matters, as further discussed in Note 29, "Subsequent Events," the Parent entered into guaranties in favor of Citibank, as well as ClearPoint's lenders.

        Also, as further discussed in Note 29 "Subsequent Events," one of ClearPoint's lenders reduced to $0 the committed capacity under its warehouse line (meaning the lender is under no obligation to fund any particular loan origination), and in March 2012, the lender of ClearPoint's remaining committed capacity elected not to renew its line which was originally scheduled to expire on March 10, 2012. Instead, this lender agreed to extend the line for 120 days, while requiring more restrictive curtailment provisions and financing terms. ClearPoint may make requests for funding under this line for the first 60 days of the extension, with the amount which ClearPoint may request decreasing, ultimately to zero at the sixtieth day. However, the lender is not committed to agree to any particular funding request. The two continuing warehouse lines expire in September 2012, and one, in the amount of $100 million, can be terminated at will by the lender on 90-days' notice. Failure of the lenders to renew the warehouse lines upon expiration and/or not provide financing on the uncommitted portions of the lines would adversely impact ClearPoint's ability to conduct business. If ClearPoint is unable to replace the borrowing capacity when the warehouse lines expire or the lenders do not continue to fund requests, it may be required to reduce its loan origination activities and may not be able to satisfy its unfunded loan commitments.

        The warehouse lines and Citibank obligations are effectively collateralized by ClearPoint's funded but unsold loans. The Parent and/or ClearPoint would seek to recoup any payments under their obligations through the sale of these loans. However, if payment becomes due to the lenders or Citibank at a time when the related loans cannot be sold quickly for an amount approximating their full principal amount, or at all, whether as a result of a dislocation in the financial markets, purchaser delays or otherwise, both ClearPoint and the Parent could face a liquidity shortfall and may not be able to perform as required under the agreements, and/or could incur losses from the sale of the loans at prices below the market value of the loans in order to meet these obligations.

        With the assistance of the Parent, ClearPoint is engaged in a remediation program designed to address the curtailment and default issues it has experienced lately and generally reduce its risk profile. The program consists of the following principal elements:

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  limiting new loan originations to more closely balance the rate of loans entering the warehouse with the rate of loan sales to investors, and to reflect the reduction of warehouse capacity resulting from the pending termination of one of the warehouse lines;

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  right-sizing ClearPoint's sales force based upon new loan origination limits;

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  enhancing the operational infrastructure (including implementing temporary measures to address the unresolved conditions related to the Citibank purchase);

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  evaluating changes to ClearPoint's management to enhance its expertise and better match talents to responsibilities;

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  increasing the number of loan purchasers with which ClearPoint transacts; and

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  pursuing additional warehouse line lenders.

        In addition, ClearPoint is analyzing additional loan distribution channels, including becoming licensed to sell directly to Fannie Mae, Freddie Mac and other government-sponsored entities as well as collaborating with the Company's broker-dealer subsidiaries to securitize loans originated by ClearPoint. Other strategies may be pursued, as well.

        In connection with addressing ClearPoint's liquidity constraints, the Parent issued the guaranties described above in order to obtain concessions from certain of ClearPoint's counterparties. While the Parent's maximum potential liability under these guaranties is substantial, the Company believes that under the most likely scenarios, the arrangements described above will not have a material adverse impact on the Parent and/or its subsidiaries. This belief is based in large part on ClearPoint's prior history of curtailment exposure, as well as ClearPoint (or the Parent) ultimately receiving the proceeds from the sale of these loans to finance, or offset, any payments made to the parties to which the guaranties were provided. Such loans are underwritten to be conventional , conforming or government insured or guaranteed loans, satisfying criteria of Fannie Mae, Freddie Mac, FHA or Ginnie Mae.

        However, in light of the risks and uncertainties mentioned above, if ClearPoint, with the Parent's assistance, is unable to execute on the outlined strategies and/or other events occur which reduce our ability to obtain continued financing, it ultimately could have a material and adverse effect on the Parent and/or its subsidiaries financial position, results of operations and/or cash flows.

Risks Related to the Company's Broker-Dealer Operations

        Concentrations of credit risk can be affected by changes in political, industry, or economic factors. The Company's most significant industry credit concentration is with financial institutions. Financial institutions include other brokers and dealers, commercial banks, finance companies, insurance companies and investment companies. This concentration arises in the normal course of the Company's brokerage, trading, financing, and underwriting activities. To reduce the potential for concentration of risk, credit exposures are monitored in light of changing counterparty and market conditions.

        The Company may also purchase securities that are individually significant positions within its inventory. Should the Company find it necessary to sell such a security, it may not be able to realize the full carrying value of the security due to the significance of the position sold.

        The majority of securities transactions of customers of the Company's broker-dealer subsidiary, Gleacher Securities, are cleared through third parties under clearing agreements. Under these agreements, the clearing agents settle customer securities transactions, collect margin receivables related to these transactions, monitor the credit standing and required margin levels related to these customers and, pursuant to margin guidelines, require the customer to deposit additional collateral with them or to reduce positions, if necessary.

        Refer to Note 19 herein within the section labeled "Other" for additional information regarding credit risks of the Company.