Bond Insurers

[HenryTo]

This continues to bear watching going forward:

http://www.bloomberg.com/apps/news?pid=20601109&sid=aOjl_Hy9ibBI&refer=exclusive

[Rubedo]

http://bigpicture.typepad.com/comments/2008/02/monoline-rescue.html

US Equity markets were ending last week on a down note, when rumors of an Ambac (ABK) rescue plan started circulating (via Charlie Gasparino of CNBC)

A few issues that may be getting overlooked in the initial reaction to this:

1) This is the fifth such rumor in 2008, and I'm not sure why that is. Is it wishful thinking, or have the other deals have fallen apart? If they did, was it for good reason, too?

We had the initial rumor over a month ago (Next on the Worry List: Shaky Insurers of Bonds); that was a $15 Billion dollar bailout. Then came the Wilbur Ross - Ambac rescue plan. It went nowhere fast. Another bank consortium plan came and went. Lastly, the Buffett offer, which was widely misrepresented as Berkshire (BRK'A) injecting money into the monolines duolines, when in reality all Buffett offered to do was merely sell reinsurance to the duolines.

2) The current rescue operation is for but $3B. This small sum is intriguing -- not just relative to the prior rumors. First, the duolines have potential exposure anywhere from $30 to $75 billion dollars. On top of that, the bank's counterparty and hedging exposure has been estimated at $150B to $200B. Can $3B really solve this problem?

3) From the FT Friday: Banks to aid Ambac with up to $3bn

The banks looking at supporting Ambac include Citigroup (C), Wachovia (WB), Barclays, Royal Bank of Scotland, Société Générale, BNP Paribas, UBS and Dresdner. They have the most exposure to guarantees supplied by Ambac on structured bonds and derivatives, the value of which could fall sharply, resulting in billions of dollars of writedowns if the insurer's credit ratings drop far below the triple-A level. (emphasis added)

Hence, the banks who are Part of the rumored consortium are (of course!) the ones who have the most to lose if any of the Duolines fail. This is not so much a bailout as a possible attempt to kick the can down the road. They have the most exposure to guarantees supplied by Ambac on structured bonds and derivatives, the value of which could fall sharply, resulting in billions of dollars of writedowns if the insurer’s credit ratings drop far below the triple-A level.

What's truly bizarre is that a dozen banks spending three large may actually be a relatively good deal for them, if it avoids a quarter trillion in writedowns.

4) Coincidence or good timing? Look who's expected to report writedowns this week: Fannie Mae (FNM), Freddie Mac (FMC), Lehman (LEH), Morgan and Goldman Sachs (GS), and Royal Bank of Scotland.

The bottom line: Until this deal gets done and the details are better known, its simply another in a loing string of rumors. Worse yet is what it means: Banks have so much derivative exposure they are willing to throw away $3 billion to prevent the counter-parties from getting a ratings agency downgrade.

UPDATE: January 25, 2008 2:50pm

S&P has reaffirmed MBIA's AAA rating. Markets are rallying on the news. To achieve this feat, MBI was forced to sell surplus notes at par that yielded 14% during that capital raise --t hat is way above junk bond levels. In the markets, its trading between 97-100. Note that US Govt is AAA, GE is AAA , Exxon Mobil, Johnson & Johnson, Berkshire Hathaway and Northwestern Mutual are also AAA.

Peter Boockvar of Miller Tabak points out:

"What S&P is saying is that a bond yielding 14% in the marketplace is also AAA. It's now a game among the rating agencies, regulators and banks with whether the bond insurers are rated AAA or not when they clearly are not and their securities don't trade as they are. This is being done in an attempt to prevent the banks from going through another round of writedowns."

What of Ambac? Any hope of its AAA ratings reaffirmations are likely contingent upon a deal going thru -- and if it falls apart so, do any hope of AAA ratings for Ambac.

What this really points out is how worthless and corrupt the S&P and Moody's ratings actually are.

Forget that the foxes are watching the henhouse, it appears that the regulators, banks, insurers, and SEC, Federal Reserve -- pretty much anyone else you can think of -- are all in cahoots with each other. Its American Socialism at its finest . .

[HenryTo]

Deal is nearly done - waiting for the ratings agencies' stamp of approval right now:

http://www.cnbc.com/id/23337607/site/14081545?__source=yahoo%7Cheadline%7Cquote%7Ctext%7C&par=yahoo

[HenryTo]

An update on the bond insurers from Bloomberg:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aj5fqH8i34mg&refer=home

I was on the PIMCO institutional call this morning and the two muni managers pointed out that the majority of the liquidity issues in the municipal and ARS market is now dependent on this being resolved. PIMCO has been a significant liquidity provider in the ARS market over the last few days and rates are now slowing coming down (the NY Port Authority rate of 20% was only a one-day event/outlier). Most NY issuers are now paying 4% to 6% while CA issuers are paying 6% to 7%. With the Ambac situation (hopefully) resolved on Monday or Tuesday of next week, liquidity issues should continue to dissipate over the next few trading days.

[texfly101]

so Dinallo's plan seems to be attracting buyers, AMBAC and MBIA and the Dow spike on the news, CNBC takes credit of course, (who is to dispute them?) for the turn around in the markets. Freddie and Fannie downgraded but the markets rise. Everyone agrees that there will be a 20% decrease in home values and consequent lack of equity to fuel growth from the retail investor and consequent credit card defaults. And no guarantee that all of this won't be as convoluted as the cloudy instruments that are at the heart of all of this. An amazing report that foreclosures were being held up because they couldn't determine who really owned the mortgages, that they had been sold so many times, leveraged so much that it will take litigation to determine who really can file the necessary foreclosure papers. And bond insurers at the heart of this mess.

Too much for me to digest, I'm glad for mechanical systems, stay the course, conservative plans from people who can navigate their way thru this minefield. Following in the footprints at least charts a path.

I do note that there is definitely potential for those willing to stomach the risk. The only person on CNBC that made sense to me was an older gentleman institutional investor who said he was definitely going to miss the bottom, he wouldn't try to maximize his profits, that the market was in too much turmoil for him to try and make any calls on the direction of future investments other than caution and make your move only after a definite direction has been established. Maybe not the best advice for a financial telecast but believable to me. I'm in his boat.
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dj

[texfly101]

Henry,
Thanks, that was a great piece of information. Very interesting as this sort of information is not available in our plans 401k website. I'll check with Bill and see what he has to say on the matter...dj
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dj

[HenryTo]

Some humor for the day at the expense of Bill Ackman:

http://www.bankstocks.com/images/080221ackman.pdf

I looked over the model - and the only assumptions they disclosed were their LIBOR rate of 3.3% (with no disclosure on how it is being used in the model) and a decline in overall housing prices of 19% in the next two years and flat for the three after.

[HenryTo]

At this point, this looks to be the most likely "private solution" scenario. A downgrade to AA would force MBIA and Ambac into a run-off scenario but it would also limit overall write-downs to $5 billion according to Bank of America's calculations.
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AA ratings for U.S. bond insurers may cut risks: report

NEW YORK (Reuters) - Bond insurers would be better off targeting AA ratings than trying to protect their top "AAA" ratings by splitting their businesses, which could damage their bank policyholders, Bank of America said in a report on Thursday.

The ratings of bond insurers including MBIA Inc (MBI.N: Quote, Profile, Research) and Ambac Financial Group (ABK.N: Quote, Profile, Research) may be cut because of expected claims from their guarantees on risky residential mortgage backed debt, including collateralized debt obligations.

A rating downgrade would dry up demand for their business of insuring municipal bonds and could make it more expensive for local governments to sell debt.

Regulators and some bond insurers have proposed splitting off the companies' risky structured finance operations into a separate company as a way to protect the ratings on more than a trillion dollars of municipal bonds.

However, this would likely prompt a credit ratings cut for the structured finance unit, Bank of America analyst Jeff Rosenberg said in a report sent on Thursday. That would force banks to write down the value of securities guaranteed by the structured finance units by as much as $30 billion.

"That plan, while limiting the damage to the municipal market comes at significant cost to the broader financial markets," Rosenberg said.

An alternative option would be for insurers to target an "AA" rating. The capital requirements to hold this rating would be significantly lower than those required for the top "AAA" ratings, Rosenberg said.

Bank write downs from insurance policies they have purchased on CDOs would likely fall to around $5 billion, he said.

"The AA level limits the spread of systemic risk while reducing the amount of new capital required," Rosenberg said. "Targeting the AA level would also reduce the risk of further capital requirements as loss expectations change," he added.

Damage to the municipal bond market would also likely be limited from this scenario, as triggers for tax-free money market funds to sell municipal debt is often below "AA."

However, Rosenberg noted that a downgrade below AA could limit the number of buyers and force banks to absorb $100 billion in short-term municipal bonds.

While a rating of AA will likely lead to some losses for municipal bond investors, Rosenberg notes that breaking up the insurers would likely face significant legal hurdles and may not offer any greater protection of their investment.

(Reporting by Karen Brettell; Editing by Tom Hals)

[HenryTo]

Hi DJ,

Here's a good take on it:

http://www.lmstrategies.com/types~2.html

Bill would know more about this and I do - I don't work with stable value and GICs on a daily basis (neither does Bill I think but he probably has more exposure to this than I do).

Best regards,

Henry

[texfly101]

Its my assumption that most 401k "guaranteed return" vehicles depend on these type of instruments. If I am correct, could that mean that in the short term, that these types of selections might bear a higher rate of return due to the increased risk and higher auction rates? Or are these the type of funds that can not buy any muni or corporate bond that doesn't have a AAA rating or isn't insured by a AAA insurer? I guess what I am saying is how will this end up affecting the common working man who has a choice to make in a 401 k account? Since I can't actively manage my 401k account, it having penalties for trading, I typically use the guaranteed return as a defensive choice in times of uncertainty when going long is not advised. And as such, I use that guaranteed return as my basis for analyzing future strategies.
This is really interesting time for me as I have to wear two hats. In my 401k, I am an investor and as such use a strategy based on The Retirement Advisor. In my personal account, I am a trader and use strategies based on Bill Remple's systems. So just trying to see this bond insurer mess from both sides.
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dj

[rffrydr]

I'm thinking the reason there is a problem just might be because of a government solution. Spitzer gets no love from financial center banks.

Shot over the bow?
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

An update. No doubt the auction rate securities market is now screaming for a solution. My guess is that this issue will get resolved by next Monday morning - even if it means adopting a government solution.
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NY gov downplays deadline in bond insurer talks

By Joan Gralla

NEW YORK, Feb 19 (Reuters) - New York Gov. Eliot Spitzer is less interested in a specific timetable for devising a plan to help rescue bond insurers than finding a "beneficial private- sector solution," his spokeswoman said on Tuesday.

Last Thursday, the Democratic governor testified to Congress about his efforts to help the bond insurers keep their "AAA" ratings, later telling reporters that a solution "could happen within a couple of days."

Asked about the deadline, Christine Anderson, a spokeswoman for Spitzer, said on Tuesday he had been stressing the matter's urgency.

"We are less interested in a specific timetable than we are about achieving a beneficial private-sector solution," she said.

Spitzer also told reporters in Albany on Tuesday that he was "making good progress" in talks with the U.S. Treasury, the Federal Reserve, and major banks to help embattled bond insurers keep their top "AAA" ratings.

Credit agencies repeatedly have warned the insurers that they could lose their "AAA" ratings unless they raise capital.

But the insurers are solid, Spitzer said, explaining the risk he sees is that any downgrades could force widespread selling because many players can own only top-rated debt.

"The solvency is rock solid, the rating is what would percolate through the entire marketplace and could then be transmitted through other underlying bonds that are being held by a lot of entities that are precluded by their own internal rules from holding anything other than 'AAA,'" he said.

"If they were to lose the 'AAA' status, it could cause a significant sell in other parts of the bond market."

OF REMEDIES AND RATES

Only one of the three big bond insurers whose risky subprime investments have imperiled its municipal bond business has publicly said it will try one of Spitzer's options: splitting its muni book from its subprime portfolio.

FGIC Corp (BX.N: Quote, Profile, Research)(PMI.N: Quote, Profile, Research) told regulators last week it wants to split into two companies. Rival Ambac Financial Group (ABK.N: Quote, Profile, Research) is in discussions to raise $2 billion of capital, a prelude to dividing itself into two companies, Tuesday's Wall Street Journal said.

In contrast, bond insurer MBIA Inc (MBI.N: Quote, Profile, Research) said on Tuesday it would not split in two but is looking at shifting its insurance operations into multiple subsidiaries under the current holding company.

States regulate insurance companies, and the remedies they have once insurers fall ill include seizing control of them via the courts. This gives considerable clout to Spitzer's point man in the talks, the state's insurance superintendent, Eric Dinallo.

Spitzer noted many government entities have been forced to pay uncommonly high interest rates because investors are so wary of paper insured by the ailing companies that they have stopped buying auction-rate securities.

Auctions of these securities have failed every day since early last week when dealers en masse stopped supporting them. But some hedge funds and wealthy individuals are gobbling them up, drawn by yields as high as 20 percent,

Auctions fail in this market -- which totals $330 billion though only about $250 billion is tax-exempt -- when there are not enough investors. At this point, however, would-be purchasers have a strong motivation to wait until an auction fails -- or bid just below the maximum rate -- in order to get the highest possible tax-free income. (Additional reporting by Elizabeth Flood Morrow in Albany; Editing by Leslie Adler)

[rffrydr]

Here I think Mr. Brown has it pegged, you won't find the turn in the ABX (let me add that Goldman could never afford it).

http://www.bankstocks.com/article.asp?type=1&id=9881644
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

"Good Bank, Bad Bank"...good luck.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Eliot Spitzer and his right-hand man, Eric Dinallo, is now seeking to end this crisis on an accelerated schedule.
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Monolines given five days to find funds
Thursday February 14, 7:50 pm ET
By Aline Van Duyn in Washington and Michael Mackenzie in New York


Eliot Spitzer, New York governor, gave bond insurers three to five business days to find fresh capital, or face a potential break-up by state regulators who want to safeguard the municipal bond markets.

Mr Spitzer's warning came shortly before Moody's Investors Service highlighted concerns about the bond insurers by withdrawing its triple-A credit rating for privately held Financial Guaranty Insurance Company.

However, the sting of Moody's downgrade was mitigated by its more positive comments about MBIA (NYSE:MBI) and Ambac, the two largest bond insurers, which helped send their shares up 8.4 per cent and 12.4 per cent, respectively, in New York trading.

If the bond insurers lose their triple-A credit rating, the bonds and other instruments they insure also would be downgraded. This could trigger more writedowns for banks and other investors that hold such investments and a sharp rise in borrowing costs for local government entities that issue insured bonds.

Mr Spitzer told the House financial services sub-committee on capital markets in Washington that he believed the crisis involving the credit insurers needed to be resolved in three to five business days. "We will be forced to act sooner rather than later," Mr Spitzer said.

He said New York regulators were considering a division of the bond insurers into a "good bank, bad bank" structure. Under such proposals, the insurers' municipal bond businesses would be separated from their riskier activities, such as guaranteeing complex structured securities.

Mr Spitzer did not say what specific steps could be taken by insurance regulators, who operate at the state rather than federal level. But the state regulators have powers to protect policyholders, as well as banks.

The tough tone was echoed by Eric Dinallo, New York's insurance superintendent, who was appointed by Mr Spitzer and who has been pushing for bond insurers and the banks most exposed to them to discuss new sources of capital. He said his first priority would be to protect the municipal bondholders and issuers.

Mr Dinallo said the regulator would allow bond insurers to split into two companies. Warren Buffett, the billionaire investor, has already offered to take over the municipal portfolios of Ambac, MBIA and FGIC. One has already rejected the offer. Mr Dinallo said other investors were also interested. "If we do not take effective action, this could be a financial tsunami that causes substantial damage throughout our economy."

Mr Dinallo said he was considering rewriting the rules for bond insurance to prevent companies taking inappropriate risks.

A break-up of the bond insurer model holds grave implications for financial institutions that face writedowns on insurance and derivatives contracts entered into with bond insurers.

[HenryTo]

The Feds, regulators, and the banks have "the next few weeks" to find a solution that does not involve Mr. Buffett:

http://www.bloomberg.com/apps/news?pid=20601087&sid=adTOpUQ9qNzo&refer=home