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HenryTo
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 Posted: Thu Nov 15, 2007 10:18 am Post subject: Bond Insurers |
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This continues to bear watching going forward:
http://www.bloomberg.com/apps/news?pid=20601109&sid=aOjl_Hy9ibBI&refer=exclusive
| Quote: | Insurers could boost their padding by reinsuring the securities they guarantee, Fitch analyst Keith Buckley said on a conference call Nov. 8.
Banks may step in to back the companies because it would be cheaper than taking more writedowns, Michael Barry and Seth Levine, analysts at Charlotte, North Carolina-based Bank of America Corp., wrote in a report.
``The securities industry, no small force, has a keen interest in the financial guarantors remaining healthy and rated AAA,'' they wrote. ``Financial guarantors would not have to look far for help making sure the demand was met.'' |
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rffrydr
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| Posted: Thu Feb 14, 2008 12:35 pm Post subject: |
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Ackman vs. the Insurers coming today on CNBC.
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HenryTo
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rffrydr
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| Posted: Wed Feb 13, 2008 2:56 pm Post subject: |
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It took Buffett's cruel joke for the market to finally see the certainty in uncertainty:
| Quote: | Survival tactics in the wake of the downgrade plague
By John Dizard
Published: February 12 2008 02:00 | Last updated: February 12 2008 02:00
The disappearance of much of the speculative capital that had been committed to the "credit space" has led to ionospheric yields in the US municipal bond markets. Usually, municipal bonds, which provide Federal tax-exempt yields for US taxpayers, trade at less than 90 per cent of the yield of the Treasury curve. Now the AAA municipals are offering just about the same yield as Treasuries, and finding little liquidity there. This isn't driven by any measurable increase in default risk, but by the continuing Sack of Rome in the speculative credit world.
Once a preserve for widows in Florida, the "muni" market became a playground for credit speculators in recent years. The "non-traditional buyers", as they are called in muni-land, included European banks, Canary Wharf quant funds and New York arbitrageurs. While the liquidity wasn't all you could ask for - after all, those widows aren't wired up to a Bloomberg - the muni market curve rarely inverted. That meant that a leveraged position would be much less at risk of being decapitalised by a rise in short rates.
The credit speculators actually fulfilled a useful ecological function for the "real money" buyers and sellers. States and municipalities like to issue long-dated paper, since they are using most of the proceeds for capital projects, and like to do multi-year budgeting. But the natural buyers of conservative tax-exempt paper are old people, savers who are uncomfortable with paper that will mature long after they're gone. The result was a relative dearth of short-term, tax-exempt paper.
So first the banks and dealers, and then the hedge funds, set up TOB (tender option bond) trusts. These would buy the 20- and 30-year bonds from the municipal issuers, put them into a trust that would pay the retail buyers the short-term muni rate, and lift the trust with libor-tied funds. Even after hedging the libor risk, they could collect some pretty good "vig", as New York professionals say.
Since all the most sophisticated models told the credit funds they couldn't lose, by last spring they were putting on one form or another of muni yield-curve-riding trades at spreads of 50 basis points. Even there, you could pay for dinner at Nobu and school fees for everyone in the office.
Then, Alaric the Visigoth in the form of margin calls descended to administer God's punishment for believing in models. That's been followed by the monoline crisis, which has struck the survivors with downgrade plague. Now the spread on the generic muni curve between one and 30 years has widened out to around 250 basis points. "At this level," says James Iselin, a Lehman Brothers Asset Management senior vice-president, "the trade is getting very compelling." Not compelling enough, though, for anyone to actually do it. All the capital that should bridge the gap between those widows with money market funds and the states with crumbling bridges . . . well, you know the story. Like policemen: never around when you need them. At points such as these, you wonder what trigger event will resolve the issue, and get those muni spreads to Treasuries down 10 or 12 percentage points. In this case, there's no need to wonder. The muni market needs a resolution of the monoline crisis. Good or bad.
The monolines, remember, were founded on the difference between the perception and reality of the creditworthiness of water authorities in Illinois, or small towns in Missouri. They sold the best kind of insurance, which is the sort on which claims hardly ever need to be paid. Municipal managers and state government bureaucrats are very conservative.
But the widows were never sure of that, so much of the muni paper was either unsaleable or very expensive to sell unless it had that monoline wrap.
Now, as Mr Iselin of Lehman says: "Right now, much of that insurance is priced as though it were worthless. In the event of a monoline failure, though, we could see a flood of selling by players that can only own AAA bonds. There would be limited demand for those bonds."
That wouldn't last for long. You may have heard that this is an election year in the US. The chance of the Federal Reserve, the US government or the leading banks allowing a collapse of the municipal bond market is, take my word for it, exactly zero. If the Fed buys nothing else that week, they'll buy every muni bond on offer. The vulnerable monoline holding companies may or may not be rescued. But the municipal book of any insolvent insurer will be taken over by solvent underwriters and reinsurers.
The resolution of the muni crisis may also pile up one more stack of wood around the stake on which the rating agencies are tied. Duncan Smith, a muni trader who works with the Lebenthal family firm in New York, points out: "If the agencies rated muni bonds with the same criteria they rate corporates, most of these bonds would be AAA because the default rates are so low. They didn't need the insurance for safety."
In effect, the rating agencies and monolines together sucked a lot of unjustified fees from the muni issuers. They're the short sale, not the munis. |
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rffrydr
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| Posted: Sat Feb 09, 2008 8:52 am Post subject: |
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The Egan number misses the key time factor of this risk and is surely overstated. Furthermore it still believes that Moody's et. al. is the law in this matter. The market however is well past that.
I'm long the stuff and I'm sure T. Brown has built a rather juicy portfolio of distressed mortage securities of which I'd like a piece; but T.B. is no guide. His problem? Like always, his success. He's a "specialist." Brown has parsed so many portfolios he forgets the bigger world in which he lives. He looks for "first-year" mortgage analyst material like geography, 2004 vintage vs. 2006 vs. 2007, etc. from Egan. "Back of the envelope" is exactly what Egan gets right however. Those discriminations may matter again, but for now they're long gone. Brown doesn't realize that the great tide that he himself swam in on has now ebbed and is indiscriminate in what it leaves high and dry.
Exasperated, he reaches for an anchor:
| Quote: | | ....No one, not even Bill Ackman, looks for a crackup in those credits, and for good reason. Over the past 35 years, all of 41 municipal issues have defaulted. Roughly 99% of muni issues are investment grade on their own. ... |
Well...don't they? Pick up the paper, look at the balance sheet in this sixth greatest economy on earth, California. See what we owe to real estate. Look at the local jurisdictions, the dismantling of Lincoln, CA that I highlighted above. Sure there is the power to tax. Sure 99 percent will payoff. But never have the odds been greater that even here, at the bedrock of state financing, with the leverage involved (you don't make it up with cigarette tax hikes) that there will be munis going bust. For that one percent the loss is 100percent. Do you know from where it's coming? California? Far away, "geopgraphically diversified" Florida? How about away from the seaside, Las Vegas? And for those nervous-nellies who invest in this stuff that constitutes panic.
Then we're on to the heart of the matter:
| Quote: | | ....Again, no one is looking for a crackup of structured finance paper in general. ... |
Oh? When two months ago it didn't look like structured finance was going to make it through Christmas this is quite a statement. Of course he's right. And we, (the FED) made sure we made it. But with the buck having been broken, nothing is sacred. Money is two-year federal notes, maybe gold, maybe grain. Nothing is trusted, nowhere, no how.
Brown can't bear facing it. His exasperation is embarrassing. He's compounding it all with bold defenses of such stolid streams as 1st Marblehead and demonizing the sea gods themselves, the ratings agencies. Ultimately he'll be right. That time may even be starting now. But he has been proven wrong...very wrong indeed. The answer is not in a spreadsheet. What he misses is that the very culture of debt embedded in a new generation; greater still, this social structure of asset-based savings. All is being questioned: Questioned as a whole and questioned at each and every "packaged dollar."
If the recession proves itself, I fully expect to see bold headlines of a muni default or two. Structured finance is already on life-support. And I expect T. Brown's carefully combed portfolio to put in an admirable performance over the next few years and his banks to enjoy a long period of "write-ups." He'll never see another CDO of CDOs and drifting off, looking across his desk to a picture of "Gentle Ben," remember back, when, fundamentally speaking, he was right all along.
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HenryTo
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| Posted: Fri Feb 08, 2008 5:08 pm Post subject: |
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Tom Brown at bankstocks.com slams Egan Jones' recent "analysis" of the bond insurers, and what it will take for them to retain their triple-A ratings. A must-read:
http://www.bankstocks.com/article.asp?type=1&id=9881638
| Quote: | When it comes to Egan Jones’ assessment of the bond guarantors, here’s what passes for number crunching: Egan told me that he looked at each guarantor’s subprime mortgage and second lien exposure, and simply assumed 30% loss across the board. He then added up his estimates for all the guarantors, and arrived at $80 billion. Then he multiplied that by three, on the assumption that the rating agencies require three times anticipated losses to maintain a AAA rating. Then he took the result, $240 billion, and rounded it down to “over $200 billion” because it was such a big number.
I kid you not. Sean Egan has done the impossible. He’s managed to make S&P and Moody’s look like models of analytical rigor by comparison. |
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rffrydr
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| Posted: Thu Feb 07, 2008 8:46 am Post subject: |
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Maybe no bailout is the bullish news. Muni insurance was an artefact of the OC bankruptcy in 94. And bank's resistence may be a sign they think they already have a good markdown.
http://biz.yahoo.com/bizwk/080207/0807b4071020418218.html?.v=1
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rffrydr
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HenryTo
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HenryTo
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| Posted: Mon Feb 04, 2008 3:17 pm Post subject: |
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Here is Morgan Stanley's take on the monolines:
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Bank losses from monolines likely $5-7 bln: analyst
NEW YORK (Reuters) - Financial institutions are likely to take only around $5 billion to $7 billion in losses from their exposure to bond insurers, while a bailout of the industry by banks is unlikely, Morgan Stanley said on Monday.
Monoline bond insurers are under review to lose the "AAA" ratings vital to their business, as their capital is not viewed by rating agencies as adequate due to losses they are expected to take from insuring risky residential mortgages.
Some analysts have said they believe U.S. financial institutions exposed to the bond insurers are facing as much as $50 billion to $70 billion in losses, though Greg Peters, Morgan Stanley's lead credit analyst, said he views exposures as significantly lower.
"That (number) seems too high to us to begin with and that is a gross number," he said on Monday on a conference call.
Morgan Stanley evaluated mortgage exposure in Collateralized Debt Obligations (CDOs) insured by the bond insurance arms of Ambac Financial Group Inc (ABK.N: Quote, Profile, Research), FGIC, Security Capital Assurance (SCA.N: Quote, Profile, Research), and MBIA Inc (MBI.N: Quote, Profile, Research), and determined that exposures by U.S. banks is likely in the $20 billion to $25 billion range.
Once the capacity of the bond insurers to pay out claims is taken into account, and assuming that a bankruptcy doesn't force the insurance arms of the companies out of business, likely losses are in the $5 billion to $7 billion range, Peters said.
Bond insurers typically have holding companies, which issue stock and debt, while the insurance arm generates the income that pays dividends on the stock.
"These are very complex structures...very little in the way of investors really understand the dynamics of these structures," Peters said.
While the inability of an insurer to generate new business could weigh on the holding company, and potentially drive the stock price down to zero, the insurance arms could continue to operate on its existing business, and continue to pay claims, he said.
In this scenario, the counterparty exposure of banks to the insurers is negligible, he added.
DOWNGRADES, NEW ENTRANTS
Meanwhile Morgan Stanley continues to view a downgrade of MBIA or Ambac as likely, in spite of talks between banks and the New York insurance regulator for a bailout of the industry.
"We believe there will be downgrades, absolutely," Peters said. "A LTCM style kind of bailout is pretty remote."
Hedge fund Long Term Capital Management (LTCM) was bailed out by a consortium of banks in 1998 after it faced margin calls on heavily levered exposures to U.S. government bonds and emerging market debt.
"We just don't think the incentives exist, banks are clearly capital constrained, the exposure to the monolines is far from uniform, so one dealer might not want to help out their competitor when they have a very limited exposure," Peters said.
"I think the key difference is, unlike LTCM, these losses are not temporary," he said. "They're real losses, the ABS CDO losses are real and will actually be taken at some point in time, unlike the temporary kind of liquidity phenomenon of 1998...you're actually asking banks and dealers to pony up cash to help plug a loss that's far from temporary."
Meanwhile, Financial Security Assurance (FSA), Assured Guaranty Corp (AGO), whose "AAA" ratings are not under review, and the new market entrant created by Warren Buffett's Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research) (BRKb.N: Quote, Profile, Research), will likely be sufficient to satisfy market needs for bond insurance, Peters added.
"You don't need to have an Ambac still in business, you've got the FSA, AGO and Berkshire Hathaway...they can come in and write new business," Peters said. "So we're not convinced that you need to have existing monolines still up and running as you have other ways that you could actually wrap that risk." |
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rffrydr
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rffrydr
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HenryTo
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| Posted: Fri Feb 01, 2008 9:18 am Post subject: |
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As Winston Churchill would say: "Americans will always do the right thing, after they have exhausted all the alternatives." (note I am not going to discuss politics here).
Of course, there are others out there who don't like this government-induced intervention, citing moral hazard issues, fairness issues, etc. The alternative, though, is much worse, and will impact all our lives in a (net) negative way, unless one is short MBIA, Ambac, or the financials, of course. |
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rffrydr
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| Posted: Fri Feb 01, 2008 9:07 am Post subject: |
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This is the course we all, the market, assumed two months ago. Not too big to fail; too necessary to fail. Yet we're pushed to the brink.
This can spin many interpretations. On the crazier side, the banks may actually think their written-off books are worth something.  Insurers then came as an afterthought.
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HenryTo
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| Posted: Fri Feb 01, 2008 8:35 am Post subject: |
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Here it is. Note that the deal isn't finalized yet. However, now that it has been announced, I doubt it will fall apart.
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Eight banks seek rescue plan for bond insurers
NEW YORK, Feb 1 (Reuters) - Eight banks have formed a consortium to seek a rescue plan for MBIA Inc (MBI.N: Quote, Profile, Research), Ambac Financial Group Inc (ABK.N: Quote, Profile, Research) and other troubled bond insurers, CNBC said on Friday, citing an unnamed source.
The eight banks include Barclays Plc (BARC.L: Quote, Profile, Research), BNP Paribas (BNPP.PA: Quote, Profile, Research), Citigroup Inc (C.N: Quote, Profile, Research), Dresdner (ALVG.DE: Quote, Profile, Research), Royal Bank of Scotland Group Plc (RBS.L: Quote, Profile, Research), Societe Generale (SOGN.PA: Quote, Profile, Research), UBS AG (UBSN.VX: Quote, Profile, Research) and Wachovia Corp (WB.N: Quote, Profile, Research), CNBC said.
Wachovia had no immediate comment. Citigroup, Ambac and MBIA did not immediately return requests for comment. The other banks were not immediately available for comment.
Shares of MBIA rose $2.50, or 16.1 percent, to $18 in trading before the market opened. Ambac rose $2, or 17.2 percent, to $13.64.
Regulators, including New York Insurance Commissioner Eric Dinallo, have been meeting with industry participants to discuss a rescue for bond insurers, which guarantee some $2.5 trillion of debt. State and local governments issue much of this debt.
Many of those insurers have encountered trouble from their decision in recent years to begin guaranteeing complex securities, often backed by mortgages, to increase profit.
Those decisions backfired last year as credit markets tightened, homeowner defaults soared, and the value of those securities, including collateralized debt obligations, sank.
On Thursday, MBIA reported a record $2.3 billion quarterly loss and said it was looking for ways to raise new capital.
Credit rating agencies have taken away their critical "triple-A" ratings from a handful of bond insurers and have threatened to do the same for MBIA and Ambac, the industry's largest insurers. Losing "triple-A" ratings would make it difficult for bond insurers to attract new business. (Reporting by Christian Plumb and Jonathan Stempel; Editing by Lisa Von Ahn and Steve Orlofsky) |
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rffrydr
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| Posted: Fri Feb 01, 2008 12:52 am Post subject: |
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MBIA's book value per share at December 31, 2007 decreased to $29.11 from $53.43 at December 31, 2006, which includes a $19.24 impact from the third and fourth quarters' mark-to-market from the Company's structured credit derivatives portfolio. Adjusted book value (ABV) per share at December 31, 2007 declined 20 percent to $60.31 from $75.72 at December 31, 2006. ABV is a non-GAAP measure (which is defined in the attached Explanation of Non-GAAP Financial Measures).
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