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cuz everyone else was doing it and if they didn't, they wouldn't have had any business. Gotta grow you know?
I think you typoed on MGIC's "explanation". I think you meant to write "defense in the forthcoming shareholder class action litigation".
I should have added the old Keynes quote CR used to post from time to time:
"A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him."
So now you have to lie about being self-employed when you fabricate your loan application.
Reminds me of when I was a kid and my mother would ask why I did something silly. Of course, the answer was that everyone else was doing it.
For a belly laugh..
http://forum.brokeroutpost.com/loans/forum/2/186267.htm
The way I parse "silly" here, by the way, has to do with the excuse, not the practice.
In other words, Culver is saying that the excuse for making stated income loans to wage earners--that it was worth it to them to pay a higher interest rate in return for saving the effort involved in coughing up a paystub--was (and is) silly.
That said, the response to all this in the beginning should have been, "If that's the best excuse you can come up with, forget it."
Legally, of course, there's a difference between saying that the claimed need for a product option is silly and saying that in fact the real "need" all along was fraud and we all knew it. Culver is trying to walk that fine line, I think.
Justin,
Larry's real name is Hank Paulson.
When I read that headline, I keep thinking MAGIC instead of MGIC. Maybe that is a Freudian thing.
So do they insure against fraud? Or are they praying that if fraud can be proven they will be let off the hook?
From the San Francisco Chronicle:
"Too big to fail" has taken on a whole new meaning, writes Ed Yardeni, president of Yardeni research. It used to mean that a financial colossus such as Citigroup or Freddie Mac (both in financial distress) was about to go under, the federal government would bail it out. Now it pertains to the whole U.S. of A."
Wells Fargo woes show breadth of mortgage meltdown
Don't take this as a support for stated products, but is there any analysis as to how stated wage earner loans perform in comparsion to stated self employed?
Yes, but if you say a practice is silly while simultaneously declining to insure it any longer, I can infer that you knew something was wrong with it.
Here's yet another sign of the credit crunch.
Don't take this as a support for stated products, but is there any analysis as to how stated wage earner loans perform in comparsion to stated self employed?
Heh. Good question.
As far as I know, loans to the self-employed still always underperform loans to the salaried. This has been true since dirt: self-employment income is more volatile than wage income as a general rule; the small business failure rate has always been very high. That was why one was always a bit pickier about loans to the self-employed.
The trouble right now, I suspect, is that there are simply more fraudulent stated-wage earners than stated-SE because there are a lot more wage earners than SE. But that's absolute numbers. It doesn't say whether the rate of fraud is higher or lower.
I know of no detailed analysis comparing performance of stated SE with fully-documented SE with the appropriate control of other variables; if anyone else does, please post link. But that would be the useful comparison, not stated SE to stated WE.
So do they insure against fraud?
Nope. They never have.
It just doesn't do them any good to write policies for loans that never end up paying premiums, because they default by six months into the deal. It's small consolation that you don't take the loss when you also don't make any profit. Plus put-backs are expensive, especially these days: the lenders are lawyering up to try to keep from taking back as much as they can avoid.
Makes a lot more sense to just stop writing the policies.
TH,
I love that site and check it daily. The Banker Cat one is really funny. I think someone has stolen the bankers blue bucket!
Wow, this article is a hoot.
"We are increasing pricing to make money on these going forward, if we insure them at all," he said.
So they've discovered a novel business strategy: Charge enough to make a profit. Brilliant!
Noureil Roubini's Global EconoMonitor
The Bernanke Put and the Last Legs of the Stock Market Sucker's Rally:
RGE - The Bernanke Put and the Last Legs of the Stock Market Sucker's Rally
Reuters - GDP growth surges but jobless claims up "It looks like lights out for the economy," said Chris Rupkey of Bank of Tokyo-Mitsubishi UFJ in New York, referring to the rise in [unemployment] claims. "This is exactly what it looks like when we are going into recession."
GDP growth surges but jobless claims up
| Reuters
I wonder if they hired a management consultant from McKinsey or wherever.
"How come we're losing money?"
"Let me get back to you on that."
(8 weeks later)
"OK I found your problem. You need to increase your pricing to make money going forward.
My invoice is on its way."
Well, f you lose a little on each one you can always make it up in volumne, right?
OT: anyone seen all the bulls today? If we remain down, yesterday was a lower low then the last pop.
I am beginning to wonder at if MGIC saw that Radian would go down first, and decided to hang separately, rather than together;-}
Of course, how many NINA or SISA mortgages were made to realtors in the biz? Or the trades? I am beginning to wonder if a lot of the participants on the inside were fully invested and involved. I remember when I was shopping there were quite a few owner/agent signs. I suspect they played the game to the hilt, and when they lost, they understood they could just walk away!
So maybe their income did exist, for a couple of years;-} But gone like the 1099 from last year;-}
Someday this war's gonna end...
Piggy backs were killing their business, and Congress wasn't acting fast enough to allow for MI tax deductions.
FFDIC, "Too big to fail"
This morning I was trying to locate something on Wells Fargo and I stumbled onto this link instead. The numbers looked odd at first, then I noticed the date at the top of the article.. 1991 !
Wells Fargo to Set Aside $700 Million for Losses - The New York Times
It was like deja vu.. just change the numbers, we can use the rest of it as is.. 16 years later.
I should say Congress wasn't acting fast enough-- for them-- to allow for the MI deduction.
Wasn't just FHA that was eating into them anymore...
So do they insure against fraud?
Nope. They never have.
Right. They're not allowed to. (1)Hidebound regulators won't let them - they think it's a bad line of business for an insurer to be in. (2)Courts agree and will not allow insurers to cover fraud; it's against public policy. (3) Fraud against an insurer is criminal.
OT, does anyone have more details on this story from Bloomberg? It's titled "Florida Agency Suspends Withdrawals From Local Investment Pool", with full text reproduced below the link:
Florida Halts Withdrawals From Local Investment Fund (Update3) - Bloomberg.com
Nov. 29 (Bloomberg) -- Florida officials voted at a special meeting to suspend withdrawals from an investment pool for schools and local governments after redemptions reduced assets by 44 percent in the past month.
The pool had $3 billion of withdrawals today alone, putting assets at $15 billion, said Coleman Stipanovich, executive director of the State Board of Administration, manager of the pool along with other short-term investments and the state's pension fund.
``If we don't do something quickly, we're not going to have an investment pool,'' said Stipanovich at the meeting in the state capitol in Tallahassee.
The fund was the largest of its kind before this month's withdrawals at $27 billion.
Clawback time, short.
That will be fun to watch as the counties litigate against the state.
Should lead to some interesting times.
warren buffet summarized it best regarding the insurance market. it is always the case that the dumbest and worst underwriters drag down the market as they take share from people by getting worse and worse in their standards and cut premiums.
it takes deeeeeeeeeeeeeeeeeeeeeep pockets and patience to ride out those cycles.
just what buffet has in spades
So do they insure against fraud?
I guess my underlying question is: When do they fire up the lawyers and deny all claims against them?
FT - Sears earnings tumble 99 per cent (I stopped shopping Sears after my Whirlpool washer quit in less than 5 years/$400 to repair - bought a Maytag (at Maytag store)instead)
FT.com / Companies / Travel & Leisure - Sears earnings tumble 99 per cent
"A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him."
Or as Jeremy Grantham often paraphrases it (and here I'll paraphrase him):
No asset manager has ever lost his job for being wrong. You lose your job for being wrong and being alone.
Herd mentality governs all!
MGIC will insure these loans only for people who are self-employed, the original market for them, Culver said. They have been used more recently by people who wanted to borrow more than they could really afford, resulting in losses for MGIC and other mortgage insurers, he said.
And Lord knows the self-employed would never borrow more than they could afford.
Florida Halts Withdrawals From Local Investment Fund (Update3) - Bloomberg.com
Didn't we discuss this recently - what happens when debt is lowered and held by public agencies. TIMBERRRRRRRRRRR
"Local governments including Orange County and Pompano Beach that use the pool like a money-market fund asked for their money back after the State Board of Administration disclosed in a report earlier this month that holdings in the fund were lowered to below investment grade. "
I've done valuations for small businesses and helped with many purchases and sales. The way most sole proprietors estimate their annual Net Profit is to take the best week in history and multiply it by 52 (or more).
The fact is, most small business owners don't make any more per hour than wage earners. Unlike wage earner however, they work 80-100 hours per week.
OT: here's another reason for MEW/HEW:
MarketWatch.com
It's an article about how to buy a bigscreen TV. Some people there in the comments argue that you don't need a bigscreen TV, to which one math-impaired guy answers:
by mikeintheWVpartofNY 4 hours ago
Just ordered mine from Sam's Club on Tuesday, I put it on my home equity line of credit and yes I will write the interest off. I have to put purchases on my home eqity line since my mortgage is nearly paid and I need the tax relief. If the gub'ment would cut my taxes some more I'd pay cash. Speaking of that do you really think most people are taking the equity out of their homes for any other reason? Death to the socialist state!
I wonder what kind of exposure the MI companies have to state loans. So much of the stated business I saw in the past was 100% (different bagholder). The stated loans insured by MI companies really took off this year as the equity lenders pulled back.
Deconstructing the word "silly"---take the "s", move the two "l"s right over the "s", invert the "i"and then there is no reason to ask "y". ($ ! )
Posted today by Standard & Poors:
Standard & Poor's Rating Services recently published guidance on the treatment of collateralized debt obligations (CDOs) with nonmonetary events of default (EODs) that were triggered by a breach of an overcollateralization (O/C) ratio test…
As of Nov. 26, 2007, Standard & Poor's had received 31 notices from CDO trustees of a breach of the O/C ratio test EOD for CDO of asset-backed securities (CDO of ABS) transactions collateralized, in part, by tranches from recent-vintage U.S. residential mortgage-backed securities (RMBS) transactions
https://www.ratingsdirect.com/Apps/RD/controller/ArticleCM
It looks to me to be a big dollar volume of defaults.
....Ker..plunk!
The fact is, most small business owners don't make any more per hour than wage earners. Unlike wage earner however, they work 80-100 hours per week.
lama | 11.29.07 - 2:43 pm | #
Most make less not 'as much'... not when benefits are included. And the 80-100 hours is for real EXCEPT...
You decide when the 100 hours is, not 'your boss'... there are some constraints (like regular business hours) but if you want to do that report at 3 AM Sunday night in the bathtub - go for it.
Also many businesses have occasional 'liquidity events' as described in 'Richistan
where the owner receives a windfall, usually when they sell out. I've had a couple of them in my 25 years... the art is to realize they are windfalls and not typical. The rest of the time its hunker down - if you want to stay in business through the 'rest of the time'.
I find it hard to believe self-employed would over-extend and buy more home than they can afford... that is unless I hadn't seen it happen over and over. MGIC would be smart to include the self-employed among those they insure very cautiously.
Oh well back to wasting time self-employing myself... kinda fun, you all should try it.
Closing the doors on another empty barn...
That's exactly my sense, too, Mike.
More like closing the door on a barn that is on fire, with the smoking corpses of the horses still in their stalls.
What is missing here is the explanation for why they went ahead and insured something this "silly."
Some possibile candidates:
"All the other guys were doing it."
"We thought it made us look cool."
"Our consultant told us it was totally safe, um, just before he went to work for Countrywide"
"Our CFO said we had something called a 'delta hedge,' whatever that is."
"We hated it when people told us that monoline insurance is totally boring."
The Florida pool fund is toast.
Suspending withdrawals may have been all they could do to avoid leaving bagholders with nothing. But it forever blows their credibility.
"The board also considered adopting a more conservative investment policy and seeking a top credit rating for the pool from Standard & Poor's."
Yep, that's going to lure people back in.
This is a big black eye for public finance. The biggest pool of its type in the country. Who's next?
Who's next?
How about Orange County, Calif. -- just for old times sake.
Dry,
I did that already...now I'm a consultant. I don't know how to run a business, but I know how to tell you how to run a business.
Dryfly, Allen M has a good theory about who these "self-employed" people are who bought more than they could afford: people in the biz. Specifically, Realtors and mortgage brokers. Also, people who own tile-flooring companies and a landscaping firms. But above all, Realtors and mortgage brokers. That's the notion I get, speaking purely anecdotally.
In South Florida, when the housing boom was in full force, and values were rising 15 percent a quarter, it was people in housing-related industries who took the biggest chances with their own home loans. Now, everyone here is rational, and we would all ask ourselves, "Why would I want to overextend myself on a house, when I would lose my livelihood if house prices fell?" But these folks were enthralled by the housing market. They were bewitched, intoxicated. Irrational.
That's the sense I get -- again, anecdotally, talking about South Florida. Dentists and fishing charter captains weren't getting stated-income, 95 percent CLTV mortgages; it was your Realtors, mortgage brokers, tile layers, decorators, landscapers.
By "everyone here is rational," I meant everyone on this board. There's a serious lack of rationality in Florida.
I just finished my own proprietary analysis of Ambac which is much more granular than my analysis of MBIA since Ambac was more forthcoming with quite a bit of their portfolio.
There is absolutely no way they can remain as an ongoing concern without a capital injection that at least matches their current equity market cap of around $2.6 billion, give or take a few hundred million.
If you haven't been following the monoline drama as it unfolds - if MBIA or Ambac get downgraded or go bust (according to their business model, these events are one in the same), then they by default downgrade everything that they insure - hospital bonds, airports, municipalities (a lot of them), consumer finance securitized asset pools, MBS, CDOs, the whole shebang. This will lead to a real market turmoil.
Think about what happens when those claims from Citibank, Countrywide and Indymac start rolling and Ambac can't pay?
The current conversation between pundits in the media is over whether they can retain their AAA rating, which they shouldn't even have in the first place (I go though this dilemma in the scary Halloween story below) - and it should be one of solvency. Of particular interest is the lost tail, if calculated even opimistically, totally devastates their equity capital.
The blog post with the analysis is here: Reggie Middleton's Boom, Bust & Bling Blog - HAS MOVED TO REGGIEMIDDLETON.BOOMBUSTBLOG.COM!!!: Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap
The post with MBIAs analysis is here Reggie Middleton's Boom, Bust & Bling Blog - HAS MOVED TO REGGIEMIDDLETON.BOOMBUSTBLOG.COM!!!: A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton (also close to effectively insolvent IMO)
justin, if our trolls were anywhere near as good as larrystoken35 I would respect them.
For further analysis of Ambac, see
Accrued Interest: AMBAC: Episode II
and
Accrued Interest: AMBAC: This is not going to work
Conclusion: "I don't see how they maintain a AAA rating without raising new capital," with $2-3 billion required to maintain their rating.
As to survival, "AMBAC would be able to survive the $6 billion in losses if they occurring [sic] over time," which means that all claims would be timely paid.
I think that's the more realistic analysis. Ambac pays claims as they come due (i.e., current interest and principal at maturity, not at default). That gives them time to earn their way out of trouble by (i) premiums on non-defaulted businesses and (ii) investment earnings.
And they'll make every possible effort to prevent a downgrade, which would probably put them in run-off (no new business, just paying claims), which would adversely affect salaries among other things. See CIFG, which persuaded its parents to double its capital (a significant investment that will be locked up in CIFG for years to come), presumably because they thought the cost of a downgrade was even higher.
Which is not to say this is a good time to buy stock in a monoline. I'm not. Or buy a deal that doesn't look good just because it's wrapped.
I read accrued interests analysis, which is very good. I don't see how it is more credible, though. I included a loss tail analysis in the blog post for base, best and worse case scenarios (at least I think I did:-), if not there is a pdf up there with a loss tail anlaysis on it. This shows the payout and damage to statutory capital over time, assuming a certain expense raio and duration. It is the structured products that will cause ABK its worst damage. Remember that financial guaranty is a short tail casualty business, not like the long tail medical liability or disability business where you can actually earn your way out of (and even profit with) a 110% combined ratio.
Granted, I haven't dabbled in insurance for a while, but ABKs situation is not that amibiguous. They are significantly undercapitalized.
Reggie,
I don't disagree that Ambac is significantly undercapitalized (neither, as I read it, does Accrued Interest). What I didn't see, or perhaps didn't understand, is that your analysis factored in what I think is a long-tail risk for financial guarantors. They don't pay claims at default; they pay them at maturity, replicating the deal the investors thought they had. So they pay principal on a 30-year muni bond in 30 years, even if it defaults in year 2; in the interim, they pay interest. In the case of a structured finance deal, they may (or may not, depending on the type of deal and the terms of the policy) pay tranche write-offs at the time written down or principal at sale and liquidation and maturity. But not at default.
The same is true for their CDS.
That means they have many years in which to accumulate cash to pay claims. Of course they have to establish reserves for defaulted deals; but those reserves are based on the present value of the probable loss (after recoveries collected in the interim) and as a result are generally significantly less than the principal amount expected to be paid.
I think Accrued Interest understands this; perhaps you do too, but I didn't see it in your analysis. On the other hand, I'm not a quant, so perhaps it was there and I missed it.
As I've said before, I don't expect payment of claims (as opposed to downgrades) to be an issue.
You lost me here. The primary risk in the long tail lines is the relatively unlimited amount of the payout amount. The advantage is that they can stretch the payout over a very long period, hence profit from business with a combined ration of over 100% (make money from investment income when they have 100%+ losses). If I mistakenly inured such a aspect to the monoline industry, that would err on the side of conservatism, if anything. The financial guarant business is a short tail line, though.
You did make me go back through the blog post (since I wrote it on 3 hours of sleep and lord knows I am prone to error and mistakes:-), but I still do not see your point.
I stated in the blog, "The policy terms must be examined to see where the breakpoints are for losses, of course" and then went on in the tail analysis "we have calculated the provisioning for losses that Ambac will need to make every year on the basis of the anticipated losses that the company will have to pay in coming years... The loss reserve uptill 2007 is taken from comapny's balance sheet. The losses have been calculated on the basis of various default probabilities assummed in Strucutred Finance, Direct Subprime RMBS and Consumer Finance portfolios. We have assumed a duration of 5 years to spread the losses on various vintages over the coming years. We anticipate the company will have to create a provisoin of $ 6.8 billion under the base case scenario."
These loss provisions, filter down to the bottom line as actual losses, and if the default assumptions are even close to write, quickly eat through the statutory capital - and can do so without being actual paid out as claims. Then there is the matter of the type of toxic material that Ambac is insuring. I don't want to take up any more space on this blog with this. You are welcome to discuss it on my blog, if you wish.
Please don't get me wrong, if there is an error it will be admitted and corrected. I just don't see one. Any error would have had to slip by three people to make it to the blog intact.
Reggie,
As I've said, I'm not a quant, and (although I've tried, over a beer or two with quant friends) I don't entirely understand what a duration of 5 years entails. What I do understand is that cash outlays for financial guarantors are (a) current interest and (b) ultimate principal, where "ultimate" ordinarily means at the originally scheduled legal maturity (many years out) or, in the case of many CDO/SF deals, after default and liquidation of the related tranche (also a few years out, but not as many as legal maturity). If the deal provides for actual principal writedowns (e.g., less-than-AAA RMBS), the guarantor may also pay as the writedowns occur (and get reimbursed if and when there are any writeups).
The analysis, therefore, should reflect the long-dated payment of principal, as well as the monoline's ability to prepay when it feels like it. I didn't see that in your analysis (but I was relying on the words rather than the figures).
you have to rely on the figures and the words, if anything the figures would tell more of the story. This really is more of an actuarial task, not a quant's task. Much of abk's riskiest exposure is in mezzanine tranche cdo's which have the risk of totally getting wiped if losses build nominally. a lot of this stuff will be difficult to recover if not impossible. it is not as if it was a plain vanilla mortgage secured via first lien by real assets with a low ltv.
let's keep it simple. abk reported a loss last quarter from the bubble bursting. that loss did not come from bonds written 30 yrs ago, it came from the credit malaise that stemmed from bad underwiting a couple of years ago. this is the beginning of a string of losses that I am referring to.
I find it interesting that I put more supporting documentation in that one particular blog post than I have seen anywhere else on the topic (blog wise), yet I have received so much feedback on how it is unsupported. interesting. I guess the numbers don't hold the attention that the words do. I guess some of the land guys are going to have a fit when I post the ryland research update. I hear it is a respected company.
well, like I said I am not too proud to be wrong (it happened before back in the '80s:-) and I am not a quant or actuary, but I have dabbled a little in both fields. I am fairly decent at investing though and recognize undue risk when I see it.
I have officially typed more on this blog than my own, at least it feels like it. I ownly post on two blogs, this and nouriel's. hats off to both of you guys for doing such a good job.
reggie,
My difficulty with your analysis is that the losses you mention are GAAP mark-to-market losses, not claims. They're neither losses nor claims for statutory accounting principles (SAP - don't laugh); they'd become visible under SAP, in a ghostly way, if they caused Ambac to increase its general loss reserve. Mark-to-market losses may foreshadow claims, but there's a huge difference -- and that difference is what the monoline business model is built on.
I think it's just you and me here now...
I can go back and forth, but will not. Be award that stat cap took a hit last quarter and will continue to do so, which will reduce future underwriting capacity - this is not so ghostly, in contrast scaringly realistic. I strongly suggest you go through the numbers. A good example between what is explicitly reported and what I find is the economic reality can be found in the homebuilding and big bank posts on my blog, many of which I also find to be effectively insolvent.
Time will tell. Unfortunately, not much time, at that.