Fitch: Ambac put on Rating Watch Negative
Submitted by
CalculatedRisk on Fri, 12/21/2007 - 9:06am (54 comments)
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What would be the best guess for minimum amount per issue 2 million or much more (genuine question!)?
Several hunderthousend issues on possible downgrades would add up, although rateing or insurance is not necessary anway.
Thanks
Holy crap! Can you say mushroom cloud?!?!
Ambac, MBIA, FNM, and FRE are the pillars of this scam economy, and the AAA rating is crucial to keep the scam going. This is big, big, news.
Looking at the coming deadlines for repos, ratings, and the new year; I am conclude that January 18th will be a very interesting day. Jauary 18th will be the day that ACA has to come up with additional money for existing bond obligations. If ACA does not receive a cash infusion or a bailout to provide the cash for their bonds, they will default on their bonds. If this occurs, S&P, Fitch, and Moody will have no choice but to downgrade across the board even though ACA is currently trading on the pink sheets. Once the down grade occurs, it will hit every finacial insitution as they will have to either recognize their loses or sell. This will also be around the time that the current repos (short term loans will become due).
Yves over at NakedCapitalism wrote this yesterday:
"The securities industry cannot afford to have MBIA downgraded; the firms already are taking losses on mortgage securities and CDOs independent of any insurer downgrade. If MBIA loses its AAA, that will lead to forced selling by some entities that are required to hold only top-rated paper, which will depress prices further, leading to more writedowns. I don't know how it can come about, but expect a deux ex machina for MBIA. Bankers Trust officers told me the Fed played a role in its purchase by DeutscheBank, While there is precedent for regulators lending a helping hand, MBIA is not under the purview of any banking regulator, which raises the question of who might take it upon themselves to orchestrate a solution."
Anybody got any ideas about the form of the deux ex machina that could give this story a happy ending?
This bond-thing is a non-issue, no big deal, but in the interest of blog-jacking, try this related info:
LDI strategies are starting to gaintraction in the United States. This interest is a response to increased volatility in financial reporting and cash contribution requirements caused by the Pension Protection Act of 2006 (the PPA) and financial accounting reform of how plan sponsors account forpension plans under new Financial Accounting Statement 158 (FAS 158). Included among the effects of the PPA and FAS 158 are faster funding requirements...
Also see: Methods of smoothing out volitility and how to manipulate a loss curve with smooth functions:
http://www.moodys.com/cust/content/content.ashx?source=StaticContent/Free%20pages/Credit%20Policy%20Research/documents/current/2006200000430444.pdf
December 2006
Measuring Loss-Given-Default for Structured
Finance Securities: An Update
Business - Ask allenM, Dryfly, Knot and worried. They seem to think that we can inflate right by this whole thing. Surely, they have the perfect solution.
FIRE UP DAT DER PRINTN' PRESS!
I however, think we are going to eat this whole damn thing and nobody can do anything about it. Just sit back and get out of debt as fast as you can.
Franz,
Jan 18th will not be an interesting day, IMO. Looking at the Canadian ABCP crisis, where debt rollover was simply replaced by deadline rollover, you can bet that the capital requirement will be similarly put off indefinitely.
franz, right on. That's why this is a critical event in the history of the biggest scam ever conceived of. The Wall St. pushers have developed a system that relies upon the insurance and ratings agencies to supposedly mitigate risk and line up appropriate counter-parties. Muni's get instantly destroyed if this happens as well as all derivatives. Tens, even hundreds of trillions going right to the crapper immediately. And Ambac/MBIA are so poorly capitalized considering the book size that they are supposedly "insuring".
I can't begin to describe how not good this is. It's not even funny anymore.
I have circled back to look at the old fashioned private mortgage insurance.
Naturally, it doesn't look all that great.
However, it looks like they use stand alone statutory insurance companies with contingency reserves. No modeling, just a Luddite 50% approach. Based on the original batch of private mortgage insurers that got wiped out in 1934.
The only point being, as much as the smart money would like to short these puppies down to $0, it only seems prudent to get down in the dirty details.
By the way, the GAAP holding companies can go to $0 without the underlying insurers defaulting. They would have to stop writing new business, but would keep paying until they ran out of money, which will be a while.
This also has implications regarding GSE's and bank banks. I can't really tell how much private mortgage insurance is shielding their assets from writedowns.
Without the old 50% statutory contingency reserves, left over from the depression, they would have evaporated by now.
I figure that around 11:59PM tonight is an ideal time to release bad news i.e. (do an 'American Home Mortgage').
Go ahead and shoot me:
CapitalisationA monolines capital can be decomposed into soft and hard capital.Moodys Investors Service, for instance, notes that soft capitalinvolves facilities which are subject to periodic rollover. Generally thisform of capital does little to mitigate downgrade risk. The averagehard capital ratio (effective net par outstanding / hard capital) for themonoline industry is in the low 60s multiples, indicating a strongindustry capitalisation. As at 30 June, 2000 Ambac had a hard capitalratio of 64x while MBIA maintained a hard capital ratio of 59x. Totalcapital ratios range from 79x to110x.The monolines generally have soft capital ratios (soft capital/totalcapital) up to 25% (Ambac) although the average is closer to 20%.Standard and Poors AAA soft capital requirements are limited to amaximum soft capital ratio of 33%. Generally, a good snapshot of amonolines capital cushion (in an accounting sense) can be providedby measuring the monolines total capital resources relative to theexposure at risk. Capital ratios showing qualified statutory capitalrelative to net financial guarantees are shown below. It should benoted however that this measure does not account for the risk profileof the insurance portfolio, the tenor of the risks and ignores howcapital requirements change over time.
Go ahead and shoot me:
bang
you're dead.
You missed, but Im done; ok, Ill walk the dog for a few miles....
Try this:
MBIA continues to manage its single and correlated risks prudently, helped by its large capital base relative to most other industry participants. This is evidenced by the chart below that shows the cumulative expected loss given default (LGD) of MBIA's portfolio (as modeled by Moody's) relative to hard capital, broken down by transaction level LGD relative to hard capital.
We already had hyperinflation in the form of asset price increases. for all the doubters of deflation, chew on this:
What the above suggests is that we are in a deflation now. The write downs you see by Citigroup (C), HSBC (HBC), Washington Mutual (WM) et. al plus the 30%+ decline in asset back commercial paper volume since August 1 is in fact a deflation of the most serious kind. What you have not yet seen en masse is this credit deflation rolling downhill into the regular economy into CPI, into PPI, into wages. Having such a massive unprecedented destruction of credit that we have seen worldwide not make its way from the financial economy to the regular economy would be unprecedented in any cycle in any country at anytime in the modern financial era.
Minyan Mailbag: Deflation, The Fed and Control-Minyanville
I think I'm with John McLeod on this one. These deadlines are artificial.
Also, rules can if necessary be changed; for example, we can dispense with the 'archaic' notion that bonds can't be rated higher than the insurer, or we can change ideas about what constitutes 'adequate' capital for an insurer.
"Your daily dose of reality":
So what happened to all the anecdotal bear stories about empty malls and parking lots around Thanksgiving? And how can it be that the cosumer is no "tapped out" as so often proclaimed here?
Also, on the other side of the economy: how can companies do so bad if they can raise wages by .4% in November in the midst of the proclaimed "un-contained financial Armageddon"?
O-Joe
o-joe -
Calender Shift. Got Dec numbers?
Thanks for the update Joe, looks like the economy is in great shape and everybody is making money, I am on the way to my local Mall and spend that .17 cent pay raise.
O-Joe, apparently it might only be a decission problem
Page expired - MSN Money
"Traffic to U.S. stores for the week ended December 15 fell 8.9 percent compared with last year, according to ShopperTrak.
NPD's Cohen said some of the decline was due to indecision.
Besides popular electronics like Nintendo Co Ltd's Wii game console and Activision Inc's , Guitar Hero video game, he said shoppers are unsure of what buy.
"They're walking around like lost puppies," he said."
O-Joe --
American Consumers haven't gotten the memo yet about the "un-contained financial Armageddon" -- that's the good news. The bad news is that every day brings more bad news.
On the hopeful side of the equation, there isn't much blood in the streets -- yet. The "Financial Armageddon" has been contained (so far) to the players in the financial sector -- but that may be changing.
Shorter answer -- the financial sector is imploding, but the damage hasn't filtered down to the street -- yet.
One of the biggest problems with trying to imagine an act of God rescue of MBIA is the fact that MBIA could be taken down by a ratings decline in any of the other big monolines. So, unless you knew about a bailout for the whole thing, why would you try to save MBIA? (This is why Warburg didn't make sense.)
I've tried to imagine a scenario where one big monoline goes down and others don't. It's difficult.
Either the concept/product continues to make sense or it doesn't. My feeling is the product no longer makes sense except as a niche.
I first heard about MBIA 25 years ago when (believe it or not) I wrote their first presentation to sell municipal bond insurance to Wall Street bond sales people. (Tells you how old I am.) At that time, we wondered if the idea really made sense.
It has only made sense so long because of an extraordinary economic boom and enormous financial confidence in Wall Street. What most people can't see is...what unusual times we have lived through...now coming to a close.
Anybody got any ideas about the form of the deux ex machina that could give this story a happy ending?
Repurpose the uber-SIV.
Wow, containment is sure spreading fast. If it spreads any further, I'm going to start investing in ammo.
Shorter answer -- the financial sector is imploding, but the damage hasn't filtered down to the street -- yet.
-ck-
I agree that the divergence between financials and the stock market averages cannot last. One side has to give. I currently think we'll see the mother of all short-covering rallies in financials starting in ~late January. This is when the masses start to see that their fear & panic are way overblown.
O-Joe
O - joe; LOL ... good luck with your trade dude. I hope you have money that your not investing. Your going to need it.
I think your right O-Joe. We're looking at this all wrong. If personal income rose 0.4% that means I really got a 2-3% increase in the debt I can now carry for consumption.
O - Joe
Sold to you!
Deus ex machina requires there to be a God.
"This is when the masses start to see that their fear & panic are way overblown."
There is no fear and panic of the masses. You pointed out the consumption numbers yourself.
Does the American consumer manifest panic by consuming more?
So, if you held insured bonds that might have some chance of default, you'd be better off to push them to default immediately so you could be in line before the insurer went BK?
Offer good only while supplies last...
OJoe- "This is when the masses start to see that their fear & panic are way overblown."
Conjure says he didn't know that "the masses" buy commercial paper.
"Besides popular electronics like Nintendo Co Ltd's Wii game console and Activision Inc's , Guitar Hero video game, he said shoppers are unsure of what buy. "They're walking around like lost puppies," he said."
I've been feeling this way about electronics shopping this Xmas. There's nothing much to buy under $100 that isn't an accessory for something else which costs $300 or more. Basically I'm skipping electronics as an Xmas item entirely now.
Rich:
I don't like the business model. Picking up nickels in front of a steam roller. No way to diversify away systemic risk and alternatives to diversifying specific risk. Etc.
However, I think if they had stuck to the basics they could have survived. The private mortgage insurance survived 3 severe regional meltdown without big problems. Of course this is national, but only the worst areas will be close to Texas, if as bad. There wasn't even a Repo bus in Texas.
The municipal bond business could have held up. However, the synthetics, CDS's, various wraps were suicidal.
If they had stuck to the basics, it would have taken a long time to run through their capital. Long enough for a lot of things to change. Right now, on a cash basis, they are fine. On a market/economic basis they are upside down, and using their traditional accrual basis, they take the benefit of the doubt regarding losses. Plus, even without the ratings, if they survive long enough, they could eke through.
I just broke even with a little profit with a handfull of dec 30 puts, getting the timing off by a week. The problem with options.
Right now, I'm still trying to figure things out -- how it feeds back into the stronger banks (which will be bargains at some point), and if they can be shorted to zero. It's a long way from trashing the equity to BK.
O Joe:
We all want in at the bottom.
"It is early to pass judgment on most of the investments. The investors are hoping to duplicate some of the long-term successes from past crises, such as the $600 million investment Prince Alwaleed bin Talal of Saudi Arabia made in Citigroup's predecessor in 1991 when the bank was beset by bad real-estate and foreign debt. It is now worth billions."
It will happen but it may be too early...check out the wsj - subscription - Even the Smart Money Looks Bad - WSJ.com
All the IBs are running off shore to raise capital because they can't raise it here, or in Europe. The free cash is in the Mid East and Asia. Think about it.
Meanwhile, Morgan Stanley, Bear Stearns and Goldman Sachs are sinking by the head. The money they've raised so far is chump change compared to what they need.
At an absolute minimum, those three firms need $90 billion. I repeat: $90 billion. The figure could go as high as $180 billion. Yes, $180 billion. So, if anyone thinks this is going to be over any time soon, they're deluding themselves.
There is a very interesting letter on how the ratings work here:
http://nakedshorts.typepad.com/nakedshorts/files/EinhornOnCredit.pdf
O-Joe -
O-Noe!
You won't be O-Kay with that trade.
Also, check the economic numbers released yesterday - they were horrible.
Unemployment claims are definately on an upward trend that appears to be steepening.
Everyone I've talked to says that business hit a wall in December - thats what I'm seeing on the front lines as well.
The personal income numbers werent that good when adjusted for inflation either.
I actually would argue that the personal spending and income numbers were very troubling due to the fact that spending far outpaced income - most of which came from severe inflationary pressure. That's not a good thing - thats money that people dont want to spend but they have to spend. Considering the contraction of consumer credit you have to wonder how this spending to income mismatch will get funded in the future.
Remember also that as it relates to spending that in addition to massive inflation there was huge promotional activity this November and a calendar shift that gave retailers (and consumers) an extra post Thanksgiving shopping weekend.
None of the retailers I've talked to share your optimism about November and seem to be very concerned about December.
From what I'm seeing and hearing I wouldn't be surprised if December is the start of a recession - its going to be very week and if we dont bounce back hard in January then we're in trouble.
Ambac needs a cool billion. Heck Paulson can just write a check. 700M net worth. Put the rest on Amex.
Our city has an A1 rating. When they issue bonds, they get bids from the monolines, then they do the math to figure out if the lower interest rate is worth the cost of buying an AAA rating with insurance. Sometimes it is, sometimes it isn't, so some of our city's bonds go out with no insurance. Our local public port district, with a similar rating of its own, does it similarly, as does the school district. The school district's bonds are also backed by the state here.
It seems to me the impact of any widespread monoline downgrade will be on people who hold existing bonds that may lose their AAA rating and hence some portion of their resale value, and on municipalities that have much lower ratings of their own.
It won't be a big or even medium deal for healthier municipalities/states, and it won't be a big deal for private investors who don't plan to sell their bonds before maturity--unless the bonds default.
The big losers, from what I read here, will be financial institutions who hold mbs/cdos that are headed for default--insured by corporations that might not be answering the phone.
In the trenches | 12.21.07 - 2:24 pm | #
Nice summary and my thoughts as well.
I just find the happy talk amusing. We're battening down the hatches. My wife and I have to work over the holidays anyway and we like the simple life.
Another point -- the increase in consumer spending is filling the gas tank, not discretionary spending.
Okay, so according to this article, Merrill, Bear and other banks are going to chip in and come up with the money so that ACA doesn't lose its AAA rating. So, does that mean ratings can be bought, sort of? Seems to me something is either AAA or it not. Today, ACA is clearly not, but after the banks bail them, we're all good. What about if they need more money later? Not AAA again?
Search - Global Edition - The New York Times
That should be sterlingerl...dodgy n on the keyboard...
How can you bail out an insurance company without taking on all their liabilities.
Re: deux ex machina
It turns out that Betty typed in the wrong data because she has dyslexia and attention deficit problems, but her employer saw that one coming when she was hired, but they failed to take into account that her meds would actually not work, thus the day she missed her meds, she typed i the right data at the wrong time, which resulted in a distorted curve which was adjusted as a positive correlation versus the actual negative which the swap had been based on. Betty, realized the mistake later and re-corrected the correction, but she forgot to tell the guy that had just proof read the data and thus recalculated the mis-modified data.
After lunch, they had a good laugh and then exchanged meds , kissed and lived happily ever after.
The last time the world's central banks were force feeding y/e liquidity into the system on anything close to this sort of scale was Dec.99 pre Y2K, which ended up underwriting the subsequent equities moonshot (and sped along the crash when they drained liquidity hard in Q2/2000). It also underwrote a nice little spike in inflation in early 2000. Plus ca change, plus ca le meme chose as the French would say. The point being is that stocks may well continue to rally nicely into early next year as all this central bank hot money looks for a home, but it's waaaay too early to turn bullish on financials as a long-term investor. We are only 20-30% through the writedown process, and by the time this is over a number of financial institutions will either have gone bk or be forced into mergers.
I am still interested in this here stuff, but I imagine hard assets are off topic? I would just like to understand how these darn defaults are impacting hard capital ratios.....do anybody gots any guesses?
Re: This is evidenced by the chart to the right that shows the cumulative expected loss given default (LGD) of CIFG's portfolio(as modeled by Moody's) relative to hard capital, broken down by transaction level LGD relative to hard capital. (Forexample, the cumulative LGD for those transactions that have an LGD of less than 2% of CIFG's hard capital equals 2.9 times hard capital.)
How does one look at impacts to hard capital??
Within the US municipal segment,MBIA's largest single risks are backed by stategeneral obligations. In the structured and inter-national portions of the portfolio, most of thelarge exposures are highly rated syntheticCDOs or RMBS transactions. When under-writing CDO structures, MBIA generallyinsures super senior tranches (i.e., senior mostin the structure and senior to a Aaa-ratedtranche), where loss content is likely to be lowdespite their large notional amounts. The com-pany is also exposed to some large and complexrisks in sectors such as project finance and XXXsecuritizations where the underlying rating canbe in the low investment grade range.Due to high growth in the domestic MBSarea during 2004 and consolidation amongseller/servicers, MBIA's exposure to certainseller/servicers has increased noticeably. Thelargest five servicers account for 41% of MBIA'sABS/MBS portfolio relative to 19.3% as of year end 2003, reflecting consolidation in the mortgage industry. The averagecredit profile of the servicers improved through this process
"the AAA rating is crucial to keep the scam going"
The second part of the post suggests that this is not true for munis (a non-trivial market). Mortgage bonds, sure. But it looks like that market died beore ACA anyway.
Ok Im done, dont explode:
Exhibit 6: MBIAs 10 Largest US Public Finance Exposures (Sep 30, 02) Net Par% of US Public% of Total$ mnOutstandingFinance Net ParNet ParNew York City General Obligation3,3641.10%0.70%New York State Lease2,7650.90%0.57%Puerto Rico General Obligation 2,6310.86%0.54%Illinois General Obligation2,3220.76%0.48%Massachusetts General Obligation2,2760.74%0.47%California General Obligation2,2410.73%0.46%California Housing Finance Agency Single Family Mtg2,0910.68%0.43%Long Island Power Authority Electric1,8980.62%0.39%New York City Municipal Water Finance Authority 1,8400.60%0.38%New York State Mental Health Services Lease1,6700.55%0.35%Aggregate Top 1023,0987.54%4.77%Sources: MBIA reports, Barclays Capital. US Structured Finance: This segment accounted for $120.6 billion, or 25.0% of the overall portfolio. It is heavily weighted towards mortgage-backed and asset-backed securities,which accounted for 59.6% of total US Structured Finance net par outstanding, while CDOs and related structures accounted for 27.5%, pooled obligations measured 9.6%, andfinancial risk instruments comprised 3.3% (see Exhibit 7)
Ok,Im not done:
example:
Assured Guaranty Corp
Financial Supplement
Second Quarter 2007
June 30, 2007
25 Largest U.S. Public Finance Exposures
as of June 30, 2007
(dollars in millions)
Revenue Source:
Outstanding
2
Rating
1
State of California General Obligation & Leases
421
$
A+
Commonwealth of Puerto Rico General Obligation & Leases
368
BBB-
Puerto Rico Highway & Transportation Authority
363
BBB
Jefferson County, Alabama Sewer Enterprise
306
A
http://www.assuredguaranty.com/App_Assets/Public/ab4564c7-0191-42a6-8391-961189424126/2Q-07%20AGC%20Financial%20Supplement%20-%20final.pdf
Look here: PFD - History of GO Credit Ratings
Also: http://www.treasurer.ca.gov/bonds/debt/11-07/authorized.pdf
AUTHORIZED AND OUTSTANDING GENERAL OBLIGATION BONDS
As of November 1, 2007
Better yet: http://www.treasurer.ca.gov/cdiac/debtpubs/2007/12-07.pdf
According to the report, by 202728, the states General Fund
balance sheet will show a gap of $14.6 billion
Fitch to Reevaluate Guarantors
Fitch Ratings announced that it would reevaluate whether the rising number of structured finance collateralized debt obligation (SF CDO) downgrades could result in downgrades among the tripe-A rated bond guarantors
Maybe O-Joe is right, everything will work out.
But here in Boston I've been to the "upscale" suburban malls and they've been dead, even when the weather has been fine.
Plus, a major local jeweler just closed its doors.....five days before Christmas. Now maybe there's something unique going on with that business but how a jeweler with a good reputation as a very competitively priced business closes its doors the week before Christmas....I don't think that's a good sign, do you?
Does that Bloomberg story mean that the municipal bond market just won't be much affected by the demise of the monolines, after all?
Why would anyone invest in a monoline rescue now, if the muni market's discovering it's possible to rub along just fine without the monolines' core product?
Who still needs the monolines to be in business? Just holders of insured CDOs, and holders of any CDS issued by monolines? I bet they're not too cheerful just now.