how much money do rating companies have to cover MBI and ABK? Don't they fear the lawsuits against them? Especially after the widely available Ackman's letter?
OK, everybody get this. The rating agencies know the financial debacle will spiral to hell if they downgrade MBIA and AMBAC and so do PUBLIC OFFICIALS. There's no way to prove this unless somebody comes clean and fesses up, but there is zero doubt that public officials are TELLING the rating agencies NOT to downgrade or else. It's simple.
"sure public officials can tell them not to downgrade. But can public officials stop civil lawsuits?"
It's not their personal money at stake so they don't give a $hit and they figure it's a far lessor evil. They are TELLING the rating agencies to look the other way. No doubt the rating agencies are telling them in turn, to hurry the phuck up... tick tock tick tock..
Banks and home shortages, these are going to be the two big stories of 2008.
Because we have taken out so much mortgage capacity and because the homebuilders have basically stopped building -- they are building one-quarter of the homes they did in 2006 -- we are going to run out this year.
That's right. The people who still own homes who bought then in 2005-2006 are hunkering down, they are spending less, going out less and not leaving their homes much so they can refinance and pay down debt and keep their homes. They are not going to be flooding the market with supply.
We know the homebuilders' inventories are no longer ballooning. We know mortgages rates are 5.18 -- I went onto BankingMyWay.com, which is owned by TheStreet.com, and found a 5.18 rate in my ZIP code. It's like Moviefone for rates. Count me in.
Meanwhile, the mortgage industry's been wiped out except a couple of players. Those are now presuming the monoline Gang of Four aren't going to pay. They have issued equity, but not enough to cover what I think will be a huge push into these value names.
Rates are too low, there won't be enough houses to go around soon, because there are no new homes and nobody left to sell them -- it is enough to make me think that the financials and the homebuilders, many of which are already up huge from when I called the bottom from the stress portfolio, will have a gigantic move off the next rate cut, and you need to buy any weakness.
And nobody owns them now but value funds, who simply will not sell them until they are much higher.
I agree that commenting on the stock price is risky. And then saying that they do not know why it has fallen so much is just plain silly. Perhaps most investors have just a little concern about how MBIA will do should residential real estate prices continue to fall... and the US enter a recession... and commercial real estate follow residential off the cliff...
But perhaps these things are not on the radar screen at MBIA?
We all get so caught up in the minutae of the moment we miss the bigger picture. The "rating" doesn't change the fundamentals only the perception. Sure other people actually pay attention ratings when it comes to lend them money and the rates charged but Aaa or C- isn't going to change their exposure to claims. Let 'em keep their Aaa and let them borrow as much as they can at those best rates and still somebody is going to lose a bunch of money. And that's the point. the ratings game is now not one of risk assessment but of picking who gets left holding the bag.
From Bloomberg this morning:
Credit-default swaps on MBIA rose to $1.85 million upfront and $500,000 a year to protect $10 million of debt from default for five years, according to CMA Datavision. The upfront cost was $1.8 million yesterday. Contracts on Ambac Financial Group Inc., the second biggest bond insurer, were unchanged at $1.9 million in advance and $500,000 a year. The contracts trade upfront when investors see a risk of imminent default......
So would someone please tell me how anyone can reconcile the value of MBIA's or Ambac bonds (impliedly junk) with the AAA credit rating of the agencies?
I am so confused: See, over at Marketwatch, they said that the MBIA CEO said everything was going to be okay... and the stock was UP! Surely, they can't be lying to us, right?
Hahaha: Liars one and all, and don't call me Shirley!
Seriously, what a joke! Market rallies over 300 points today based upon "a soothing conference call" from the doomed executives at a failing insurance agency.
I suspect that when MBIA, AMBAC, and the other living dead go belly up, their stock will rally and the DOW will go up!
Yeah, the CEO of MBIA can't figure out why the stock is down 80%. Gee, durrr... I guess stock - much like real estate - only goes up!
Dwight, they are deliberately being allowed to keep their AAA ratings else it would cause a domino cascade of financial turmoil through the financial markets making matters exponentially worse. So for the greater common good, even though we all know they don't deserve the AAA status, the rules are being bent for now.
Robert, ratings matter a great deal. For one thing, many large portfolios have investment policies that require them to hold debt of a certain quality.
But in the end, is it for the greater good? Why not pass a law that says "housing prices only go up!" for the greater good?
That's what burns me about this nonsense: while the pigs debate who gets to feed in what order at the trough, lots of other people are being hosed. It started with just the people who were not able to buy housing without a toxic loan, but when one steps back and looks at the stunning misallocation of resources in our economy, the mind-boggling levels of debt, the loss of jobs, the rewards to executives for idiocy and greed, and so on... well, something needs to change even if it does involving hitting a brick wall when the insurers go under.
Banks, Homebuilders Could Zoom on the Next Cut
By Jim Cramer
Banks and home shortages, these are going to be the two big stories of 2008.
Because we have taken out so much mortgage capacity and because the homebuilders have basically stopped building -- they are building one-quarter of the homes they did in 2006 -- we are going to run out this year.
Somebody needs to subscribe to the CR Newsletter. That's just insane reasoning above. It doesn't even have the excuse of talking his book. His charitable trust doesn't have any HBs and he's already dumped AIG.
Very roughly at the current completion and adsorption rates we'd "run out" of new houses in about 20-24 months. Thing is there's substitution for new houses in old houses very available. He's said some stupid things but this one needs a bronze plaque outside the entrance to CRs Tanta-Bank of New Reality.
Gary - sorry if the irony didn't come through - old age - the point is exactly that there is no way the cuts are going to make Cramer's dream come to fruitio
MSM info management - the FGIC downgrade by S&P was briefly on the front page of Bloomberg but without a mention of the MBI negative credit watch...now the story does not appear and the two "We're AAA all the way!" MBI cheerleading stories are still there...sheesh!
Markel writes:
Robert, ratings matter a great deal. For one thing, many large portfolios have investment policies that require them to hold debt of a certain quality.
I know about that aspect and mentioned it. I was looking at the other end; all the promises they made and all the risk to which they are exposed have nothing to do with the rating going forward. Give 'em Aaa and they'll still come up short in meeting the payouts. The ratings speak to liquidity but their problems are those of solvency.
ah, fatbear . . . I am much happier to be wrong, than for you to have been ignorant.
In other news, the news said bernanke was pumping money into the banks, but I checked my account this morning and the balance was the same. What gives?
Rob Dawg- I agree Cramer is wrong on the builders; there will not be a shortage of homes. And there were quite a few sellers who took their homes off the market because they didn't get an decent offers. if prices stabilize, they will put them back on, so I wouldn't worry about running out of houses..
On the other hand, Cramer could be right on the banks, at least short term. Banks can now borrow very cheaply from the Fed and they haven't lowered loan rates, so their spreads are very good. They have 96,000 ways to make money besides wacky home mortgages. Watch fees on ATMs, overdrafts, you name it.
"Late Thursday, Standard & Poor's Ratings Services placed MBIA ratings on a watch list "with negative implications," which means there is a 50 percent chance the agency will drop the rating at least a notch within the next 90 days. Such a move would severely undermine the insurer's ability to win new business."
Regarding the homebuilders, lax lending pulled a lot of demand forward: instead of saving for a down payment required by normal underwriting, those people bought over the last few years for nothing down and reduced payments via teaser rates. All of that has now disappeared. This will kill the builders going forward.
MBIA said it would keep its AAA rating. Hey, Bush said Iraq had WMD, and Rummy said....and Condi said....and Americans believed them all. It's comforting to know we are such a believing people.
I've read in a couple places where the exposure of the monolines is way over estimated.
The reasoning behind this is that they're only obligated to pay off a defaulted security OVER TIME, not all at once. In other words, they have to make good on the interest payments per the schedule but don't have to pay off the principle until its due.
Now I don't know how accurate this assessment is but, if its true, it does make SOME difference in that, depending on the structure of the maturities of one's insured portfolio, a monoline might have enough time to "regroup" by raising current premiums to offset the future principle obligations.
It still seems dubious. Further, if the above is the case, why wouldn't the monolines just provide rating agencies and investors the details of their exposure...over time? If they COULD work this out, given time, why wouldn't they just provide the data?
Seems to me, someone doesn't provide data like this, in circumstances like this, because they CAN'T.
Rob Dawg - "Somebody needs to subscribe to the CR Newsletter. That's just insane reasoning above. It doesn't even have the excuse of talking his book. His charitable trust doesn't have any HBs and he's already dumped AIG."
He might be talking up his book. Unless he unloaded it already, he bought a lot of real estate for investments a few years back.
I guess that alone tells you all you need to know about his current predictions!
His name is Bill Ackman, and he posted his logic for everyone to see.. expressly to avoid seat-of-the-pants heuristics like yours. He's been studying the monolines for 20 years, so you have one or two days' reading ahead of you.
In short: your assumptions do not include all the data.
11.6B damage to each - minimum, and that assumes many asset classes will have zero loss.
MBIA's CEO commenting on the stock price seems quite irresponsible, and seems like it would expose him and the company to giant lawsuits, assuming that the stock ever goes down again.
I wonder if this is one of those conference calls that ends up being quoted in a documentary like Smartest Guys in the Room.
jag - You're right. In fact - I don't think the actual losses of a company like MBIA are super huge as of today. This is what it said recently about 4th quarter losses:
"Estimate of Incurred Losses: Consistent with its previously released estimates (December 10, 2007), MBIA estimates that it will incur a total of $737 million in loss and loss adjustment expenses for the fourth quarter of 2007. These expenses consist of fourth quarter case loss activity of approximately $614 million and $123 million in unallocated loss reserve activity. The approximately $614 million case loss activity is principally related to MBIA's insured securitizations of prime home equity lines of credit and prime closed-end second-lien mortgages. The estimate of case loss activity reflects MBIA's best estimate of probable and estimable losses. The ultimate amount of such incurred losses might differ from the above estimate."
OTOH - companies have to mark stuff they own to market. And - I guess in MBIA's case - the stuff it insures - to market. Most of the fixed income market being what it is - illiquid and trading by appointment only - the "market value" - is - to me - only a wild guess. If there are daily 4-5 point spreads/trading ranges in high quality fairly actively traded munis - and corporate bonds - I can only imagine the spreads/trading ranges in esoteric mortgage backed securities. So I don't find marking to market a very useful exercise - except for actuaries and accountants. And I'm glad that I - as an individual investor - don't have to do it.
I will note that when I get brokerage statements - my bonds and other fixed income holdings aren't "marked to market" - they're "marked to model" - because no one has the tools or time to mark every individual's holdings to market. Heck - some of the bonds I own haven't traded in 5 years. How do you mark those to market? And some of the valuations are stupid. 6.5% CDs at 95 cents on the dollar - and 5.5% CDs at 105 cents on the dollar.
Apart from all the accounting nonsense (accrual this and mark to market that) - I think the real issue is whether the monolines - if they pay off all their claims - will be broke - or not. Will the piggy bank be empty? If they will be broke - no news source that I read has mentioned it.
FWIW - I have always been a big fan of accounting on a cash (not accrual) basis. Unless the accrual is certain in terms of income or expense (like I will get a social security check next month - or I will owe real estate taxes in November). And I don't in particular trust anything I've read about the monolines to date from those who are long or short the companies and simply talking their book. Roby
Alas, this is an example of a commodity business. Even Apple, with it's now innovative iPhone, will face the same issues long-term, unless it can continue to execute (the key word) true innovations on a regular and consistent basis -- which is next to impossible. Meanwhile, there is such global oversupply of manufacturers (and contract manufactures) that this business is a zero-sum game ... a race to the bottom for those unlucky enough to be long-term fixed players.
In summary, I think a spin-off of MOT has almost no value ... it will bleed money unless it fundamentally reinvents itself every 18 months, and as we've seen with post-RAZR, they (like most companies) are far, far removed from being master's of "Eureka Innovation". Lightning strikes only once ..
P.S. To Jag - Because you're right about paying off claims in the future - the concept of the present value of a future stream of income or payments is extremely important. And the present value of that money flow - in or out - can be affected a ton - a huge amount - by the interest rate assumption one uses in discounting the amount of future receipts or payments to present value - especially if the time frame is long (10 years) or very long (30 years). The longer the time frame - the more the interest rate assumption matters.
One could make - or not make a case - for the monolines - simply by changing the interest rate assumption used for discounting the worth of future payments to present value by a percent or two (assuming we knew for certain what the future payments would be). Roby
Michael - Can we agree we all hate Cramer and get on with it ? Those who disagree - raise your hands - and we will simply make a list (Cramer haters and Cramer non-haters).
The person on CNBC I am most disappointed with is Charlie Gasparino. I have known him a long time - since I was young - and he was younger. Used to give him an occasional small news story (the only kind I ever had information about). He is just plain rude to CNBC guests. And he can't shut up and let people answer his questions. I thought his performance today with Arthur Levitt was disgraceful. If he wants to harass people - perhaps he should stop trying to be a journalist and go to law school. I am gravitating more to Bloomberg these days. Roby
"Recent pricing on MBIA's swaps can be said to have largely moved past the "assumption" stage of bankruptcy into the "likelihood" stage. This morning, swaps traders confirmed that MBIA protection was trading at 8.5% upfront and 5% a year. This implies that the cost to protect $10 million in MBIA debt against default for five years rose to an upfront payment fee of $1.85 million and $500,000 a year - a sharply more bearish sentiment than in previous weeks. The contracts trade upfront when investors see a risk of imminent default."
...
"According to the spreadsheet, MBIA's loss exposure, based on the market inputs Ackman says are available, is $11.61 billion."
"According to the spreadsheet, MBIA's loss exposure, based on the market inputs Ackman says are available, is $11.61 billion."
Yeah, except if you actually look at the spreadsheet it is lame. No formulas for how the losses are computed, no model assumptions, just loss numbers assigned to each pool and then a sum.
In addition if you read the disclaimer you will find that:
"Pershing Square (Ackman;s outfit) has not independently verified the underlying source data contributed by such third parties in preparing the Open Source Model. Pershing Square therefore makes no representation regarding the correctness of this methodology or the accuracy of this information and disclaims any liability with respect thereto"
I know that this is standard legalese but it makes clear that the work does not even originate from Ackman. He is just the marketer.
It's too bad Charlie Gasparino has become so rude. I didn't see the Arthur Levitt interview, but I have seen him be unforgiveably discourteous to other participants in round table discussions.
His reporting has been good on the investment banks and I believe he has got it right regarding MBIA and AMBAC, but there is no excusing his behavior.
Peconic Bay - Obviously I agree. The Levitt interview was horrible. I don't think Levitt was great or horrible - he has a mixed record - but he is an important figure - longest term ever as head of the SEC (from 1993-2001). For a pisher like Gasparino to be rude with him isn't excusable IMO. Roby
You make an interesting point about the liabilities of the monolines and time value of money. Those of us who see lots of inflation could see them bailed out of their misery as a side-effect of various unpleasantness.
Billy - I just don't see lots of inflation in the official numbers or our personal cost of living. CPI is up 4.08% YOY - but only .81% over the last 6 months (I follow the 6 month figure because that's the number used to determine the interest rate on I-Bonds).
In our personal basket - the cost of gas has gone up a bit - but we don't drive a huge amount - and it's nothing like gas going from 19 cents a gallon to over a buck in a short period of time in the 70's. Our property taxes have gone down. Our health insurance costs have gone up - but our property and auto insurance have gone down. Cost of drugs has gone down - a lot - as popular drugs like statins have gone generic. Groceries are up. But we are only 2 older people - no ravenous teenagers. The only shocking increases are - for example - in the price of travel to some places like western Europe. But those expenditures are totally discretionary. The overall changes aren't big - one way or the other. Guess perceptions are based on what's in your personal "consumption basket". Roby
jag - " they're only obligated to pay off a defaulted security OVER TIME, not all at once"
The problem for MBIA is that once they know that the security will default, they have to reserve for that loss and it will probably have to be dollar for dollar. So while you are correct, the actual cash out the door will be well in the future, they have to recognize that reserve expense now. And that is what will hurt them.
It's the same thing the big banks are going through. UBS's $14B markdown wasn't on actual losses, but on projected losses. It is possible - but highly unlikely - that their default estimates are too high and they could mark the portfolio back UP.
it's a long, slow roller coaster ride to hell.
Uh oh.
What was it MBIA said today, something like, "don't worry, we are awash in liquidity"?
Cramer said buy GOOG at 700
Was that the blip in the Dow just before market close?
Alo,
I think what he said was MBIA is the strongest company in the sector
REBear,
GOOG misses down by ~$50/share after hours... course we saw how that show ended with AMZN today so who knows...
1 down... 2 technical knockouts?
you can hear the sound of a pin drop on Wall Street- today's headlines were the crisis had turned the corner.
This is just going to be a long long long year. Cramer posited a housing shortage- Countrywide has 15K houses to sell you!
Someday this war's gonna end...
I'm changing my handle to "fear-mongerer."
Wasn't Ken Lay telling employees their stock was undervalued and they should back up the truck... I wonder how that worked out.
WTF!!!
Just downgrades these puppies and get it over with!
so how does Moody's now explain that they still see FGIC as AAA?
but... but...
the man in the conference call said MBIA would keep its AAA rating. All the citizens of Whoville are counting on it...
how much money do rating companies have to cover MBI and ABK? Don't they fear the lawsuits against them? Especially after the widely available Ackman's letter?
OK, everybody get this. The rating agencies know the financial debacle will spiral to hell if they downgrade MBIA and AMBAC and so do PUBLIC OFFICIALS. There's no way to prove this unless somebody comes clean and fesses up, but there is zero doubt that public officials are TELLING the rating agencies NOT to downgrade or else. It's simple.
Didn't Dunton just meander into Martha Stewart territory?
Certainly, all those talks with NY regulators and bagholders, um, patsies, um, customers weren't all sunshine and roses, were they?
Pssssssssst..........
Mr. Dunton, Dean Wormer called and said that the MBIA's AAA status is now on DOUBLE SECRET PROBATION!
So when is the toga party?
sure public officials can tell them not to downgrade. But can public officials stop civil lawsuits?
freebirdinblue writes:
sure public officials can tell them not to downgrade. But can public officials stop civil lawsuits?
Yes.
Tried to sue a gunmaker lately?
"sure public officials can tell them not to downgrade. But can public officials stop civil lawsuits?"
It's not their personal money at stake so they don't give a $hit and they figure it's a far lessor evil. They are TELLING the rating agencies to look the other way. No doubt the rating agencies are telling them in turn, to hurry the phuck up... tick tock tick tock..
AllenM says, "This is just going to be a long long long year. Cramer posited a housing shortage- Countrywide has 15K houses to sell you!"
Very interesting. Here's exactly what Cramer wrote today. He'll either be right or wrong. I know where I'm placing my bets.
Banks, Homebuilders Could Zoom on the Next Cut
By Jim Cramer
RealMoney.com Columnist
1/31/2008 2:01 PM EST
URL: Financial Investments and Stock Market Tips for Real Money - TheStreet.com
Banks and home shortages, these are going to be the two big stories of 2008.
Because we have taken out so much mortgage capacity and because the homebuilders have basically stopped building -- they are building one-quarter of the homes they did in 2006 -- we are going to run out this year.
That's right. The people who still own homes who bought then in 2005-2006 are hunkering down, they are spending less, going out less and not leaving their homes much so they can refinance and pay down debt and keep their homes. They are not going to be flooding the market with supply.
We know the homebuilders' inventories are no longer ballooning. We know mortgages rates are 5.18 -- I went onto BankingMyWay.com, which is owned by TheStreet.com, and found a 5.18 rate in my ZIP code. It's like Moviefone for rates. Count me in.
Meanwhile, the mortgage industry's been wiped out except a couple of players. Those are now presuming the monoline Gang of Four aren't going to pay. They have issued equity, but not enough to cover what I think will be a huge push into these value names.
Rates are too low, there won't be enough houses to go around soon, because there are no new homes and nobody left to sell them -- it is enough to make me think that the financials and the homebuilders, many of which are already up huge from when I called the bottom from the stress portfolio, will have a gigantic move off the next rate cut, and you need to buy any weakness.
And nobody owns them now but value funds, who simply will not sell them until they are much higher.
Makes me want to buy more Citigroup (C) !
I read somewhere, maybe here, that most of GOOG's profits are from mortgage lenders ..
I agree that commenting on the stock price is risky. And then saying that they do not know why it has fallen so much is just plain silly. Perhaps most investors have just a little concern about how MBIA will do should residential real estate prices continue to fall... and the US enter a recession... and commercial real estate follow residential off the cliff...
But perhaps these things are not on the radar screen at MBIA?
We all get so caught up in the minutae of the moment we miss the bigger picture. The "rating" doesn't change the fundamentals only the perception. Sure other people actually pay attention ratings when it comes to lend them money and the rates charged but Aaa or C- isn't going to change their exposure to claims. Let 'em keep their Aaa and let them borrow as much as they can at those best rates and still somebody is going to lose a bunch of money. And that's the point. the ratings game is now not one of risk assessment but of picking who gets left holding the bag.
Can someone explain this - from Bankrate front page:
30yr Fixed - 5.52 UP 27bp from last week
15yr Fixed - 5.01 UP 22bp from last week
5/1 ARM - 5.07 UP 19bp from last week
30yr FJum - 6.60 UP 19bp from last week
It's like Ben's 50bp cut never happened....
From Bloomberg this morning:
Credit-default swaps on MBIA rose to $1.85 million upfront and $500,000 a year to protect $10 million of debt from default for five years, according to CMA Datavision. The upfront cost was $1.8 million yesterday. Contracts on Ambac Financial Group Inc., the second biggest bond insurer, were unchanged at $1.9 million in advance and $500,000 a year. The contracts trade upfront when investors see a risk of imminent default......
So would someone please tell me how anyone can reconcile the value of MBIA's or Ambac bonds (impliedly junk) with the AAA credit rating of the agencies?
fatbear, the FED does not control long term rates . . . inflation expectations do.
So the bullish argument?
MBIA CEO says they have BILLIONS ( > 1 billion?) of capital in reserve
S&P hasn't downgraded MBIA from AAA (yet?)
Housing is going up! (in inventory!)
Homebuilders are going up! (in losses)
Fannie and Freddie are now allowing good American citizens to buy even MORE expensive houses!!! (than the ones they already couldn't afford).
Now's the best time to buy stocks!!!! (for suckers!)
The government is giving everyone $600!!! (that they have to borrow from China)
The Fed cut rates 125 bps in a little over a week!!!! (because theres nothing, possibly, at all to worry about!!!)
Now how can anyone argue with that? Time to back up the truck! Booyah!
I am so confused: See, over at Marketwatch, they said that the MBIA CEO said everything was going to be okay... and the stock was UP! Surely, they can't be lying to us, right?
Hahaha: Liars one and all, and don't call me Shirley!
Seriously, what a joke! Market rallies over 300 points today based upon "a soothing conference call" from the doomed executives at a failing insurance agency.
I suspect that when MBIA, AMBAC, and the other living dead go belly up, their stock will rally and the DOW will go up!
Yeah, the CEO of MBIA can't figure out why the stock is down 80%. Gee, durrr... I guess stock - much like real estate - only goes up!
Cramer wins the happy talk of the year award. What a load of sh**.
Dwight, they are deliberately being allowed to keep their AAA ratings else it would cause a domino cascade of financial turmoil through the financial markets making matters exponentially worse. So for the greater common good, even though we all know they don't deserve the AAA status, the rules are being bent for now.
Robert, ratings matter a great deal. For one thing, many large portfolios have investment policies that require them to hold debt of a certain quality.
Oh, I forgot, and this might make all the difference:
SEC blesses Enronesque off balance sheet accounting!!! (what losses? I don't see any losses on this here book.)
But in the end, is it for the greater good? Why not pass a law that says "housing prices only go up!" for the greater good?
That's what burns me about this nonsense: while the pigs debate who gets to feed in what order at the trough, lots of other people are being hosed. It started with just the people who were not able to buy housing without a toxic loan, but when one steps back and looks at the stunning misallocation of resources in our economy, the mind-boggling levels of debt, the loss of jobs, the rewards to executives for idiocy and greed, and so on... well, something needs to change even if it does involving hitting a brick wall when the insurers go under.
Banks, Homebuilders Could Zoom on the Next Cut
By Jim Cramer
Banks and home shortages, these are going to be the two big stories of 2008.
Because we have taken out so much mortgage capacity and because the homebuilders have basically stopped building -- they are building one-quarter of the homes they did in 2006 -- we are going to run out this year.
Somebody needs to subscribe to the CR Newsletter. That's just insane reasoning above. It doesn't even have the excuse of talking his book. His charitable trust doesn't have any HBs and he's already dumped AIG.
Very roughly at the current completion and adsorption rates we'd "run out" of new houses in about 20-24 months. Thing is there's substitution for new houses in old houses very available. He's said some stupid things but this one needs a bronze plaque outside the entrance to CRs Tanta-Bank of New Reality.
Gary - sorry if the irony didn't come through - old age - the point is exactly that there is no way the cuts are going to make Cramer's dream come to fruitio
MSM info management - the FGIC downgrade by S&P was briefly on the front page of Bloomberg but without a mention of the MBI negative credit watch...now the story does not appear and the two "We're AAA all the way!" MBI cheerleading stories are still there...sheesh!
Markel writes:
Robert, ratings matter a great deal. For one thing, many large portfolios have investment policies that require them to hold debt of a certain quality.
I know about that aspect and mentioned it. I was looking at the other end; all the promises they made and all the risk to which they are exposed have nothing to do with the rating going forward. Give 'em Aaa and they'll still come up short in meeting the payouts. The ratings speak to liquidity but their problems are those of solvency.
whups - now on Bloomberg front page
S&P Cuts FGIC's AAA Rating, Puts MBIA on Watch, Affirms Ambac
I for one can't wait for the next time they go begging for capital. Can you say 20-30%+ cost of funds for a AAA enterprise?
We're definitely all AAA now, and I challenge any ratings agency to tell me otherwise!
Robert, I think we are in agreement about the long-term effectiveness of porcine cosmetics.
ah, fatbear . . . I am much happier to be wrong, than for you to have been ignorant.
In other news, the news said bernanke was pumping money into the banks, but I checked my account this morning and the balance was the same. What gives?
Gary:
Your bailout comes in June, the bill for the bailout comes in 2009.
In Disney's version of Robin Hood, the Sheriff of Nottingham is going around collecting taxes from the poor.
He comes to a blind man with a tin cup. He takes out a coin and throws it hard into the cup, and snatches all the rest of the coins that bounce up.
Clueless, the blind man says "Bless you, sir."
You see where I'm going with this.
Did S&P publish the details of their analysis? It would be interesting to see the means to their end compared to what Ackman has done.
Rob Dawg- I agree Cramer is wrong on the builders; there will not be a shortage of homes. And there were quite a few sellers who took their homes off the market because they didn't get an decent offers. if prices stabilize, they will put them back on, so I wouldn't worry about running out of houses..
On the other hand, Cramer could be right on the banks, at least short term. Banks can now borrow very cheaply from the Fed and they haven't lowered loan rates, so their spreads are very good. They have 96,000 ways to make money besides wacky home mortgages. Watch fees on ATMs, overdrafts, you name it.
FWIW here's a link to an AP story.
The article requested is no longer available.
"Late Thursday, Standard & Poor's Ratings Services placed MBIA ratings on a watch list "with negative implications," which means there is a 50 percent chance the agency will drop the rating at least a notch within the next 90 days. Such a move would severely undermine the insurer's ability to win new business."
Regarding the homebuilders, lax lending pulled a lot of demand forward: instead of saving for a down payment required by normal underwriting, those people bought over the last few years for nothing down and reduced payments via teaser rates. All of that has now disappeared. This will kill the builders going forward.
MBIA said it would keep its AAA rating. Hey, Bush said Iraq had WMD, and Rummy said....and Condi said....and Americans believed them all. It's comforting to know we are such a believing people.
I've read in a couple places where the exposure of the monolines is way over estimated.
The reasoning behind this is that they're only obligated to pay off a defaulted security OVER TIME, not all at once. In other words, they have to make good on the interest payments per the schedule but don't have to pay off the principle until its due.
Now I don't know how accurate this assessment is but, if its true, it does make SOME difference in that, depending on the structure of the maturities of one's insured portfolio, a monoline might have enough time to "regroup" by raising current premiums to offset the future principle obligations.
It still seems dubious. Further, if the above is the case, why wouldn't the monolines just provide rating agencies and investors the details of their exposure...over time? If they COULD work this out, given time, why wouldn't they just provide the data?
Seems to me, someone doesn't provide data like this, in circumstances like this, because they CAN'T.
Anyone got a better take on the issue?
Rob Dawg - "Somebody needs to subscribe to the CR Newsletter. That's just insane reasoning above. It doesn't even have the excuse of talking his book. His charitable trust doesn't have any HBs and he's already dumped AIG."
He might be talking up his book. Unless he unloaded it already, he bought a lot of real estate for investments a few years back.
I guess that alone tells you all you need to know about his current predictions!
"Such a move would severely undermine the insurer's ability to win new business."
No shit!
Yeah, jag.
His name is Bill Ackman, and he posted his logic for everyone to see.. expressly to avoid seat-of-the-pants heuristics like yours. He's been studying the monolines for 20 years, so you have one or two days' reading ahead of you.
In short: your assumptions do not include all the data.
11.6B damage to each - minimum, and that assumes many asset classes will have zero loss.
Unsympathetic,
Thank you. I'll look him up.
Yes, I know my assumptions, my "seat-of-the-pants heuristics".... "do not include all the data"....
that's why I asked the question in the first place
MBIA's CEO commenting on the stock price seems quite irresponsible, and seems like it would expose him and the company to giant lawsuits, assuming that the stock ever goes down again.
I wonder if this is one of those conference calls that ends up being quoted in a documentary like Smartest Guys in the Room.
jag - You're right. In fact - I don't think the actual losses of a company like MBIA are super huge as of today. This is what it said recently about 4th quarter losses:
"Estimate of Incurred Losses: Consistent with its previously released estimates (December 10, 2007), MBIA estimates that it will incur a total of $737 million in loss and loss adjustment expenses for the fourth quarter of 2007. These expenses consist of fourth quarter case loss activity of approximately $614 million and $123 million in unallocated loss reserve activity. The approximately $614 million case loss activity is principally related to MBIA's insured securitizations of prime home equity lines of credit and prime closed-end second-lien mortgages. The estimate of case loss activity reflects MBIA's best estimate of probable and estimable losses. The ultimate amount of such incurred losses might differ from the above estimate."
OTOH - companies have to mark stuff they own to market. And - I guess in MBIA's case - the stuff it insures - to market. Most of the fixed income market being what it is - illiquid and trading by appointment only - the "market value" - is - to me - only a wild guess. If there are daily 4-5 point spreads/trading ranges in high quality fairly actively traded munis - and corporate bonds - I can only imagine the spreads/trading ranges in esoteric mortgage backed securities. So I don't find marking to market a very useful exercise - except for actuaries and accountants. And I'm glad that I - as an individual investor - don't have to do it.
I will note that when I get brokerage statements - my bonds and other fixed income holdings aren't "marked to market" - they're "marked to model" - because no one has the tools or time to mark every individual's holdings to market. Heck - some of the bonds I own haven't traded in 5 years. How do you mark those to market? And some of the valuations are stupid. 6.5% CDs at 95 cents on the dollar - and 5.5% CDs at 105 cents on the dollar.
Apart from all the accounting nonsense (accrual this and mark to market that) - I think the real issue is whether the monolines - if they pay off all their claims - will be broke - or not. Will the piggy bank be empty? If they will be broke - no news source that I read has mentioned it.
FWIW - I have always been a big fan of accounting on a cash (not accrual) basis. Unless the accrual is certain in terms of income or expense (like I will get a social security check next month - or I will owe real estate taxes in November). And I don't in particular trust anything I've read about the monolines to date from those who are long or short the companies and simply talking their book. Roby
The MBIA CEO is clearly incompetent (sp) and I would expect him to be named in many lawsuits in the coming year(s).
Jim Cramer put lip stick on the pig today. Why would he want to dirty his hands with this pitch?
Alas, this is an example of a commodity business. Even Apple, with it's now innovative iPhone, will face the same issues long-term, unless it can continue to execute (the key word) true innovations on a regular and consistent basis -- which is next to impossible. Meanwhile, there is such global oversupply of manufacturers (and contract manufactures) that this business is a zero-sum game ... a race to the bottom for those unlucky enough to be long-term fixed players.
In summary, I think a spin-off of MOT has almost no value ... it will bleed money unless it fundamentally reinvents itself every 18 months, and as we've seen with post-RAZR, they (like most companies) are far, far removed from being master's of "Eureka Innovation". Lightning strikes only once ..
P.S. To Jag - Because you're right about paying off claims in the future - the concept of the present value of a future stream of income or payments is extremely important. And the present value of that money flow - in or out - can be affected a ton - a huge amount - by the interest rate assumption one uses in discounting the amount of future receipts or payments to present value - especially if the time frame is long (10 years) or very long (30 years). The longer the time frame - the more the interest rate assumption matters.
One could make - or not make a case - for the monolines - simply by changing the interest rate assumption used for discounting the worth of future payments to present value by a percent or two (assuming we knew for certain what the future payments would be). Roby
Effing Cramer
mentions nothing about qualifying for the loan rate.
"I see a lottery ticket"
Doesn't mean that you won...
MS
Michael - Can we agree we all hate Cramer and get on with it
? Those who disagree - raise your hands - and we will simply make a list (Cramer haters and Cramer non-haters).
The person on CNBC I am most disappointed with is Charlie Gasparino. I have known him a long time - since I was young - and he was younger. Used to give him an occasional small news story (the only kind I ever had information about). He is just plain rude to CNBC guests. And he can't shut up and let people answer his questions. I thought his performance today with Arthur Levitt was disgraceful. If he wants to harass people - perhaps he should stop trying to be a journalist and go to law school. I am gravitating more to Bloomberg these days. Roby
Fortune article on MBIA's troubles.
Bond insurer MBIA loses $1.9 billion in 2007 - Jan. 31, 2008
"Recent pricing on MBIA's swaps can be said to have largely moved past the "assumption" stage of bankruptcy into the "likelihood" stage. This morning, swaps traders confirmed that MBIA protection was trading at 8.5% upfront and 5% a year. This implies that the cost to protect $10 million in MBIA debt against default for five years rose to an upfront payment fee of $1.85 million and $500,000 a year - a sharply more bearish sentiment than in previous weeks. The contracts trade upfront when investors see a risk of imminent default."
...
"According to the spreadsheet, MBIA's loss exposure, based on the market inputs Ackman says are available, is $11.61 billion."
"According to the spreadsheet, MBIA's loss exposure, based on the market inputs Ackman says are available, is $11.61 billion."
Yeah, except if you actually look at the spreadsheet it is lame. No formulas for how the losses are computed, no model assumptions, just loss numbers assigned to each pool and then a sum.
In addition if you read the disclaimer you will find that:
"Pershing Square (Ackman;s outfit) has not independently verified the underlying source data contributed by such third parties in preparing the Open Source Model. Pershing Square therefore makes no representation regarding the correctness of this methodology or the accuracy of this information and disclaims any liability with respect thereto"
I know that this is standard legalese but it makes clear that the work does not even originate from Ackman. He is just the marketer.
At least they're not like the GGP guys, who reference blogs in press releases sent off on Saturday night.
Robyn,
It's too bad Charlie Gasparino has become so rude. I didn't see the Arthur Levitt interview, but I have seen him be unforgiveably discourteous to other participants in round table discussions.
His reporting has been good on the investment banks and I believe he has got it right regarding MBIA and AMBAC, but there is no excusing his behavior.
Sounds like double secret probation time for the Monolines. Man are they in big trouble.
Peconic Bay - Obviously I agree. The Levitt interview was horrible. I don't think Levitt was great or horrible - he has a mixed record - but he is an important figure - longest term ever as head of the SEC (from 1993-2001). For a pisher like Gasparino to be rude with him isn't excusable IMO. Roby
Robyn- I agree with you about Mr Gasparino.
You make an interesting point about the liabilities of the monolines and time value of money. Those of us who see lots of inflation could see them bailed out of their misery as a side-effect of various unpleasantness.
Billy - I just don't see lots of inflation in the official numbers or our personal cost of living. CPI is up 4.08% YOY - but only .81% over the last 6 months (I follow the 6 month figure because that's the number used to determine the interest rate on I-Bonds).
In our personal basket - the cost of gas has gone up a bit - but we don't drive a huge amount - and it's nothing like gas going from 19 cents a gallon to over a buck in a short period of time in the 70's. Our property taxes have gone down. Our health insurance costs have gone up - but our property and auto insurance have gone down. Cost of drugs has gone down - a lot - as popular drugs like statins have gone generic. Groceries are up. But we are only 2 older people - no ravenous teenagers. The only shocking increases are - for example - in the price of travel to some places like western Europe. But those expenditures are totally discretionary. The overall changes aren't big - one way or the other. Guess perceptions are based on what's in your personal "consumption basket". Roby
jag - " they're only obligated to pay off a defaulted security OVER TIME, not all at once"
The problem for MBIA is that once they know that the security will default, they have to reserve for that loss and it will probably have to be dollar for dollar. So while you are correct, the actual cash out the door will be well in the future, they have to recognize that reserve expense now. And that is what will hurt them.
It's the same thing the big banks are going through. UBS's $14B markdown wasn't on actual losses, but on projected losses. It is possible - but highly unlikely - that their default estimates are too high and they could mark the portfolio back UP.
The "rating" doesn't change the fundamentals only the perception.Tactical Flashlights
r c helicopter
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