Wow, hiring a small investment banking boutique is hardly what the markets were expecting. This is a far cry from the NY Insurance department finding capital. How do you protect someone from their insurer getting downgraded? I guess you simply tell them to get another insurer. I guess thats a possibility for the good credits, but the indentures restrict stuff like that and I'd imagine the troubled insurers will put up a good fight to keep their good business. Maybe the insurance commish can force the bond insurers out. If that happens, these downgraded insurers will go out of business because they'll only be left with their crap. And if that happens, look out below....
If the insurers have a negative equity position, then they must have either a capital infusion or a reduction in their liabilities. I don't foresee the insured assets suddenly increasing in value, so I highly doubt their liabilities will go down. So a large capital infusion seems inevitable.
If the capital comes from the insured, then there is no net benefit to the financial health of the insurer and the insured who put in equity. The benefit accrues to the insurer and the insured who do not pony up new equity.
The equity really must come from a player outside the current pool of insured institutions. The only reason I could see someone currently with out a stake in one of these insurers to participate is if a government guarantee if offered. To me this situation is ripe for another taxpayer funded bailout.
I'm not sure how you can protect the policy holders if the insurer can't pay.
It's still mostly a matter of accounting fiction, isn't it? As long as Ambac and MBIA look solvent, pension funds won't be forced to sell the bonds insured by those companies, and banks won't have to look for more capital.
The should have hired me. I'm a lot cheaper, and I will give them the same answer. The bond insurance are functionally illiquid and cannot be counted on.
[Government data showing a bigger-than-expected drop in new-home sales last month strengthened the argument for Fed rate cut, analysts said. Lower rates could ease the strain on mortgage borrowers.
"The Fed is focused on public confidence," said Bruce McCain, head of the investment strategy team for Key Private Bank in Cleveland. A 50 basis points cut "is what we'd expect from the Fed."]
There is a lot of stuff that could be done. Interesting that they explicitly aren't there to help the stock holders of these companies.
They could split the business into muni and structured finance, and recapitalize the muni portion. Let the structured finance go into runoff with whatever is saved on the muni side.
Or whatever. I would say that the NY Insurance Dept is being much more proactive then anyone would expect.
In spite of what anyone says, MBI isn't running out of cash anytime soon.
Why can't the pension funds decide that they can go a few rating squidges downward, without the end of the world happening? Most muni bonds are pretty safe, aren't they? Seems you'd lose less money than selling heavily into a declining market.
If they do decide to sell, that sounds like an excellent buying opportunity for a careful buyer.
I assume the pension funds are thinking about this. Well, they would be stupid not be contemplating this. Is it that is what the regulators are demanding?
exactly right Lawyerliz. too much assuming out there that an insurer downgrade will trigger massive sales. most will not sell if holding to maturity looks to be money good. Pension fund boards will meet to decide to override guidelines that mandate automatic sales.
i asked this yesterday but didn't get a good answer. an investment banker friend of mine told me pension funds don't invest in muni bonds b/c they are already tax deductible. if this is so, who is the biggest investor group?
I heard someone on Bloomberg talking about this. The gist of it was, these monolines will most likely be downgraded to AA and it won't make too much difference in the muni market. He was leaving aside all the CDS holdings and just talking about the muni business.
If you find yourself worried about the bond insurer, aren't you already in trouble?
That is, isn't everyone going to need insurance payouts at the same time?
Liz...The problems aren't on the muni side of the house.
You don't know that for a fact, and it's the real problem with trying to come up with a solution. Over time, the muni side could get pretty bad, given current trends.
You can't split out the structured finance guarantees from the muni guarantees. It would be unethical, illegal and arbitrary. The lawsuits would never stop.
If they really wanted to protect the policyholders, they would have hired an insurance specialist consulting firm like Milliman, not a mid-tier M&A firm. It's not a serious initiative. It's just designed to buy time and punt it over to the ratings agencies to take the next step, which will be downgrades.
MBIA's cash position is immaterial. People who talk about it just show their ignorance about how regulated insurance companies work.
More desperate nonsense. But this is the kind of news flow that drives the indexes higher. Which come to think of it just may be the point after all...
The point of the insured bailing the insurers is to delay the day of reckoning. The ratings are wildly inflated now even without considering additional future losses. If the insured give the insured enough the ratings agencies can continue pretending the monolines are AAA even if they are actually long-term insolvent. That allows everybody to keep the insured bonds on the books at full price. Eventually of course this will all come out but the idea is that the PTB may be able to fix a lot more in 5 years than in 5 weeks. For anybody associated with the Bush administration this would have the additional huge benefit of dumping the problem on a different PTB. NY state doesn't have that incentive, but they do have the incentive to get a deal which favors them, since they are a small part of the problem. The fact that they have the only significant criminal investigation going (in spite of the obvious criminality of all this) gives them the clout to extract concessions.
Hey, how about some Super Bowl preditions to lighten the mood - I see the Giants winning 27-24, but I'm a contrarian...
Here are some guesses of other predictions:
O-Joe - thinks both teams will win scoring everytime they touch the ball.
Sebastian - has a bunch of charts showing that the NFC wins if the coin toss is heads and the AFC wins if they receive the ball in the second half, but the Wright Model B says that the Cowboys are going to win so thats who he's going with.
Jas - says no one will win the Super Bowl ever again and the game is built on euphoria and hype that cant be sustained, and we will all regret watching it and not listening to him.
Of course, whoever Tanta and CR pick will emerge victorious.
i asked this yesterday but didn't get a good answer. an investment banker friend of mine told me pension funds don't invest in muni bonds b/c they are already tax deductible. if this is so, who is the biggest investor group?
I had some for awhile to dodge taxes. They're good for making income on the margin when you're in one of those higher tax brackets. I did the math and at the time the worked out better than similar rated taxable bonds for me.
Gary.... the insurance companies are licensed by the states. MBI is a New York company, ABK is a Wisconsin company. They each have their own insurance department.
Note these are not the holding companies, but they are where most of the assets and liabilities are.
There is no federal or cross-state insurance regulation. Ambac could voluntarily agree to participate in a plan devised by the NY Commissioner. But nobody, including the President, Congress or Supreme Court, could compel them.
NY has no jurisdiction because I believe ABK is a Wisconsin company. MBIA is a NY state company.
My question: Whatever happened to S&P's review of ABK? After Fitch downgraded on 1/17, S&P indicated that it would finish its review "within one week."
AMEX missed earnings. Look for a 100 bps point cut tommrow...
Oil prices heading back north. That makes it harder for the Fed to cut. If we have $90 dollar oil in the summer (when gas prices peak) that's going to make Joe Six Pack very unhappy heading into the elections.
The central banks dramatic three-quarter of a percentage point rate cut last Tuesday was the equivalent of shoving a pacifier in a crying babys mouth. And that only stopped the whining for a little bit.
Dallas Federal Reserve president Richard Fisher, speaking in Philadelphia on the same day that Bernanke was giving his blessing to an economic stimulus package during testimony on Capitol Hill, made some interesting remarks that the market pretty much ignored.
He warned that the Fed still has only two mandates, fostering price stability and supporting economic growth. Keeping the markets happy is not a new third mandate.
Our job is not to bail out imprudent decisionmakers or errant bankers, nor is it to directly support the stock market or to somehow make whole those money managers, financial engineers and real estate speculators who got it wrong. And it most definitely is not to err on the side of Wall Street at the expense of Main Street, he said.
Most importantly, he stressed how crucial it is for the Fed to not go overboard in response to current doom and gloom headlines. We must be mindful that short-term fixes often lead to long-term problems, Fisher said.
That may be the case, but I think Eliot Spitzer has amply proved that NY has jurisdiction over insurance companies in another sense: the court system.
They all do business in NY and can be sued here. Wisconsin and Maryland may be their regulators, but I will guarantee you New York has a say in the reality of their business.
--
I hope that I am given the chance to provide supporting EVIDENCE, verifiable, from time-to-time, for some of my accusations against the NYC Banking and Finance Cabal.
CNBC just put on screen what the leading Wall Street firms said about CFC when the Scam was at $43 in January 2007. It was like Enron all over again.
They couldnt have known? This is crap type of defense that Crooks love and they know in advance when they engage in deception.
How do you get to make billions if you couldnt have known what was obvious to many ordinary Americans? CFC was making horribly bad mortgages in Jan'07, no? Everything that happened since then is a surprise?
If you're looking for a laugh today, Gary Watt's 2008 economic forecast is out. I just started reading but he starts out with government figures on employment so obviously it's well grounded in fact.
--
"Jas - says no one will win the Super Bowl ever again and the game is built on euphoria and hype that cant be sustained, and we will all regret watching it and not listening to him"
A fatwah is going to be issued against you, In the trenches, for blasphemy against the Prophet.
The NY Attorney General can sue just about anyone.
The NY Insurance Department is trying to attract capital to bond insurers. He is looking for some sort of "win/win". You can't attract capital by threats from an AG. Baring that, the insurance departments are similar to the FDIC in that they take over rather then bankruptcy.
One of the reasons is that insurance companies tend to have lots of liquid assets and uncertain liabilities. Anyway, there have been high profile insurance insolvencies, like Reliance and Kemper.
If you want to know how insurance runoff works, those are a couple of recent examples.
This is silly. I guess the sole purpose of trying to prop up the bond insurers would be to give the institutions holding crummy insured paper (the vast majority of which is taxable structured products) time to sell it for X cents on the dollar - instead of Y. You don't see the regulators asking Pimco - or Fidelity - or me - or anyone else who owns lots of munis - to throw money in the kitty. We'd all laugh in their faces.
AC - The largest buyers of munis are individuals - either directly or through mutual funds. Pension funds - hedge funds - etc. are sometimes crossover buyers of munis - when the interest rate spread between munis and taxables makes it worthwhile. You can usually tell when they're getting into and out of the market by looking at the yield spread - commonly called "MOB":
"The yield spread between tax-free municipal bonds and treasury bonds with the same maturity. 'Mob' is an acronym for 'municipals over bonds'."
BTW - I don't see any problems with the New York insurance department getting involved here - as long as the companies do business in the state. That's what insurance departments are for. OTOH - the odds of them coming up with any good solutions are negligible IMO. I do see problems with the federal government getting involved. There's a body of law which basically gives states powers over insurance companies - but not the federal government. How big the problem would be - I don't know (it's a complicated legal area and I haven't kept up on it).
Zig - All I'm suggesting is that the NY state government has a tremendous stick to wield against the insurers, banks, and everyone else involved in this sorry mess.
Rich pointed out that NY doesn't have jurisdiction, and that may technically be true, but it's not the final word.
"Zigurrat writes:
There is a lot of stuff that could be done. Interesting that they explicitly aren't there to help the stock holders of these companies.
They could split the business into muni and structured finance, and recapitalize the muni portion. Let the structured finance go into runoff with whatever is saved on the muni side."
Good plan. It is similar to the "good bank" - "bad bank" structures that were used in the 1980s and 1990s, the last time the big banks needed to be recapitalized.
Lawyerliz: Downgrading of muni bonds should not impact pension funds. Muni bonds are exempt from Federal taxes. Pension funds are not taxed so they do not need the tax shielding. Typical buyers of munis are people who want tax exempt interest income (e.g., high income individuals, Muni Money Market and Bond Funds targeted to high income individuals, insurance companies, and banks). Banks and insurance companies vary their use of munis depending on whether they have taxable income. With their losses in the asset backed markets, their taxable income should be minimal so they don't need the tax shielded interest income offered by munis.
Most mutual funds have credit quality criteria for what they can own. Money market funds in particular must own highly rated paper.
Sounds like the big problem (in addition to banks holding insured CDO cr_p) is for the Muni funds to the extent they have obligations to keep all the paper they hold AAA. If they all had to sell at once, that would be berry, berry bad. They would be in trouble with their holders, though if they didn't. You can imagine them facing runs as individuals go into funds buying only Buffett AAA bonds. So maybe this is the Eric Perrino exercise - get someone to insure the stuff that isn't crap, so as to avoid a needless clusterf__k
If you want to write insurance in NY, then the NY DOI is involved, I don't care if you're domiciled on Mars and Jesus is your CEO. One of these two will probably have a run-off and one will probably survive. Isn't Kidder Peabody involved with one of these two? They'll probably make a fortune.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.
That Mortgage Pig is one amazing creature. Feed him toxic paper and he poops out triple A rated golden bricks with a sweet lemony perfume smell.
The stuff is worthless and no amount of poking a stick at the bloated corpse is going to change that. It is too late for insurance regulation. All that's left is to see that the bodies are disposed of in a sanity fashion and nobody else is served up another slice.
I think the real game is getting the banks, etc, to release covenants on the worst quality insured issues to save the protection on the rest.
I think the NY insurance beagles are hiring this firm to do the arm-twisting, and they will stand by with the stick. They don't want to come out and tell the insureds that they are going to lose everything unless they renegotiate on the worst, but that's the net answer.
Getting the regulator involved will give protection to the companies that release the debt. Just my guess, but I think it's a decent one.
The banks, especially, don't have the money to give the monolines.
Kidder, Peabody was history a long time ago. It went under - or almost under - was taken over by Paine Webber - which in turn was bought by UBS.
I am not aware of any muni bond fund that requires its holdings to be AAA - although there are some that are called "insured muni fund" this or that. I assume they are required to buy insured munis. I suspect those funds with this requirement will change their objectives. Perhaps there are some out of the hundreds that exist. I've just never heard of one. "High yield" or "junk muni" funds are much more common. Roby
GARY: "That may be the case, but I think Eliot Spitzer has amply proved that NY has jurisdiction over insurance companies in another sense: the court system...They all do business in NY and can be sued here. Wisconsin and Maryland may be their regulators, but I will guarantee you New York has a say in the reality of their business."
As powerful as the New York state government may be, it is going to be awefully hard to sue the bond insurers when they haven't defaulted on any insurance claims or any other obligation.
Contrary to the misinformation put out by Cramer and others, the bond insurers are nowhere near defaulting on any payments. Even rating cuts have nothing to do with their insurance contracts. All they promise to do is to pay when a bond defaults not ensure that it maintains an AAA rating at all times.
All you shorts hoping the government seizes the company from shareholders wouldn't even last one minute in a court of law.
Very few of you seem to realize that this is all about present value of theoretical future liabilities. Until the insurance regulator is reasonably sure that the future losses are going to be large, they will have a hard time doing anything. The way I see it, we'll know by the end of this year. Either the companies will be in run-off by then, or all of this will be a distant memory. Until then, I really don't see the regulator seizing the company from the shareholders (unless things worsen materially)...
NY has jurisdiction over Ambac, ACA and all the others who do business in NY. In fact, all the states have jurisdiction over all the bond insurers. That's because you have to be licensed in a state in order to sell insurance there; all the bond insurers (except CIFG, which is missing a few small states) have 50-state licenses plus DC and assorted territories. NY being a major market and the location of the bond insurers' headquarters, its ability to revoke an insurer's license is equivalent to the ability to put it into run-off (since CA and the others would probably follow suit and the rating agencies would probably downgrade for loss of a major market). In any event, NY is co-ordinating with Wisconsin (for Ambac) and watching Maryland (for ACA) with great interest.
Run-off, by the way, is what happens when you stop originating business. You let the portfolio run off until you've paid (or provided for) all the claims or have no more assets. The effect is to trap capital for a very long time. The run-off analysis is the key to whether the insurer will be able to pay all claims against it (which is a very different question from whether it will be downgraded).
As for providing support for the bond insurers, a wrap of the wraps would do the trick. The super-wrap could be a government guarantee or a financial guaranty fund like the current property and casualty funds (in which the bond insurers don't participate); such a fund could be capitalized by the insured, as the P&C funds are, or by anyone else to whom you wish to assign the task. No need to switch insurers, release covenants (pretty much impossible in a public deal anyway) or do anything fancy.
RBLawyer, I really appreciate your comments (here and elsewhere too). Could you comment on the relationship between the bond-insuring parts and the CDS-writing parts of the monolines? I have read that the state insurance regulators actually regulate only the bond-insurance part. Because these parts could not write CDSs because of state regulations, the monolines set up separate subsidiaries for that activity. Does that mean that the state regulators do not actually regulate the CDS-writing part? Are the CDS-writing parts and the bond insuring parts subsidiaries of the holding cos, or are CDS parts subsidiaries of the bond insurers? Is there a way to separate the assets which back up the insurance, or are the cross-commitments between the subsidiaries?
"Officials with the New York State Insurance Department have reached out to Wall Street bond rating agencies to suggest that they postpone a downgrade of bond insurers until the state can develop a bailout package for the troubled sector, CNBC has learned."
Hiring an "expert" firm from the street is a very politicly expedient move. My belief the regulator needs a "total" solution. Some firms won't make it. By hiring a street firm, the regulator shifts blame for failure. I think they would have done better to have kicked it upstairs to the feds instead of out to the street. Dinallo is smart and moving the stench of failure a few feet away from his office. History will judge who is to blame. My bias, "this is a normal" accident. Bond insurance is a Short Gamma approach statistically designed to fail.
Second, your question.The monolines did set up separate affiliates to do their CDS, but not because regulations directly prohibited their doing CDS. (NY and CA law explicitly permit CDS that are the equivalent of financial guaranty insurance.) The reason was that CDS aren't insurance policies; they're done using forms developed by ISDA. The monolines being insurers, what they do is issue insurance policies, the forms of which must be filed with all their regulators (50 states plus other jurisdictions). So they set up special-purpose entities to do the CDS and then guaranteed the payment obligations of their SPEs. (This is very much an oversimplification of a rather complicated story.)
The guarantees of the CDS are policies just like those on municipal bonds -- can't separate them out. I think, however, there's a principled argument for separating out any guarantees of the SPE's obligation to make termination payments if the SPE defaults on a payment obligation (another long and complicated story). But as far as I know - the CDS are almost always not public - in general the monolines didn't guarantee any payments other than for shortfalls in interest or ultimate principal on the underlying securities. So the swaps are covered by insurance policies and the swaps counterparties are policyholders.
Except for ACA, which seems to have guaranteed termination payments by its swaps affiliate that arise from its affiliate's failure to post collateral. I can easily see an argument to separate payments relating to an affiliate's technical default from "normal" policy payments (especially since obligations to affiliates are restricted by insurance company holding acts). But, again, that's only ACA.
RB Lawyer - Are you talking about a federal fund - or a state fund? In Florida - we have FIGA (Florida Insurance Guaranty Association) which basically passes on all insurance company insolvency losses to all insureds (primarily in the liability insurance area) through assessments on policy premiums. I think it would be political suicide for any Florida politician to propose extending the coverage of a fund like FIGA to save a bunch of "fat cats" on Wall Street - while average insureds with homeowners and auto policies pick up the bill. Roby
It could be a state fund, a federal fund, a multi-state fund, an emergency fund - whatever suits. I just meant it as an example of an easy way to provide support for the bond insurers. I mentioned the P&C funds because they're an existing device with similar purposes, paid for in effect by the insured (since it's ultimately funded by their premium payments).
Bond insurers are not covered by FIGA - the Florida policies explicitly carve it out, as does disclosure for a Florida offering. They're not covered by the equivalent P&C funds in other states, either. Nor should they be; it's a different line of business.
Such a fund would be better, I think, than reinsurance. No credit risk on the reinsurer and, more importantly, the whole portfolio is covered rather than letting the reinsurer cherry-pick the good credits (leaving the primary with sole liability for the not-so-good credits). For that reason, now would be a great time to start a AAA reinsurer: high premiums, good credits. Suspect Buffett already knows that....
RB Lawyer - Thanks for the definition of run-off. Funny - I read a lot - and I haven't heard of anything in terms of unusual levels of claims - as opposed to possible exposure - at outfits like Ambac and MBIA. For all intents and purposes - I think they are dead in the water in terms of what they used to do. So the run-off concept is important.
As a retired Florida lawyer who did a lot of PI work - I'm familiar with FIGA - what it covers and what it doesn't. I don't know about other states - but Florida has enough problems with the hurricane cat fund - I don't think it would have anything to do with a guaranty fund for the monoline insurers. Roby
I'm not sure how you can protect the policy holders if the insurer can't pay.
Simple: The government takes the place of the insurer.
The short answer is you can't.
Wow, hiring a small investment banking boutique is hardly what the markets were expecting. This is a far cry from the NY Insurance department finding capital. How do you protect someone from their insurer getting downgraded? I guess you simply tell them to get another insurer. I guess thats a possibility for the good credits, but the indentures restrict stuff like that and I'd imagine the troubled insurers will put up a good fight to keep their good business. Maybe the insurance commish can force the bond insurers out. If that happens, these downgraded insurers will go out of business because they'll only be left with their crap. And if that happens, look out below....
CR-
If the insurers have a negative equity position, then they must have either a capital infusion or a reduction in their liabilities. I don't foresee the insured assets suddenly increasing in value, so I highly doubt their liabilities will go down. So a large capital infusion seems inevitable.
If the capital comes from the insured, then there is no net benefit to the financial health of the insurer and the insured who put in equity. The benefit accrues to the insurer and the insured who do not pony up new equity.
The equity really must come from a player outside the current pool of insured institutions. The only reason I could see someone currently with out a stake in one of these insurers to participate is if a government guarantee if offered. To me this situation is ripe for another taxpayer funded bailout.
I'm not sure how you can protect the policy holders if the insurer can't pay.
It's still mostly a matter of accounting fiction, isn't it? As long as Ambac and MBIA look solvent, pension funds won't be forced to sell the bonds insured by those companies, and banks won't have to look for more capital.
what is the point of bond insurers really? why dont we get stock insurers? it is stupid....simply continues the BS
The should have hired me. I'm a lot cheaper, and I will give them the same answer. The bond insurance are functionally illiquid and cannot be counted on.
I meant "insolvent."
I'm not sure how you can protect the policy holders if the insurer can't pay - CR
Hire a high-priced Wall Street consultant! Come on, CR, where have you been.
it is simply a scheme for companies to raise money more cheaply in a disguise of something better.....it is dangerous
they regulate how often a person has to cut their grass but when it comes to something HIGHLY DANGEROUS and VERY MISLEADING...that if ok
I WANT MY RATE CUT!
[Government data showing a bigger-than-expected drop in new-home sales last month strengthened the argument for Fed rate cut, analysts said. Lower rates could ease the strain on mortgage borrowers.
"The Fed is focused on public confidence," said Bruce McCain, head of the investment strategy team for Key Private Bank in Cleveland. A 50 basis points cut "is what we'd expect from the Fed."]
US STOCKS-Rate-cut expectations lift Wall Street
| Reuters
Fed bubble rescue looks to have been a success:
CCI
Again, when an organization does the same thing over and over again for more than a decade, I assume that they're not suddenly going to stop.
Quick OT question: are barely and barley two different posters? or just the occasional transposition of one person?
There is a lot of stuff that could be done. Interesting that they explicitly aren't there to help the stock holders of these companies.
They could split the business into muni and structured finance, and recapitalize the muni portion. Let the structured finance go into runoff with whatever is saved on the muni side.
Or whatever. I would say that the NY Insurance Dept is being much more proactive then anyone would expect.
In spite of what anyone says, MBI isn't running out of cash anytime soon.
Why can't the pension funds decide that they can go a few rating squidges downward, without the end of the world happening? Most muni bonds are pretty safe, aren't they? Seems you'd lose less money than selling heavily into a declining market.
If they do decide to sell, that sounds like an excellent buying opportunity for a careful buyer.
I assume the pension funds are thinking about this. Well, they would be stupid not be contemplating this. Is it that is what the regulators are demanding?
What I would like to know is since the previous 175bpts haven't changed the course of the economy' why the next 75bpts will.
barely & barley not the same.
Liz...The problems aren't on the muni side of the house.
Thanks B. I've been wondering for months.
However it gets done, the muni side will be done in the future by someone with a clean balance sheet.
The structured credit side has no future, so it will be runoff.
exactly right Lawyerliz. too much assuming out there that an insurer downgrade will trigger massive sales. most will not sell if holding to maturity looks to be money good. Pension fund boards will meet to decide to override guidelines that mandate automatic sales.
i asked this yesterday but didn't get a good answer. an investment banker friend of mine told me pension funds don't invest in muni bonds b/c they are already tax deductible. if this is so, who is the biggest investor group?
Lawyerliz,
I heard someone on Bloomberg talking about this. The gist of it was, these monolines will most likely be downgraded to AA and it won't make too much difference in the muni market. He was leaving aside all the CDS holdings and just talking about the muni business.
If you find yourself worried about the bond insurer, aren't you already in trouble?
That is, isn't everyone going to need insurance payouts at the same time?
The current problem with munis seem to be the auction rate notes that aren't getting bids. That is more a problem for the holders then the insurers.
idoc,
I'd guess mutual and closed-end muni funds, and high-income individuals.
idoc.....
munis - 60% individual, 20% bank, 20% insurance company. Most don't have to mark to market.
However, pension funds do hold mortgage backed stuff which I suppose include CDO's
So when does the government announce the new insurer for bonds?
FBA - federal bond administration
And while they are at it, why not the
FDIA - federal dervatives insurance administratio
You don't know that for a fact, and it's the real problem with trying to come up with a solution. Over time, the muni side could get pretty bad, given current trends.
You can't split out the structured finance guarantees from the muni guarantees. It would be unethical, illegal and arbitrary. The lawsuits would never stop.
If they really wanted to protect the policyholders, they would have hired an insurance specialist consulting firm like Milliman, not a mid-tier M&A firm. It's not a serious initiative. It's just designed to buy time and punt it over to the ratings agencies to take the next step, which will be downgrades.
MBIA's cash position is immaterial. People who talk about it just show their ignorance about how regulated insurance companies work.
Anyway, NY State has no jurisdiction over Ambac.
It reminds me of a nervous rat peering out of the hole he dug himself.
Newsweek (check out the comments)
The U.S. Economy Faces the Guillotine
U.S. Economy at the Guillotine | Newsweek Business | Newsweek.com
More desperate nonsense. But this is the kind of news flow that drives the indexes higher. Which come to think of it just may be the point after all...
I know where we could get the bailout money, tax the churches and the assets they own. Problem solved.
sorry rich but the insurance department can do a lot.
It is also a fact that the problem with bond insurers isn't their assets but their liabilities. Therefore they don't have cash problems.
They aren't banks.
They collect in advance.
Anyway, I have no idea if they could be split into parts, but stuff like this has happened before.
Other than that, there is nothing to do except put them in runoff and see what happens.
Gary,
Good question. We think it's barley most of the time and after midnight it's barely barley when he has had a few...but we could be wrong.
M of T: the answer is always a Dissolution of the Monasteries. I admit I was thinking more of Harvard than the churches, but what the hell - do both.
Rich, in what sense do you think NY does not have jurisdiction over Ambac?
The point of the insured bailing the insurers is to delay the day of reckoning. The ratings are wildly inflated now even without considering additional future losses. If the insured give the insured enough the ratings agencies can continue pretending the monolines are AAA even if they are actually long-term insolvent. That allows everybody to keep the insured bonds on the books at full price. Eventually of course this will all come out but the idea is that the PTB may be able to fix a lot more in 5 years than in 5 weeks. For anybody associated with the Bush administration this would have the additional huge benefit of dumping the problem on a different PTB. NY state doesn't have that incentive, but they do have the incentive to get a deal which favors them, since they are a small part of the problem. The fact that they have the only significant criminal investigation going (in spite of the obvious criminality of all this) gives them the clout to extract concessions.
Hey, how about some Super Bowl preditions to lighten the mood - I see the Giants winning 27-24, but I'm a contrarian...
Here are some guesses of other predictions:
O-Joe - thinks both teams will win scoring everytime they touch the ball.
Sebastian - has a bunch of charts showing that the NFC wins if the coin toss is heads and the AFC wins if they receive the ball in the second half, but the Wright Model B says that the Cowboys are going to win so thats who he's going with.
Jas - says no one will win the Super Bowl ever again and the game is built on euphoria and hype that cant be sustained, and we will all regret watching it and not listening to him.
Of course, whoever Tanta and CR pick will emerge victorious.
i asked this yesterday but didn't get a good answer. an investment banker friend of mine told me pension funds don't invest in muni bonds b/c they are already tax deductible. if this is so, who is the biggest investor group?
I had some for awhile to dodge taxes. They're good for making income on the margin when you're in one of those higher tax brackets. I did the math and at the time the worked out better than similar rated taxable bonds for me.
Ambac is headquartered in Milwaukee and regulated by Wisconsin.
outstanding, trenches
since the Fed only reacts...they have to read their data...either getting ready for the next rebubble...or it will not work..
Fed has fixed the bubble? what is your time frame? a week?
the FTSE100 looks like it is going to blown away
Gary.... the insurance companies are licensed by the states. MBI is a New York company, ABK is a Wisconsin company. They each have their own insurance department.
Note these are not the holding companies, but they are where most of the assets and liabilities are.
Trenches - thanks for the laugh - I needed that. Go Big Blue!!
Rich, that does not matter.
Name the last failed insurance company that was "put in run-off." It's a ridiculous idea. It doesn't happen in the real world.
it looks like the FED creates the boom and busts....not natural cycles.
Any comments?
"what is the point of bond insurers really? why dont we get stock insurers? it is stupid....simply continues the BS"
Actually, there is stock insurance-it's called buying puts. It would have been wise if all the debts holders had done the same.
My Super Bowl prediction is both teams will win, but not necessarily this year.
AMEX missed earnings. Look for a 100 bps point cut tommrow...
How about Kemper?
Gary writes:
Rich, that does not matter.
There is no federal or cross-state insurance regulation. Ambac could voluntarily agree to participate in a plan devised by the NY Commissioner. But nobody, including the President, Congress or Supreme Court, could compel them.
Next they will hire a NY PR firm
to discuss how hard they are trying but money is tight and times are tough..
Economist.com
Bank losses /A Citi situation
"The mother of all write-downs is unlikely to mark a turning-point"
Premium content | Economist.com
NY has no jurisdiction because I believe ABK is a Wisconsin company. MBIA is a NY state company.
My question: Whatever happened to S&P's review of ABK? After Fitch downgraded on 1/17, S&P indicated that it would finish its review "within one week."
In the Trenches....awesome!
How about this:
dryfly: "When I grew up, we played without helmets. What do they need them for?".
StagMark: "The number of points scored will be astronomical, but there will be no winner."
ACA is already under supervision of the Maryland Insurance Department.
AMEX missed earnings. Look for a 100 bps point cut tommrow...
Oil prices heading back north. That makes it harder for the Fed to cut. If we have $90 dollar oil in the summer (when gas prices peak) that's going to make Joe Six Pack very unhappy heading into the elections.
That is astounding an insurance would by a bank but here is a article on the importance of life insurance Lively Money: LIfe Insurance is a must for an average person!
OT: anyone hear that Citi was just snubbed by the Chinese while trying to secure $2B?
In the Trenches,
The Super Bowl of bank failure runs could preempt the game!
Trenches, I think that's the funniest post I've ever read here.
"That makes it harder for the Fed to cut"
Did you see this earlier today:
The central banks dramatic three-quarter of a percentage point rate cut last Tuesday was the equivalent of shoving a pacifier in a crying babys mouth. And that only stopped the whining for a little bit.
Dallas Federal Reserve president Richard Fisher, speaking in Philadelphia on the same day that Bernanke was giving his blessing to an economic stimulus package during testimony on Capitol Hill, made some interesting remarks that the market pretty much ignored.
He warned that the Fed still has only two mandates, fostering price stability and supporting economic growth. Keeping the markets happy is not a new third mandate.
Our job is not to bail out imprudent decisionmakers or errant bankers, nor is it to directly support the stock market or to somehow make whole those money managers, financial engineers and real estate speculators who got it wrong. And it most definitely is not to err on the side of Wall Street at the expense of Main Street, he said.
Most importantly, he stressed how crucial it is for the Fed to not go overboard in response to current doom and gloom headlines. We must be mindful that short-term fixes often lead to long-term problems, Fisher said.
Expired
Everbody in Dallas knows that Fisher has been on a campaign to become Fed chair since before Greenspan and at this rate he just might get it too.
Rich/zackattack/ziggurat -
That may be the case, but I think Eliot Spitzer has amply proved that NY has jurisdiction over insurance companies in another sense: the court system.
They all do business in NY and can be sued here. Wisconsin and Maryland may be their regulators, but I will guarantee you New York has a say in the reality of their business.
am I last to see Bloomberg's story that Buffett will go national as insurer? Buffett's Bond Insurer to Go National, Regulators Say (Update2) - Bloomberg.com
well, back to work.
And Go Big Blue!
Trenches you may have miscalculated though - MY Wright Model B is forecasting a tennis match.
anyone else smell toast?
OFFICIAL OFFICIAL WWW.JEROMEKERVIEL.COM WEBSITE WEBSITE
--
I hope that I am given the chance to provide supporting EVIDENCE, verifiable, from time-to-time, for some of my accusations against the NYC Banking and Finance Cabal.
CNBC just put on screen what the leading Wall Street firms said about CFC when the Scam was at $43 in January 2007. It was like Enron all over again.
They couldnt have known? This is crap type of defense that Crooks love and they know in advance when they engage in deception.
How do you get to make billions if you couldnt have known what was obvious to many ordinary Americans? CFC was making horribly bad mortgages in Jan'07, no? Everything that happened since then is a surprise?
Jas
If you're looking for a laugh today, Gary Watt's 2008 economic forecast is out. I just started reading but he starts out with government figures on employment so obviously it's well grounded in fact.
--
"Jas - says no one will win the Super Bowl ever again and the game is built on euphoria and hype that cant be sustained, and we will all regret watching it and not listening to him"
A fatwah is going to be issued against you, In the trenches, for blasphemy against the Prophet.
Grand Ayyatollah of Prophet Jas Jain.
Dallas Federal Reserve president Richard Fisher must have voted YES on last week's 75bpts since the only dissent was Poole.
It's not what you say but what you DO that counts.
Gary:
The NY Attorney General can sue just about anyone.
The NY Insurance Department is trying to attract capital to bond insurers. He is looking for some sort of "win/win". You can't attract capital by threats from an AG. Baring that, the insurance departments are similar to the FDIC in that they take over rather then bankruptcy.
One of the reasons is that insurance companies tend to have lots of liquid assets and uncertain liabilities. Anyway, there have been high profile insurance insolvencies, like Reliance and Kemper.
If you want to know how insurance runoff works, those are a couple of recent examples.
Zigurrat wrote:
However it gets done, the muni side will be done in the future by someone with a clean balance sheet.
The structured credit side has no future, so it will be runoff.
I tend to agree.
Although I am seldom barely, there have been times when I was mostly barley.
This is silly. I guess the sole purpose of trying to prop up the bond insurers would be to give the institutions holding crummy insured paper (the vast majority of which is taxable structured products) time to sell it for X cents on the dollar - instead of Y. You don't see the regulators asking Pimco - or Fidelity - or me - or anyone else who owns lots of munis - to throw money in the kitty. We'd all laugh in their faces.
AC - The largest buyers of munis are individuals - either directly or through mutual funds. Pension funds - hedge funds - etc. are sometimes crossover buyers of munis - when the interest rate spread between munis and taxables makes it worthwhile. You can usually tell when they're getting into and out of the market by looking at the yield spread - commonly called "MOB":
"The yield spread between tax-free municipal bonds and treasury bonds with the same maturity. 'Mob' is an acronym for 'municipals over bonds'."
BTW - I don't see any problems with the New York insurance department getting involved here - as long as the companies do business in the state. That's what insurance departments are for. OTOH - the odds of them coming up with any good solutions are negligible IMO. I do see problems with the federal government getting involved. There's a body of law which basically gives states powers over insurance companies - but not the federal government. How big the problem would be - I don't know (it's a complicated legal area and I haven't kept up on it).
What is an insurance company run-off? Roby
Zig - All I'm suggesting is that the NY state government has a tremendous stick to wield against the insurers, banks, and everyone else involved in this sorry mess.
Rich pointed out that NY doesn't have jurisdiction, and that may technically be true, but it's not the final word.
"Zigurrat writes:
There is a lot of stuff that could be done. Interesting that they explicitly aren't there to help the stock holders of these companies.
They could split the business into muni and structured finance, and recapitalize the muni portion. Let the structured finance go into runoff with whatever is saved on the muni side."
Good plan. It is similar to the "good bank" - "bad bank" structures that were used in the 1980s and 1990s, the last time the big banks needed to be recapitalized.
Lawyerliz: Downgrading of muni bonds should not impact pension funds. Muni bonds are exempt from Federal taxes. Pension funds are not taxed so they do not need the tax shielding. Typical buyers of munis are people who want tax exempt interest income (e.g., high income individuals, Muni Money Market and Bond Funds targeted to high income individuals, insurance companies, and banks). Banks and insurance companies vary their use of munis depending on whether they have taxable income. With their losses in the asset backed markets, their taxable income should be minimal so they don't need the tax shielded interest income offered by munis.
Most mutual funds have credit quality criteria for what they can own. Money market funds in particular must own highly rated paper.
Sounds like the big problem (in addition to banks holding insured CDO cr_p) is for the Muni funds to the extent they have obligations to keep all the paper they hold AAA. If they all had to sell at once, that would be berry, berry bad. They would be in trouble with their holders, though if they didn't. You can imagine them facing runs as individuals go into funds buying only Buffett AAA bonds. So maybe this is the Eric Perrino exercise - get someone to insure the stuff that isn't crap, so as to avoid a needless clusterf__k
If you want to write insurance in NY, then the NY DOI is involved, I don't care if you're domiciled on Mars and Jesus is your CEO. One of these two will probably have a run-off and one will probably survive. Isn't Kidder Peabody involved with one of these two? They'll probably make a fortune.
Fisher didn't get a vote on the rate cut.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.
Who else didn't vote?
That Mortgage Pig is one amazing creature. Feed him toxic paper and he poops out triple A rated golden bricks with a sweet lemony perfume smell.
The stuff is worthless and no amount of poking a stick at the bloated corpse is going to change that. It is too late for insurance regulation. All that's left is to see that the bodies are disposed of in a sanity fashion and nobody else is served up another slice.
I think the real game is getting the banks, etc, to release covenants on the worst quality insured issues to save the protection on the rest.
I think the NY insurance beagles are hiring this firm to do the arm-twisting, and they will stand by with the stick. They don't want to come out and tell the insureds that they are going to lose everything unless they renegotiate on the worst, but that's the net answer.
Getting the regulator involved will give protection to the companies that release the debt. Just my guess, but I think it's a decent one.
The banks, especially, don't have the money to give the monolines.
Kidder, Peabody was history a long time ago. It went under - or almost under - was taken over by Paine Webber - which in turn was bought by UBS.
I am not aware of any muni bond fund that requires its holdings to be AAA - although there are some that are called "insured muni fund" this or that. I assume they are required to buy insured munis. I suspect those funds with this requirement will change their objectives. Perhaps there are some out of the hundreds that exist. I've just never heard of one. "High yield" or "junk muni" funds are much more common. Roby
well if all the bonds can be insured and the stocks insured as well with puts....then a crash would be insured...great idea....your my type of perso
GARY: "That may be the case, but I think Eliot Spitzer has amply proved that NY has jurisdiction over insurance companies in another sense: the court system...They all do business in NY and can be sued here. Wisconsin and Maryland may be their regulators, but I will guarantee you New York has a say in the reality of their business."
As powerful as the New York state government may be, it is going to be awefully hard to sue the bond insurers when they haven't defaulted on any insurance claims or any other obligation.
Contrary to the misinformation put out by Cramer and others, the bond insurers are nowhere near defaulting on any payments. Even rating cuts have nothing to do with their insurance contracts. All they promise to do is to pay when a bond defaults not ensure that it maintains an AAA rating at all times.
All you shorts hoping the government seizes the company from shareholders wouldn't even last one minute in a court of law.
Very few of you seem to realize that this is all about present value of theoretical future liabilities. Until the insurance regulator is reasonably sure that the future losses are going to be large, they will have a hard time doing anything. The way I see it, we'll know by the end of this year. Either the companies will be in run-off by then, or all of this will be a distant memory. Until then, I really don't see the regulator seizing the company from the shareholders (unless things worsen materially)...
I'm not sure how the fire department can protect the burning house if they don't have any water.
Sorry, is it Pincus Warburg?
So, one more time, does anyone know what happened to S&P promised completion of its review of ABK?
NY has jurisdiction over Ambac, ACA and all the others who do business in NY. In fact, all the states have jurisdiction over all the bond insurers. That's because you have to be licensed in a state in order to sell insurance there; all the bond insurers (except CIFG, which is missing a few small states) have 50-state licenses plus DC and assorted territories. NY being a major market and the location of the bond insurers' headquarters, its ability to revoke an insurer's license is equivalent to the ability to put it into run-off (since CA and the others would probably follow suit and the rating agencies would probably downgrade for loss of a major market). In any event, NY is co-ordinating with Wisconsin (for Ambac) and watching Maryland (for ACA) with great interest.
Run-off, by the way, is what happens when you stop originating business. You let the portfolio run off until you've paid (or provided for) all the claims or have no more assets. The effect is to trap capital for a very long time. The run-off analysis is the key to whether the insurer will be able to pay all claims against it (which is a very different question from whether it will be downgraded).
As for providing support for the bond insurers, a wrap of the wraps would do the trick. The super-wrap could be a government guarantee or a financial guaranty fund like the current property and casualty funds (in which the bond insurers don't participate); such a fund could be capitalized by the insured, as the P&C funds are, or by anyone else to whom you wish to assign the task. No need to switch insurers, release covenants (pretty much impossible in a public deal anyway) or do anything fancy.
RBLawyer, I really appreciate your comments (here and elsewhere too). Could you comment on the relationship between the bond-insuring parts and the CDS-writing parts of the monolines? I have read that the state insurance regulators actually regulate only the bond-insurance part. Because these parts could not write CDSs because of state regulations, the monolines set up separate subsidiaries for that activity. Does that mean that the state regulators do not actually regulate the CDS-writing part? Are the CDS-writing parts and the bond insuring parts subsidiaries of the holding cos, or are CDS parts subsidiaries of the bond insurers? Is there a way to separate the assets which back up the insurance, or are the cross-commitments between the subsidiaries?
"Officials with the New York State Insurance Department have reached out to Wall Street bond rating agencies to suggest that they postpone a downgrade of bond insurers until the state can develop a bailout package for the troubled sector, CNBC has learned."
NY Suggests that Bond Insurers Be Spared Downgrades - CNBC
Geesh!
Hiring an "expert" firm from the street is a very politicly expedient move. My belief the regulator needs a "total" solution. Some firms won't make it. By hiring a street firm, the regulator shifts blame for failure. I think they would have done better to have kicked it upstairs to the feds instead of out to the street. Dinallo is smart and moving the stench of failure a few feet away from his office. History will judge who is to blame. My bias, "this is a normal" accident. Bond insurance is a Short Gamma approach statistically designed to fail.
Al_Tannr,
First, thanks.
Second, your question.The monolines did set up separate affiliates to do their CDS, but not because regulations directly prohibited their doing CDS. (NY and CA law explicitly permit CDS that are the equivalent of financial guaranty insurance.) The reason was that CDS aren't insurance policies; they're done using forms developed by ISDA. The monolines being insurers, what they do is issue insurance policies, the forms of which must be filed with all their regulators (50 states plus other jurisdictions). So they set up special-purpose entities to do the CDS and then guaranteed the payment obligations of their SPEs. (This is very much an oversimplification of a rather complicated story.)
The guarantees of the CDS are policies just like those on municipal bonds -- can't separate them out. I think, however, there's a principled argument for separating out any guarantees of the SPE's obligation to make termination payments if the SPE defaults on a payment obligation (another long and complicated story). But as far as I know - the CDS are almost always not public - in general the monolines didn't guarantee any payments other than for shortfalls in interest or ultimate principal on the underlying securities. So the swaps are covered by insurance policies and the swaps counterparties are policyholders.
Except for ACA, which seems to have guaranteed termination payments by its swaps affiliate that arise from its affiliate's failure to post collateral. I can easily see an argument to separate payments relating to an affiliate's technical default from "normal" policy payments (especially since obligations to affiliates are restricted by insurance company holding acts). But, again, that's only ACA.
RB Lawyer - Are you talking about a federal fund - or a state fund? In Florida - we have FIGA (Florida Insurance Guaranty Association) which basically passes on all insurance company insolvency losses to all insureds (primarily in the liability insurance area) through assessments on policy premiums. I think it would be political suicide for any Florida politician to propose extending the coverage of a fund like FIGA to save a bunch of "fat cats" on Wall Street - while average insureds with homeowners and auto policies pick up the bill. Roby
Robyn,
It could be a state fund, a federal fund, a multi-state fund, an emergency fund - whatever suits. I just meant it as an example of an easy way to provide support for the bond insurers. I mentioned the P&C funds because they're an existing device with similar purposes, paid for in effect by the insured (since it's ultimately funded by their premium payments).
Bond insurers are not covered by FIGA - the Florida policies explicitly carve it out, as does disclosure for a Florida offering. They're not covered by the equivalent P&C funds in other states, either. Nor should they be; it's a different line of business.
Such a fund would be better, I think, than reinsurance. No credit risk on the reinsurer and, more importantly, the whole portfolio is covered rather than letting the reinsurer cherry-pick the good credits (leaving the primary with sole liability for the not-so-good credits). For that reason, now would be a great time to start a AAA reinsurer: high premiums, good credits. Suspect Buffett already knows that....
RB Lawyer - Thanks for the definition of run-off. Funny - I read a lot - and I haven't heard of anything in terms of unusual levels of claims - as opposed to possible exposure - at outfits like Ambac and MBIA. For all intents and purposes - I think they are dead in the water in terms of what they used to do. So the run-off concept is important.
As a retired Florida lawyer who did a lot of PI work - I'm familiar with FIGA - what it covers and what it doesn't. I don't know about other states - but Florida has enough problems with the hurricane cat fund - I don't think it would have anything to do with a guaranty fund for the monoline insurers. Roby