Bonus time! First!

Yah know, I dont like the idea of Billionaire vulture fund scumbags coming out of the hedge world to buy up insurance companies which have failed because just because these guys see an opportunity to manipulate a mis-managed business and buy it cheap -- then fine tune the accounting and then play bond wizards and derivative gurus and use the rating agencies to start this game all over again.

We saw what just happened with accounting fraud and hedge fund SIVs, CDOs and all the crap that is helping generate a global recession....but, these guys like Buffett have the cash, so what happens in a time of panic, the regulators and everyone already asleep from this fraud, this false and misleading information all look the other way while the new kings come in like Potter in Its A Wonderful Life.

I think these type of bond insurers need to be held to higher standards and not become casino chips, and furthermore, the conflict of interest by these Billionaire vultures is a conflict of interest, when people like buffet can invest in the companies that rate his bonds and investments; and having him start his own rating agency and this other Billionaire vulture do essentially the same thing, shows the level of panic and collusion and corruption in this business! BOOOO!

DH

$200B? Thank goodness that drag will be balanced out by the $150B stimulus package. Oh, wait...

The next scene is sooo much better in Dr. Strangelove:

YouTube - dr. strangelove - survival plan 

In the interest of a balanced view on this blog I would like to state that we had a nice rallye in the ABX indexes today.

O-Joe

Why would the banks put up any capital at all? Wilbur won't touch it.

Again, we come back to the same solution. A guvmint bailout. Mark my words, private parties will not touch the monolines.

Why commit capital when you can have a taxpayer bailout. The beauty of a bank is that your too big to fail. Nice way of saying you got a PUT underneath your business.

In the interest of a balanced universe, I'd like to point out that the ABX will likely be heading down again shortly.

0-Joe

barely-- listen to me.

The Federal Reserve is going to cut interest rates to ZERO.

Bank on fifty at the next meeting. And bank on cuts if the stock market begins to misbehave again. The shorts may need some more tough love. LOL

Under the heading "other than temporary" As of September 30, 2007, MBIA has re-insured approximately $80 billion of par value
of its exposures. More than $42 billion of this reinsurance was purchased from Channel
Re, a Bermuda- based reinsurer whose only customer is MBIA. The two most senior
officers of Channel Re are former executives of MBIA. MBIA owns 17% of the
company and has two representatives on Channel Re’s board of directors.

On recent conference calls, Moody’s and S&P have stated that they have not yet updated
their ratings of the monoline reinsurers including Channel Re. Earlier this week, on
January 16th, Partner Re and Renaissance Re, the majority equity owners of Channel Re,
wrote off the entire value of their investments in Channel Re due to losses it has recently
incurred that substantially exceed Channel Re’s capital, an impairment that Channel Re’s
two majority owners have concluded is “other than temporary.”

Conclusion: Enron didn't work and so will this

So the $5B was going to do what? Keep the zombie walking?

That's a LOT of input. They're BK unless someone gifts it to them.

Cheers,

So what's next after trillion?

7) MBIA’s $1 Billion Surplus Note Issuance

Last Friday, MBIA priced an offering of surplus notes at par with a 14% yield. Within
one week the notes traded down to the mid-70s and have a yield to call of more than
20%. Previous to their pricing, the notes were rated by Moody’s and S&P at Double A.

Man - even I could get a double a rating from these guys

I'll see your perpetual preferred shares and raise you my surplus notes. Geezz

Question?
Does Warren Buffet feel like a fool now? Compared to MBI and ABK his new outfit was sure to attract all kinds of business. If the government becomes a backstop for the insurers in trouble, doesn't Buffet's edge evaporate?
Discuss

Campbeln,

Look it's like 00:05 and the Bombers and missles are launching.

Cheers,

Rob Dawg,

That's why I said it has to be GIFTED. Nothing else will do.

Cheers,

The $200 billion figure is essentially pr.

It is the number, per Egan Jones, to get ALL the Monolines to AAA.

ACA was never AAA.

We really only care about getting mbi and abk through this mess. No detail behind those figures.

MBI has $15.5 billion of claims paying ability. Toss in the time value of money and they could last a long time before they ran out of cash, if ever. That isn't to say the business is viable as a going concern or the equity is worth anything.

I think we all are missing the possiblity that the sales pitch to the public, especially during an election year, could be something like:
"The government needs to help the struggling insurers and banks because if we do not, it is your job, your family, your plasma tv that could be at stake! Maybe even the loss if WII use will result if we do not act fast!" Or something along those lines. Make people afraid for their petty little lives and it is easy to pass anything over them.

John Stark,

I sincerely believe that the problem is this:

1. Loose AAA, CDO type sewage looses AAA
2. Pensions have bought this garbage.
3. ERISA and other laws dictate the ratings of the stuff Pensions can own.
4. Triggers a forced sale of the toxic garbage.
5. Insurance co's have the same proble as pensions to some extent on this stuff.
6. Insurers can use independent ratings of S&P to value the CDO crap bonds... and other raters...BUT if S&P and others did not rate or downgrade tough poop.
7. This means that we will have a mark to market of this crap.
8. New FASB rules say you can't keep bundled tier3 stuff at mark to fantasy if a know mark to market price is revealed.

Drop ratings on monolines enough and we have a real proble.

That's a snap shot...It's not a thesis. There are simplifications here.

Cheers,

Zigurrat-

Nobody is talking about aca, egan has a B+ rating on mbi, fitch just affirmed the AAA on mbi, someone is not providing full disclosure, period.

Great ground dog gonads!

How come it took 5 hours and the great Zigurrat to articulate the first thought that popped into my head when I read this post?

America's biggest mortgage bond insurers collectively need a $200 billion (£101 billion) capital injection if they are to maintain their key AAA credit ratings, a figure that dwarfs a plan by New York regulators to put together a capital infusion of up to $15 billion, a leading ratings expert said yesterday.<

What does collectively mean? I took it as the entire industry.

In the end, all lives are petty. It is when people get all caught up thinking their deal is the biggest in the history of the world that you get where we are now. Not condescending, just an observation so relax.

risk capital.....

nothing about what his view of expected losses are by company....just what it would take to get the industry to AAA.

Since AAA should be 1/1000 chance of default give or take, the number is much higher then the expected loss. The $200 is just to get a nice headline.

Ella-

question, are you robyn's sister?

just asking, my stomach is beginning to turn again.

MBI may have bounced up 50% in last week on rumors of rescue but its curious that its very hard to find shares to short. That tells me that the strong money may be waiting this out to hear the rest of the story.

If anyone wants to see the rationale for buying bond insurers read:
Third Avenue
Most recent shareholder letter from Marty Whitman.

I own some tavfx, and frankly was surprised he bought this.

rich- "Insurance regulators exist to protect one class -- insured policyholders. Not stockholders, bond holders, investment bankers, counterparties or anybody else."

Bingo."

Protecting the policyholders means the existing policy holders. Not the future ones. Or the ratings of the companies.

The fact that New York Insurance Department stepped in to try to keep ratings to provide a market available is really stretching his role.

Direct link:
http://www.thirdavenuefunds.com/taf/documents/shareholderletters/aboutus-letters-07Q4.pdf

Shareholder letters:
Third Avenue

Personally, I was shocked to see him buying these. But these types of investments have paid off huge for him in the past.

Biggest problem the Monolines have imho from the LIMITED study I have done is their possible inability to mix muni revenue w/ cdo revenue.

Warburg did a stress test on the MBI portfolio and found them to hold up even under the worst case scenario. Remember, they don't pay until their credit instruments default, while many people are going off the 'market' price of the ABX.

Misean | 01.24.08 - 9:07 pm |

Misean,

Outstanding list. I just got a email from a realllly inside relative. One of the most stand up guys I have ever known. I have a couple of stories but I don't think he would like me bragging.

He sounded very afraid in the email. I sent a couple of questions back to clarify...He works for a major insurance co...

Chris

"All insurance company would be broke if all policy holders filed claims the
same year, but that doesn't happen. Reassure me here."

If every auto policy holder woke up tommorow and realized that they were 50-250k in a negative equity position on their vehicle, many of these vehicles would end up being stolen or burned.

Kind of OT - but people don't read old threads here. Prediction. Political stimulus plan as proposed becomes questionable as AARP comes out swinging starting tomorrow. Why should people who earn $100k a year get money back - while a little old lady living on SS gets nothing (which is the way the bill has been described - people with no earned income get nothing).

As for all the health care rants. Health care spending is 15% of GDP. That means we all have to spend - on average - 15% of gross income to get health care. Best way to get down health care spending is spend less on the real outliers - the $5 million to "save" a gorked out 10 ounce baby - and the $1 million to "save" a 90 year old in the last 3 months of his/her life. You can do away with all the paperwork - and all the lawsuits - and as long as we keep pissing away money at the extremes - the system will never be rational. Health care doesn't save lives. It merely - at best - extends them - in various degrees of quality. So the issue is how much are we willing to spend to extend a life for X period of time at Y quality. FWIW - my husband and I have 3 dead parents - and I think - in total - about $3 million of medicare dollars was spent to buy each perhaps an extra month or two at the end of their lives. Wasn't very high quality time either. Roby

rich,

I looked for the MSFT insult to Conjure. It was removed. I can't remeber the troll who posted it. Wasn't you.

Cheers,

P.S. It's really wonderful to see the "I Never Saw A Tax Cut I Didn't Love" Republicans like Bush get in bed with the "Limousine Liberals" like Pelosi with regard to the government guarantees of mortgages on really expensive houses. Think this bill should be called the "Save Our (Really Expensive) Homes" Act of 2008. Roby

Cobra,

Update your last post when you get more.

Mark,

"But the CDOs are already selling at discounted prices because of the possibility of monoline failures. Further discounts should not spell the end of civilization, no?"

Yes. Because they still retain their ratings. And there is simply a trickle of them. A disgorge of them from insurers (Life, home, fire) and pensions would plummet them. And that FASB rule about level3 assets would hit.

All of this is fantasy world stuff. S&P, Moody's, and Fitch are rating based on FASB and the law...not reality. So everyone is basing the crap on mark to fantasy, because they are allowed to. Once a market opens up for this crap...then that fantasy gets pummeled.

That's my point. I may be wrong. And then you've got muni problems bubbling underneath.

Cheers,

rich,

You're not saying that the monolines are really in good shape and this is a propaganda effort to goose FFR rates down or motivate the stimulus. I'm not sure by what you wrote, what your point is.

Cheers,

Ella,

I'm in CA. No doubt sweat is beading on brows.

Cheers,

Misean | 01.24.08 - 10:07 pm |

Misean,

I should have a couple of answers in the am. There was a "unwind" value in the email. Frankly i can't imagine a number that large. Way more than one entity would cease to exist...

Chris

d00m!

sdtfs,

Nice pull. I must have missed it.

Who the hell is Steve...

I stand by troll.

No one ate the troll bait. Except mp and conjure...but they were rightfully pissed.

Cheers,

Robyn,

Why yes it was:

YouTube -

Emjoy.

Cheers,

Thanks Misean. Yikes - it's almost 25 years old! Video is very primitive by today's standards - but the song is still great. Roby

Ray,

Gah! Another Martini is in the future. I'm tapped on Vodka...I shouldn't drive...It's raining in SoCal...I may have to walk.

Robyn,

Great tune. And we thought the comp animation back then was unbelievable.

sportsfan,

An old fave of mine.

Times change.

Cheers,

Does anyone have a take on the recent market rally in the financial? Does it have legs?
Ella | 01.24.08 - 10:36 pm | #

Ella,

You sure do jump in with both legs; I lurked here for 3 months before doing my first post!

Though I can catch the general consensus of this forum regarding the financial institutions, I will only speak for myself. I believe the issue many of our financial institutions are facing are ones of insolvency, not liquidity. The impact of the housing bubble, it's unsustainability (that a word?) and the consequences of falling housing prices will make many of those asset-backed investment vehicles worth considerably less than what they traded upon conception. These financial vehicles will take victims along with them upon their eventual demise How long this will take to fully unwind is a good question but we have been seeing the impact on various financial institutions for several months now -- just check out "confessionals" keyword for a laundry list. I surmise the FIs are up because of a sucker's rally or a dead cat bounce. You can bet on that notion (like buying SKF) but that's up to you.

low-level person
blossoms into rogue trader
whocoodanode, eh?

rogue trader bets wrong
markets plunge steeply worldwide
Fed board looks like chumps

two hundred billion
dollars are needed soon please
let me off this rock

rich,

Not sure about that SocGen story. You obviously remember Barrings.

Barings Debacle

That was 500M quid. A bit less than $7.1B.

Of course the issuers of Propaganda could be relying on that event to temper current.

The Super Colander Tin Foil Hat has been burning batteries at a high rate today...but so much is going on.

Cheers,

Robyn,

Lots of Catholic Poles from my family died there too.

Cheers,

Recession is over, market will rocket, earnings will crash, dollar will rocket, defaults will increase as ARMS reset, gold will go down, Bush will become a hero for helping save America from economic decay, bonds will default, stocks will whipsaw to record levels and earnings will decrease, employment will decrease, stocks will rise higher, Fed will lower rates to 2.25%, housing boom will turn around and HBs will be given tax breaks for expansion, walmart will go beyond its goal to be everywhere its not and be everywhere; walmart will be granted a tax exemption, earnings will be posted as N/A

Traffic pattern here remains mired in economic befuddlement; suggest more cowbell!!!

25,600 for calculatedrisk

I like deals like the stimulus package and GSE limit bump agreed to by leaders of both parties. There's no one party for everyone in flyover land to get mad at. They just get pissed at Washington. If it could only be accelerated to happen by next week Ron Paul could win.

When the GSE bailout (the last bagholders) happens, the cost will be north of $500B born by those that didn't spend 100% of their lenders' money on an $800K house.

ex-wallstreeter,

Do not appologize for long-windedness, this is most welcome 'round here.

(I think you'd agree that a 2% CADR and 80-90% recovery is optimistic for a subprime pool)

hehe...the good ol' days...

sk,

And of course MBIA reinsures with a stuf bag in cayman that it owns some 17% of and only reinsures MBIA.

This ought to go over well.

Cheers,

Banks are furiously raising capital. And deposits I might add. At very expensive rates. All these preferred and converts come with ratchets. Bottom line is that existing shareholders will get diluted big time by the time this is over.

On an anecdotal note - I got a call from my Citicard rep pushing me to open a checking account with $1,500 and for that I get 20,000 Advantage miles. Sales pitch was simple - to get that many miles I would have to purchase $20,000 on my card - so a checking account with a $1,500 minimum was such a deal.

For those folks trying to bottom fish MBIA & Ambac I just want to remind them that in early December Warburg Pincus put in a $1 billion into MBIA. The stock was at $31. Today its under $15. Sophisticated investors like Warburg Pincus and Marty Whitman have lost their shirts recently bottom feeding the monolines. Maybe in a few years their bets will be validated. The question is are there better fish in the pond?

We also note that MBIA reinsures Ambac, and Ambac reinsures MBIA.

Good grief. Not just mono-line, but mono-insurer.

The Federal Reserve is going to cut interest rates to ZERO.

Which rates? The rates at which the Chinese and other foreigners lend the US money to finance the $2bn/day current account deficit? That's up to them, not the Fed.

Yoo hoo, China, Singapore, Dubai, we have a deal for you. Name your price. Anything goes. We're..................er..desperate.

M-F,

Here's another relevant question: Does everybody "deserve" the same level of healthcare?

tj,

Well of course the little socialists think so. They should determine life and death.

Better some Beurauorat determine life span than a family who has to actually pay the bill...

Gov't is omniscient....it always knows best. How dare a peasant like you make such decisions.

Cheers,

rich,

Not saying this is Barrings...just suggesting that it has happened before. I'm being cautious.

Cheers,

M-F

You understand. It should be a family obligation, not a social one...

As long as I can demand that you pay for it, I will keep "hope" alive. When I have to pay for it I will consider the costs vs. chances of success.

I know end of life. My grandmother consumed little public resources as she outlived my grandfather by 20 years, and had little work record.

We sacraficed. There was no estate left after her death...but who cares. We made her as comfortable as we could. Then last year, when she knew she couldn't go home...after we cleared out her apt., she faded. She's gone now, many tears.

I should go now.

Cheers,

tj,

You have no right to health care. Because someone has to provide it. If you have a right to enslave someone to give you health care, you have a right to enslave someone to to give you food, transportation, shelter, and anything else you want.

You want a Play Station 3...bill it to Gaary...he thinks you should have anything you want. He doesn't want to pay for it though. He thinks Gov't should pay for it. How I'm not sure...quite illogical.

Anywho I'm off for the night.

Cheers,

Preachin' to the choir, Misean, preachin' to the choir!

tj,

Thanks,

Memories hurt,

be back tomorrow.

Cheers,

Complex Financial Trades Worry Economy Watchers
Rise of Bets Called Swaps Could Worsen Subprime Damage

Washington Post Staff Writer
Friday, January 25, 2008

While early estimates put losses from those troublesome home loans at $250 billion, the total exposure could be five times greater, mortgage analysts and researchers say.

The market for all of the side bets, called credit default swaps, exploded from $6.4 trillion in 2004 to at least $43 trillion at the end of 2007, far surpassing the total value of the debt markets, according to the Bank for International Settlements.

"Credit default swaps are perhaps the most egregious offenders" of all derivatives, Gross wrote. "Throw in an embarrassed regulatory network consisting of the Fed and Congressional watchdogs asleep at their post, and you have a recipe for credit contraction -- a run on the shadow banking system."

Once Again, the Risk Protection Fails
Société Générale's Loss
Is Example of Controls
'Thrown by Wayside'

Once Again, the Risk Protection Fails - WSJ.com

"Merrill had a risk committee," Mr. Thain said. "It just didn't function."

"The [cross-pollenation] between the credit-risk team and the market-risk team was not as strong as it needed to be," Gary Crittenden, Citigroup's chief financial officer, told analysts in October. "We have to have more integration between the way those teams operate."

In Money Funds, $3.252 Trillion
January 25, 2008; Page C11

In Money Funds, $3.252 Trillion - WSJ.com

Money-market mutual-fund assets increased by $64.42 billion to $3.252 trillion for the week ended Wednesday, up from an adjusted $3.189 trillion, according to the Investment Company Institute.

Assets of the 843 retail-class shares increased by $12.09 billion to $1.196 trillion, the institute said. Among retail-class shares, assets of the 546 taxable shares increased by $13.06 billion to $906.85 billion, and assets of the 297 tax-exempt shares decreased by $975 million to $289.49 billion.

Assets of the 1,169 institutional-class shares increased by $52.33 billion to $2.055 trillion. Among institutional-class shares, assets of the 906 taxable shares increased by $52.16 billion to $1.873 trillion, and assets of the 263 tax-exempt shares increased by $177 million to $182.36 billion.

U.S. money market fund inflows jumped by $28.6 billion in the week ending March 6, 2007 to a record $2.391 trillion,

Re: Money-market mutual-fund assets increased by $64.42 billion to $3.252 trillion for the week ended Wednesday, up from an adjusted $3.189 trillion, according to the Investment Company Institute.

That money seems to be on the sidelines ehh?

I find this amazing, but heck, its amazing Im here at all: etail: Assets of retail money market funds increased by $12.09 billion to $1.196 trillion. Taxable money market fund assets in the retail category increased by $13.06 billion to $906.85 billion, and tax-exempt fund assets decreased by $975 million to $289.49 billion.

Institutional: Assets of institutional money market funds increased by $52.33 billion to $2.055 trillion. Among institutional funds, taxable money market fund assets increased by $52.16 billion to $1.873 trillion, and tax-exempt fund assets increased by $177 million to $182.36 billion.

404 : Page Not Found

For anyone thinking about going long recommend reading this:

FPA News Article

""It's too little too late," Sean Egan, managing director at independent rating agency Egan-Jones tells TheStreet.com. The Philadelphia-based rating firm rates Ambac double-B minus and MBIA single-B plus -- ratings that imply those guarantors are well below the junk rating threshold of triple-B. "A triple-A rating implies that an insurer can pay its obligations come hell or high water. And from our perspective, the monolines don't come any near the triple-A standard," Egan adds. "

Bond Insurer Bailout a Bad Bet | Financial Services | Financial Articles & Investing News | TheStreet.com

Banks 'face a further $300bn sub-prime hit'

Banks 'face a further $300bn sub-prime hit' - Telegraph

$200 Billions here, $300 billions there.

It only took a little over a day to dissect and discount the insurer bailout. Remember how much time was wasted discussing MLEC?

Any guesses on what starts the next leg down in the market? A bad earnings report, an insufficient Fed cut, or....????
AZ_Cowboy

SOTU... most likely fade starting at 230pm on tuesday, but be positioned for wednesday.

I think their credit is no going to be triple aaa.
Lively Money

bracket sp500 1375 into SOTU... KL told me

Futures strong?

Ben, are you planning on raising rates this morning?

like duh, bis says there's $500T in notional out there...
not everyone is going to get paid on those..

idoc,

I don't know the exact percentage, but you'll find that the "typical" CRE loan is probably 10 yr term w/ 30 yr amortization.

That said, the % has fallen in recent years, as recent property valuations preclude the borrower from obtaining this type of financing (hard to cover debt service with 30yr am) and/or the property is over-leveraged.

A lot of recent-vintage CRE loans were written with 1-3 year terms, floating-rate, over LIBOR.

You'll find that all the deals in the news - Macklowe, Cosmopolitan, etc, were all floating rate loans written with 1-3 year terms.

EX WSTREETER: "While I'm in no position to question Warburg's analysis of MBIA, I would hesitate to state that the market is pricing cash CDOs or supersenior tranches, using the ABX. Underlying collateral in a number of these deals has in fact started to default - and been downgraded severely by the rating agencies. Most market participants are using cash flow models (like Intex) which run the underlying RMBS under assumptions of default rates and collateral recoveries. "

This is all just a guess from a monoline bull (I'm down a lot so maybe I'm just dumb) but I think the market IS using a worst case scenario and likely using a simplistic view (such as the ABX index). Otherwise, how can you explain the fact that insured bonds are trading below non-insured bonds (for similar bond; I think this is mostly in the muni bonds)? It's pretty much as if no one wants to touch anything that is insured even though there is no economic reason to bid that price below a non-insured bond. I might turn out to be completely wrong but I still feel that there is irrational pessimism regarding the bond insurance business.

EX WSTREETER: "A leveraged exposure to these BBB RMBS tranches with a mere 5-10% of subordination just doesn't work. If a monoline has wrapped such a tranche or written supersenior protection on it - they must see losses far in excess of what they anticipated."

I agree with that comment. A lot of the losses are coming from mezzanine tranches. The monolines are clearly taking losses far greater than they anticipated. The greatest risk for monolines are CDO-squareds where the underlying collateral is mezzanine CDO tranches. That's where MBIA and Ambac are taking big losses. (In the future, over the next 2 years, the other potential problem is ABS with credit card loans as collateral).

Having said that, why is the market treating it as if all the insured tranches are BBB? There is no benefit given to the possibility that the insurers may have picked slightly lower risk items over higher risk ones.

EX WSTREETER: "Also, I haven't seen the rating agency data for mortgage defaults lately but the last time I looked 2006-2007 collateral defaults were on an upward trajectory with no sign of leveling off. Until that happens I think it's premature to think the monolines (and the banks) have seen the worst of it."

The market will likely price in a peak long before it happens. The default rates WILL rise but the question is whether that is already being priced in. I highly doubt the market is pricing in current default rates; instead, there is already some pretty bearish views being priced in (for example, the stock price of the monolines are trading way below book value even after taking some massive mark-to-market losses).

Also, note that the stress tests carried out by the rating agencies use higher default rates than was observed.

What it will come down to is how much worse things will g

SV: This is all just a guess from a monoline bull (I'm down a lot so maybe I'm just dumb) but I think the market IS using a worst case scenario and likely using a simplistic view (such as the ABX index). Otherwise, how can you explain the fact that insured bonds are trading below non-insured bonds (for similar bond; I think this is mostly in the muni bonds)? It's pretty much as if no one wants to touch anything that is insured even though there is no economic reason to bid that price below a non-insured bond. I might turn out to be completely wrong but I still feel that there is irrational pessimism regarding the bond insurance business.

I'm not knowledgeable about the muni market, so I can't speak to that. However what I've seen in a number of RMBS bonds is that RMBS HEL bonds are essentially worthless (these are backed by the 2nd liens on subprime/Alt-A mortgages). The bonds that are wrapped by the monoline are therefore trading in direct correlation to the monoline's credit. Monoline goes down - bond goes down.
In the case of munis - perhaps there's a bit of moral hazard risk being priced in (as in: I'm not sure what the underlying muni rating should, but if it's wrapped by a monoline I'm going to assume the worst)?

SV: Having said that, why is the market treating it as if all the insured tranches are BBB? There is no benefit given to the possibility that the insurers may have picked slightly lower risk items over higher risk ones.

I'm sure they have wrapped a number of innocuous issues - far removed from the risky stuff. The problem is that the monolines are so thinly capitalized that it doesn't take much to move them below AAA. They've essentially made the same bet that took down the bank's balance sheets - they assumed that subprime MBS from different issuers would be diverse enough not to all default in tandem. As we're finding out there's not a whole lot of difference between issuers. They almost all have significant chunks of Florida, California, Arizona and related "bubble" exposure. I'd bet that a pool that excluded these two states would much better than the market! Ergo - all the BBB and above tranches which don't have much below them to begin with are now at risk because of defaults. Multiply these exposures in a CDO and you see the losses that monolines are anticipated to have.

SV: The market will likely price in a peak long before it happens. The default rates WILL rise but the question is whether that is already being priced in. I highly doubt the market is pricing in current default rates; instead, there is already some pretty bearish views being priced in (for example, the stock price of the monolines are trading way below book value even after taking some massive mark-to-market losses).

Also, note that the stress tests carried out by the rating agencies use higher default rates than was observed.

The buy side mig

And the last chunk:

SV: There is a difference between being able to pay claims versus not being able to pay.

SV: If the (present value of) losses is higher than the (present value of) claims paying ability they have, the outcome is pretty obvious: they'll go bankrupt (they just can't pay).

SV: Whenever people like me mention the fact that monolines only have to pay timely interest and principal payments, we are not talking about the above case (that case is total bankruptcy with no other hope (even the US governemnt can't save them in that case because they can theoretically have a liability of $500 billion for Ambac and another $500b for MBIA, and around $2 trillion for the whole industry (but most of this is "municipal" stuff so losses will be nowhere near that)). Instead, we are talking about the case where the losses may be high but it won't cause a cash crunch (i.e. no liquidity crunch). Monolines (except ACA) generally wrote contracts that don't require them to post collateral (unlike trillions worth of CDS contracts written by non-insurers) and they only have to make timely payments (don't have to pay billions tomorrow). Ambac and MBIA will earn around $400million in the worst case if they shut down operations right now. As long as losses that have to be paid out every year doesn't exceed that, they will keep going for years. However, depending on the amount of actual payment, shareholders and bondholders may end up with nothing.

You make a good point. And I don't want to suggest that the monolines are worth nothing today. It's just that their disclosures are minimal and the market is going to make the worst-case assumption. However, their ability to keep getting that $400MM per year is contingent on them maintaining a AAA rating. This means they have to reserve for the worst-case anticipated by the rating agencies and it's that worst-case reserve that I do not believe they have. The agencies estimates of the worst case already seem to indicate the monolines are insufficiently capitalized. Witness the downgrade of Ambac by Fitch and the threats from the other agencies to follow suit. Unless the monolines raise capital I think they have a good chance of getting downgraded.

Personally, I'm betting on a bailout of some sort - which is why I don't want to short them. And I don't want to go long the equity, because the bailout will likely result in stockholders getting the shaft.