OK, so the banks need a bailout? Is that what he's implying? Because it's easier to deal with the muni bond insurance problem (read Buffett for example) than resolving the other CDO mess.
FDIC insurance isn't going to go very far this time around. Thank God for tax payers. FDIC employees in the field (not DC)are already working 11-12 hour days seven days per week.
Though it seems spooky, very, very few institutional funds will sell muni bonds because of an insurer downgrade. It is far simpler for them to ammend their rules.
In most industries, if the established players mismanage their businesses and are unable to provide goods and services, new companies spring up to compete with them almost instantly.
I mean, nobody would seriously suggest a "grocery store bail-out" or "package delivery bail-out" or "semiconductor manufacturer bail-out", no matter what was happening to Albertson's or FedEx or Intel. Even in the worst case, some competitor would arise to fill the gap. This is kind of the whole point of capitalism.
So if our banks have screwed themselves to the point where they are unable or unwilling to perform their primary function (extending credit), why is that a crisis? Can't we just get new banks?
The bank capital ratio arguement is a farce. So is the notion that our economy will grind to a halt if banks aren't bailed out.
Capital IS available. Its just not available at stupid low rates to suspect entities.
In the last three years, the top 5 U.S. investment banks paid over $100 billion in bonuses. It appears much of the bonuses were paid on ficticious and unsustainable profits.
Where is the outrage?
If banks are deserving of capital, their own employees could certainly re-invest in their own futures and jobs. Why haven't they?
Citi, BAC, UBS, Merrill, Bear, Morgan Stanley, et al have all tapped foreign capital at rates over 10% with seniority and convertability. These are junk type rates for capital and for good reason.
It has to take all of mp's superhuman strength to prevent conjure bag from moving the minute hand on the clock of financial doom! I wonder if Oliver Stone or that crazy documentary guy will do the cinema version first? WallStreet redux, but this time going down en fuego.
"So if our banks have screwed themselves to the point where they are unable or unwilling to perform their primary function (extending credit), why is that a crisis? Can't we just get new banks?"
It's a crisis in a fascist society. The big boys have their private laws, and one of them is that nobody loses money or position in the long run. Why, when you've got the plebes to foot the bill?
Off topic, but I have to share this with all of you. Driving to the gym after the market close, I was listening to sports radio. The first commercial I heard was for 1-888-76Short [or something like that]---of course, that is a specialist in helping people with short sales of their homes.
That was interesting enough. But Then, the very next ad was for a consumer debt firm offering advice on how to discharge your credit card debt at way less than the balance!
A lot of asset destruction in under two minutes....
If guarantors are downgraded to below AA-, many money funds will be required to put tender option bonds and variable demand obligations back to the liquidity providers
Feb 13:
Bank of America Corp. estimated in a report that 80 percent of all auctions of bonds sold by cities, hospitals and student loan agencies were unsuccessful yesterday. That may mean as much as $20 billion of bonds failed to find buyers, based on the $15 billion to $25 billion of auction-rate bonds scheduled for bidding daily, according to Alex Roever, a JPMorgan Chase & Co. fixed income analyst
UBS (UBS), the second-biggest underwriter of auction-rate securities, will no longer buy deals that fail to attract enough bidders, joining a growing number of dealers stepping back from that $300 billion market
No deals were done in the Closed End Muni Funds. Among issuers with failed auctions are Van Kampen, Eaton Vance, Black Rock, Nuveen, Alliance Bernstein, MFS, Morgan Stanley, Western Asset Mgmt., and Drefyus. In the direct Municipal area, there were many failures as well. Issuers such as State of New York G.O., NY State Thruway, New Jersey Turnpike, City of San Mateo, CA and Alaska Housing Authority failed as well
The reason for the failures is that the broker dealer refused to put up their own capital to complete the auction
So if our banks have screwed themselves to the point where they are unable or unwilling to perform their primary function (extending credit), why is that a crisis? Can't we just get new banks?
Its a closer analogy to a power or water utility. Can we let the water or power company shut down while we sort out who the new owners will be & the terms of the reorganization?
So the answer from a societal level is 'no - we can't let the banking SYSTEM fail'...
The banking system is a fiat money utility. Owning physical metal is analogous to running 'off the grid'. IMHO anyway.
The same bogus and hollow bailout arguements could be made regarding the homebuilding industry, the auto industry, the textile industry, etc.
In all of the above industries, a government bailout would stimulate the economy and save jobs. It would also actually result in the production of REAL products. But as the bankers have always said, its better to let the market correct on its own.
At the same hearing New York State Superintendent of Insurance Eric Dinallo outlined a plans to regulate insurers to their ability to maintain a AAA rating (not solvency).
Oddly, it could result in an obtuse reliance on credit rating agency models by government regulators.
Surely no one can protect the insurance system better than the credit rating agencie? right?
Banks advised to walk away from big deals
By Henny Sender in New York
Published: February 14 2008 22:03 | Last updated: February 14 2008 22:03
Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.
This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.
...
It is the tipping point argument, said a senior partner at one of the biggest private equity firms, who asked not to be named. The banks have so many issues with their balance sheets that they are considering a new policy.
However, such a radical shift could have a dramatic impact on the markets. The presence of private-equity buyers is one factor that has helped boost stock prices.
If you want to come up with news that could make the Dow drop another 500 or 1,000 points, this would be it, says one lawyer specialising in private equity issues for a major New York law firm. But desperate times call for desperate measures.
Granted, there's a cancer in the banking industry, but isn't there a few good institutions out there that can step up? Even as cynical as I am, I've got to believe there's a few good bankers out there.
Instead of bailing anyone out, simply escort the bad ones out and help the good ones pick up the pieces. Sort of "Buffet and the monolines" writ large.
The most important statement today was from Spitzer placing a timetable on this fiasco. Basically, shit or get off of the pot, cause the municipalities aren't going to suffer continuous pain cause you morons went off the deep-end on the greed train.
Overview on how trouble in the ARS market is causing issues for closed-end-mutual funds.
If the run doesn't stop here, next stop is plain vanilla money market funds.
Problems with these securities could lower the returns to investors from these closed-end funds, either because the funds' borrowing costs rise or, in an extreme scenario, the funds have to de-leverage and sell some of the securities they hold.
From the hearing today: I expect a regulatory imposed split between the traditional muni insurance businesses and the CDO "bad bank" which will restore the muni market. Buffet will come to dominate the muni side in time (expect GE Capital to enter soon) but trustees will re-write guidelines for munis to be Aa3 and above. The CDO insurance will be worth nothing soon causing more write-downs at the banks, a few of which may need a little more capital. The muni sides of MBIA at Aa2 and Ambac at Aa3. The CDO sides at Ba2 for both.
Instead of bailing anyone out, simply escort the bad ones out and help the good ones pick up the pieces. Sort of "Buffet and the monolines" writ large.
I think they are so tangled up it will be hard. The good are likely to go down with the bad.
I mean have the monolines turned over the muni accounts to Buffet or are they continuing to hang on to their hostages in hope it confers TBTF status? I see the banks trying to pull the same kind of stand off.
Eliot Spitzer, New York governor, gave bond insurers three to five business days to find fresh capital, or face a potential break-up by state regulators who want to safeguard the municipal bond
The thing to keep in mind when looking at this whole mess is that the fundamental problem is that the underlying loans in these securities are performing badly.
The only remaining question is: Who is the biggest bagholder? The monolines? The banks? Or both? With the ever-increasing deterioration in the housing markets, a la today's reports on the California market from DataQuick, every month that passes will see a corresponding deterioration in the performance of the RBMS. CDO and CDS deterioration flows from there.
By June, we should really see the stress cracks open up into gargantuan fissures.
"... downgrades [of bond insurers] might adversely affect financial stability through several channels."
MIGHT?!?!?
"If guarantors are downgraded to below AA-, many money funds will be required to put tender option bonds and variable demand obligations back to the liquidity providers."
Been blowing that horn since July.
These things are already downgraded vis a vis the cost of borrowing over the last several months. The rating is a legal technicality to stave off quote 2, no more no less.
There's nothing to bail, just a huge mess of carnage to clean up. These firms are already zombies.
I keep seeing this scene over and over, only in my mind Blondie doesn't know whose gun is empty.
I was very surprised by Spitzer's statement, especially after the pablum served up by New York Insurance Commissioner, Eric Dinallo on CNBC this morning. S&P and Moody's should have downgrades MBIA and Ambac weeks ago. If the losses on the CDS portion of their portfolio were fixable with a capital infusion, the cloud around them would have lifted by now.
Spitzer forcing the issue may result in the rapid split-off of the muni insurance business. I'm sure the insurance holding companies go to zero in a blink if this happens.
Granted, there's a cancer in the banking industry, but isn't there a few good institutions out there that can step up? Even as cynical as I am, I've got to believe there's a few good bankers out there.
Currently, there isn't enough capital in the world for the banks to absorb a complete run on the shadown banking system (money that isn't money).
Let's see, as I remember it...
The CDO market collapsed which lead to a run on the conduits of mortgage lenders where the mortgages were held until they were packaged into CDOs (and a collapse of a few mortgage lenders). That run was started by the warehouse lenders (the professionals).
Next, the run spread to the SIVs of those very same investment banks. That lead to a run on conduits/SIVs and ABCP market in general.
The "Super-SIV" was supposed to stop the run there.
Now, we have a run on the ARS/VRDO market. The Banks were going to buy up big stakes in the mono-lines (remember that plan) to stop the run there. Now, Buffett is going to insure everything and save the day.
If we don't stop there...
The next stop would be a run on leveraged, closed end mutual funds. A forced de-leveraging of these funds would lead to higher long term bond rates and sharply lower equity prices.
Most likely, the run would stop there. There are 2-3 dollars of capital in every leveraged closed end fund for every dollar borrowed (could survive a 50-66% decline in the value of their holdings).
The next stop in the shadow banking system would be money market funds breaking the buck.
If Spitzer wishes to restore any semblance of confidence, he should back his statements, this cannot drag out any longer, the crisis of confidence is in full swing.
Why is the muni market affected by downgrades ? This isn't an intrinsic failure in the muni market - only a problem with the insurance companies. How does the financial stability of the insurance companies influence the muni market ? Pointers also would def be appreciated.
Before we even consider bailouts, banks should be forced to eliminate their dividends, put in HARD salary caps of say $250,000 for all employees (i.e. no deferred comp, no options, no bonuses) and the gov't should get a boatload of warrents on the common (sort of like it did with the Chysler bailout of a few decades ago, the govt actually made money on that deal).
I hope that Spitzer's ultimatum holds, and that we get real movement -- downgrade the whole or split off then downgrade the CDO/MBS remnant -- one way or the other.
(Sigh) O.K. The muni's are wrapped in insurance so that they receive the highest investment grades. This does two things:
Lowers the cost of borrowing.
Allows them to be purchased by entities that have stringent rules regarding the types of paper they can hold.
A downgrade of the insurer = down grade of insured bonds. PERIOD. Muni's default...especially at the end of booms in high growth areas.
So now, those funds that have the rules stated above are required to cover, insure, or liquidate depending on the rules.
To whomever said they just change the rules...they can't. They would be sued by the investors. The rules make up the contract to the fund's investors. Investors invested because of the rules.
There is a duration mismatch between the demand for munis and the supply.
Most of the demand for munis is driven by high income households who are looking to shield income from taxes. Since incomes and tax laws can change from year to year there is a lot of demand for short term muni's (1 year or less).
Most of the supply is driven by long term infrastructure projects (30 years). In the past, this made the yield curve for muni's very steep.
Banks and hedge funds found ways to take advantage of the steep curve by chopping up longer term securities into short term securities. They did this by wrapping an insurance wrapper around them which made them fungible and setting rates via auction. It didn't really matter which bonds you held because the yields and risk were all the same.
Hmmmm.... Fungible, pays interest, short term, looks like money!
The problems started when the monolines started having problems. Then all of a sudden the securities stopped being uniform (What do you mean I'm holding Las Vegas MonoRail bonds!). People who thought they were holding short term paper found themselves holding long term investments.
Moody's comment re. MBIA and Ambac being better positioned compared to FGIC, makes me think they might be signaling "more analysis is necessary" and will affirm ratings - or some variant of that BS.
Any opinions? Why would the agencies actually do the downgrade? Since everyone that's paid (or will pay) for the ratings have it in their best interests for the downrade not to occur? Weird!
Screw this, I am starting a bank tomorrow and anyone who wants to put their depoists in it can clearly see where the money will be invested at anytime. Local investments with addresses and names so if promises get broken so do legs if required. No damn FDIC or government intravention required, just a couple hired on Hells Angels to keep accounting in order.
--
"Part of the problem is no one knows how large the losses will be."
You mean no one who doesn't want to know "knows how large the losses will be?"
According to one estimate, the US household debt would have to be reduced by $1.9-3.5Tr for the debt payments as a % of household income to reach the historical norm. That assumes no severe recession or depression.
Therefore, household defaults would total anywhere from $1.5-5.0Tr depending upon the economy during 2008-10. Born-and-bred dopes, aka American People, will foot most of the bill, temporarily, until the Grand Leader (Gross Fuehrer) is elected who will disavow the debt created by banking Crooks whom he will nail to the cross in large numbers. Yup, bad times are coming because known Crooks were allowed free reign and they still do.
Someone with structured finance experience (cough, cough ... Nemo Misean CR!) please answer - How would Spitzer's breakup of MBI or Ambac work?
It's clear that the muni bond insurance part of their businesses is still healthy, but all the toxic CDO/MBS sludge is not. Can the government "seize" a public company and force them to broken up into pieces? I know that there is certainly precedence for this with AT&T and anti-trust laws, but this is another matter.
And the $10000 question, what does it mean for the shareholders? Obviously the "bad" part of the company that is spun off would be instantly bankrupt.
"Kimball Hill mulls Chapter 11
BY ALBY GALLUN (Crains) Struggling homebuilder Kimball Hill Inc. is considering filing for Chapter 11 bankruptcy protection as it tries to renegotiate a $500-million loan agreement with its banks."
I completely agree Nemo...Maybe Micron can get a bailout because memory prices are so low. Too big to fail should never be accommodated. My comments the other day...
With over $3T in money market accounts, it's a matter of price. The immediate problem is that we can't discover the price for many instruments. I'm interested in mortgage debt at 30 cents. These pukes don't want to take the hit. So we have to dance around until reality sets in and everyone accepts it. Mark the crap down until it moves! Money is lost. Get over it...why we collectively put up with this nonsense is crazy. Manufacturing and retail can't get away with this.
Lesson learned - Any market of significant size should trade on an exchange.
A random monoline thought.
Suppose that the feds or the insurance regulators step in and split up the monolines into muni and non muni entities. since they really don't give a hoot about the CDO side of the business suppose they divvy up the cash to way favor the muni side. The CDO side goes bust but that just hammers the banks, the shareholders of the monolines do really well because they basically just jetisoned the crap, while holding on to all the capital and the good business.
Wonder if this scenario has occurred to Ackman and co. Were I short it might give me the willies.
david_in_ct writes:
A random monoline thought.
Suppose that the feds or the insurance regulators step in and split up the monolines into muni and non muni entities. since they really don't give a hoot about the CDO side of the business suppose they divvy up the cash to way favor the muni side.
And the fed takes care of the banks. Everyone wins!
"It's clear that the muni bond insurance part of their businesses is still healthy,"
Actually, no it's not. Which is why Buffet asked for a premium. Much is good...now, but without insurance, some is sketchy. Think...Phoenix out lying infrastructure for empty subdivisions.
"Can the government "seize" a public company and force them to broken up into pieces?"
I am no expert, hell I'm no amateur on NY Insurance regulation law. Gary might have a better take, however as rich is fond to point out, Ambak is a Wisconsin company.
"I know that there is certainly precedence for this with AT&T and anti-trust laws, but this is another matter."
The point after "but" is controlling.
"Obviously the "bad" part of the company that is spun off would be instantly bankrupt."
Under the Spitzer plan...yes.
Under the Buffet plan, they'd be able to continue for a bit as zombies.
Without researching HEAVILY NY Insurance laws, and the specifics of monoline regulation, I have as much idea as the next guesser.
Like I said, I have an understanding of this crud conceptually, but nitty gritty like this is beyond my knowledge.
Perhaps Gary, or some of the other lawyers on the board could offer a legal analysis of this. Once that's settled then a fallout might be forecasted.
My gut guess is that Spitzer has ammo in his gun, or he wouldn't have said it so confidently. Five day timetable may be grand standing, to at least get the parties to the table. So I suspect at the end of the day this is a political hammer being dropped to get the players to the table to do some negotiating.
Like I posted earlier, everybody is standing around hands twitching to grab their gun, but not knowing whom to shoot if they do.
In a depression to whom will the next US President go to, or listen to, during the deepening banking and credit crisis?
Bankrupters and Fraudsters of New York City (BFNYC)! The same Crooks that created the problem!! And what sort of advice, or solution, are they likely to propose?
As someone said: We are screwed! And to that I say: There are consequences to being born-and-bred dopes. Crooks knew what they were doing. Only a dope thinks that they didnt know what was to come. They were simply taking the game as far as they could because it wasnt their money at stake. There has never been as crooked a system as BFNYC were able to create. And it was meant to take America DOWN.
CENTRAL SCRUTINIZER: "It's clear that the muni bond insurance part of their businesses is still healthy, but all the toxic CDO/MBS sludge is not. Can the government "seize" a public company and force them to broken up into pieces? I know that there is certainly precedence for this with AT&T and anti-trust laws, but this is another matter."
I'm not a legal expert but I suspect the regulator can't break up the monolines unless they default on their claims or go below the statutory capital requirement. However, the government being what it is, can possibly pass new legislation or use some loophole to force something (maybe claim that structured products were "illegal" or "different" or something). I'm not sure if that will hold up in a court of law but the companies will be bankrupt long before any verdict is reached.
As for the difficulty of breaking them up, it probably isn't hard. Most of the monolines use different subsidiaries to handle the muni bond business and the structured product business as far as I know. The difficulty is figuring out how to divide up the claims-paying resource. Ambac and MBIA have around $15 billion in claims paying resources and how do you divide that up? I'm also not sure what happens to the shareholders. Since the muni bond business has sizeable positive value, I guess it would be spun off as a divesture of some sort. The structured side will go into run-off or bankrupty right away (it won't have enough capital). And the international operations, which are generally seperate subsidiaries, will also have to be spun off.
I personally don't think it will happen but I suspect we are in unchartered territory here. I doubt many of the bureaucrats and politicians, not mention the media, understand what is going on... There is so much misunderstanding, not to mention disinformation (from the shorts), that very few know what is going on. For example, breaking up the monolines is not going to have much impact on the markets. The RMBS securities will still cause problems, and the muni side will still have the same problems now. The reason muni bond is running into problems (like those auction failures) is not because of the risk with the monolines per se, but because no one wants to pay a higher fee. Buffett has said that he will wrap almost any muni bond for up to 2% premium but no one wants to pay that. If the monolines underpriced the muni bonds (it's certain that the RMBS insurance was underpriced) then muni bond costs will go up no matter what.
Typo... I mean to say 2x not 2%. If I understood what Buffett was saying, he will wrap almost any muni bond for 2x the original premium that the monolines charged. If someone doesn't want to sell a muni bond due to a monoline rating downgrade, they can buy extra insurance from Berkshire Hathaway Assurance. Clearly very few are willing to pay that price for the time being.
How would Spitzer's breakup of MBI or Ambac work?<
Set up a new entity. Take the unearned premium reserve for US public finance from MBI and Ambac. Put it into the new entity. Take assets equal to the unearned premium reserve into the the new entity. Take enough additional capital out of MBI and Ambac to make the new entity AAA.
The unearned premium reserve is the premium collected on muni insurance that is held based on a formula that amortizes over the life of the bond.
Buffett has already bid on this. He offered to do it for $3 billion or 1/2 of the unearned premium reserve.
He also offered to kick in an additional $5 billion of cash capital, putting the bonds back at AAA.
I don't see how any other plan that provides significantly less support for the muni business will be approved.
Dinello has quite a bit of authority. He will be stuck with the mess if they go insolvent. He wants the muni insureds to go to the head of the line instead of the back of the line. Dinello could just suspend the licenses of mbi and fgic pending resolution.
Buffett's offer was not only to do the reinsurance deal but also give the companies 30 days to find a better deal. That sounds fair to me. So they have 5 days plus another 30 if they go with Buffett.
Among other things, a headline from a couple of weeks ago -- when Fitch downgraded Ambac, they then had to go back and downgrade 70,000 muni issues. The amount of work for the rating agencies is enormous and it is no wonder that they don't want to get into this.
I asked you a question before but you didn't see my post (or I didn't see your answer). LEt me ask you something:
In a free market, a borrower decides whether to take on debt; similarly, a lender decides if they want to finance a borrower. How can you attack the lender (your word is "fraudster" and "crook") when in fact the borrower decided on their own to take on more debt?
If you were concerned about America, you may want to start educating the population on the downside of debt, instead of wasting time attacking Wall Street.
My gut guess is that Spitzer has ammo in his gun, or he wouldn't have said it so confidently.
My thoughts exactly.
Given that he's said it, he expects it to have an effect. Why state 5 days, too? That's drawing a line in the sand and daring someone to cross it. I could be wrong, but Spitzer doesn't strike me as the type to make empty threats. He'll lose a lot of credibility and/or stature if the 5 days pass with no action on his part.
Sivaraman Velauthapillai,
Don't try and talk sense into Jas when he's in a(nother) fit of outrage - of course the fault is all Wall Street's. Those smooth-talking shysters were forcing Joe and Jane 6-pack to lie on their mortgage apps and to stretch the truth on their ability and willingness to pay!
SC: "The best hedge in this case is to become a corporate litigation lawyer."
Out of this subprime mess... lawyers will probably end up making more money than investors or bankers will... there are already 5+ lawsuits against Ambac and MBIA... probably another dozen against Bear Stearns, Merril Lynch, et al.... likely going to be another dozen against the rating agencies... and all this is without the buyers of CDOs and CDO-squareds suing anyone that come in sight... you know lawyers are rolling in money when some hapless investor from the Middle East sues someone because his investment in a hedge fund lost money on CDOs
There is no way the monolines will accept that Buffett offer. That's a ridiculous offer and Buffett knows it (that's why he went public--he rarely discloses anything to do with his dealings)... the only party that will accept Buffett's offer is someone that is going into run-off or almost bankrupt... or if the government uses its strong-arm tactics.
You know the Buffett offer is ridiculous when Bill Ackman says it's a great deal
A lot of the muni bond problems have nothing to with the AAA rating. Check out those variable rate auction failures. How is Buffett's plan going to help that?
If someone really wanted AAA they can pay a higher price and wrap that bond again (with Berkshire Hathaway Assurance or Assured Guaranty or any other party). I'm sure there isn't a shortage of parties willing to wrap most of the muni bonds. The reason no one is proposing that--and why Buffett is likely saying what he is--is because no one wants to pay a higher premium.
Lastly, this will destroy the structured products side. Are you sure you want the collateral damage from that? Obviously Buffett, as well as others pushing his plan, don't care about anything other than muni bonds. But the damage from RMBS, CDOs, and CDO-squareds, can cause even more problems.
In any case, I suspect we are not going to agree since our interests diverge. My interest is in seeing Ambac and MBIA stay solvent; yours seems to be on trying to protect the muni bond side irrespective of what happens to the structured products...
Do the bond insurers comingle the premiun reserves with reserves from structured finance wraps? Is it clear whether the premiums are currently "cordoned off" from the rest of the wrapper's funds? Because, I seem to remember reading that muni insurance was paid up front and with all the losses going on in their SF businesses...
TJ & THE BEAR: "Well, Siv, we know you're talking your book! ;-)"
Hey, at least you have to give me credit for being transparent and having more "honour" than Bill Ackman... At least I don't write documents with doublespeak titled "how to save the bond insurers", when in fact it's all about how to bankrupt the bond insurers...
Did you catch the FRB Outstandings for CP posted today? Third week in a row of contraction in ABCP outstanding, and second week for total CP to contract...30 day spread at 48 bps.
Gov't would be all over a real system wide failure... and they would have to be.
dryfly | 02.14.08 - 7:13 pm
I hope they'd be more effective at it than they were in the system-wide failure of levees in NO. Don't forget what government you are talking about here, dryfly.
Can't help but think of Elliot Ness and the obviousness of the crime in question. Just wondering who's his Malone...
Malone: [stopping at a post office] Well, here we are. Ness: What are we doing here? Malone: Liquor raid. Ness: [looking at the police station across the street] Here? Malone: Mr. Ness, everybody knows where the booze is. The problem isn't finding it, the problem is who wants to cross the pond. Let's go.
The proposal is not unreasonable. It is profitable long term for Berkshire. If the mono's had looked long term, they would never have offered the insurance rates they did. Instead they said, well it's AAA so it's got to be good.
BTW, Bershire could still loose a good chunk of the $5B capital. Unlike what other posters believe, muni's are not fail safe.
Further, Berkshire is offering RE to the mono's. Not buy the book:
"We priced this proposed reinsurance cover to reflect the significant opportunity cost from our perspective in providing this type of bulk reinsurance cover. In the current market environment, we are able to command premium levels double (or higher) your client's prior rates to insure the risks that in addition have the benefit of your client's AAA insurance cover. Given our conservative use of capital (for example, the capital ratios in our monoline insurer would be higher than other insurers and would not be subject to reduction by dividends, fees, etc. for a minimum of ten years under the concept we presented to the Department), by offering this cover we forgo these direct opportunities to wrap already wrapped bonds. Despite this, there is an obvious appeal to a bulk transaction like this given the low overhead costs which would be involved."
Now, this allows an offloading of liabilities from the balance sheet. Which means that their capital position (short term) increases.
"From your perspective, I would respectfully suggest that this proposal would allow MBIA to release substantial capital from the municipal bond side of the house that can be deployed to support other obligations. I would submit that our proposal at the pricing levels we require is actually a cheap way for MBIA to raise capital as compared to other alternatives and is therefore of great benefit to MBIA's owners and their municipal bond policyholders."
This is considerably cheaper than ~14-20% cost the mono's have faced lately. Sure they're zombies, but it might give breathing room to get out. I'm not optomistic on this count, but Bershire's proposal is always a in times like this a kick the can down the road deal. Spitzer (and all other muni's) want this, because they don't care about the CDO's. Their money is in the muni's (Spitzer issues them). And at the end of the day, the Big Boys have more time before their B-Sheets implode.
Karl Denninger over at the Market Ticker noted that the massive amount of slosh added today could imply that a big bank is potentially in a lot of trouble. Coupled with the TSY action today (yields up when stocks are selling off is odd), it looks like there is in fact some funny stuff going on.
Do you have any opinion on the sloshing and whether this does in fact suggest something big and bad occuring?
MISEAN: "This is considerably cheaper than ~14-20% cost the mono's have faced lately. "
I think a small portion of the muni bonds can be unloaded if a lot of capital is raised. Wilbur Ross has indicated that he has offers with better economics than Buffett. In any case, the Buffett deal is just ridiculous. Buffett asking the monolines to PAY Berkshire while giving up the good stuff that rarely defaults (I disagree with your theory that muni bonds will default significantly--the rates will go up due to economic slowdown but nothing unexpected IMO). Buffett is asking for 1.5x the original premium that the monolines earned. Now, if this was some risky RMBS product, then ok. But when it is some of the safest stuff out there, this is just looting anyone desperate enough to accept.
Issuing equity or debt-like instrument, even at around 15%, can actually be more attractive than the Buffett deal in the long run. If you assume a normalized P/E of 5 (earnings of say $400million per year) for Ambac (that's a big IF given the future), that's an earnings yield of 20%. Even debt at 15% interest can be paid off easily (for $1 billion, that's $150m in interest).
I'm ok with giving up some of the crown jewels in order to save the kingdom, but the Buffett offer is lame.
Allen C, I'd wait longer than that. The dynasty potato farming family down the road from me got their start when the patriarch bought the huge farm for twenty gold dollars back in the 30's.
Let me repost some of my research I posted from yesterday...since you missed it:
"n 1988, a study by Enhance Reinsurance Co. looked at historical patterns of municipal defaults from the 1800s to the 1980s and concluded that municipal defaults usually follow downswings in business cycles and are also more likely to occur in high growth areas that borrow heavily."
OK so think of issues in bubble areas. Do I need to be more clear here?
"In 1999 Fitch Ratings published its first study of municipal defaults, which was updated in 2003.2 The latter study covered 2,339 cases of municipal defaults worth $32.8 billion between 1980 and 2002. It found that the cumulative default rate on bonds issued through 1986 (as they approached or reached maturity) was 1.5 percent, while the cumulative default rate on bonds issued between 1987 and 1994 was 0.63 percent. Municipal bonds issued on behalf of corporations or by municipal entities had a much higher overall default rate because of their exposure to corporate risks such as bankruptcy."
These defaults occurred during the longest bull run in history. Put the two together and extrapolate to the longest upcoming bear run in known statistics. Got cash?
Here's the link to the summary. I'm holding back on some more in depth data because it is proprietary.
"Analyst Mariana Bush of Wachovia Securities, a unit of Wachovia Corp. (WB), described how this happened in what was probably the first such recent failure. Last week, the auction for Nuveen Premium Income Municipal Fund 4 (NPT), a fund with $570 million in net assets, failed. In the case of the Nuveen fund, its preferred-share rate rose to 110% of the higher of the taxable equivalent of the Kenny S&P 30-day High Grade Index or a AA composite commercial-paper rate, two yield indexes. The yield rose to 4.356% a year. That rate was 1.33 percentage points higher than rates on some other Nuveen fund preferred shares that didn't reset that day."
So a "failed" auction resulted in the paper being rolled over at 4.3%.
Not a catastrophe for either side. Just not as liquid as people thought.
Yeah...which is why the dollar was down but the $/yen was up. Carry trade shite was weird today...because the market dropped. Not a good thing eh dunham.
Seems like a lot of funny stuff going on today....
I missed it, but some people over on the market ticker forum pointed out that the VIX dropped along with the market when the DOW dropped 50 points in a minute.
Add that to the slosh, the long TSY tanking, they carry trade weirdness and the overtly bearish testimonies today......well, I'm glad i'm not long going into the 3-day weekend. Of course, being short for most of this week has been painful too, so what do i know?
It is very, very large. They have also had a huge bid for leveraged loans. I'm talking myself into taking a short position here... if states revenues dry up they can't afford infrastructure... But seriously, big commercial real estate and big leveraged loan book.
OT,if you need to let the super-colander cool down and want to feel happy for a few hours here is a recipe i got from a neighbour today (he damn near ran near ran me down on the trail with his 3 WD Ural,and yes the MG42 was mounted).take 1/2 gallon cheap vodka,run it through your Brita filter 5x to remove harmful esters,and drink 1/2 pint to test it...add 1 pint finely chopped psylocibes,and 5 grams of fresh Bud,add a Vanilla bean for flavor and top off with everclear.reseal jug and store in a cool dark place for 2 weeks,strain out solids and use them to stuff a chicken.He told me a cup at lunchtime and one after dinner kept him happy and relaxed,and he sure looked it.
Tom Stone writes:
"OT,if you need to let the super-colander cool down and want to feel happy for a few hours here is a recipe i got from a neighbour today (he damn near ran near ran me down on the trail with his 3 WD Ural,and yes the MG42 was mounted).take 1/2 gallon cheap vodka,run it through your Brita filter 5x to remove harmful esters,and drink 1/2 pint to test it...add 1 pint finely chopped psylocibes,and 5 grams of fresh Bud,add a Vanilla bean for flavor and top off with everclear.reseal jug and store in a cool dark place for 2 weeks,strain out solids and use them to stuff a chicken.He told me a cup at lunchtime and one after dinner kept him happy and relaxed,and he sure looked it."
If I did so...The shrooms would do me in. I don't get paranoid on the stuff...I get silly. I'd be broke by the end of the trip.
dunham,
I wanted to move in with Karl when things get really bad because he is better prepared than most. However, I don't scuba dive, detest large wind chime collections and sun tanning in the nude on a Manduka yoga mat isn't really my thang. Things are worse than any of us know because they are not going to alarm the public for fear of bank runs.
Damn, GE is huge. No wonder they can't get the stock price to move. A huge hit to real estate wouldn' do too much unless same happened to leverage loans and residential credit...
Let me give you background on the muni auction rate problem. It is primarily due to bond insurance problems. Many uninsured bond issues are sitting there paying low interest rates and getting plenty of bids.
The primary ones which have problems are guaranteed by an insurer that has been downgraded. Sometimes, stupid things have been happening. For example, a AA rated issuer purchased bond insurance a few years ago. The insurer is recently downgraded. Now their bonds are trading at higher interest rates than very similar uninsured bonds with a AA underlying rating.
Why? In some cases it is stupidity and laziness. Many investors never opened an official statement. They just said "AAA Muni. Must be good". Then, it becomes a AA muni because of an insurer downgrade. It's still an extremely low risk because the public entity itself is AA and is doing fine. That AA entity could typically raise taxes if necessary to pay bond interest. The stupid and lazy people dump the auction rates, right when the rates are rising. If enough stupid and lazy people dump it at once, the rates can get downright silly, like 12-15% for tax exempt bonds that are rated A or better. Nothing like giving up high yields because you can't be bothered to do a bit of research on a security you already own.
There are some people who are forced to dump bonds when ratings deteriorate, either for regulatory reasons or because their mutual fund charter says "invests only in AAA rated munis" or something similar.
So why don't banks buy more of this paper? It has a pretty attractive yield. The problem is many banks have already bought a lot of it, and are becoming capital constrained. The other new sources of capital haven't rushed in with sufficient money yet.
Some of the people with a lot of money don't care about bonds being tax exempt, and have multibillion dollar portfolios with no munis. Pension funds and most endowments don't normally buy tax-exempt bonds. It takes a while for them to adjust to the thought and do the necessary analysis or policy changes to buy this stuff.
Many munis bought their bond insurance before the insurers had gone off the deep end with risky nonmuni business. They didn't bargain for this kind of trouble. I'll bet that in the future "monoline" will be a term taken more seriously. Like, munis will get it written into the insurers' corporate charters that they can't insure other types of debt or deals.
Some investor guy,
So what is your real conclusion? Are 15% yields good munis to buy or will the very fact that they have 15% yields cause their demise?
The problem for the municipal bond market is, I believe, linked to the insurance regulations. As we wrote in our last five corners, let us imagine an insurance company with three liquid portfolios.
The first one is its portfolio of government bonds (OECD), upon which there is no reserve requirement.
The second one is a portfolio of lower quality bonds, upon which the reserve requirements vary widely depending on the quality of the underlying bond (a AAA-bond will require very low reserves, while a BBB bond will require much higher reserves).
The third one is a portfolio of shares (equities), which, according to the new regulations, must support a reserve ratio of 100%).
Let us assume further that our insurance company is operating in a county where the corporate bond market is neither active, nor very deep. Our insurance company will then buy US or European corporate bonds, and will have them insured by a monoline insurer, sporting a AAA rating. As a result, reserves requirements for the bond portfolio will be very low, and our insurance company can indulge in a little more equities than previously justified by its existing portfolio of corporate bonds.
Let us further assume that our monoline insurer is either going bankrupt, or is on the verge of being downgraded by one of the agencies (Moodys, Fitch, etc ). In such a case, our poor insurance company will immediately face dramatically higher regulatory requirements on its capital. Faced with that scenario, the only solution will be for our hypothetical insurance company to aggressively sell the non- government bond market, including municipals and, of course, shares as fast as it can, transferring all the money to the government bond market, in order to be on the safe side.
I think it is this movement that explains the headlines as the one above.
This movement towards the government bond market will be even stronger if a fourth portfolio exists in the real estate sector. Indeed, if the liquidity problems are coming from the real estate sector, then our company will have every reason to maximize the risk-free part of its balance sheet, i.e. the government bond market.
The above chain of events has obviously been unfolding on a grand scale since the beginning of this year. The regulations applied to the insurance industry have created a monster, forcing insurance companies to sell when the market and liquidity are bad (and buy when markets and liquidity are good in order to keep up with their peers?). Today, insurance companies are forced into buying government bonds when they are hopelessly overvalued (see our latest Monthly Economic Review) and yielding less than 1.5% reala level not seen since 1987. It is unlikely that, in these days of accelerating inflation, investors are piling into bonds out of choice. Instead, they are simply forced to do so.
Obviously, the insurance companies regulations have been created by accountants and civil servants, who have little or no conception of what a liquidity crisis actually entails. The regulations have been put together with one objective in mind: solvency. And unfortunately, while a dedicated focus on solvency makes sense at the micro-economic level, it can be chaos-inducing on a macro scale.
To a certain extent, this situation reminds us of the UK a few years ago, when the UK pension funds, facing new regulations and new immunization practices, became forced sellers of equities (see Immunizing Liabilities? Dont!). In turn, this secured the fortunes and the growth of the private equity industry, which could scoop in and buy assets on the cheap. The same thing is now happening once again and quoted assets are on a fire-sale. Who will be the beneficiaries this time? Large foreign sovereign funds? The investing public? Companies buying back their own shares and bonds? Warren Buffett? At this point, this remains to be seen, but we find this regulation-based bear market will undoubtedly offer up some interesting opportunities.
Siv, IMOP, the monolines are toast. It is triage time. The muni lines of business probably can be saved. The structured products are probably terminally complex and cannot be saved.
Investors to money-market funds added $33.14 billion in the week ended Tuesday, bringing total net assets to $3.337 trillion, according to the Money Fund Report, published by iMoneyNet Inc.
Institutional investors contributed $29.69 billion, while individual, or "retail," investors added $3.44 billion.
Assets in taxable money funds rose by $31.02 billion to $2.844 trillion.
Too bad those money markets still have synthetic derivatives mixed in the punch bowl!
That WaPo link with the Spitzer editorial that FDIC linked up above is really worth a read.
It discusses the Federal Governments' fight against State regulators who were trying to do something about predatory lending back in '03.
Wouldn't it have been great if this madness had stopped in '03? Goodness knows it was already bad enough by then - which was of course why the States had taken notice.
It looks like the Federal government really ran roughshod over the States, too the detriment of us all.
Thanks all (Siv, Misean, etc.) who helpfully replied to my question.
My quick read is that no matter what happens, the CDO/MBS stuff is toast. They can break up the monolines, take the Buffett offer, or whatever, but the huge problem of near worthless CDO/MBS is still there. Kind of like Chernobyl. You cannot fix the mess, only hope to contain it.
It seems inevitable that the biggest losers may be the investment banks holding the toxic sludge ... MER, Citi, LEH ... or your grand-ma-ma's pension fund. Someone is going to have to eat it.
--
Sivaram Velauthapillai: Jas, I asked you a question before but you didn't see my post (or I didn't see your answer). LEt me ask you something: In a free market, a borrower decides whether to take on debt; similarly, a lender decides if they want to finance a borrower. How can you attack the lender (your word is "fraudster" and "crook") when in fact the borrower decided on their own to take on more debt?
Hello, Sivaram,
Regrettably, you have been brainwashed about the free markets system. Without ethics a free market system turns into a free fraud system. WHEN A LENDER IS NOT LENDING HIS, OR HER, MONEY HE, OR SHE, IS COMMITTING FRAUD, OR HAS THE LICENSE TO COMMIT FRAUD. Got it?
Do you doubt that Wall Street constantly misleads the public to push Scams? Do you not agree that Bankrupters and Fraudsters constructed Debt Concentration Camps by Pushing Debt on homes? Most importantly, do you have the ability to distinguish between proper lending and Pushing Debt? See what I mean, without ethics a free market system was turned into a free fraud system.
Hey, a$$h*le Jas Jain's therapist, dont you have anything better in your life ? I thought so. It is one to deal with born-and-bred dopes, but quite another to deal with pathetic people like you.
I don't know. Maybe we need to let a couple of banks fail. It sure would be a wakeup to the others who want to make bad business decisions. If a normal consumer makes poor decisions they usually face the piper. Not so sure about corporate welfare.
I hope they'd be more effective at it than they were in the system-wide failure of levees in NO. Don't forget what government you are talking about here, dryfly. rc helicopter Tactical Flashlights video game
Wow, some funds are already giving this stuff back without the downgrades!
So, let me take a shot...his solution to the problem is a bailout? Am I a winner?
OK, so the banks need a bailout? Is that what he's implying? Because it's easier to deal with the muni bond insurance problem (read Buffett for example) than resolving the other CDO mess.
FDIC insurance isn't going to go very far this time around. Thank God for tax payers. FDIC employees in the field (not DC)are already working 11-12 hour days seven days per week.
Though it seems spooky, very, very few institutional funds will sell muni bonds because of an insurer downgrade. It is far simpler for them to ammend their rules.
In most industries, if the established players mismanage their businesses and are unable to provide goods and services, new companies spring up to compete with them almost instantly.
I mean, nobody would seriously suggest a "grocery store bail-out" or "package delivery bail-out" or "semiconductor manufacturer bail-out", no matter what was happening to Albertson's or FedEx or Intel. Even in the worst case, some competitor would arise to fill the gap. This is kind of the whole point of capitalism.
So if our banks have screwed themselves to the point where they are unable or unwilling to perform their primary function (extending credit), why is that a crisis? Can't we just get new banks?
Half-serious question.
The bank capital ratio arguement is a farce. So is the notion that our economy will grind to a halt if banks aren't bailed out.
Capital IS available. Its just not available at stupid low rates to suspect entities.
In the last three years, the top 5 U.S. investment banks paid over $100 billion in bonuses. It appears much of the bonuses were paid on ficticious and unsustainable profits.
Where is the outrage?
If banks are deserving of capital, their own employees could certainly re-invest in their own futures and jobs. Why haven't they?
Citi, BAC, UBS, Merrill, Bear, Morgan Stanley, et al have all tapped foreign capital at rates over 10% with seniority and convertability. These are junk type rates for capital and for good reason.
It has to take all of mp's superhuman strength to prevent conjure bag from moving the minute hand on the clock of financial doom! I wonder if Oliver Stone or that crazy documentary guy will do the cinema version first? WallStreet redux, but this time going down en fuego.
Michael Moore I meant (and Mike, I meant a good type of crazy).
FFDIC,
You scare the bejeezus out of me.
Two words...
CHINA SYNDROME
-- Hiding Out
"So if our banks have screwed themselves to the point where they are unable or unwilling to perform their primary function (extending credit), why is that a crisis? Can't we just get new banks?"
It's a crisis in a fascist society. The big boys have their private laws, and one of them is that nobody loses money or position in the long run. Why, when you've got the plebes to foot the bill?
Off topic, but I have to share this with all of you. Driving to the gym after the market close, I was listening to sports radio. The first commercial I heard was for 1-888-76Short [or something like that]---of course, that is a specialist in helping people with short sales of their homes.
That was interesting enough. But Then, the very next ad was for a consumer debt firm offering advice on how to discharge your credit card debt at way less than the balance!
A lot of asset destruction in under two minutes....
If guarantors are downgraded to below AA-, many money funds will be required to put tender option bonds and variable demand obligations back to the liquidity providers
Isn't this what happened to FGIC today?
AMBAC CEO just called the mortgage market a "pig in a python" before a House FinServ Subcommittee!
Hoo-Pig-Soo-ey!
the Mortgage Pig appears!!!
in the python!!!
Feb 13:
Bank of America Corp. estimated in a report that 80 percent of all auctions of bonds sold by cities, hospitals and student loan agencies were unsuccessful yesterday. That may mean as much as $20 billion of bonds failed to find buyers, based on the $15 billion to $25 billion of auction-rate bonds scheduled for bidding daily, according to Alex Roever, a JPMorgan Chase & Co. fixed income analyst
UBS (UBS), the second-biggest underwriter of auction-rate securities, will no longer buy deals that fail to attract enough bidders, joining a growing number of dealers stepping back from that $300 billion market
No deals were done in the Closed End Muni Funds. Among issuers with failed auctions are Van Kampen, Eaton Vance, Black Rock, Nuveen, Alliance Bernstein, MFS, Morgan Stanley, Western Asset Mgmt., and Drefyus. In the direct Municipal area, there were many failures as well. Issuers such as State of New York G.O., NY State Thruway, New Jersey Turnpike, City of San Mateo, CA and Alaska Housing Authority failed as well
The reason for the failures is that the broker dealer refused to put up their own capital to complete the auction
quotes fom Mish
Mish's Global etc.
and, from another source interest rate on some smaller deals approached 20.27%
AMBAC CEO - "We made a mistake. We thought if we had mortgages in CA and mortgages in Maine they wouldn't both go down together."
So if our banks have screwed themselves to the point where they are unable or unwilling to perform their primary function (extending credit), why is that a crisis? Can't we just get new banks?
Its a closer analogy to a power or water utility. Can we let the water or power company shut down while we sort out who the new owners will be & the terms of the reorganization?
So the answer from a societal level is 'no - we can't let the banking SYSTEM fail'...
The banking system is a fiat money utility. Owning physical metal is analogous to running 'off the grid'. IMHO anyway.
The same bogus and hollow bailout arguements could be made regarding the homebuilding industry, the auto industry, the textile industry, etc.
In all of the above industries, a government bailout would stimulate the economy and save jobs. It would also actually result in the production of REAL products. But as the bankers have always said, its better to let the market correct on its own.
NO BAILOUTS ARE REQUIRED.
No bailout, just a split between the traditional muni insuring and the CDO disaster, which is going to whack the banks but save the muni market.
Can someone tell me how the holding companies are going to be worth anything?
NO BAILOUTS ARE REQUIRED.
Angry Saver | 02.14.08 - 7:07 pm | #
If banks fail there won't be a bail out - it will be a 'take over'. I absolutely can guarantee it.
Like I said we'd have it easier if the power companies turned the lights off than if the banks really failed.
Gov't would be all over a real system wide failure... and they would have to be.
Regulate to Ratings?
At the same hearing New York State Superintendent of Insurance Eric Dinallo outlined a plans to regulate insurers to their ability to maintain a AAA rating (not solvency).
Oddly, it could result in an obtuse reliance on credit rating agency models by government regulators.
Surely no one can protect the insurance system better than the credit rating agencie? right?
Slight-ly OT
And there's a small but real risk that the tank could rupture, releasing a "toxic gas" over a "populated area," causing a "risk to human life."
a satellite is going to enter the atmosphere and make a crater like wily-coyote....and there's only a small risk that the tank ruptures...
This is straight out of them Sub-prime speak..all contained.
-angencie
+angencies
Next chapter of the walk away saga...
FT.com / In depth - Big deals under threat over bank losses
Banks advised to walk away from big deals
By Henny Sender in New York
Published: February 14 2008 22:03 | Last updated: February 14 2008 22:03
Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.
This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.
...
It is the tipping point argument, said a senior partner at one of the biggest private equity firms, who asked not to be named. The banks have so many issues with their balance sheets that they are considering a new policy.
However, such a radical shift could have a dramatic impact on the markets. The presence of private-equity buyers is one factor that has helped boost stock prices.
If you want to come up with news that could make the Dow drop another 500 or 1,000 points, this would be it, says one lawyer specialising in private equity issues for a major New York law firm. But desperate times call for desperate measures.
Granted, there's a cancer in the banking industry, but isn't there a few good institutions out there that can step up? Even as cynical as I am, I've got to believe there's a few good bankers out there.
Instead of bailing anyone out, simply escort the bad ones out and help the good ones pick up the pieces. Sort of "Buffet and the monolines" writ large.
"I've got to believe there's a few good bankers out there."
Sure. Hank Paulson. A hell of a guy.
The most important statement today was from Spitzer placing a timetable on this fiasco. Basically, shit or get off of the pot, cause the municipalities aren't going to suffer continuous pain cause you morons went off the deep-end on the greed train.
Overview on how trouble in the ARS market is causing issues for closed-end-mutual funds.
If the run doesn't stop here, next stop is plain vanilla money market funds.
Problems with these securities could lower the returns to investors from these closed-end funds, either because the funds' borrowing costs rise or, in an extreme scenario, the funds have to de-leverage and sell some of the securities they hold.
CNNMoney.com: 404 Page Not Found
From the hearing today: I expect a regulatory imposed split between the traditional muni insurance businesses and the CDO "bad bank" which will restore the muni market. Buffet will come to dominate the muni side in time (expect GE Capital to enter soon) but trustees will re-write guidelines for munis to be Aa3 and above. The CDO insurance will be worth nothing soon causing more write-downs at the banks, a few of which may need a little more capital. The muni sides of MBIA at Aa2 and Ambac at Aa3. The CDO sides at Ba2 for both.
Instead of bailing anyone out, simply escort the bad ones out and help the good ones pick up the pieces. Sort of "Buffet and the monolines" writ large.
I think they are so tangled up it will be hard. The good are likely to go down with the bad.
I mean have the monolines turned over the muni accounts to Buffet or are they continuing to hang on to their hostages in hope it confers TBTF status? I see the banks trying to pull the same kind of stand off.
Bernanke wrote a long and boring book about the causes of the great depression. His conclusions prove he can't see the forest through the trees.
It reall very simple, the great depression was caused by GREED.
How long can the agencies hold off on downgrades? Wouldn't any sentient being have done it weeks ago?
dryfly,
That's where the government might serve a useful purpose -- sorting that mess out.
SC-
sooner the better.
http://www.ft.com/home/us
Monolines given five days to find funds
Eliot Spitzer, New York governor, gave bond insurers three to five business days to find fresh capital, or face a potential break-up by state regulators who want to safeguard the municipal bond
The thing to keep in mind when looking at this whole mess is that the fundamental problem is that the underlying loans in these securities are performing badly.
The only remaining question is: Who is the biggest bagholder? The monolines? The banks? Or both? With the ever-increasing deterioration in the housing markets, a la today's reports on the California market from DataQuick, every month that passes will see a corresponding deterioration in the performance of the RBMS. CDO and CDS deterioration flows from there.
By June, we should really see the stress cracks open up into gargantuan fissures.
Owning physical metal is analogous to running 'off the grid'. IMHO anyway
ZPE more like
"... downgrades [of bond insurers] might adversely affect financial stability through several channels."
MIGHT?!?!?
"If guarantors are downgraded to below AA-, many money funds will be required to put tender option bonds and variable demand obligations back to the liquidity providers."
Been blowing that horn since July.
These things are already downgraded vis a vis the cost of borrowing over the last several months. The rating is a legal technicality to stave off quote 2, no more no less.
There's nothing to bail, just a huge mess of carnage to clean up. These firms are already zombies.
I keep seeing this scene over and over, only in my mind Blondie doesn't know whose gun is empty.
YouTube - The Good The Bad and the Ugly Finale
Cheers,
At the risk of echoing JJ, "Banks" aren't the problem, the "Bankers" are.
Risk Capital,
I was very surprised by Spitzer's statement, especially after the pablum served up by New York Insurance Commissioner, Eric Dinallo on CNBC this morning. S&P and Moody's should have downgrades MBIA and Ambac weeks ago. If the losses on the CDS portion of their portfolio were fixable with a capital infusion, the cloud around them would have lifted by now.
Spitzer forcing the issue may result in the rapid split-off of the muni insurance business. I'm sure the insurance holding companies go to zero in a blink if this happens.
No bailouts for anyone.
None.
Nada.
Zip.
Zilch.
We can't afford it - we're broke.
Suck.
It.
Up.
Granted, there's a cancer in the banking industry, but isn't there a few good institutions out there that can step up? Even as cynical as I am, I've got to believe there's a few good bankers out there.
Currently, there isn't enough capital in the world for the banks to absorb a complete run on the shadown banking system (money that isn't money).
Let's see, as I remember it...
The CDO market collapsed which lead to a run on the conduits of mortgage lenders where the mortgages were held until they were packaged into CDOs (and a collapse of a few mortgage lenders). That run was started by the warehouse lenders (the professionals).
Next, the run spread to the SIVs of those very same investment banks. That lead to a run on conduits/SIVs and ABCP market in general.
The "Super-SIV" was supposed to stop the run there.
Now, we have a run on the ARS/VRDO market. The Banks were going to buy up big stakes in the mono-lines (remember that plan) to stop the run there. Now, Buffett is going to insure everything and save the day.
If we don't stop there...
The next stop would be a run on leveraged, closed end mutual funds. A forced de-leveraging of these funds would lead to higher long term bond rates and sharply lower equity prices.
Most likely, the run would stop there. There are 2-3 dollars of capital in every leveraged closed end fund for every dollar borrowed (could survive a 50-66% decline in the value of their holdings).
The next stop in the shadow banking system would be money market funds breaking the buck.
If Spitzer wishes to restore any semblance of confidence, he should back his statements, this cannot drag out any longer, the crisis of confidence is in full swing.
Time for them to clean house.
on another note, Fitch was busy-
Fitch cuts ratings on $11.3 bln Morgan Stanley deals
| Reuters
News
Why is the muni market affected by downgrades ? This isn't an intrinsic failure in the muni market - only a problem with the insurance companies. How does the financial stability of the insurance companies influence the muni market ? Pointers also would def be appreciated.
Regards.
Before we even consider bailouts, banks should be forced to eliminate their dividends, put in HARD salary caps of say $250,000 for all employees (i.e. no deferred comp, no options, no bonuses) and the gov't should get a boatload of warrents on the common (sort of like it did with the Chysler bailout of a few decades ago, the govt actually made money on that deal).
Kicker,
"We can't afford it - we're broke."
Exactly. The gov't is cash flow -$9T.
But even more fundementally, if the public could afford a bail out, we wouldn't need a bail out.
Where's the money going to come from...monetized t-bills? What's the roaring sound? A tsunami of FCB's making a run on the bank!
Kicker,
Nice run down.
Cheers,
Nice excerpting, CR; thanks.
I hope that Spitzer's ultimatum holds, and that we get real movement -- downgrade the whole or split off then downgrade the CDO/MBS remnant -- one way or the other.
Vikram,
"Why is the muni market affected by downgrades ?"
(Sigh) O.K. The muni's are wrapped in insurance so that they receive the highest investment grades. This does two things:
Lowers the cost of borrowing.
Allows them to be purchased by entities that have stringent rules regarding the types of paper they can hold.
A downgrade of the insurer = down grade of insured bonds. PERIOD. Muni's default...especially at the end of booms in high growth areas.
So now, those funds that have the rules stated above are required to cover, insure, or liquidate depending on the rules.
To whomever said they just change the rules...they can't. They would be sued by the investors. The rules make up the contract to the fund's investors. Investors invested because of the rules.
Cheers,
18 months ago, top BK firms started staffing up....
hookuttanode
Why is the muni market affected by
downgrades?
There is a duration mismatch between the demand for munis and the supply.
Most of the demand for munis is driven by high income households who are looking to shield income from taxes. Since incomes and tax laws can change from year to year there is a lot of demand for short term muni's (1 year or less).
Most of the supply is driven by long term infrastructure projects (30 years). In the past, this made the yield curve for muni's very steep.
Banks and hedge funds found ways to take advantage of the steep curve by chopping up longer term securities into short term securities. They did this by wrapping an insurance wrapper around them which made them fungible and setting rates via auction. It didn't really matter which bonds you held because the yields and risk were all the same.
Hmmmm.... Fungible, pays interest, short term, looks like money!
The problems started when the monolines started having problems. Then all of a sudden the securities stopped being uniform (What do you mean I'm holding Las Vegas MonoRail bonds!). People who thought they were holding short term paper found themselves holding long term investments.
More money that isn't money...
Kicker,
Thanks for the review. Very timely and useful.
Moody's comment re. MBIA and Ambac being better positioned compared to FGIC, makes me think they might be signaling "more analysis is necessary" and will affirm ratings - or some variant of that BS.
Any opinions? Why would the agencies actually do the downgrade? Since everyone that's paid (or will pay) for the ratings have it in their best interests for the downrade not to occur? Weird!
Screw this, I am starting a bank tomorrow and anyone who wants to put their depoists in it can clearly see where the money will be invested at anytime. Local investments with addresses and names so if promises get broken so do legs if required. No damn FDIC or government intravention required, just a couple hired on Hells Angels to keep accounting in order.
Kicker | 02.14.08 - 8:21 pm |
I'll second...
I need to get misean to send me a tin foil hat/colander so I can make the bad dreams about all the structured finance go away...
Heck,I spent 15 minutes in the break room yesterday just explaining recourse vs non recourse(we have people in real trouble).
My head hurts...
Chris
Cobra,
The FDA said I can't do it as they've labeled it a medical device.
However, today, the amount of juice this things been soaking up has lead to sparking, ionization, and quite a lot of heat.
Not that I'm thinking of taking it off outside of the bunker...but...it can be uncomfortable.
Cheers,
--
"Part of the problem is no one knows how large the losses will be."
You mean no one who doesn't want to know "knows how large the losses will be?"
According to one estimate, the US household debt would have to be reduced by $1.9-3.5Tr for the debt payments as a % of household income to reach the historical norm. That assumes no severe recession or depression.
Therefore, household defaults would total anywhere from $1.5-5.0Tr depending upon the economy during 2008-10. Born-and-bred dopes, aka American People, will foot most of the bill, temporarily, until the Grand Leader (Gross Fuehrer) is elected who will disavow the debt created by banking Crooks whom he will nail to the cross in large numbers. Yup, bad times are coming because known Crooks were allowed free reign and they still do.
It Is the Debt, Stupid!
Jas
Enjoy this.
Paper Economy - A Real Estate Bubble Blog
Someone with structured finance experience (cough, cough ... Nemo Misean CR!) please answer - How would Spitzer's breakup of MBI or Ambac work?
It's clear that the muni bond insurance part of their businesses is still healthy, but all the toxic CDO/MBS sludge is not. Can the government "seize" a public company and force them to broken up into pieces? I know that there is certainly precedence for this with AT&T and anti-trust laws, but this is another matter.
And the $10000 question, what does it mean for the shareholders? Obviously the "bad" part of the company that is spun off would be instantly bankrupt.
wawawa,
Thanks for the link. Got to the point where the guy debating Ruobini was saying that sales were up and clicked off. Sales were not.
Cheers,
8:41 PM ET, Feb 14, 2008 - 2 minutes ago
"Kimball Hill mulls Chapter 11
BY ALBY GALLUN (Crains) Struggling homebuilder Kimball Hill Inc. is considering filing for Chapter 11 bankruptcy protection as it tries to renegotiate a $500-million loan agreement with its banks."
Kimball Hill mulls Chapter 11 | Crain's Chicago Business
I completely agree Nemo...Maybe Micron can get a bailout because memory prices are so low. Too big to fail should never be accommodated. My comments the other day...
With over $3T in money market accounts, it's a matter of price. The immediate problem is that we can't discover the price for many instruments. I'm interested in mortgage debt at 30 cents. These pukes don't want to take the hit. So we have to dance around until reality sets in and everyone accepts it. Mark the crap down until it moves! Money is lost. Get over it...why we collectively put up with this nonsense is crazy. Manufacturing and retail can't get away with this.
Lesson learned - Any market of significant size should trade on an exchange.
A random monoline thought.
Suppose that the feds or the insurance regulators step in and split up the monolines into muni and non muni entities. since they really don't give a hoot about the CDO side of the business suppose they divvy up the cash to way favor the muni side. The CDO side goes bust but that just hammers the banks, the shareholders of the monolines do really well because they basically just jetisoned the crap, while holding on to all the capital and the good business.
Wonder if this scenario has occurred to Ackman and co. Were I short it might give me the willies.
david_in_ct writes:
A random monoline thought.
Suppose that the feds or the insurance regulators step in and split up the monolines into muni and non muni entities. since they really don't give a hoot about the CDO side of the business suppose they divvy up the cash to way favor the muni side.
And the fed takes care of the banks. Everyone wins!
I trust that everyone is hoping for the best and preparing for the worst.
Surely, there's a requirement to liquidate regardless of the rating if contemporary information is more accurate.
CR-
Greenspan warns U.S. economy near recession - MarketWatch
central_scrutinizer,
"It's clear that the muni bond insurance part of their businesses is still healthy,"
Actually, no it's not. Which is why Buffet asked for a premium. Much is good...now, but without insurance, some is sketchy. Think...Phoenix out lying infrastructure for empty subdivisions.
"Can the government "seize" a public company and force them to broken up into pieces?"
I am no expert, hell I'm no amateur on NY Insurance regulation law. Gary might have a better take, however as rich is fond to point out, Ambak is a Wisconsin company.
"I know that there is certainly precedence for this with AT&T and anti-trust laws, but this is another matter."
The point after "but" is controlling.
"Obviously the "bad" part of the company that is spun off would be instantly bankrupt."
Under the Spitzer plan...yes.
Under the Buffet plan, they'd be able to continue for a bit as zombies.
Without researching HEAVILY NY Insurance laws, and the specifics of monoline regulation, I have as much idea as the next guesser.
Like I said, I have an understanding of this crud conceptually, but nitty gritty like this is beyond my knowledge.
Perhaps Gary, or some of the other lawyers on the board could offer a legal analysis of this. Once that's settled then a fallout might be forecasted.
My gut guess is that Spitzer has ammo in his gun, or he wouldn't have said it so confidently. Five day timetable may be grand standing, to at least get the parties to the table. So I suspect at the end of the day this is a political hammer being dropped to get the players to the table to do some negotiating.
Like I posted earlier, everybody is standing around hands twitching to grab their gun, but not knowing whom to shoot if they do.
Cheers,
Misean-
It's a long weekend, time for them to meet Jesus.
--
A sober thought for Americas taxpayers
In a depression to whom will the next US President go to, or listen to, during the deepening banking and credit crisis?
Bankrupters and Fraudsters of New York City (BFNYC)! The same Crooks that created the problem!! And what sort of advice, or solution, are they likely to propose?
As someone said: We are screwed! And to that I say: There are consequences to being born-and-bred dopes. Crooks knew what they were doing. Only a dope thinks that they didnt know what was to come. They were simply taking the game as far as they could because it wasnt their money at stake. There has never been as crooked a system as BFNYC were able to create. And it was meant to take America DOWN.
Jas
The best hedge in this case is to become a corporate litigation lawyer.
(disclosure: Ambac shareholder so may be biased
)
CENTRAL SCRUTINIZER: "It's clear that the muni bond insurance part of their businesses is still healthy, but all the toxic CDO/MBS sludge is not. Can the government "seize" a public company and force them to broken up into pieces? I know that there is certainly precedence for this with AT&T and anti-trust laws, but this is another matter."
I'm not a legal expert but I suspect the regulator can't break up the monolines unless they default on their claims or go below the statutory capital requirement. However, the government being what it is, can possibly pass new legislation or use some loophole to force something (maybe claim that structured products were "illegal" or "different" or something). I'm not sure if that will hold up in a court of law but the companies will be bankrupt long before any verdict is reached.
As for the difficulty of breaking them up, it probably isn't hard. Most of the monolines use different subsidiaries to handle the muni bond business and the structured product business as far as I know. The difficulty is figuring out how to divide up the claims-paying resource. Ambac and MBIA have around $15 billion in claims paying resources and how do you divide that up? I'm also not sure what happens to the shareholders. Since the muni bond business has sizeable positive value, I guess it would be spun off as a divesture of some sort. The structured side will go into run-off or bankrupty right away (it won't have enough capital). And the international operations, which are generally seperate subsidiaries, will also have to be spun off.
I personally don't think it will happen but I suspect we are in unchartered territory here. I doubt many of the bureaucrats and politicians, not mention the media, understand what is going on... There is so much misunderstanding, not to mention disinformation (from the shorts), that very few know what is going on. For example, breaking up the monolines is not going to have much impact on the markets. The RMBS securities will still cause problems, and the muni side will still have the same problems now. The reason muni bond is running into problems (like those auction failures) is not because of the risk with the monolines per se, but because no one wants to pay a higher fee. Buffett has said that he will wrap almost any muni bond for up to 2% premium but no one wants to pay that. If the monolines underpriced the muni bonds (it's certain that the RMBS insurance was underpriced) then muni bond costs will go up no matter what.
Re:financial services hearing
i heard FHLB mentioned twice; once in connection with a 10B line of credit thru investment bans (i think dinallo).
Typo... I mean to say 2x not 2%. If I understood what Buffett was saying, he will wrap almost any muni bond for 2x the original premium that the monolines charged. If someone doesn't want to sell a muni bond due to a monoline rating downgrade, they can buy extra insurance from Berkshire Hathaway Assurance. Clearly very few are willing to pay that price for the time being.
Set up a new entity. Take the unearned premium reserve for US public finance from MBI and Ambac. Put it into the new entity. Take assets equal to the unearned premium reserve into the the new entity. Take enough additional capital out of MBI and Ambac to make the new entity AAA.
The unearned premium reserve is the premium collected on muni insurance that is held based on a formula that amortizes over the life of the bond.
Buffett has already bid on this. He offered to do it for $3 billion or 1/2 of the unearned premium reserve.
He also offered to kick in an additional $5 billion of cash capital, putting the bonds back at AAA.
I don't see how any other plan that provides significantly less support for the muni business will be approved.
Dinello has quite a bit of authority. He will be stuck with the mess if they go insolvent. He wants the muni insureds to go to the head of the line instead of the back of the line. Dinello could just suspend the licenses of mbi and fgic pending resolution.
Buffett's offer was not only to do the reinsurance deal but also give the companies 30 days to find a better deal. That sounds fair to me. So they have 5 days plus another 30 if they go with Buffett.
Among other things, a headline from a couple of weeks ago -- when Fitch downgraded Ambac, they then had to go back and downgrade 70,000 muni issues. The amount of work for the rating agencies is enormous and it is no wonder that they don't want to get into this.
Washington Post
Predatory Lenders' Partner in Crime (OCC)by: Eliot Spitzer
Eliot Spitzer - Predatory Lenders' Partner in Crime - washingtonpost.com
Jas,
I asked you a question before but you didn't see my post (or I didn't see your answer). LEt me ask you something:
In a free market, a borrower decides whether to take on debt; similarly, a lender decides if they want to finance a borrower. How can you attack the lender (your word is "fraudster" and "crook") when in fact the borrower decided on their own to take on more debt?
If you were concerned about America, you may want to start educating the population on the downside of debt, instead of wasting time attacking Wall Street.
My gut guess is that Spitzer has ammo in his gun, or he wouldn't have said it so confidently.
My thoughts exactly.
Given that he's said it, he expects it to have an effect. Why state 5 days, too? That's drawing a line in the sand and daring someone to cross it. I could be wrong, but Spitzer doesn't strike me as the type to make empty threats. He'll lose a lot of credibility and/or stature if the 5 days pass with no action on his part.
Sivaraman Velauthapillai,
Don't try and talk sense into Jas when he's in a(nother) fit of outrage - of course the fault is all Wall Street's. Those smooth-talking shysters were forcing Joe and Jane 6-pack to lie on their mortgage apps and to stretch the truth on their ability and willingness to pay!
SC: "The best hedge in this case is to become a corporate litigation lawyer."
Out of this subprime mess... lawyers will probably end up making more money than investors or bankers will... there are already 5+ lawsuits against Ambac and MBIA... probably another dozen against Bear Stearns, Merril Lynch, et al.... likely going to be another dozen against the rating agencies... and all this is without the buyers of CDOs and CDO-squareds suing anyone that come in sight... you know lawyers are rolling in money when some hapless investor from the Middle East sues someone because his investment in a hedge fund lost money on CDOs
Warren Buffett's letter to bond insurers - MarketWatch
This is the Buffett proposal. Any other solution would have to beat this in order to make sense.
Oh, that Middle East investor suit hasn't happened yet... but I was just saying that IF it does...
"I trust that everyone is hoping for the best and preparing for the worst."
Amen. I'm ready.
risk capital writes:
Misean-
It's a long weekend, time for them to meet Jesus.
Hey, I'm all for that. This f'ing BS has gone on long enough.
Cheers,
Ziggurat,
There is no way the monolines will accept that Buffett offer. That's a ridiculous offer and Buffett knows it (that's why he went public--he rarely discloses anything to do with his dealings)... the only party that will accept Buffett's offer is someone that is going into run-off or almost bankrupt... or if the government uses its strong-arm tactics.
You know the Buffett offer is ridiculous when Bill Ackman says it's a great deal
OK Siv.....
Tell me another option to get the muni's back to AAA.
If it isn't this, it would be splitting the companies and the capital.
Well, Siv, we know you're talking your book!
Welcome to Elliot Spitzer.
Ziggurat,
A lot of the muni bond problems have nothing to with the AAA rating. Check out those variable rate auction failures. How is Buffett's plan going to help that?
If someone really wanted AAA they can pay a higher price and wrap that bond again (with Berkshire Hathaway Assurance or Assured Guaranty or any other party). I'm sure there isn't a shortage of parties willing to wrap most of the muni bonds. The reason no one is proposing that--and why Buffett is likely saying what he is--is because no one wants to pay a higher premium.
Lastly, this will destroy the structured products side. Are you sure you want the collateral damage from that? Obviously Buffett, as well as others pushing his plan, don't care about anything other than muni bonds. But the damage from RMBS, CDOs, and CDO-squareds, can cause even more problems.
In any case, I suspect we are not going to agree since our interests diverge. My interest is in seeing Ambac and MBIA stay solvent; yours seems to be on trying to protect the muni bond side irrespective of what happens to the structured products...
OT
For those of you who may have missed it, Robert Reich has an interesting op-ed piece in yesterday's Times.
FT - Rerun of correlation crisis will cost banks
FT.com / Capital Markets - Rerun of correlation crisis will cost banks
Do the bond insurers comingle the premiun reserves with reserves from structured finance wraps? Is it clear whether the premiums are currently "cordoned off" from the rest of the wrapper's funds? Because, I seem to remember reading that muni insurance was paid up front and with all the losses going on in their SF businesses...
TJ & THE BEAR: "Well, Siv, we know you're talking your book! ;-)"
Hey, at least you have to give me credit for being transparent and having more "honour"
than Bill Ackman... At least I don't write documents with doublespeak titled "how to save the bond insurers", when in fact it's all about how to bankrupt the bond insurers...
mp,
Did you catch the FRB Outstandings for CP posted today? Third week in a row of contraction in ABCP outstanding, and second week for total CP to contract...30 day spread at 48 bps.
Gov't would be all over a real system wide failure... and they would have to be.
dryfly | 02.14.08 - 7:13 pm
I hope they'd be more effective at it than they were in the system-wide failure of levees in NO. Don't forget what government you are talking about here, dryfly.
Heh. "Heckuva job, Hankie!"
Can't help but think of Elliot Ness and the obviousness of the crime in question. Just wondering who's his Malone...
Malone: [stopping at a post office] Well, here we are.
Ness: What are we doing here?
Malone: Liquor raid.
Ness: [looking at the police station across the street] Here?
Malone: Mr. Ness, everybody knows where the booze is. The problem isn't finding it, the problem is who wants to cross the pond. Let's go.
Siv, yes, I give you lots of credit for transparency. I may not agree with your investment choices, but I respect your opinion.
Siv,
The proposal is not unreasonable. It is profitable long term for Berkshire. If the mono's had looked long term, they would never have offered the insurance rates they did. Instead they said, well it's AAA so it's got to be good.
BTW, Bershire could still loose a good chunk of the $5B capital. Unlike what other posters believe, muni's are not fail safe.
Further, Berkshire is offering RE to the mono's. Not buy the book:
"We priced this proposed reinsurance cover to reflect the significant opportunity cost from our perspective in providing this type of bulk reinsurance cover. In the current market environment, we are able to command premium levels double (or higher) your client's prior rates to insure the risks that in addition have the benefit of your client's AAA insurance cover. Given our conservative use of capital (for example, the capital ratios in our monoline insurer would be higher than other insurers and would not be subject to reduction by dividends, fees, etc. for a minimum of ten years under the concept we presented to the Department), by offering this cover we forgo these direct opportunities to wrap already wrapped bonds. Despite this, there is an obvious appeal to a bulk transaction like this given the low overhead costs which would be involved."
Now, this allows an offloading of liabilities from the balance sheet. Which means that their capital position (short term) increases.
"From your perspective, I would respectfully suggest that this proposal would allow MBIA to release substantial capital from the municipal bond side of the house that can be deployed to support other obligations. I would submit that our proposal at the pricing levels we require is actually a cheap way for MBIA to raise capital as compared to other alternatives and is therefore of great benefit to MBIA's owners and their municipal bond policyholders."
This is considerably cheaper than ~14-20% cost the mono's have faced lately. Sure they're zombies, but it might give breathing room to get out. I'm not optomistic on this count, but Bershire's proposal is always a in times like this a kick the can down the road deal. Spitzer (and all other muni's) want this, because they don't care about the CDO's. Their money is in the muni's (Spitzer issues them). And at the end of the day, the Big Boys have more time before their B-Sheets implode.
JMHO.
Cheers,
FFDIC-
Karl Denninger over at the Market Ticker noted that the massive amount of slosh added today could imply that a big bank is potentially in a lot of trouble. Coupled with the TSY action today (yields up when stocks are selling off is odd), it looks like there is in fact some funny stuff going on.
Do you have any opinion on the sloshing and whether this does in fact suggest something big and bad occuring?
Slosh report: The Slosh Report
Unlike what other posters believe, muni's are not fail safe.
That bears repeating!
Energyecon, today I began to grow philosophical and am now completely resigned to all of it.
Conjure is ready, and so am I.
If the sons of bitches want to screw the pooch, they are welcome to do so.
But even more fundamentally, if the public could afford a bail out, we wouldn't need a bail out.
Profound and elegant, Misean.
Factoid:
GE used to own FGIC.
Don't expect them to be looking to get back into this business.
dunham,
Thanks for the slosh report. That's even worse than the -18 from the tac posted in earlier thread today.
The ground around the caldera is rumbling mightily now.
Cheers,
MISEAN: "This is considerably cheaper than ~14-20% cost the mono's have faced lately. "
I think a small portion of the muni bonds can be unloaded if a lot of capital is raised. Wilbur Ross has indicated that he has offers with better economics than Buffett. In any case, the Buffett deal is just ridiculous. Buffett asking the monolines to PAY Berkshire while giving up the good stuff that rarely defaults (I disagree with your theory that muni bonds will default significantly--the rates will go up due to economic slowdown but nothing unexpected IMO). Buffett is asking for 1.5x the original premium that the monolines earned. Now, if this was some risky RMBS product, then ok. But when it is some of the safest stuff out there, this is just looting anyone desperate enough to accept.
Issuing equity or debt-like instrument, even at around 15%, can actually be more attractive than the Buffett deal in the long run. If you assume a normalized P/E of 5 (earnings of say $400million per year) for Ambac (that's a big IF given the future), that's an earnings yield of 20%. Even debt at 15% interest can be paid off easily (for $1 billion, that's $150m in interest).
I'm ok with giving up some of the crown jewels in order to save the kingdom, but the Buffett offer is lame.
Zig, don't you think the muni side would be attractive to GECC, not the RM stuff
Dunham, Misean,
Sorry - newbie question. How does one interpret that report?
I'm interested in mortgage debt at 30 cents.
Allen C, I'd wait longer than that. The dynasty potato farming family down the road from me got their start when the patriarch bought the huge farm for twenty gold dollars back in the 30's.
Anon - This is a decent start:
The Market Ticker
SC:
I think they are still doing high fives over unloading FGIC.
However, if they duplicated the Buffett deal and needed a 15% return of $5 billion, they would have a hard time achieving it over 10 years.
They always tend to talk about hurdle rates in that ballpark.
They would have to beat it, I would think. Plus they wouldn't want to compete with Buffett's muni insurer for new business.
Also, Kicker, thank you for the very good explanation of the muni bond business, that clarified a lot for me.
mp,
Sounds like a good time for cigars and cognac (or an 18 year old single malt - choose your poison)...
And maybe a bit of Uncle Scrooge just for grins!
GECC is way long commercial real estate so good times ahead for them.
Siv,
Let me repost some of my research I posted from yesterday...since you missed it:
"n 1988, a study by Enhance Reinsurance Co. looked at historical patterns of municipal defaults from the 1800s to the 1980s and concluded that municipal defaults usually follow downswings in business cycles and are also more likely to occur in high growth areas that borrow heavily."
OK so think of issues in bubble areas. Do I need to be more clear here?
"In 1999 Fitch Ratings published its first study of municipal defaults, which was updated in 2003.2 The latter study covered 2,339 cases of municipal defaults worth $32.8 billion between 1980 and 2002. It found that the cumulative default rate on bonds issued through 1986 (as they approached or reached maturity) was 1.5 percent, while the cumulative default rate on bonds issued between 1987 and 1994 was 0.63 percent. Municipal bonds issued on behalf of corporations or by municipal entities had a much higher overall default rate because of their exposure to corporate risks such as bankruptcy."
These defaults occurred during the longest bull run in history. Put the two together and extrapolate to the longest upcoming bear run in known statistics. Got cash?
Here's the link to the summary. I'm holding back on some more in depth data because it is proprietary.
MUNICIPAL BONDS AND DEFAULTS
Cheers,
Energyecon, how did you guess?
"Analyst Mariana Bush of Wachovia Securities, a unit of Wachovia Corp. (WB), described how this happened in what was probably the first such recent failure. Last week, the auction for Nuveen Premium Income Municipal Fund 4 (NPT), a fund with $570 million in net assets, failed. In the case of the Nuveen fund, its preferred-share rate rose to 110% of the higher of the taxable equivalent of the Kenny S&P 30-day High Grade Index or a AA composite commercial-paper rate, two yield indexes. The yield rose to 4.356% a year. That rate was 1.33 percentage points higher than rates on some other Nuveen fund preferred shares that didn't reset that day."
So a "failed" auction resulted in the paper being rolled over at 4.3%.
Not a catastrophe for either side. Just not as liquid as people thought.
SC:
How serious is GE's commercial re exposure?
They are so damn big that it is almost certain they will be in some area that blows up.
I was looking at AIG's $1 trillion of assets and wondering where the real problems are. Even if you give them a mulligan for the CDS's.
dunham writes:
Anon - This is a decent start:
http://market-ticker.denninger.n...isplay- ppt.html
Yeah...which is why the dollar was down but the $/yen was up. Carry trade shite was weird today...because the market dropped. Not a good thing eh dunham.
Cheers,
dunham,
Forgot I agree with market ticker...
Cheers,
Misean,
Seems like a lot of funny stuff going on today....
I missed it, but some people over on the market ticker forum pointed out that the VIX dropped along with the market when the DOW dropped 50 points in a minute.
Add that to the slosh, the long TSY tanking, they carry trade weirdness and the overtly bearish testimonies today......well, I'm glad i'm not long going into the 3-day weekend. Of course, being short for most of this week has been painful too, so what do i know?
It is very, very large. They have also had a huge bid for leveraged loans. I'm talking myself into taking a short position here... if states revenues dry up they can't afford infrastructure... But seriously, big commercial real estate and big leveraged loan book.
GE Capital Real Estate
NREI_Global Real Estate 1_: Affordable Housing Agonies... Staying
Healthy: Property owners plan for H1N1 outbreak
OT,if you need to let the super-colander cool down and want to feel happy for a few hours here is a recipe i got from a neighbour today (he damn near ran near ran me down on the trail with his 3 WD Ural,and yes the MG42 was mounted).take 1/2 gallon cheap vodka,run it through your Brita filter 5x to remove harmful esters,and drink 1/2 pint to test it...add 1 pint finely chopped psylocibes,and 5 grams of fresh Bud,add a Vanilla bean for flavor and top off with everclear.reseal jug and store in a cool dark place for 2 weeks,strain out solids and use them to stuff a chicken.He told me a cup at lunchtime and one after dinner kept him happy and relaxed,and he sure looked it.
GE Real Estate...
Financial Performance
28% compound annual growth rate since 1993, achieving >10% net income growth for 12 consecutive years
$72 billion in total assets
$91 billion served assets
Portfolio comprised of 57% equity investments and 43% debt financing
Closed $29 billion of real estate transactions in '06
Average investment size: $7.4 million
http://usa.gerealestate.com:80/cms/servlet/cmsview/GERealEstateUSA/prod/en/info_center/at_a_glance.html#financial
Tom Stone writes:
"OT,if you need to let the super-colander cool down and want to feel happy for a few hours here is a recipe i got from a neighbour today (he damn near ran near ran me down on the trail with his 3 WD Ural,and yes the MG42 was mounted).take 1/2 gallon cheap vodka,run it through your Brita filter 5x to remove harmful esters,and drink 1/2 pint to test it...add 1 pint finely chopped psylocibes,and 5 grams of fresh Bud,add a Vanilla bean for flavor and top off with everclear.reseal jug and store in a cool dark place for 2 weeks,strain out solids and use them to stuff a chicken.He told me a cup at lunchtime and one after dinner kept him happy and relaxed,and he sure looked it."
If I did so...The shrooms would do me in. I don't get paranoid on the stuff...I get silly. I'd be broke by the end of the trip.
Cheers,
dunham,
Wish I had a 3 day weekend. I think mine is a one day...
Cheers,
dunham,
I wanted to move in with Karl when things get really bad because he is better prepared than most. However, I don't scuba dive, detest large wind chime collections and sun tanning in the nude on a Manduka yoga mat isn't really my thang. Things are worse than any of us know because they are not going to alarm the public for fear of bank runs.
Damn, GE is huge. No wonder they can't get the stock price to move. A huge hit to real estate wouldn' do too much unless same happened to leverage loans and residential credit...
http://www.ge.com/files/usa/company/investor/downloads/webcast_01182008/ge_investor_communications_brochure_4q2007.pdf
FFDIC,
"Things are worse than any of us know because they are not going to alarm the public for fear of bank runs."
Thanks man,
I'll sleep better now after that post.
Although it's quite obvious that that is what's coming down the pike.
BTW outside the nude thing...the tanning bit doesn't sound bad.
Cheers,
SC....yea, they are big. There are around 10 billion shares, so it takes a big hit to get to $1/share.
Misean-
It's a long weekend, time for them to meet Jesus.
risk capital | 02.14.08 - 9:21 pm | #
Jesus? They can't handle Jesus!!*
dryfly,
We don't need badges...
YouTube - We don't need no stinking badges!
Cheers,
Let me give you background on the muni auction rate problem. It is primarily due to bond insurance problems. Many uninsured bond issues are sitting there paying low interest rates and getting plenty of bids.
The primary ones which have problems are guaranteed by an insurer that has been downgraded. Sometimes, stupid things have been happening. For example, a AA rated issuer purchased bond insurance a few years ago. The insurer is recently downgraded. Now their bonds are trading at higher interest rates than very similar uninsured bonds with a AA underlying rating.
Why? In some cases it is stupidity and laziness. Many investors never opened an official statement. They just said "AAA Muni. Must be good". Then, it becomes a AA muni because of an insurer downgrade. It's still an extremely low risk because the public entity itself is AA and is doing fine. That AA entity could typically raise taxes if necessary to pay bond interest. The stupid and lazy people dump the auction rates, right when the rates are rising. If enough stupid and lazy people dump it at once, the rates can get downright silly, like 12-15% for tax exempt bonds that are rated A or better. Nothing like giving up high yields because you can't be bothered to do a bit of research on a security you already own.
There are some people who are forced to dump bonds when ratings deteriorate, either for regulatory reasons or because their mutual fund charter says "invests only in AAA rated munis" or something similar.
So why don't banks buy more of this paper? It has a pretty attractive yield. The problem is many banks have already bought a lot of it, and are becoming capital constrained. The other new sources of capital haven't rushed in with sufficient money yet.
Some of the people with a lot of money don't care about bonds being tax exempt, and have multibillion dollar portfolios with no munis. Pension funds and most endowments don't normally buy tax-exempt bonds. It takes a while for them to adjust to the thought and do the necessary analysis or policy changes to buy this stuff.
Many munis bought their bond insurance before the insurers had gone off the deep end with risky nonmuni business. They didn't bargain for this kind of trouble. I'll bet that in the future "monoline" will be a term taken more seriously. Like, munis will get it written into the insurers' corporate charters that they can't insure other types of debt or deals.
ight all,
Cheers,
Some investor guy,
So what is your real conclusion? Are 15% yields good munis to buy or will the very fact that they have 15% yields cause their demise?
Here is Louis Gave's take on the Buffett offer:
The problem for the municipal bond market is, I believe, linked to the insurance regulations. As we wrote in our last five corners, let us imagine an insurance company with three liquid portfolios.
Let us assume further that our insurance company is operating in a county where the corporate bond market is neither active, nor very deep. Our insurance company will then buy US or European corporate bonds, and will have them insured by a monoline insurer, sporting a AAA rating. As a result, reserves requirements for the bond portfolio will be very low, and our insurance company can indulge in a little more equities than previously justified by its existing portfolio of corporate bonds.
Let us further assume that our monoline insurer is either going bankrupt, or is on the verge of being downgraded by one of the agencies (Moodys, Fitch, etc ). In such a case, our poor insurance company will immediately face dramatically higher regulatory requirements on its capital. Faced with that scenario, the only solution will be for our hypothetical insurance company to aggressively sell the non- government bond market, including municipals and, of course, shares as fast as it can, transferring all the money to the government bond market, in order to be on the safe side.
I think it is this movement that explains the headlines as the one above.
This movement towards the government bond market will be even stronger if a fourth portfolio exists in the real estate sector. Indeed, if the liquidity problems are coming from the real estate sector, then our company will have every reason to maximize the risk-free part of its balance sheet, i.e. the government bond market.
The above chain of events has obviously been unfolding on a grand scale since the beginning of this year. The regulations applied to the insurance industry have created a monster, forcing insurance companies to sell when the market and liquidity are bad (and buy when markets and liquidity are good in order to keep up with their peers?). Today, insurance companies are forced into buying government bonds when they are hopelessly overvalued (see our latest Monthly Economic Review) and yielding less than 1.5% reala level not seen since 1987. It is unlikely that, in these days of accelerating inflation, investors are piling into bonds out of choice. Instead, they are simply forced to do so.
Obviously, the insurance companies regulations have been created by accountants and civil servants, who have little or no conception of what a liquidity crisis actually entails. The regulations have been put together with one objective in mind: solvency. And unfortunately, while a dedicated focus on solvency makes sense at the micro-economic level, it can be chaos-inducing on a macro scale.
To a certain extent, this situation reminds us of the UK a few years ago, when the UK pension funds, facing new regulations and new immunization practices, became forced sellers of equities (see Immunizing Liabilities? Dont!). In turn, this secured the fortunes and the growth of the private equity industry, which could scoop in and buy assets on the cheap. The same thing is now happening once again and quoted assets are on a fire-sale. Who will be the beneficiaries this time? Large foreign sovereign funds? The investing public? Companies buying back their own shares and bonds? Warren Buffett? At this point, this remains to be seen, but we find this regulation-based bear market will undoubtedly offer up some interesting opportunities.
GaveKal Forum
Siv, IMOP, the monolines are toast. It is triage time. The muni lines of business probably can be saved. The structured products are probably terminally complex and cannot be saved.
@Jas Jain - You are absolutely on target. It’s painfully obvious « Sidetalk
I wonder if Oliver Stone or that crazy documentary guy will do the cinema version first?
"Will"?
Wall Street (disambiguation) - Wikipedia, the free encyclopedia
Investors to money-market funds added $33.14 billion in the week ended Tuesday, bringing total net assets to $3.337 trillion, according to the Money Fund Report, published by iMoneyNet Inc.
Institutional investors contributed $29.69 billion, while individual, or "retail," investors added $3.44 billion.
Assets in taxable money funds rose by $31.02 billion to $2.844 trillion.
That WaPo link with the Spitzer editorial that FDIC linked up above is really worth a read.
It discusses the Federal Governments' fight against State regulators who were trying to do something about predatory lending back in '03.
Wouldn't it have been great if this madness had stopped in '03? Goodness knows it was already bad enough by then - which was of course why the States had taken notice.
It looks like the Federal government really ran roughshod over the States, too the detriment of us all.
I would imagine that seeing the State of NY G.O. bond fail at auction today would have Governor Spitzer a little upset.
Thanks all (Siv, Misean, etc.) who helpfully replied to my question.
My quick read is that no matter what happens, the CDO/MBS stuff is toast. They can break up the monolines, take the Buffett offer, or whatever, but the huge problem of near worthless CDO/MBS is still there. Kind of like Chernobyl. You cannot fix the mess, only hope to contain it.
It seems inevitable that the biggest losers may be the investment banks holding the toxic sludge ... MER, Citi, LEH ... or your grand-ma-ma's pension fund. Someone is going to have to eat it.
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Sivaram Velauthapillai: Jas, I asked you a question before but you didn't see my post (or I didn't see your answer). LEt me ask you something: In a free market, a borrower decides whether to take on debt; similarly, a lender decides if they want to finance a borrower. How can you attack the lender (your word is "fraudster" and "crook") when in fact the borrower decided on their own to take on more debt?
Hello, Sivaram,
Regrettably, you have been brainwashed about the free markets system. Without ethics a free market system turns into a free fraud system. WHEN A LENDER IS NOT LENDING HIS, OR HER, MONEY HE, OR SHE, IS COMMITTING FRAUD, OR HAS THE LICENSE TO COMMIT FRAUD. Got it?
Do you doubt that Wall Street constantly misleads the public to push Scams? Do you not agree that Bankrupters and Fraudsters constructed Debt Concentration Camps by Pushing Debt on homes? Most importantly, do you have the ability to distinguish between proper lending and Pushing Debt? See what I mean, without ethics a free market system was turned into a free fraud system.
Hey, a$$h*le Jas Jain's therapist, dont you have anything better in your life ? I thought so. It is one to deal with born-and-bred dopes, but quite another to deal with pathetic people like you.
Jas
I don't know. Maybe we need to let a couple of banks fail. It sure would be a wakeup to the others who want to make bad business decisions. If a normal consumer makes poor decisions they usually face the piper. Not so sure about corporate welfare.
Agree with the corporate welfare comment. We have too many issues in this country already and the federal budget is about to burst.
Fed's Parkinson on Bond insurance.
Thanks for posting this.
I hope they'd be more effective at it than they were in the system-wide failure of levees in NO. Don't forget what government you are talking about here, dryfly.
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