he wont touch CDO's! So, even if his plan works, which it prob wont other than give the markets a short jolt of confidence, there will be more write downs!
Smart move by Berkshire. I can see why Buffet would do this. The only reason the monolines might go for this is in some crazy hope it will bide them enough time to make it over the hump.
This is the equivalent of offering to buy Allstate's insurance business outside of the gulf coast states just after Katrina.
I'd say, it doesn't try to fix problems that cannot be fixed.
If I'm reading this correctly, Buffett is observing that the municipalities are going to get dragged down with the CDOs, because the bond insurers can't be fixed, and will get downgraded, and once they are, the munis' bonds get killed even though muni defaults aren't the problem here.
So he's offering to save what can be saved: if Buffett reinsures the muni book, then it's protected from the blowback.
That would be precisely the kind of "bailout" that leaves the consequences of moral hazard in place. Who could dislike it, except those who engaged in reckless insuring in the first place?
What Buffett is saying is...there's no need for a public bailout of the public interest. I am willing to take on the part of this mess that is "public interest." It underscores the fact that the most troubled side of the monoline biz has nothing to do with the public.
What Buffett isn't saying is that he wants to cherry pick the best muni credits in monoline books and leave the garbage to go belly up.
Who could dislike it, except those who engaged in reckless insuring in the first place?
Who could dislike it is state insurance commissioners, who are charged with protecting all policyholders equally. They would want Buffett to take all the muni biz or none at all. Cherry-picking is not in their interest.
I appreciate Buffett's willingness to step up and provide insurance so that the government does not have to do it, but I'm not sure he realizes that "we are all subprime now." Some of those non-subprime muni bonds might actually start behaving like some of our subprime friends in the near future . . . (e.g., muni bonds from overbuilt California suburbs.)
I can easily see a scenario where the government would force the insurers to turn their muni business over to Buffett, which would be a righteous screwing for them.
Yes I see how news that happened LAST week and doesn't really solve ANY of the growing concerns of a downgraded insurer is good for the market to get juiced upwards of 100 pts.
This is getting out of hand with the futures crap....
Peripheral Visionary:
I think that is the whole point. Doesn't Buffett still have his house in Laguna Beach? I am sure he knows all about the problems in the Inland Empire and other overbuilt places in CA. He didn't get this rich by being dumb. He knows that he'll either get the good stuff or the monolines will let it all go to shit. He's betting that the AAA munis will force the monolines to sell(if they are smart).
So what's to stop any single municipality from terminating their agreement with AMBAC and taking out Buffet's insurance? Why do the monolines have to agree to the plan? I don't understand why their cooperation is needed.
Post over on Accrued Interest about the impact that the problems with the monolines is having on the ARS market. ARS auctions aren't settling and some municipalities are getting hammered with high interest rates.
He's suggesting that the "sheep" are going to choose to refinance in mass soon.
If you are buying stocks on these pumps you are the sucker. It is almost funny to watch. Data continues to stream in on the negative side, yet these pumps keep happening. You have to ask yourself why? I bet someone smarter than you wants to unload.
Tanta, with all due respect (love your stuff!), I think you're missing the hostage value to the monolines of the municipals.
It's precisely in the monolines' interest to keep the municipals, with the threat to the system that if the monolines get downgraded the municipals get gutted because a lot of institutions will need to sell them. Without the municipals in their books, there would be less pressure on the government to help the monolines.
Blueridge's question's a good one - anyone know what the "typical" terms are for a muni bond to obtain insurance from a moronline? Is there a mandatory renewal each year or some other term which makes it tough to run to Berkshire?
Umm...can you say "undercut"? You gotta love Buffet. He knows value and he clearly sees some in the muni bonds. However, he will never overpay and I guarantee he low-balled ABK, MBIA, FGIC, etc. You notice that one of them has already responded with a NO? This is vulture investing at its finest.
Why doesn't buffet let them get downgraded and go under first? Once they're bankrupt, I would imagine any agreement between them and the municipalities would be nullified. I assume this would be an implied breach of contract.
Then, Buffet could just get their business the old fashioned way and wouldn't have to pony up $5 billion.
$5b for buying the cash flow behind $800b in safe (for now) muni bonds seems awfully low. The rejection may be one of price not principles. Principles at Ambac? Sorry, got carried away with fairy tales of fiduciary responsibilities and such. Sorry. Then again maybe Buffet is coming around to my way of thinking (the hubris!). People forget that most of these municipalities are full of nothing but real estate agents and dentists and everyday folk who have just lived the same decade of excess and overreaching as the rest of us. They are not going to have the same sense of responsibility of previous generations. They very well may surprise us all by defaulting on munis especially when voters demand it by rejecting increased taxes.
It seems like a sensible solution to me, but I can't imagine that anyone is going to sign off on it. Once you make that kind of sale you're pretty much admitting to the world that you've run your company into the ground.
Buffett is willing to offer to buy now to get a monopoly. The other monolines are his competitors. If they get bailed (even via a bankruptcy-like deal) he has competitors and less profits. But if he's willing to pick up the muni business, the government has much less interest in bailing out the other monolines.
At the same time the chance of him getting taken up on this is nil. If the monolines sell their possibly profitable muni insurance to him, they're left with the toxic CDO insurance and not even a fig leaf of future premiums from legitimate insurance. They don't dare accept. So this is a manuever to increase the chance the other munis will go under, giving Buffett almost the whole market once they do.
This is a strategy to drive all muni bond business to Buffett the moment his business hangs out the "open" sign.
This is hardball politics over money. The monolines' PR firms should be attacking Buffett now, aggressively, scaring that business back into their arms. But stupid is as stupid does.
If Buffett can save local taxpayers a few bucks and make some for himself, what's wrong with that? As for the market going up, it may not be due to Buffett at all, simply that anyone who wanted to sell already sold last week. Much of the time, the market trades on technical factors; the day's news is just an excuse.
I can't believe anyone was seriously entertaining the idea, in recent days, that Buffet would bail out the monolines.
He's positioning now - MBIA, Ambac, FGIC etc. will all go to the dustbin of finance history. And Berkshire will pick up the business they were in before they lost their collective minds betting on short term gains.
The audience for this pitch is not the monolines but to the NY state insurance commissioner and wall street.. Look, Buffett is the one breaking the news. Did he ever do that before a deal is completed? There is absolutely no reason for the monolines to take up on his offer. However, there is billions dollars reason for the NY State Insurance commissioner to think it through.. The commissioner already tried once getting banks together and get nowhere. Now Buffett is offering to take care of the muni which is the big worry for the commissioner since it may cause our banking system (and insurance system) to fail with all the write off and capital requirement associate with rating downgrade. The rest of stuff that monolines insure has much less impact to the banking systems..
Of course he is making a lowball offer; that is what the man does for a living. But it also provides a clear path by which the regulators can address their systemic risk concerns without spending a dime of taxpayer money: Simply force the monolines to accept the deal and cede the muni business to Berkshire Hathaway.
As a concerned American (and Berkshire shareholder), I fully support this idea.
Tanta writes:
I thought Buffett's whole plan was to make that clear: he buys it or we buy it.
What? a large entity with taxing power and reliable cash flow (and printing presses) self-insure? That's exactly what they should do. I fail to see why lenders should get lower rates and municipal borrowers less value just so a private group can get rich from what is an otherwise closed loop system of financial interdependence.
Buffet's not trying to save the monolines, save anybody, bail out anybody.
Buffet's trying to make money. It's what he knows how to do, and he does it well. He wouldn't take a monoline as a package right now if you threw in pink unicorns.
Buffett has not offered to bail out the monolines. He has thrown them an anchor, and when he is sure they have drowned, he will pull it back up and rifle their pockets.
So what's to stop any single municipality from terminating their agreement with AMBAC and taking out Buffet's insurance? Why do the monolines have to agree to the plan? I don't understand why their cooperation is needed.
blueridge | 02.12.08 - 9:57 am | #
Municipalities generally pay all the premiums up front, with part of the bond proceeds, the monolines hold on to that cash and recognize it as income over the life of the bond. So yeah they could cancell, but would still be out the premium they paid. Interestingly, this is not generally true for the subprime structured finance crap they insured. Seems like a great move by Buffet, and one that would help prevent a lot of collateral damage. The CDO's still go to hell, but all those County, State and local general revenue bonds, the stuff mostly held by conservative little old ladies stay solid.
I think the government should force the monoliners to sell the munis to him. They've screwed themselves, and this is the best way for the country to get out from under these vultures.
Don't know the legal ramifications of all this, but surely some way can be arranged to force a sell....
sorry OT - (From the Philly fed)
"Growth in the current quarter is projected at an annual rate of 0.7 percent"
"growth of 1.3 percent in the second quarter"
"The risk of a contraction has risen in this survey. Although the forecasters median estimate for real GDP this quarter and the next suggests slow, but positive growth, they think the risk of a contraction is high. That risk is pegged at 47 percent for growth this quarter, up from 23 percent previously, and 43 percent for growth in 2008 Q2, up from 22 percent. "
Ohhh, I like. Gut the monolines into two parts: the crap and the good, and buy the good.
Buffett is very VERY careful with long term obligations, after being burned on Swiss Re's derivitives business when he bought the reinsurance business.
So he's now careful about only getting the good part when you have a mixed-bag of good & crap.
Oh, and he sold his house in Emerald Bay about a year ago IIRC.
This approach does change the balance. Since insurance coys like to address risk by rounding out what they insure; it is, or will set about the demise of the monolines...they will be stuck with all the junk.
Great deal for Buffett.
Good news for Muni issues and issuers.
Bad news for monolines.
Bad news for non-Muni credit markets.
Pretty simple.
This would guarantee a wipe out of the monolines and the wrapped non-Muni issues would crater even further. I would not expect that cratering to be "contained".
Buffett is no John Pierpont Morgan.
Yes, the Street bullies are back to pump this thing up. Has this anything to do with Friday's option expiry? Perhaps?
Let's see what has changed while Buffet is preparing a feast on munis .. the banks still needs to re-capitalise; housing inventories are not disappearing at any alarm rate; the questionable consumers' free wheeling, high spending habits; no house as an ATM; increased counter party risk in CDS and related derivs and the list can still grow ...
So has the world really changed beucase of Buffet?
"It's precisely in the monolines' interest to keep the municipals, with the threat to the system that if the monolines get downgraded the municipals get gutted because a lot of institutions will need to sell them. Without the municipals in their books, there would be less pressure on the government to help the monolines."
Why would the munis keep the monolines as providers then? If my insurance company sucks big time, I move my business elsewhere. Why wouldn't the munis do likewise?
Technically it's not everything but subprime. Outside of the US, the monolines have quite a large business in non-muni infrastructure bonds and to a lesser extent non-mortgage securitisations (eg Russian/Kazakh/Turkish diversified payment rights, credit cards and so on). In the grand scheme of things its small beer compared to the muni business, but we're still talking many billions of dollars.
Buffett is very VERY careful with long term obligations, after being burned on Swiss Re's derivitives business when he bought the reinsurance business.
I think you mean General Re, not Swiss Re.
But your point stands. Buffett is no fool. He is essentially offering to buy the only profitable part of these businesses for a song.
Buffett also never discusses his plans in public until after the fact. The purpose of talking about it on CNBC is to bring pressure on the monolines and the regulators. Duh.
CNBC's characterization of this as a "bail out of the monolines" is right up there with their usual hilarious journalistic standards.
MBIA shareholders -- God bless 'em -- are not being fooled.
The monolines can not cancel the insurance. It is bought up front and it becomes a permanent contract with the investor who buys the bond, for the life of the bond.
Insurance regulators are charged with protecting the interests of both policyholders (munis) and investors. But really, their primary fiduciary duty is to investors, much as their primary duty in life insurance and annuities is to protect beneficiaries (not policyholders).
Insurance regulators could allow Buffett to reinsure selected bonds, subject to regulatory review and approval. But from a practical standpoint, this could only happen after the insurance companies (not the holding companies) are put into receivership by the states. It could be that the "next shoe" will be receivership and Buffett is anticipating this.
It isn't the goats that are unhappy, it is the shepherds who would see all their sheep go to Buffett while they are left with the goats.
Goats that they themselves originally agreed to shepherd, it is true, but goats nontheless.
Where does anyone see that Buffett has offered to buy (reinsure) all the outstanding muni bond policies of the monolines? I don't see that. He's cherry-picking.
He would be a fool to reinsure the lowest 10-20% of the insured muni universe.
Absolutely. This is real hardball by Buffett. It puts the competition in a very tough spot; it inserts Buffett between them and their only profit-porducing customers.
"If Buffet's move is so great, where are other players? Other insurers can compete with Buffet for that munis business. There is nothing to stop them,"
How many other companies in the world have AAA rating and 40B in the bank?
As Tanta and a ( and metoo ) note, Buffett announced a proposed deal that was rejected by one monoline and got no response from the other two; this is rather unusual no ?
The monolines must be holding the muni business hostage - a MAD game - to get something for the CDO biz - and Buffett is letting it become widely known - in preparation for a forced solution? IMO it doesn't look good for either the monolines or the owners of the insured CDOs that will have worthless insurance.
This also ought to really depress Wall Street for this reason: if political sentiment moves toward Buffett's plan, the end result would be BK of all monolines left with non-muni books. Then where would all the CDO guarantees go? (hint: gone to **** every one).
I always feel on safer ground when agreeing with Tanta, so let me now boldly say...
If this works in giving $800 bln in muni debt a AAA rating, it will mean that one asset class is made relatively safe from nominal price deflation. From a macro perspective, asset price deflation can be a big problem. Also from a macro perspective, having one level of government able to do a bit more snow removal and a bit more school repair during a slowdown means less fiscal policy drag at an inopportune time. With regard to Kicker's opint, UBS warned yesterday that the auction-rate securities market might come apart (while helping one NY water region exit the ARS market). It's a roughly $200 bln market. Munis are major participants, and at least some part of that market may be helped by what Buffett has proposed.
My guess, much like Joe's, is that Buffett has some leverage over the insurers through their clients. If the bond insurers are unable to offer AAA coverage, with all that implies for municipalities and municipal bond holders, they are really going to tick off their clients by holding them hostage. Buffett can go out and cook up his own bond insurance business from scratch, and still put a huge hurt on the crippled bond insurers, without giving them a dime. Municipalities would have a strong practical motive to go to Buffett, and a raging emotional motive to do so. If bond insurers do the right thing for their clients, they may find they still have a place in that market (or some market), assuming they survive.
Buffet is the first of probably several reinsurance companies willing pick up the Muni bond business so the issue of saving the
monolines lessen considerably. So now we are only talking about the non-muni business that needs to be saved which puts a different light on the NY State rescue plan not to mention the rating agencies lack of action in downgrading the impaired monolines.
"I thought Buffett's whole plan was to make that clear: he buys it or we buy it."
To be more precise, he buys the viable portion of "it" and we buy the rest.
This is the classic pre-nationalization play: healthy parts of the business stay private, gov't (read: taxpayers) get the toxic waste dump. Everybody, everywhere on Wall St. is now telegraphing Washington:
Nationalize this crap, or we will let it blow up in your face- either way, you will be staring down the barrels of some seriously pissed citizens.
And the public sector now has to walk a line. A lot of people have expressed anger at the bailout culture of Washington, but I think they are actually fighting it tooth and nail, mainly because international implications of the Federal gov't swallowing up so much bad debt.
Every week Washington fights the pressure to step in and play sugardaddy, the Street ups the ante.
"In 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."
"n 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."
The devil is in the details and you always make your money upfront on these deals. I don't know the real numbers but play along with some fake numbers:
Say the muni insurers charge 1 percent upfront to bring the bond offering up to AAA. They have $800b if this stuff so they have $8b in the bank "insuring" the bond performance. Who wouldn't want to buy that for $5 billion? That's where the devil comes in. The insurers cannot touch the $8b, it is there to cover the expected losses. If however they sell the assets and the obligations to Buffet they have $5b of free and clear cash to cover salaries and bonuses and stuff. Buffet can afford to have his money encumbered, the insurers cannot. I wish someone could provide the real numbers but I think my point stands as to the various parties' motivations.
"If the bond insurers are unable to offer AAA coverage, with all that implies for municipalities and municipal bond holders, they are really going to tick off their clients by holding them hostage. "
You don't really care if you tick off a hostage. That's why they're the hostage. And you certainly don't care if you tick off someone if, when they're ticked off, you're already dead.
I love the Lasik ad that is running on CR. No money down, no interest, no payments. They have shown us the way out of the housing crisis. Or is that how we got here? Good stuff!
Can someone tell me the last few times that any municipal bonds actually defaulted? I don't think you can.
Wake up! You're reading the premier blog on the Net about housing. There's no difference between housing and muni bonds.
Both have prime and subprime.
Both have had big refinance markets.
Any borrower who couldn't make payments had an easy out to refinance into a new loan (usually at higher principal) to keep making payments.
Both had ways to turn junk paper into magic AAA.
Now, both have had the magic AAA go away. And both are seeing the refin opportunity go away.
There have been little muni defaults, but only by issuers who couldn't get insurance or refis. Now comes the flood of all the defaults that should have happened over time but were propped up.
This was the deal that Buffett offered:
And we offered to take over the liabilities for the whole $800 billion of these three companies for a premium that would be equal to, essentially, one-and-a-half times the remaining premium left over the life of the bonds. They have what they call an 'unearned premium reserve' which reflects the original premium less the amount that's been proportionately earned. And we said, for one-and-a-half times that amount, we would take away all of their liabilities so that the $800 billion in bonds would carry a real triple-A insurance, and would sell in the market as if it had real triple-A insurance. Whereas now the bonds sell at significant discounts.
This is from the transcript of the phone call to cncbc. If the initial premium was 1%, and NONE was spent then its 1.5% to me. In practice it ought still to be 1.5% of what's left in the pot so to speak.
" There's no difference between housing and muni bonds. "
Um, no. Muni bonds don't default. Why? The issuer of a muni bond possesses the ability to tax their inhabitants.
Good try, though. I sentence you to 24 hours of reading nothing but the blog named Accrued Interest.
Actually, none of the rest of your points are factual, so we'll just recommend a refresher over at that blog.
As an example: " There have been little muni defaults " - Um, not of principal. Orange County missed an interest payment but made that up and didn't default on the principal.
ISTM that this is analogous to starting an auto company and buying some of the successful lines from Ford and GM. The main differential advantage in that case is not being saddled with pension obligation for current and near future retirees. Buffets main advantage in this case is not being saddled with payouts for a bunch of bad real estate bonds. I suspect that this bid is partly an attempt at preventing the existing insurers from getting bailed out because local governments "need" them. Buying existing, seasoned, bonds probably gives him a little bit of help entering this market, but the barriors to entry aren't nearly as high as they'd be in the auto business. The main barrier is simply capital reserves, and if he has them he can simply insure only NEW munis and let the existing monolines wither on the vine.
Here's Krishna Memani's take from Deutsche Banks credit desk:
"The Buffett proposal calls for 1.5 times the initial premium. Assume for a second that they wrote the gty at 50 basis points. So it will cost them 75 basis points to reinsure. Assume a 10 year duration. The reinsurance will lead to a loss of 2.5 points (locking in a 25 bps loss per year for ten years). The corresponding freeing up of the capital is only a point. Net net, the proposal has the potential of consuming capital rather than freeing up capital for the monolines. And, in realistic terms, the likely loss in the portfolio is minimal. No equity holder is likely to accept such a proposal. At least, not yet. The only people who could make them are the regulators. And considering that they still believe these entities are solvent -- they said that in a letter(presumably legally binding) to Congress -- the likelihood of them cramming it down monolines throat is very low. This is a very down bid to test the desperation of the regulators more than anything else. Smart politically but unrelaistic to be hit, in my view."
" If the bond insurers are unable to offer AAA coverage, with all that implies for municipalities and municipal bond holders, they are really going to tick off their clients by holding them hostage. "
This is grossly erroneous. Muni bond insurance is a wrapper, not financial alchemy.
"Say the muni insurers charge 1 percent upfront to bring the bond offering up to AAA. "
There's no way it averages out to 1%, although individual bonds could in theory reach that. Before the crisis, monolines were charging in the region of 20bp-40bp in the markets I cover for deals rated as low as BBB-.
Memani's take sounds very plausible to me. I'm not at all surprised the monolines have refused the offer - it would basically kill them off as going concerns, and they're only going to accept that if they think there's no other alternative. So far most of the monoline people I and my colleagues have spoken to insist that they can recover. That may be mistaken, but it's what they believe.
There are two substantial differences between these "hostages" and real hostages (ignoring the part about loss of freedom and risk of death an limited potty breaks). One is that these "hostages" are one side of a market in which somebody is gonna wanna take the other side. The other is that, perched atop the "hostages" are "politicians" and they can, when they get up enough gumption, change the rules on ya. These hostages have leverage.
Um, no. Muni bonds don't default. Why? The issuer of a muni bond possesses the ability to tax their inhabitants.
Unsympathetic,
You're a fu**ing idiot who knows nothing. 90% of the revenue bonds issued have no taxing authority at all.
They receive tolls, fees or special tax assessments granted by other entities. They finance infrastructure in a given geographic area, such as roads, water & sewer, hospitals, schools and office/industrial parks. But in MANY cases, the people who are suppose to live in these districts don't live there yet. They are future growth. When you have a historic real estate downturn in which whole areas turn to tumbleweeds, these bonds will default. Nothing except growth stands behind them.
The deal is for 1.5 x the unearned premium reserve. That is probably more like 25 to 50bp, since a lot of it has already earned out.
His $5 billion is surplus (capital) in the new company.
So he takes all the muni exposure (a liability) for maybe $4 billion.
And everyone that was endlessly writing about all the people that would have to liquidate their bonds because they could only hold AAA could quit worrying.
Buffett also pointed out that currently insured munis are selling at about a 5% haircut right now, which is $40 billion.
One other bit of information -- he is selling wraps on insured bonds for 200bp.
So he will buy it wholesale for 1.5 x what the original insurers charged or retail for maybe 3x.
Anyway, if anyone has to sell a large portfolio of munis after a downgrade, they now heard on cnbc that they can get a wrap for 200bp instead of whatever haircut the market would give them.
Faced with $32 billion in debt, a depleted transportation fund and hundreds of highways and bridges in need of maintenance, Mr. Corzine has proposed increasing tolls 50 percent every four years over 12 years on the New Jersey Turnpike, Garden State Parkway and Atlantic City Expressway, and establishing a new nonprofit corporation to issue billions in bonds and manage the three roads.
The atmosphere has become so volatile that last week the State Police began checking the audience with metal detectors and searching handbags.
A few people have dressed in pig costumes, parodying Mr. Corzines admonition that his plan to raise money was necessary because pigs will fly over the State House before there is a realistic level of new taxes or spending cuts that can fix this mess.
..lenders say they will contact homeowners who are 90 or more days overdue on their monthly mortgage payments. They will be given the opportunity to put the foreclosure process on pause for 30 days while the lenders try to work out a way to make the mortgage more affordable to the homeowner.
Mermani right, and then some. Basically Buffett is (on the surface) asking the bond insurers to pay him to take their profitable book. But that leaves out the ceding commission that the reinsurer pays the primary, which is usually around 30% (paid upfront). That would mean Buffett would more or less be getting the muni portfolio for free. Don't see why anyone would take that deal.
So-far-not-mentioned point: nothing stops the market from buying Buffett's reinsurance in the secondary market. Easy to do, and a very standard product. Just ask what Berkshire would charge to insure an MBIA- or Ambac- or SCA- guaranteed bond, and pay the premium.
Difference with Buffett's offer is just that he wants the monolines to pay to be eviscerated. Great advertising, and probably a good political move.
Footnote: the reinsurer assumes the reserves for the reinsured bonds as well as the liability. The structure is: primary cedes liabilities and the associated unearned premium and reserves; reinsurer pays primary a ceding commission.
part of the debate about municipal bonds and the need for the monolines might include a discussion about whether or not the munis are general obligation verses revenue bonds. are the monolines insuring GOBs?
the default of WPPSS bonds and the lesson learned regarding revenue bonds is that the power plants were never built and the utility defaulted on the bonds.
has a state or municipality ever defaulting on a general obligation bond? such bonds are backed by thee general taxing authority of the entire gov entity. someone, somewhere (a small city on the edge of dis-incorporation or a dissolving school district?) but i cant remember who and when.
His offer was to put up $5 billion in capital and not take a cent in dividends for 10 years.
I doubt if there will be too many people competing on those terms.
Whether it happens or not, it puts a floor under part of the lingering uncertainty. And no public money.
This also gives the rating agencies more cover to downgrade the monolines. They won't need a rating anyway, since they will not be doing much new business.
Any time there's a Buffett buyout buzz it sets up a great opportunity to short the market. Amazing how any Buffett buzz can juice the stock market by a $Trillion. It makes ZERO difference for the banks or credit card outfits but they rally 5%. Bullshit stock market.
It would be suicide for the insurers to sell their municipal bond business to Buffet. It would be the last act before they roll over and die.
Don't you think that the CDO market would sue over the gutting of the minimal viability of their insurer? Wouldn't that be considered looting the assets of operation heading for bankruptcy?
And, at what point do you think the premiums on the municipal bond insurance business will begin to look inadequate? These are not ordinary times and ordinary default rates will be exceeded by a large margin.
After factoring in a standard ceding commission of 30%, he's charging 1.05x unearned premium. (I don't know what ceding commission he actually offered.) No major pricing implications there; just a message that the monolines are up against it, which plays into Buffett's hands.
$5 billion in capital and a 10-year dividend stopper is no big deal, either. How much of the "capital" is plain cash equity and how much reinsurance and other forms of claims-paying resources?
And if he's going to stick to munis, due to insurance accounting principles that require you to record your liabilities upfront and your income only over time as the liabilities amortize, you normally erode capital for the first several years. He wouldn't be able to dividend out for something on the other of 10 years and keep his AAA rating (and his by-laws will require him not to pay a dividend if it would reduce the insurance company's rating).
I'm beginning to understand why he's rich. Comes in like a white knight, and rides off with the treasure in his pocket, having paid nothing for it.
Buffett the supreme con artist to "assume" responsibility for $800 billion of municipal bonds guaranteed by MBIA
He has already assumed responsibility for mergers for M/A activity which has resulted in goodwill accounting of $33 Billion, which IMHO is Highly suspect, as no questions are asked about the valuations related to this type of Level Three Asset Valuation, thus one can assume that since regulations and accounting enforcement are not at issue, the assumption of $800 Billion in bond debt can simply be synthetically structured to morph into anything this next crook can dream up. MBIA took on this synthetic assumption and failed, but now Biffett with grand dreams has a better derivative model, 100% related to his goodwill accounting tricks -- which would fail if we had legal authorities with fragmented backbones, versus the jellyfish whores that are intertwined around this snakeoil con artist!
Re: So he's offering to save what can be saved: if Buffett reinsures the muni book, then it's protected from the blowback.
Save, you mean steal and then spin into new age derivatives to hide debt while he profits from chaos. Every see the movie, Its A Wonnerful Life? This is Potter to the T!!!
otter: [laughs] George, now that's just what I like so much about you. George, I'm an old man, and most people hate me. But I don't like them either, so that makes it all even. You know just as well as I do that I run practically everything in this town but the Bailey Building and Loan. You know, also, that for a number of years I've been trying to get control of it... or kill it. But I haven't been able to do it. You have been stopping me. In fact, you have beaten me, George, and as anyone in this county can tell you, that takes some doing. Take during the depression, for instance. You and I were the only ones that kept our heads. You saved the Building and Loan, and I saved all the rest.
George: Yes. Well, most people say you stole all the rest.
Potter: The envious ones say that, George, the suckers. Now, I have stated my side very frankly. Now, let's look at your side. Young man, twenty-seven,twenty-eight... married, making, say... forty a week.
Wake up America, Buffett wants to steal the system and cause systemic imbalance!
The entire point of It's A WL, is that without competition and honesty, the town, the bank, the system will become a unified mafia dream to control drugs and blackmarket activities, or in this case, to have unregulated securities, derivatives and synthetic debt instruments that know one can look at, unless your Potter, or Buffett!
Re: You saved the Building and Loan, and I saved all the rest.
Buffett as an investor in rating agencies, Buffett as reinsurance king with offshore, off balance sheet accounting, Buffett with $33 Billion in Goodwill accounting, Buffett as saint and sweet ol lovable guy, and he wants to help, isnt that nice, how sweet that he would help America and these poor companies that were over leveraged and run like crooked casinos....how nice that Buffett has the ethics to help!
George: [shaking Potter's hand] Okay, Mr. Potter. [drops Potter's hand] No... no... no... no, now wait a minute, here! I don't have to talk to anybody! I know right now, and the answer is no!NO! Doggone it!You sit around here and you spin your little webs and you think the whole world revolves around you and your money. Well, it doesn't, Mr. Potter! In the... in thewhole vast configuration of things, I'd say you were nothing but a scurvy little spider. You... [to Potter's assistant] And that goes for you too! [to Potter's secretary] And it goes for you too!
REALTY-BASED LAWYER: "- Mermani right, and then some. Basically Buffett is (on the surface) asking the bond insurers to pay him to take their profitable book. But that leaves out the ceding commission that the reinsurer pays the primary, which is usually around 30% (paid upfront). That would mean Buffett would more or less be getting the muni portfolio for free. Don't see why anyone would take that deal."
Speaking as an Ambac shareholder, the deal can make sense depending on the circumstances.
If you are certain that you can hold on to your AAA rating (this is a big IF given the rating agency flip-flops) then unloading the muni bonds via reinsurance makes sense.
I'm not an expert but the analyst quoted may not turn out to be right based on the details. Since the premiums are earned up-front on muni bonds and invested, the loss to the monolines should be smaller than 50%.
If the goal of the monoline is to retain its AAA rating, and it can be sure the rating agencies will give a solid guide on what capital is required, then this can make sense. Instead of issuing shares and giving up 20% yield (say a P/E of 5) or say 15% with debt-like instrument, this can make sense.
As for why a monoline might want to retain AAA at such a cost, it's because that's their core business. If you lose AAA, your muni bond business will be significantly smaller. One needs to compare the losses of unloading muni bonds against the loss of future muni bond business.
Secondary-market insurance requires that a bondholder place the bonds to be insured into a trust. The trust typically based in New York then issues a custodial receipt which is wrapped by the bond insurer.
A spokesman for the New York State Insurance Department said that the department does not restrict guarantors from doing business in other states but that the issue might be handled differently by departments around the country. Jain said his understanding is that Berkshires New York license allows it to insure in the secondary market bonds first issued in other states.
Buffett:
Potter, you old dog...the whole idea of bond insurance was to provide protection for municipalities--you know, schools, sewers, roads...all that stuff we all depend on! If one town fell on hard times, well, then, we had insurance.
But you! You pretend to insure everybody, anybody at all! The fools, the drunkards, the liars...and then when you can't pay up, you go bankrupt and none of us have any insurance at all!
Potter:
(rubbing hands together) Wah hah hah! I'll take the premiums, never pay a claim, and I'll be rich!
Buffett:
We'll see about that. Maybe I'll go into the insurance business...maybe those towns will see what you're made of, and maybe they'll come on over to Berkshire, where we have real insurance for real people...and you can keep your liars and drunkards over here, where they can't hurt anybody but you!
Those that insured CDOs are gone. Get out now. Get short if you want. The AAA won't matter as what municipal treasurer will tell his boss that he insured with Ambac or MBIA in the future? Now imagine that he can tell his boss that Warren Buffet is insuring their bonds. The BIs have tainted themselves and will die when it is clear that it will not bring the system down.
The New York Insurance Department expedited the licensing for Berkshire Hathaway Assurance Corp. The state's insurance superintendent, in a statement, said the state was doing what it could to help insurers win regulatory approvals needed to keep their businesses going.
If Berkshire Hathaway leverages its strength and issues reinsurance to other bond insurers as part of its new business, it could help boost firms like MBIA and Ambac, Stelmach said. Rating agencies said one of the ways MBIA and Ambac could raise new capital is through reinsurance plans to cover their outstanding books of business.
But, if Berkshire Hathaway provides no reinsurance options and instead just issues insurance on new municipal bonds, the new competition is likely to squeeze out some of the smaller insurers, such as Security Capital Assurance, Stelmach said.
Also on Friday, Berkshire Hathaway agreed to buy NRG N.V., the reinsurance unit of ING Group said for about $435.7 million in cash.
Re: r. Potter! In the... in thewhole vast configuration of things, I'd say you were nothing but a scurvy little spider.
Reposted above: Here's Krishna Memani's take from Deutsche Banks credit desk:
"The Buffett proposal calls for 1.5 times the initial premium. Assume for a second that they wrote the gty at 50 basis points. So it will cost them 75 basis points to reinsure. Assume a 10 year duration. The reinsurance will lead to a loss of 2.5 points (locking in a 25 bps loss per year for ten years). The corresponding freeing up of the capital is only a point. Net net, the proposal has the potential of consuming capital rather than freeing up capital for the monolines. And, in realistic terms, the likely loss in the portfolio is minimal. No equity holder is likely to accept such a proposal. At least, not yet. The only people who could make them are the regulators. And considering that they still believe these entities are solvent -- they said that in a letter(presumably legally binding) to Congress -- the likelihood of them cramming it down monolines throat is very low. This is a very down bid to test the desperation of the regulators more than anything else. Smart politically but unrelaistic to be hit, in my view."
Tanta, though impressive, doesn't seem like the smartest kid in class. And the sick greed that got us into this mess shows no sign of abatement, thanks to Warren Buffett.
The reason behind the mechanism in this story (which played on The Great Depression) of the run on the banks, was 100% related to a lack of accountability and unregulated, un-enforced loan practices which we see today with subprime synthetic derivative chaos. You see this same pattern emerge time after time, where banks become casinos, and then these bets increse to a point where the bank gambler collapses!
In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing. By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931.
Massive layoffs occurred, resulting in unemployment rates of over 25%. Banks which had financed a lot of this debt began to fail as debtors defaulted on debt and bank depositors became worried about their deposits and began massive withdrawals. Government guarantees and Federal Reserve banking regulations to prevent these types of panics were ineffective or not used. Bank failures led to the evaporation of billions of dollars in assets. Up to 40% of the available money supply normally used for purchases and bank payments was destroyed by all these bank failures.
Now, as for Buffett bashing related to Pottersville:
First, think back to the concept of accountability: Bank failures snowballed as desperate bankers tried calling in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. [5] Banks built up their capital reserves, which intensified deflationary pressures. The vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.
Okeeydookie, more accountability concepts >>
Monetarists, including Milton Friedman and Benjamin Bernanke, argue that the Great Depression was caused by monetary contraction, which was the consequence of poor policy making by the American Federal Reserve System and continuous crisis in the banking system.[7] By not acting, the Federal Reserve allowed the money supply to shrink by one-third from 1930 to 1931. Friedman argued[8] the downward turn in the economy starting with the stock market crash would have been just another recession.
As an added bonus, to piss people off, correlate this related tangent:
Harvard Scientist Dr. John Ross wrote in a letter published in the 'Chemistry and Engineering News' (July 27, 1980). Stated:
"There are no known violations to the second law of thermodynamics. Ordinarily the second law is stated for isolated systems, but the second law applies equally well to open systems. ... there is somehow associated with the field of far-from equilibrium phenomena the notion that the second law of thermodynamics fails for such systems. It is important that this error does not perpetuate itself."
Therefore, to close up here, we have a financial system in place which wants to keep the corruption going, the collusion, the bad bets, the non-repayment of debt, which is spun into extensions by using derivative chains that link synthetic financially engineered voodoo into a world of un-accountability which feeds on this chaos which has increasing entropy.
In the movie Wonnerful Life, Potter is in a position to steal business because the system allows him to have monopoly powers, which mafia like, are unchecked, unregulated and he can do as he pleases, because he is in control and has the power of money to expand his reach. He wants to destroy Bailey S&L, because it is competition and competition is the key symbolic driver to consider when you look at what Buffett is playing with. Buffett IMHO, should not be allowed to invest in rating agencies, and rating agencies should not be corporations that use the casino of the stock market as a means to fuel its growth, and thus be in a position where an investor, like a Buffett can extract pressure as a shareholder that might be able to influence ratings or to manipulate a fiduciary position. We are talking about trust and free competition and in this society, we are allowing a mafia like takeover of the financial system, which will result in our little towns being turned in to the nightmare that george bailey wanted to wake up from, where Pottersville was a drug infested casino/whore house filled with little people that feed of the exchange between drug dealers and money laundry organizations, in a world filled with the expansion of chaos!
Do I make myself clear or do I have to physically draw a picture and morph Potters face into Buffetts and then give you a choice between living in his hell or going to your windows and screaming that you aint gonna take this shit no mo!
Mortgage Firm Offers Files
To Sworn Owners of Loans
A WALL STREET JOURNAL NEWS ROUNDUP
February 11, 2008; Page C7
American Home Mortgage Investment Corp. is offering to hand over hard copies of 490,000 home-loan files to Wall Street investors who are prepared to provide a sworn declaration they own the mortgages.
The mortgages at issue may have been bought and sold many times since they were first issued by American Home sometime after September 2005. American Home isn't sure who owns the loans recorded in the files it is storing.
Maybe the romantic symbolism of Buffy/Potter is too subjective and cute, but look at Blackrock and The Florida Bond Implosion story and think in terms of Buffy-Potter:
Re: Florida State Board of Administration, Tallahassee, narrowed to 10 firms the candidates it will consider in its search for managers of as much as $35.5 billion in assets, including the $10 billion Local Government Investment Pool A and the $2 billion LGIP B. The two funds, which were internally managed, were subject to a run on assets caused by reports of subprime-related problems.
In case your out of the loop, the LGIP funds were split into two funds, the A fund which may survive and the B funds which are casino bets taken on by retarded people that didnt have a clue what they were doing, as they wasted other peoples money by illegally abusing their fiduciary responsibilities. When you take away accountability and let retadred people bet other peoples money, the retarded people will burn up as much cash as you stuff into their pig-like pockets..its like stuff cocaine in the nose of a whore that lives in Pottersville, they want more and more and life is all about getting more and taking something to the extreme edge of stupidity! Do you think Buffett will be buying the A funds or the B funds, and do you think he will cherry pick the A funds and then save Florida from the damage these retards spun out, and do you think Buffett will help pay back losses to pension funds attached to these collusive networks of crooks that should be burned alive? Do you think Buffett will be thankful to God that The Department Of Labor will help underwriters tap into the future cash flows of other peoples money, in the form of exemptions to prohibited actions, which allow these types of crooks to play like this is a casino where these little pension fund accounts are just waiting to go to slaughter?? God bless people like potter and Buffett!
These crooks in Florida are guilty of fraud, providing false and misleading information, mismangement and if we go back to Pottersville:
No securities no stocks no bonds nothing but a miserable little five hundred dollar equity in a life insurance policy. [laughs] You're worth more dead than alive. Why don't you go to the riff-raff you love so much and ask them to let you have eight thousand dollars? You know why? Because they'd run you out of town on a rail...But I'll tell you what I'm going to do for you, George. Since the state examiner is still here, as a stockholder of the Building and Loan, I'm going to swear out a warrant for your arrest. Misappropriation of funds manipulation malfeasance... [George gets up to leave] All right, George, go ahead. You can't hide in a little town like this.
And another thing, this is all about RISK (FRIGGN) TRANSFER!!!!!!
Buffett can not simply pick around the ground for a basket of blemish free apples and not take on excessive risk for his corporations. If he is going to save the bond world, he needs to place himself into a position of great exposure to massive risk. The only way he can do this is to use synthetic derivatives and he is so full of shit to play games and to suggest that he doesnt understand anything about these financial timebombs:
He needs to come clean and step down from the awe shucks im a good olboy con artist magic show....the magic lantern show in his tidy circus tent where derivatives aresoo unsafe.....gimmie a friggn break warren!
Re: To the extent the actuary is asked to quantify the risk transfer described in d. above, it
might be helpful to have available documentation supporting the analysis and
calculations sufficient for another actuary practicing in the area to follow. The risk
transfer documentation will be available to state regulators and auditors. In developing
such documentation, the actuary might wish to refer to Actuarial Standard of Practice
(ASOP) 9, Documentation and Disclosure in Property and Casualty Insurance
Ratemaking, Loss Reserving and Valuations
When evaluating reinsurance contracts as to whether risk transfer is reasonably self-
evident, it should be understood that this is a principles-based standard. Therefore, there
is no bright line that can be used for its application. As a matter of practice, it would be
more conservative to evaluate contracts for risk transfer when there is any doubt as to
whether or not risk transfer is reasonably self-evident
The 10/10 rule is a frequently cited test for determining if there is enough risk in a
contract to satisfy the risk transfer standard laid out in SSAP 62. Specifically, the 10/10
rule equates reasonable possibility with at least a 10 percent chance and significant
loss with a net present value loss at least equal to 10 percent of the reinsurers net
present value premium. The 10/10 rule may be thought of as a specific case of a more
general Value at Risk method for measuring economic losses under a reinsurance
agreement.
The Academys risk transfer report notes that many actuaries believe the 10/10 rule is
inadequate for purposes of testing across the spectrum of all reinsurance agreements,
particularly for agreements that reinsure low frequency/high severity risks. Further,
COPLFR does not believe a bright-line approach, without allowance for judgment, is an
optimal approach. These conclusions were supported by the NAICs CATF in its
comment letter on the Academys risk transfer report
Buffett isn't interested in a standard reinsurance transaction. He wasn't interested in the business when it was written, so ceding commissions and expenses are irrelevant. The only thing that matters is future cash flows. The unearned premium should roughly be equal to what was charged less expenses and less the proportion earned. 1.5 gives a margin of safety.
I think he is offering to put up $5 billion in real capital in a monoline structure. I don't know who would want to do that and not take anything out for 10 years. The income into the entity would include new written premium, investment income from the capital, and investment income from the unearned premium. Out of that he would pay losses in cash as they are due.
Obviously the monolines won't like it -- although mbi had to give away 1/2 its equity for an extra $1 billion.
Anyway, the easiest way to look at it from my point of view is that he will do it wholesale for 1.5 unearned premium reserve or retail (via wraps) for 200 bp.
The regulators will have to encourage the companies to go along. The fact that their original mission was protection of municipal bonds gives the regulators an alternative to some convoluted scheme involving banks.
Also, the rating agencies would have cover to do whatever they want.
But, yea....I'm not surprised that the insurers don't like it.
One additional thought.... There really aren't any other true AAA's out there with excess capital. High ratings via structured finance no longer get any respect.
When AIG's super senior AAA's are getting hammered, people want old fashioned capital.
He is offering to take the fattest, most profitable part of their business,'' said Jerry Bruni, president and portfolio manager, at J.V. Bruni and Co. in Colorado Springs, Colorado. Bruni has $650 million under management including Berkshire shares. The firm sold MBIA last month.I can't imagine why they would want to do that. If I were MBIA or Ambac, this does not sound like a good offer.''
This is a very appealing solution,'' Ackman said.It is a potentially very significant attempt to remove some of the systemic risk.''
Goldman Sachs Group analysts estimate that Buffetts proposal would free up approximately $6 billion in capital for the insurers, including $2 billion for Ambac, $2.5 billion for MBIA and $1.5 billion for FGIC.
Our other minority-owned investment is Ceridian, a leading information services company in the human resource, retail and transportation markets. Ceridian is probably most well-known as one of the largest payroll processing firms in the United States. We closed our minority investment in Ceridian in November and we are excited about the implementation of a 4 point cost reduction plan.
Specialty insurance revenue was $93 million for the fourth quarter, including $4 million in investment income, a decline of $2 million from the fourth quarter of 2006.
As Bill mentioned, we completed our investments in Ceridian in November. Our equity investment of approximately $500 million represents a 33% ownership stake in Ceridian. As is the case with Sedgwick, we will account for this investment under the equity method of accounting and Ceridian will not be consolidated for financial statement purposes.
Debt on our balance sheet primarily consists of the $490 million in senior notes due in 2011 and 2013; the $535 million drawn under our credit facility to primarily fund our Ceridian investment in November 2007; and debt at Fidelity National Capital, the vast majority of which is non-recourse. The debt to total capital ratio was 26% at December 31, 2007.
Fidelity National Financial Q4 2007 Earnings Call Transcript
Re: We believe that MBIA reinsured on a quota share basis 25% of its 2007 CDO transactions with Channel Re. As a result of Moodys and S&P not updating its ratings of Channel Re, these exposures do not appear on MBIAs list of exposures and have not been included in your calculation of MBIAs capital adequacy.
MBIAs second largest reinsurer is Ram Re which has reinsured $11 billion of par as of September 30, 2007. While the rating agencies have not updated their credit ratings of Ram Re, the market appears to have already done so. The publicly traded stock of Ram Holdings Ltd., the parent company of Ram Re, has declined 92% in the last year. The company currently trades as a penny stock with a market value of $32 million.
We believe that Ram Re is substantially undercapitalized and therefore, like Channel Re, is unlikely to be able to meet its obligations to MBIA.
Are Buffett and Ackman trying to crash the value of bond insurers, so that Buffett can steal market share with his new bond business and then scoop up all the good debt to underwrite reinsurance for the bad debts?
Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony
In U.S. antitrust law, the Sherman Act addresses single-firm conduct by providing a remedy against "[e]very person who shall monopolize, or attempt to monopolize . . . any part of the trade or commerce among the several States."[3] This prohibition does not condemn monopoly per se but only monopoly that has been acquired or maintained through prohibited conduct: Most businessmen don't like their competitors, or for that matter competition. They want to make as much money as possible and getting a monopoly is one way of making a lot of money. That is fine, however, so long as they do not use methods calculated to make consumers worse off in the long run.[4]
With regard to multi-firm conduct, the Sherman Act addresses this by prohibiting "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce."[5] Conduct falls within the scope of this prohibition only if some form of agreement or concerted action can be proven.
Section one of the Sherman Act prohibits concerted action, which requires more than a unilateral act by a person or business alone. The Supreme Court has stated that an organization may deal or refuse to deal with whomever it wants, as long as that organization is acting independently.
The courts have held that conspiracy requires an additional element such as complex actions that would benefit each competitor only if all of them acted in the same way.
Tying arrangements are closely scrutinized because they exploit market power in one product to expand market power in another product. The result of tying arrangements is to reduce the choices for the buyer and exclude competitors.
Buffet has $2.4 Billion invested in Moody's rating agency, a condition which presents conflicts of interest and Tying arrangements IMHO.
Market allocations are situations where competitors agree to not compete with each other in specific markets, by dividing up geographic areas, types of products, or types of customers.
Buffett needs The new York Insurance Board to bless him for expansion of his market; they said great, go for it and we will push to help you!
Section one of the Sherman Act provides that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations is hereby declared to be illegal."
Bermuda and offshore reinsurance trusts are given special treatment to expand the transfer of risk.
Buffett acknowledged to the Journal that there is a risk in local governments deciding that the price of its bond insurance is too high and choosing to do without. "It could be tiny, it could be very large," Mr. Buffett said of his new venture.
In another insurance deal, Buffett's Berkshire Hathaway is buying ING Group of the Netherlands' reinsurance unit for 300 million euros, or $436 million. Reinsurance helps insurers spread their risk.
Karen Richardson in the Wall Street Journal reports that Buffett is starting a bond insurer that opens for business today in New York State. Buffett told the Journal that the business will seek approval to open in California, Puerto Rico, Texas, Illinois, and Florida.
Some lawmakers already are concerned and a House subcommittee has a hearing scheduled for Thursday on the state of the bond insurance industry.
'The written responses of financial regulators to recent inquiries I made about the problems affecting the bond insurance industry and the shortcomings of its current regulatory regime have convinced me of the real need to reform the oversight of this important sector of our financial system,' Paul E. Kanjorski, D-Pa., chairman of the subcommittee on capital markets, insurance, and government sponsored enterprises, said last week.
Not surprisingly, such developments have the attention of Congress -- particularly of Capital Markets and Insurance Subcommittee Chairman Paul Kanjorski. Already in the midst of an ongoing investigation of state insurance regulation, Kanjorski is planning a mid-February hearing focused exclusively on the monoline sector. Senate Banking Committee Chairman Chris Dodd likewise has an eye on the bond insurers, and may be mulling steps to address their line of business.
Questions abound, and will no doubt be asked during the forthcoming inquiries. Where were state regulators when insurers starting taking on these risks? Where was the solvency monitoring, supposedly the raison d'être of the NAIC? How is it that an industry with more than $2 trillion in insured obligations was permitted to keep so little in reserves?
All fair questions, no doubt, but similar interrogatories also can and will be hurled in the direction of such federal authorities as Housing and Urban Development, the Securities and Exchange Commission, and the Federal Reserve. When it comes to the now-burst housing bubble, there appears no shortage of regulators who could be accused of falling asleep at the switch.
On September 23, 1998, around 11:30 a.m., LTCM received a $250 millionoffer for its assets that was to expire within an hour, at 12:30 p.m. Thepurchaser was to be a limited partnership comprising Berkshire Hathaway,American International Group, and Goldman Sachs. 12 According to theterms of the offer, management of the assets would have been under thesole control of the newly created partnership. According to LTCMofficials, the Fund could not be sold without stockholder approval and theapprovals could not be obtained in an hour. The offer was subsequentlywithdrawn because Berkshire Hathaway representatives were unable toalter the terms of the original agreement.According to Federal Reserve officials, the Federal Reserve did notparticipate in the evaluation of the deal. FRBNYs president testified thathe informed an LTCM official that There is no guarantee whatsoever thatthis consortium approach is ever going to come together. At some point,the official telephoned FRBNY to inform it of potential legal issuesconcerning the offer. FRBNYs president testified that he informed theLTCM official that he had only one offer to consider, the BerkshireHathaway offer, and that a bird in the hand is worth two in the bush.FRBNYs president added that this type of involvement is as close to theedge as any central banker should ever go, and [it] may be right at the edgeof getting involved in a situation and encouraging an outcome. We cantget involved and say this has to be the outcome. Later in his testimony,FRBNYs president said that he was informed that the deal did not workand that the offer was off the table
I think MBIA should meet with Warren, listen to him and thank him for the offer. Then, they should buy him lunch at Wendy's, a pair of Dexter shoes for the road and one-way ticket home on US Air, to refresh his memories a little and remind him than he does not walk on water.
In conclusion, why would the DOJ be opposed to Microsoft manipulating and abusing its monopoly power to crush competition, while on the other hand, the threat if market manipulation and collusion are seemingly blessed by the powers that be. Essentially, the government is looking for a bailout of its own, as they duck responsibility for their part in this collusion and thus are willing to look away at any threat to competition which might be tied to rating agencies and the dissemination of false and misleading information! The conflict of nature here is of great importance and has less and less to do with MBIA, as a hollow shell of a company worth pennies -- but more about the reality that there is not the connection being made that Buffett is not involved here as a simple investor, but a threat to market competition. The liquidity he offers has a very high price and IMHO, he should be investigated just as Microsoft was, because he is using the power of money to place himself in a position of unfair competition, and that creates gross inefficiency and it should be illegal for a person to have a 17.2% interest in a company like Moody's and then come to town, get on TV and then take down a stock and then go in for the kill, while the insurance authorities cheer him on. This is chaos and its not right and this corruption will become worse if not acted upon by an honest DOJ!
Right or wrong Microsoft was judged as a monopoly. During the antitrust case it was revealed that Microsoft had threatened PC manufacturers with revoking their license to distribute Windows if they removed the Internet Explorer icon from the initial desktop, something that Netscape had requested of its licensees.
Judge Jackson issued his findings of fact on November 5, 1999, which stated that Microsoft's dominance of the personal computer operating systems market constituted a monopoly, and that Microsoft had taken actions to crush threats to the monopoly, including Apple, Java, Netscape, Lotus Notes, Real Networks, Linux, and others. Then on April 3, 2000, he issued a two-part ruling: his conclusions of law were that Microsoft had committed monopolization, attempted monopolization, and tying in violation of Sections 1 and 2 of the Sherman Act, and his remedy was that Microsoft must be broken into two separate units, one to produce the operating system, and one to produce other software components.
Judge Jackson's response to this was that Microsoft's conduct itself was the cause of any "perceived bias"; Microsoft executives had "proved, time and time again, to be inaccurate, misleading, evasive, and transparently false. ... Microsoft is a company with an institutional disdain for both the truth and for rules of law that lesser entities must respect. It is also a company whose senior management is not averse to offering specious testimony to support spurious defenses to claims of its wrongdoing."
"Gut the monolines into two parts: the crap and the good, and buy the good." Buffett said he wants to make money in this deal. His main aim is maximise money and minimise competition. He will try to avoid some crap muni bonds too( maximise). If monolines go under or waits longer, he will have compitetion(minimise). Buffett's life time opportunity. Berkshire stock holders are going to laugh all the way to bank.
Buffett is not the only game in town for bond insurance. Of the "big four" monoline insurers, FGIC is essentially dead, Ambac and MBIA are seriously ailing, BUT FSA is doing just fine. FSA avoided the worst of the structured finance deals and subprime (althought it did some HELOC deals that it now regrets). FSA has hugely increased its market share of bond insurance, in the primary as well as secondary market. After all, what bond emitter is now buying insurance from the other three in the current atmosphere?
Buffett is NOT offering to take all the public finance bonds insured by FGIC, Ambac & MBIA. Following is net par outstanding as of 9/30/2007 in billion $ (with % US public, % US structured finance, % Foreign):
MBIA $673 (59%, 24%, 17%) //
Ambac $556 (54%, 32%, 14%) //
FSA $365 (62%, 25%, 13%) //
FGIC $315 (71%, 23%, 6%) //
[Data is from a FGIC presentation]
This gives $920 billion net par outstanding of US public finance for FGIC, Ambac & MBIA. Uncle Warren only offered to take up $800 billion. Maybe he didn't want the NJ bonds? More seriously, I've had the impression that he is more interested in the general obligation bonds (backed by taxing authority) than the revenue-backed bonds (public hospitals, sports stadia, toll roads ...).
Why should the holders of bonds he doesn't like find themselves lumped with the structured finance part, while Uncle cherry picks the best stuff for himself (AND asks to be paid for his trouble?). I doubt the insurance regulators would choose such a solution.
.
once MBIA et al lose AAA rating, the muni market goes boom (forced sells).
But this does not have direct effect on MBIA et al going under whatsoever. The insurnace is for the actual bond, not for a specific rating.
This means the hot potato is being held by the bond holders, not the MBIA et al, who may very well overcome this (but without AAA rating). At least, they have a chance (without buffett) ... and he knowing this makes his offer senseless.
In the end, if the government will provide re-insurance for MBIA they may very well survive, without actual cost to taxpayers. I think this is the likely actual solution, coming next week!
Keep in mind the fight is about AAA, not bankruptcy. If MBIA et al return to the old business, they may overcome the current losses with the next 10 years' income.
OT - This is "news"?
MORTGAGE CRISIS SPREADS BEYOND SUBPRIME LOANS - NY Times
he wont touch CDO's! So, even if his plan works, which it prob wont other than give the markets a short jolt of confidence, there will be more write downs!
It doesnt fix where the problems are.
Smart move by Berkshire. I can see why Buffet would do this. The only reason the monolines might go for this is in some crazy hope it will bide them enough time to make it over the hump.
This is the equivalent of offering to buy Allstate's insurance business outside of the gulf coast states just after Katrina.
Isn't Buffet basically offering to gut the monolines?
While providing support to prevent or mitigate a systemic event - at a tidy profit no doubt.
It doesnt fix where the problems are.
I'd say, it doesn't try to fix problems that cannot be fixed.
If I'm reading this correctly, Buffett is observing that the municipalities are going to get dragged down with the CDOs, because the bond insurers can't be fixed, and will get downgraded, and once they are, the munis' bonds get killed even though muni defaults aren't the problem here.
So he's offering to save what can be saved: if Buffett reinsures the muni book, then it's protected from the blowback.
That would be precisely the kind of "bailout" that leaves the consequences of moral hazard in place. Who could dislike it, except those who engaged in reckless insuring in the first place?
What Buffett is saying is...there's no need for a public bailout of the public interest. I am willing to take on the part of this mess that is "public interest." It underscores the fact that the most troubled side of the monoline biz has nothing to do with the public.
What Buffett isn't saying is that he wants to cherry pick the best muni credits in monoline books and leave the garbage to go belly up.
energyecon- "Isn't Buffet basically offering to gut the monolines?"
Conjure Bag says, "Yes, and it's wonderful."
Who could dislike it is state insurance commissioners, who are charged with protecting all policyholders equally. They would want Buffett to take all the muni biz or none at all. Cherry-picking is not in their interest.
I appreciate Buffett's willingness to step up and provide insurance so that the government does not have to do it, but I'm not sure he realizes that "we are all subprime now." Some of those non-subprime muni bonds might actually start behaving like some of our subprime friends in the near future . . . (e.g., muni bonds from overbuilt California suburbs.)
What does he think this is?
A buffet?!
thank you, thank you. I'll be here all week!
I can easily see a scenario where the government would force the insurers to turn their muni business over to Buffett, which would be a righteous screwing for them.
Yes I see how news that happened LAST week and doesn't really solve ANY of the growing concerns of a downgraded insurer is good for the market to get juiced upwards of 100 pts.
This is getting out of hand with the futures crap....
MS
Peripheral Visionary:
I think that is the whole point. Doesn't Buffett still have his house in Laguna Beach? I am sure he knows all about the problems in the Inland Empire and other overbuilt places in CA. He didn't get this rich by being dumb. He knows that he'll either get the good stuff or the monolines will let it all go to shit. He's betting that the AAA munis will force the monolines to sell(if they are smart).
So what's to stop any single municipality from terminating their agreement with AMBAC and taking out Buffet's insurance? Why do the monolines have to agree to the plan? I don't understand why their cooperation is needed.
Post over on Accrued Interest about the impact that the problems with the monolines is having on the ARS market. ARS auctions aren't settling and some municipalities are getting hammered with high interest rates.
He's suggesting that the "sheep" are going to choose to refinance in mass soon.
Accrued Interest: You have failed me for the last time, Auction Rate Municipals!
If you are buying stocks on these pumps you are the sucker. It is almost funny to watch. Data continues to stream in on the negative side, yet these pumps keep happening. You have to ask yourself why? I bet someone smarter than you wants to unload.
Tanta, with all due respect (love your stuff!), I think you're missing the hostage value to the monolines of the municipals.
It's precisely in the monolines' interest to keep the municipals, with the threat to the system that if the monolines get downgraded the municipals get gutted because a lot of institutions will need to sell them. Without the municipals in their books, there would be less pressure on the government to help the monolines.
Blueridge's question's a good one - anyone know what the "typical" terms are for a muni bond to obtain insurance from a moronline? Is there a mandatory renewal each year or some other term which makes it tough to run to Berkshire?
Umm...can you say "undercut"? You gotta love Buffet. He knows value and he clearly sees some in the muni bonds. However, he will never overpay and I guarantee he low-balled ABK, MBIA, FGIC, etc. You notice that one of them has already responded with a NO? This is vulture investing at its finest.
Why doesn't buffet let them get downgraded and go under first? Once they're bankrupt, I would imagine any agreement between them and the municipalities would be nullified. I assume this would be an implied breach of contract.
Then, Buffet could just get their business the old fashioned way and wouldn't have to pony up $5 billion.
$5b for buying the cash flow behind $800b in safe (for now) muni bonds seems awfully low. The rejection may be one of price not principles. Principles at Ambac? Sorry, got carried away with fairy tales of fiduciary responsibilities and such. Sorry. Then again maybe Buffet is coming around to my way of thinking (the hubris!). People forget that most of these municipalities are full of nothing but real estate agents and dentists and everyday folk who have just lived the same decade of excess and overreaching as the rest of us. They are not going to have the same sense of responsibility of previous generations. They very well may surprise us all by defaulting on munis especially when voters demand it by rejecting increased taxes.
Can't blame Buffett for trying.
It seems like a sensible solution to me, but I can't imagine that anyone is going to sign off on it. Once you make that kind of sale you're pretty much admitting to the world that you've run your company into the ground.
Buffett is willing to offer to buy now to get a monopoly. The other monolines are his competitors. If they get bailed (even via a bankruptcy-like deal) he has competitors and less profits. But if he's willing to pick up the muni business, the government has much less interest in bailing out the other monolines.
At the same time the chance of him getting taken up on this is nil. If the monolines sell their possibly profitable muni insurance to him, they're left with the toxic CDO insurance and not even a fig leaf of future premiums from legitimate insurance. They don't dare accept. So this is a manuever to increase the chance the other munis will go under, giving Buffett almost the whole market once they do.
Who could dislike it...?
The guys who get paychecks from the monolines.
Ah, if the prosecutors gave them all immunity, then there'd be a stampede by current management to hand it over and step outta the way.
Left would be merely the bagholders, the shareholders and the derivatives counterparties.
Hey, so, what's to dislike?
This is a strategy to drive all muni bond business to Buffett the moment his business hangs out the "open" sign.
This is hardball politics over money. The monolines' PR firms should be attacking Buffett now, aggressively, scaring that business back into their arms. But stupid is as stupid does.
If Buffett can save local taxpayers a few bucks and make some for himself, what's wrong with that? As for the market going up, it may not be due to Buffett at all, simply that anyone who wanted to sell already sold last week. Much of the time, the market trades on technical factors; the day's news is just an excuse.
Economists see small growth effect from stimulus: Philly Fed
Economists surveyed by Philadelphia Fed see no recession
Philly Fed survey says growth outlook much weaker
REBear-So? No news there; already discounted.
Buffet is a genius, and tanta is on a roll today.
I can't believe anyone was seriously entertaining the idea, in recent days, that Buffet would bail out the monolines.
He's positioning now - MBIA, Ambac, FGIC etc. will all go to the dustbin of finance history. And Berkshire will pick up the business they were in before they lost their collective minds betting on short term gains.
And the market is up 1.5% on this news?
What flavor of Kool Aid are they drinking on the Street?
Tanta, with all due respect (love your stuff!), I think you're missing the hostage value to the monolines of the municipals.
I actually noticed that part. I thought Buffett's whole plan was to make that clear: he buys it or we buy it.
The audience for this pitch is not the monolines but to the NY state insurance commissioner and wall street.. Look, Buffett is the one breaking the news. Did he ever do that before a deal is completed? There is absolutely no reason for the monolines to take up on his offer. However, there is billions dollars reason for the NY State Insurance commissioner to think it through.. The commissioner already tried once getting banks together and get nowhere. Now Buffett is offering to take care of the muni which is the big worry for the commissioner since it may cause our banking system (and insurance system) to fail with all the write off and capital requirement associate with rating downgrade. The rest of stuff that monolines insure has much less impact to the banking systems..
OT:
another great read by Mike Whitney.
The Mother of All Rip-offs
Get Ready For A Real Hosing
The Mother of All Rip-offs: “Get ready for a real hosing”
by Mike Whitney
AheadOfTheCurve,
I'm sure all the bad news is discounted and there are no premiums yet for the good news like Buffet makes a lousy offer to monolines.
What's truly hilarious is that the MSM is reporting that Buffet has offered to help the monolines.
This rally has all the trappings of a pump-and-dump.
("Buffett" has two "t"s, dammit.)
Of course he is making a lowball offer; that is what the man does for a living. But it also provides a clear path by which the regulators can address their systemic risk concerns without spending a dime of taxpayer money: Simply force the monolines to accept the deal and cede the muni business to Berkshire Hathaway.
As a concerned American (and Berkshire shareholder), I fully support this idea.
Tanta writes:
I thought Buffett's whole plan was to make that clear: he buys it or we buy it.
What? a large entity with taxing power and reliable cash flow (and printing presses) self-insure? That's exactly what they should do. I fail to see why lenders should get lower rates and municipal borrowers less value just so a private group can get rich from what is an otherwise closed loop system of financial interdependence.
Could it be that Buffet senses a bottom to all this ?
Buffet's not trying to save the monolines, save anybody, bail out anybody.
Buffet's trying to make money. It's what he knows how to do, and he does it well. He wouldn't take a monoline as a package right now if you threw in pink unicorns.
Buffett has not offered to bail out the monolines. He has thrown them an anchor, and when he is sure they have drowned, he will pull it back up and rifle their pockets.
And god bless him, too.
So what's to stop any single municipality from terminating their agreement with AMBAC and taking out Buffet's insurance? Why do the monolines have to agree to the plan? I don't understand why their cooperation is needed.
blueridge | 02.12.08 - 9:57 am | #
Municipalities generally pay all the premiums up front, with part of the bond proceeds, the monolines hold on to that cash and recognize it as income over the life of the bond. So yeah they could cancell, but would still be out the premium they paid. Interestingly, this is not generally true for the subprime structured finance crap they insured. Seems like a great move by Buffet, and one that would help prevent a lot of collateral damage. The CDO's still go to hell, but all those County, State and local general revenue bonds, the stuff mostly held by conservative little old ladies stay solid.
I think the government should force the monoliners to sell the munis to him. They've screwed themselves, and this is the best way for the country to get out from under these vultures.
Don't know the legal ramifications of all this, but surely some way can be arranged to force a sell....
sorry OT - (From the Philly fed)
"Growth in the current quarter is projected at an annual rate of 0.7 percent"
"growth of 1.3 percent in the second quarter"
"The risk of a contraction has risen in this survey. Although the forecasters median estimate for real GDP this quarter and the next suggests slow, but positive growth, they think the risk of a contraction is high. That risk is pegged at 47 percent for growth this quarter, up from 23 percent previously, and 43 percent for growth in 2008 Q2, up from 22 percent. "
First Quarter 2008 Survey of Professional Forecasters - Philadelphia Fed.
Ohhh, I like. Gut the monolines into two parts: the crap and the good, and buy the good.
Buffett is very VERY careful with long term obligations, after being burned on Swiss Re's derivitives business when he bought the reinsurance business.
So he's now careful about only getting the good part when you have a mixed-bag of good & crap.
Oh, and he sold his house in Emerald Bay about a year ago IIRC.
Buffett Buffett Buffett Buffett Buffett Buffett Buffett Buffett Buffett.
Get it?
This approach does change the balance. Since insurance coys like to address risk by rounding out what they insure; it is, or will set about the demise of the monolines...they will be stuck with all the junk.
Damed if you do damed if you dont.
OT: TAF auction for 30B at 3% (2x oversubscribed).
Great deal for Buffett.
Good news for Muni issues and issuers.
Bad news for monolines.
Bad news for non-Muni credit markets.
Pretty simple.
This would guarantee a wipe out of the monolines and the wrapped non-Muni issues would crater even further. I would not expect that cratering to be "contained".
Buffett is no John Pierpont Morgan.
Yes, the Street bullies are back to pump this thing up. Has this anything to do with Friday's option expiry? Perhaps?
Let's see what has changed while Buffet is preparing a feast on munis .. the banks still needs to re-capitalise; housing inventories are not disappearing at any alarm rate; the questionable consumers' free wheeling, high spending habits; no house as an ATM; increased counter party risk in CDS and related derivs and the list can still grow ...
So has the world really changed beucase of Buffet?
Buffett is brilliant. This is a stroke of genius from almost any angle. Very nicely done.
Maybe next week he can offer to buy TWX, sans AOL.
Well, he had two houses in Laguna Beach, he sold the second one, a 2 bedroom on a 2000 sq foot lot for $3.5 million or so.
"It's precisely in the monolines' interest to keep the municipals, with the threat to the system that if the monolines get downgraded the municipals get gutted because a lot of institutions will need to sell them. Without the municipals in their books, there would be less pressure on the government to help the monolines."
Why would the munis keep the monolines as providers then? If my insurance company sucks big time, I move my business elsewhere. Why wouldn't the munis do likewise?
Whatever makes the stock market go up.
but surely some way can be arranged to force a sell
i think the technical term is bankruptcy.
If Buffet's move is so great, where are other players? Other insurers can compete with Buffet for that munis business. There is nothing to stop them,
So at what point in the day does Buffett say he was Misquoted?
Technically it's not everything but subprime. Outside of the US, the monolines have quite a large business in non-muni infrastructure bonds and to a lesser extent non-mortgage securitisations (eg Russian/Kazakh/Turkish diversified payment rights, credit cards and so on). In the grand scheme of things its small beer compared to the muni business, but we're still talking many billions of dollars.
Nicholas Weaver --
Buffett is very VERY careful with long term obligations, after being burned on Swiss Re's derivitives business when he bought the reinsurance business.
I think you mean General Re, not Swiss Re.
But your point stands. Buffett is no fool. He is essentially offering to buy the only profitable part of these businesses for a song.
Buffett also never discusses his plans in public until after the fact. The purpose of talking about it on CNBC is to bring pressure on the monolines and the regulators. Duh.
CNBC's characterization of this as a "bail out of the monolines" is right up there with their usual hilarious journalistic standards.
MBIA shareholders -- God bless 'em -- are not being fooled.
The monolines can not cancel the insurance. It is bought up front and it becomes a permanent contract with the investor who buys the bond, for the life of the bond.
Insurance regulators are charged with protecting the interests of both policyholders (munis) and investors. But really, their primary fiduciary duty is to investors, much as their primary duty in life insurance and annuities is to protect beneficiaries (not policyholders).
Insurance regulators could allow Buffett to reinsure selected bonds, subject to regulatory review and approval. But from a practical standpoint, this could only happen after the insurance companies (not the holding companies) are put into receivership by the states. It could be that the "next shoe" will be receivership and Buffett is anticipating this.
It isn't the goats that are unhappy, it is the shepherds who would see all their sheep go to Buffett while they are left with the goats.
Goats that they themselves originally agreed to shepherd, it is true, but goats nontheless.
Where does anyone see that Buffett has offered to buy (reinsure) all the outstanding muni bond policies of the monolines? I don't see that. He's cherry-picking.
He would be a fool to reinsure the lowest 10-20% of the insured muni universe.
"This is hardball politics over money."
Absolutely. This is real hardball by Buffett. It puts the competition in a very tough spot; it inserts Buffett between them and their only profit-porducing customers.
"If Buffet's move is so great, where are other players? Other insurers can compete with Buffet for that munis business. There is nothing to stop them,"
How many other companies in the world have AAA rating and 40B in the bank?
As Tanta and a ( and metoo ) note, Buffett announced a proposed deal that was rejected by one monoline and got no response from the other two; this is rather unusual no ?
The monolines must be holding the muni business hostage - a MAD game - to get something for the CDO biz - and Buffett is letting it become widely known - in preparation for a forced solution? IMO it doesn't look good for either the monolines or the owners of the insured CDOs that will have worthless insurance.
-K
This also ought to really depress Wall Street for this reason: if political sentiment moves toward Buffett's plan, the end result would be BK of all monolines left with non-muni books. Then where would all the CDO guarantees go? (hint: gone to **** every one).
Any conflict in owning piece of Moody's? Hmmm...
Great strategic move taking his plan public.
Can someone tell me the last few times that any municipal bonds actually defaulted? I don't think you can.
There were defaults last year totalling less than 500mm if I remember correctly.
I hereby offer to buy Bear Stearns, sans losses.
I always feel on safer ground when agreeing with Tanta, so let me now boldly say...
If this works in giving $800 bln in muni debt a AAA rating, it will mean that one asset class is made relatively safe from nominal price deflation. From a macro perspective, asset price deflation can be a big problem. Also from a macro perspective, having one level of government able to do a bit more snow removal and a bit more school repair during a slowdown means less fiscal policy drag at an inopportune time. With regard to Kicker's opint, UBS warned yesterday that the auction-rate securities market might come apart (while helping one NY water region exit the ARS market). It's a roughly $200 bln market. Munis are major participants, and at least some part of that market may be helped by what Buffett has proposed.
My guess, much like Joe's, is that Buffett has some leverage over the insurers through their clients. If the bond insurers are unable to offer AAA coverage, with all that implies for municipalities and municipal bond holders, they are really going to tick off their clients by holding them hostage. Buffett can go out and cook up his own bond insurance business from scratch, and still put a huge hurt on the crippled bond insurers, without giving them a dime. Municipalities would have a strong practical motive to go to Buffett, and a raging emotional motive to do so. If bond insurers do the right thing for their clients, they may find they still have a place in that market (or some market), assuming they survive.
Buffet is the first of probably several reinsurance companies willing pick up the Muni bond business so the issue of saving the
monolines lessen considerably. So now we are only talking about the non-muni business that needs to be saved which puts a different light on the NY State rescue plan not to mention the rating agencies lack of action in downgrading the impaired monolines.
"I thought Buffett's whole plan was to make that clear: he buys it or we buy it."
To be more precise, he buys the viable portion of "it" and we buy the rest.
This is the classic pre-nationalization play: healthy parts of the business stay private, gov't (read: taxpayers) get the toxic waste dump. Everybody, everywhere on Wall St. is now telegraphing Washington:
Nationalize this crap, or we will let it blow up in your face- either way, you will be staring down the barrels of some seriously pissed citizens.
And the public sector now has to walk a line. A lot of people have expressed anger at the bailout culture of Washington, but I think they are actually fighting it tooth and nail, mainly because international implications of the Federal gov't swallowing up so much bad debt.
Every week Washington fights the pressure to step in and play sugardaddy, the Street ups the ante.
Can someone tell me the last few times that any municipal bonds actually defaulted? I don't think you can
Spam is funny..I like spam.
spam,
"In 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."
"n 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."
MUNICIPAL BONDS AND DEFAULTS
Cheers,
The devil is in the details and you always make your money upfront on these deals. I don't know the real numbers but play along with some fake numbers:
Say the muni insurers charge 1 percent upfront to bring the bond offering up to AAA. They have $800b if this stuff so they have $8b in the bank "insuring" the bond performance. Who wouldn't want to buy that for $5 billion? That's where the devil comes in. The insurers cannot touch the $8b, it is there to cover the expected losses. If however they sell the assets and the obligations to Buffet they have $5b of free and clear cash to cover salaries and bonuses and stuff. Buffet can afford to have his money encumbered, the insurers cannot. I wish someone could provide the real numbers but I think my point stands as to the various parties' motivations.
reckless insuring = ruthless insuring
Not a good match but I couldn't resist.
Maybe this works: Buffet = ruthless?
"If the bond insurers are unable to offer AAA coverage, with all that implies for municipalities and municipal bond holders, they are really going to tick off their clients by holding them hostage. "
You don't really care if you tick off a hostage. That's why they're the hostage. And you certainly don't care if you tick off someone if, when they're ticked off, you're already dead.
I love the Lasik ad that is running on CR. No money down, no interest, no payments. They have shown us the way out of the housing crisis. Or is that how we got here? Good stuff!
Wake up! You're reading the premier blog on the Net about housing. There's no difference between housing and muni bonds.
Both have prime and subprime.
Both have had big refinance markets.
Any borrower who couldn't make payments had an easy out to refinance into a new loan (usually at higher principal) to keep making payments.
Both had ways to turn junk paper into magic AAA.
Now, both have had the magic AAA go away. And both are seeing the refin opportunity go away.
There have been little muni defaults, but only by issuers who couldn't get insurance or refis. Now comes the flood of all the defaults that should have happened over time but were propped up.
Rob,
This was the deal that Buffett offered:
And we offered to take over the liabilities for the whole $800 billion of these three companies for a premium that would be equal to, essentially, one-and-a-half times the remaining premium left over the life of the bonds. They have what they call an 'unearned premium reserve' which reflects the original premium less the amount that's been proportionately earned. And we said, for one-and-a-half times that amount, we would take away all of their liabilities so that the $800 billion in bonds would carry a real triple-A insurance, and would sell in the market as if it had real triple-A insurance. Whereas now the bonds sell at significant discounts.
Buffett's Big Muni Bond Offer: CNBC Interview Transcript (Part 1) - CNBC
This is from the transcript of the phone call to cncbc. If the initial premium was 1%, and NONE was spent then its 1.5% to me. In practice it ought still to be 1.5% of what's left in the pot so to speak.
-K
*Everything But Subprime
You misspelled "Shitpile".
" There's no difference between housing and muni bonds. "
Um, no. Muni bonds don't default. Why? The issuer of a muni bond possesses the ability to tax their inhabitants.
Good try, though. I sentence you to 24 hours of reading nothing but the blog named Accrued Interest.
Actually, none of the rest of your points are factual, so we'll just recommend a refresher over at that blog.
As an example: " There have been little muni defaults " - Um, not of principal. Orange County missed an interest payment but made that up and didn't default on the principal.
ISTM that this is analogous to starting an auto company and buying some of the successful lines from Ford and GM. The main differential advantage in that case is not being saddled with pension obligation for current and near future retirees. Buffets main advantage in this case is not being saddled with payouts for a bunch of bad real estate bonds. I suspect that this bid is partly an attempt at preventing the existing insurers from getting bailed out because local governments "need" them. Buying existing, seasoned, bonds probably gives him a little bit of help entering this market, but the barriors to entry aren't nearly as high as they'd be in the auto business. The main barrier is simply capital reserves, and if he has them he can simply insure only NEW munis and let the existing monolines wither on the vine.
Here's Krishna Memani's take from Deutsche Banks credit desk:
"The Buffett proposal calls for 1.5 times the initial premium. Assume for a second that they wrote the gty at 50 basis points. So it will cost them 75 basis points to reinsure. Assume a 10 year duration. The reinsurance will lead to a loss of 2.5 points (locking in a 25 bps loss per year for ten years). The corresponding freeing up of the capital is only a point. Net net, the proposal has the potential of consuming capital rather than freeing up capital for the monolines. And, in realistic terms, the likely loss in the portfolio is minimal. No equity holder is likely to accept such a proposal. At least, not yet. The only people who could make them are the regulators. And considering that they still believe these entities are solvent -- they said that in a letter(presumably legally binding) to Congress -- the likelihood of them cramming it down monolines throat is very low. This is a very down bid to test the desperation of the regulators more than anything else. Smart politically but unrelaistic to be hit, in my view."
Smoke and mirrors.
" If the bond insurers are unable to offer AAA coverage, with all that implies for municipalities and municipal bond holders, they are really going to tick off their clients by holding them hostage. "
This is grossly erroneous. Muni bond insurance is a wrapper, not financial alchemy.
"Say the muni insurers charge 1 percent upfront to bring the bond offering up to AAA. "
There's no way it averages out to 1%, although individual bonds could in theory reach that. Before the crisis, monolines were charging in the region of 20bp-40bp in the markets I cover for deals rated as low as BBB-.
Memani's take sounds very plausible to me. I'm not at all surprised the monolines have refused the offer - it would basically kill them off as going concerns, and they're only going to accept that if they think there's no other alternative. So far most of the monoline people I and my colleagues have spoken to insist that they can recover. That may be mistaken, but it's what they believe.
CFC part of the DOW 30...
wuuuu huuuuuuuuuuuuu
So much hubris about the infallibility of municipal revenue streams.
Buffett is too early!
a,
There are two substantial differences between these "hostages" and real hostages (ignoring the part about loss of freedom and risk of death an limited potty breaks). One is that these "hostages" are one side of a market in which somebody is gonna wanna take the other side. The other is that, perched atop the "hostages" are "politicians" and they can, when they get up enough gumption, change the rules on ya. These hostages have leverage.
"How many other companies in the world have AAA rating and 40B in the bank?"
I'd like to know which bank that is!!
Unsympathetic,
You're a fu**ing idiot who knows nothing. 90% of the revenue bonds issued have no taxing authority at all.
They receive tolls, fees or special tax assessments granted by other entities. They finance infrastructure in a given geographic area, such as roads, water & sewer, hospitals, schools and office/industrial parks. But in MANY cases, the people who are suppose to live in these districts don't live there yet. They are future growth. When you have a historic real estate downturn in which whole areas turn to tumbleweeds, these bonds will default. Nothing except growth stands behind them.
scooby, I am willing to bet you are wrong about that.
There will be no CDO bailout.
Loser pays one dog ball to Conjure bag, harvested by hand on the African savannah from a wild hyena (or dies trying).
"Treasury, banks to give 30-day freeze option on foreclosures"
What does this mean?
Gary,
You play for high stakes, man!
The deal is for 1.5 x the unearned premium reserve. That is probably more like 25 to 50bp, since a lot of it has already earned out.
His $5 billion is surplus (capital) in the new company.
So he takes all the muni exposure (a liability) for maybe $4 billion.
And everyone that was endlessly writing about all the people that would have to liquidate their bonds because they could only hold AAA could quit worrying.
Buffett also pointed out that currently insured munis are selling at about a 5% haircut right now, which is $40 billion.
One other bit of information -- he is selling wraps on insured bonds for 200bp.
So he will buy it wholesale for 1.5 x what the original insurers charged or retail for maybe 3x.
Anyway, if anyone has to sell a large portfolio of munis after a downgrade, they now heard on cnbc that they can get a wrap for 200bp instead of whatever haircut the market would give them.
What's not to like?
Buffett would offer to buy the whole world if 1) he could pick and choose the profitable parts and 2) pay low dollar. Simple road to success.
A Hard-Times Road Show on New Jersey's Finances
A Hard-Times Road Show on New Jersey Finances - NY Times
Faced with $32 billion in debt, a depleted transportation fund and hundreds of highways and bridges in need of maintenance, Mr. Corzine has proposed increasing tolls 50 percent every four years over 12 years on the New Jersey Turnpike, Garden State Parkway and Atlantic City Expressway, and establishing a new nonprofit corporation to issue billions in bonds and manage the three roads.
The atmosphere has become so volatile that last week the State Police began checking the audience with metal detectors and searching handbags.
A few people have dressed in pig costumes, parodying Mr. Corzines admonition that his plan to raise money was necessary because pigs will fly over the State House before there is a realistic level of new taxes or spending cuts that can fix this mess.
Ha. I guess you've seen one of those National Geographic specials . . . those hyenas are the most frightening thing I have ever seen.
Still, no bailout of CDOs. And I meant "one pair" . . . in for a penny, in for a pound, eh.
Other large insurers with an extra $5 billion are welcome to jump in.
Maybe AIG would like a piece of the action.
ver mind ... Yet another Paulson trick.
..lenders say they will contact homeowners who are 90 or more days overdue on their monthly mortgage payments. They will be given the opportunity to put the foreclosure process on pause for 30 days while the lenders try to work out a way to make the mortgage more affordable to the homeowner.
No time to write (have to work). Couple thoughts:
Footnote: the reinsurer assumes the reserves for the reinsured bonds as well as the liability. The structure is: primary cedes liabilities and the associated unearned premium and reserves; reinsurer pays primary a ceding commission.
part of the debate about municipal bonds and the need for the monolines might include a discussion about whether or not the munis are general obligation verses revenue bonds. are the monolines insuring GOBs?
the default of WPPSS bonds and the lesson learned regarding revenue bonds is that the power plants were never built and the utility defaulted on the bonds.
has a state or municipality ever defaulting on a general obligation bond? such bonds are backed by thee general taxing authority of the entire gov entity. someone, somewhere (a small city on the edge of dis-incorporation or a dissolving school district?) but i cant remember who and when.
Bank of America may write down some part of Lifeline debt
Reality based....
I think the idea is that Buffett thought the muni insurers were underpricing their product.
Therefore, the 1.5x the unearned premium reserve.
One final note.....
His offer was to put up $5 billion in capital and not take a cent in dividends for 10 years.
I doubt if there will be too many people competing on those terms.
Whether it happens or not, it puts a floor under part of the lingering uncertainty. And no public money.
This also gives the rating agencies more cover to downgrade the monolines. They won't need a rating anyway, since they will not be doing much new business.
Any time there's a Buffett buyout buzz it sets up a great opportunity to short the market. Amazing how any Buffett buzz can juice the stock market by a $Trillion. It makes ZERO difference for the banks or credit card outfits but they rally 5%. Bullshit stock market.
". . . he buys it or we buy it."
Evidence provided above suggests he overstates the case.
We are definitely "in for a hosing" but more like a hosing with gasoline and a torch to set it off. This mess is reaching the flash point, IMO.
It's your classic win/win/win.
Even the shorts win - just not today
It would be suicide for the insurers to sell their municipal bond business to Buffet. It would be the last act before they roll over and die.
Don't you think that the CDO market would sue over the gutting of the minimal viability of their insurer? Wouldn't that be considered looting the assets of operation heading for bankruptcy?
And, at what point do you think the premiums on the municipal bond insurance business will begin to look inadequate? These are not ordinary times and ordinary default rates will be exceeded by a large margin.
Ziggurat -
After factoring in a standard ceding commission of 30%, he's charging 1.05x unearned premium. (I don't know what ceding commission he actually offered.) No major pricing implications there; just a message that the monolines are up against it, which plays into Buffett's hands.
$5 billion in capital and a 10-year dividend stopper is no big deal, either. How much of the "capital" is plain cash equity and how much reinsurance and other forms of claims-paying resources?
And if he's going to stick to munis, due to insurance accounting principles that require you to record your liabilities upfront and your income only over time as the liabilities amortize, you normally erode capital for the first several years. He wouldn't be able to dividend out for something on the other of 10 years and keep his AAA rating (and his by-laws will require him not to pay a dividend if it would reduce the insurance company's rating).
I'm beginning to understand why he's rich. Comes in like a white knight, and rides off with the treasure in his pocket, having paid nothing for it.
Back to work.
Buffett the supreme con artist to "assume" responsibility for $800 billion of municipal bonds guaranteed by MBIA
He has already assumed responsibility for mergers for M/A activity which has resulted in goodwill accounting of $33 Billion, which IMHO is Highly suspect, as no questions are asked about the valuations related to this type of Level Three Asset Valuation, thus one can assume that since regulations and accounting enforcement are not at issue, the assumption of $800 Billion in bond debt can simply be synthetically structured to morph into anything this next crook can dream up. MBIA took on this synthetic assumption and failed, but now Biffett with grand dreams has a better derivative model, 100% related to his goodwill accounting tricks -- which would fail if we had legal authorities with fragmented backbones, versus the jellyfish whores that are intertwined around this snakeoil con artist!
Re: So he's offering to save what can be saved: if Buffett reinsures the muni book, then it's protected from the blowback.
Save, you mean steal and then spin into new age derivatives to hide debt while he profits from chaos. Every see the movie, Its A Wonnerful Life? This is Potter to the T!!!
otter: [laughs] George, now that's just what I like so much about you. George, I'm an old man, and most people hate me. But I don't like them either, so that makes it all even. You know just as well as I do that I run practically everything in this town but the Bailey Building and Loan. You know, also, that for a number of years I've been trying to get control of it... or kill it. But I haven't been able to do it. You have been stopping me. In fact, you have beaten me, George, and as anyone in this county can tell you, that takes some doing. Take during the depression, for instance. You and I were the only ones that kept our heads. You saved the Building and Loan, and I saved all the rest.
George: Yes. Well, most people say you stole all the rest.
Potter: The envious ones say that, George, the suckers. Now, I have stated my side very frankly. Now, let's look at your side. Young man, twenty-seven,twenty-eight... married, making, say... forty a week.
Wake up America, Buffett wants to steal the system and cause systemic imbalance!
The entire point of It's A WL, is that without competition and honesty, the town, the bank, the system will become a unified mafia dream to control drugs and blackmarket activities, or in this case, to have unregulated securities, derivatives and synthetic debt instruments that know one can look at, unless your Potter, or Buffett!
Wake up!
Re: You saved the Building and Loan, and I saved all the rest.
Buffett as an investor in rating agencies, Buffett as reinsurance king with offshore, off balance sheet accounting, Buffett with $33 Billion in Goodwill accounting, Buffett as saint and sweet ol lovable guy, and he wants to help, isnt that nice, how sweet that he would help America and these poor companies that were over leveraged and run like crooked casinos....how nice that Buffett has the ethics to help!
In closing, or we could go into Kant:
George: [shaking Potter's hand] Okay, Mr. Potter. [drops Potter's hand] No... no... no... no, now wait a minute, here! I don't have to talk to anybody! I know right now, and the answer is no!NO! Doggone it!You sit around here and you spin your little webs and you think the whole world revolves around you and your money. Well, it doesn't, Mr. Potter! In the... in thewhole vast configuration of things, I'd say you were nothing but a scurvy little spider. You... [to Potter's assistant] And that goes for you too! [to Potter's secretary] And it goes for you too!
ABK -13% at 9.18
MBI -10% at 11.87
Oh, you mean he's not saving all of it. Aw, crap.
REALTY-BASED LAWYER: "- Mermani right, and then some. Basically Buffett is (on the surface) asking the bond insurers to pay him to take their profitable book. But that leaves out the ceding commission that the reinsurer pays the primary, which is usually around 30% (paid upfront). That would mean Buffett would more or less be getting the muni portfolio for free. Don't see why anyone would take that deal."
Speaking as an Ambac shareholder, the deal can make sense depending on the circumstances.
If you are certain that you can hold on to your AAA rating (this is a big IF given the rating agency flip-flops) then unloading the muni bonds via reinsurance makes sense.
I'm not an expert but the analyst quoted may not turn out to be right based on the details. Since the premiums are earned up-front on muni bonds and invested, the loss to the monolines should be smaller than 50%.
If the goal of the monoline is to retain its AAA rating, and it can be sure the rating agencies will give a solid guide on what capital is required, then this can make sense. Instead of issuing shares and giving up 20% yield (say a P/E of 5) or say 15% with debt-like instrument, this can make sense.
As for why a monoline might want to retain AAA at such a cost, it's because that's their core business. If you lose AAA, your muni bond business will be significantly smaller. One needs to compare the losses of unloading muni bonds against the loss of future muni bond business.
Buffet is not buying EBS - he is buying a cut of a taxpayer backed revenue stream.
Smart capitalists always position themselves in an optimal position to extract capital from others, after all.
Soros with the pound, and now Mr 'Raise My Taxes' Buffet.
Is this really hardball, or just a first offer? Surely if the companies think there is more room to bargain they can say no.
BTW- Hyenas are more closely related to cats than dogs, don't know if Conjure Bag cares.
Secondary-market insurance requires that a bondholder place the bonds to be insured into a trust. The trust typically based in New York then issues a custodial receipt which is wrapped by the bond insurer.
A spokesman for the New York State Insurance Department said that the department does not restrict guarantors from doing business in other states but that the issue might be handled differently by departments around the country. Jain said his understanding is that Berkshires New York license allows it to insure in the secondary market bonds first issued in other states.
No, no. Buffett isn't Potter; Buffett is Bailey!
Buffett:
Potter, you old dog...the whole idea of bond insurance was to provide protection for municipalities--you know, schools, sewers, roads...all that stuff we all depend on! If one town fell on hard times, well, then, we had insurance.
But you! You pretend to insure everybody, anybody at all! The fools, the drunkards, the liars...and then when you can't pay up, you go bankrupt and none of us have any insurance at all!
Potter:
(rubbing hands together) Wah hah hah! I'll take the premiums, never pay a claim, and I'll be rich!
Buffett:
We'll see about that. Maybe I'll go into the insurance business...maybe those towns will see what you're made of, and maybe they'll come on over to Berkshire, where we have real insurance for real people...and you can keep your liars and drunkards over here, where they can't hurt anybody but you!
(With apologies to actual playwrights...)
Those that insured CDOs are gone. Get out now. Get short if you want. The AAA won't matter as what municipal treasurer will tell his boss that he insured with Ambac or MBIA in the future? Now imagine that he can tell his boss that Warren Buffet is insuring their bonds. The BIs have tainted themselves and will die when it is clear that it will not bring the system down.
The New York Insurance Department expedited the licensing for Berkshire Hathaway Assurance Corp. The state's insurance superintendent, in a statement, said the state was doing what it could to help insurers win regulatory approvals needed to keep their businesses going.
If Berkshire Hathaway leverages its strength and issues reinsurance to other bond insurers as part of its new business, it could help boost firms like MBIA and Ambac, Stelmach said. Rating agencies said one of the ways MBIA and Ambac could raise new capital is through reinsurance plans to cover their outstanding books of business.
But, if Berkshire Hathaway provides no reinsurance options and instead just issues insurance on new municipal bonds, the new competition is likely to squeeze out some of the smaller insurers, such as Security Capital Assurance, Stelmach said.
Also on Friday, Berkshire Hathaway agreed to buy NRG N.V., the reinsurance unit of ING Group said for about $435.7 million in cash.
Re: r. Potter! In the... in thewhole vast configuration of things, I'd say you were nothing but a scurvy little spider.
Vega gets it!!!
Reposted above: Here's Krishna Memani's take from Deutsche Banks credit desk:
"The Buffett proposal calls for 1.5 times the initial premium. Assume for a second that they wrote the gty at 50 basis points. So it will cost them 75 basis points to reinsure. Assume a 10 year duration. The reinsurance will lead to a loss of 2.5 points (locking in a 25 bps loss per year for ten years). The corresponding freeing up of the capital is only a point. Net net, the proposal has the potential of consuming capital rather than freeing up capital for the monolines. And, in realistic terms, the likely loss in the portfolio is minimal. No equity holder is likely to accept such a proposal. At least, not yet. The only people who could make them are the regulators. And considering that they still believe these entities are solvent -- they said that in a letter(presumably legally binding) to Congress -- the likelihood of them cramming it down monolines throat is very low. This is a very down bid to test the desperation of the regulators more than anything else. Smart politically but unrelaistic to be hit, in my view."
Smoke and mirrors.
As much as I love references to It's A Wonderful Life, comparing Buffet to potter is just asinine.
Threetorches is much closer to the truth.
Old Mossback Warren? He's no Potter.
Love the speculation!
Tanta, though impressive, doesn't seem like the smartest kid in class. And the sick greed that got us into this mess shows no sign of abatement, thanks to Warren Buffett.
Ok,
Its a wonnerful life thoughts:
The reason behind the mechanism in this story (which played on The Great Depression) of the run on the banks, was 100% related to a lack of accountability and unregulated, un-enforced loan practices which we see today with subprime synthetic derivative chaos. You see this same pattern emerge time after time, where banks become casinos, and then these bets increse to a point where the bank gambler collapses!
I submit the following background for my case Great Depression - Wikipedia, the free encyclopedia
:
In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing. By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931.
Massive layoffs occurred, resulting in unemployment rates of over 25%. Banks which had financed a lot of this debt began to fail as debtors defaulted on debt and bank depositors became worried about their deposits and began massive withdrawals. Government guarantees and Federal Reserve banking regulations to prevent these types of panics were ineffective or not used. Bank failures led to the evaporation of billions of dollars in assets. Up to 40% of the available money supply normally used for purchases and bank payments was destroyed by all these bank failures.
First, think back to the concept of accountability: Bank failures snowballed as desperate bankers tried calling in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. [5] Banks built up their capital reserves, which intensified deflationary pressures. The vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.
Okeeydookie, more accountability concepts >>
Monetarists, including Milton Friedman and Benjamin Bernanke, argue that the Great Depression was caused by monetary contraction, which was the consequence of poor policy making by the American Federal Reserve System and continuous crisis in the banking system.[7] By not acting, the Federal Reserve allowed the money supply to shrink by one-third from 1930 to 1931. Friedman argued[8] the downward turn in the economy starting with the stock market crash would have been just another recession.
As an added bonus, to piss people off, correlate this related tangent:
Harvard Scientist Dr. John Ross wrote in a letter published in the 'Chemistry and Engineering News' (July 27, 1980). Stated:
"There are no known violations to the second law of thermodynamics. Ordinarily the second law is stated for isolated systems, but the second law applies equally well to open systems. ... there is somehow associated with the field of far-from equilibrium phenomena the notion that the second law of thermodynamics fails for such systems. It is important that this error does not perpetuate itself."
Therefore, to close up here, we have a financial system in place which wants to keep the corruption going, the collusion, the bad bets, the non-repayment of debt, which is spun into extensions by using derivative chains that link synthetic financially engineered voodoo into a world of un-accountability which feeds on this chaos which has increasing entropy.
In the movie Wonnerful Life, Potter is in a position to steal business because the system allows him to have monopoly powers, which mafia like, are unchecked, unregulated and he can do as he pleases, because he is in control and has the power of money to expand his reach. He wants to destroy Bailey S&L, because it is competition and competition is the key symbolic driver to consider when you look at what Buffett is playing with. Buffett IMHO, should not be allowed to invest in rating agencies, and rating agencies should not be corporations that use the casino of the stock market as a means to fuel its growth, and thus be in a position where an investor, like a Buffett can extract pressure as a shareholder that might be able to influence ratings or to manipulate a fiduciary position. We are talking about trust and free competition and in this society, we are allowing a mafia like takeover of the financial system, which will result in our little towns being turned in to the nightmare that george bailey wanted to wake up from, where Pottersville was a drug infested casino/whore house filled with little people that feed of the exchange between drug dealers and money laundry organizations, in a world filled with the expansion of chaos!
Do I make myself clear or do I have to physically draw a picture and morph Potters face into Buffetts and then give you a choice between living in his hell or going to your windows and screaming that you aint gonna take this shit no mo!
Screw them!
OT: Tanta should love this.
Mortgage Firm Offers Files
To Sworn Owners of Loans
A WALL STREET JOURNAL NEWS ROUNDUP
February 11, 2008; Page C7
American Home Mortgage Investment Corp. is offering to hand over hard copies of 490,000 home-loan files to Wall Street investors who are prepared to provide a sworn declaration they own the mortgages.
The mortgages at issue may have been bought and sold many times since they were first issued by American Home sometime after September 2005. American Home isn't sure who owns the loans recorded in the files it is storing.
Mortgage Firm Offers Files To Sworn Owners of Loans - WSJ.com
Can we add "Document Risk" to our our sources of worry?
And another damn thing:
http://www.pionline.com/apps/pbcs.dll/article?AID=/20080117/DAILY/935000
Maybe the romantic symbolism of Buffy/Potter is too subjective and cute, but look at Blackrock and The Florida Bond Implosion story and think in terms of Buffy-Potter:
Re: Florida State Board of Administration, Tallahassee, narrowed to 10 firms the candidates it will consider in its search for managers of as much as $35.5 billion in assets, including the $10 billion Local Government Investment Pool A and the $2 billion LGIP B. The two funds, which were internally managed, were subject to a run on assets caused by reports of subprime-related problems.
In case your out of the loop, the LGIP funds were split into two funds, the A fund which may survive and the B funds which are casino bets taken on by retarded people that didnt have a clue what they were doing, as they wasted other peoples money by illegally abusing their fiduciary responsibilities. When you take away accountability and let retadred people bet other peoples money, the retarded people will burn up as much cash as you stuff into their pig-like pockets..its like stuff cocaine in the nose of a whore that lives in Pottersville, they want more and more and life is all about getting more and taking something to the extreme edge of stupidity! Do you think Buffett will be buying the A funds or the B funds, and do you think he will cherry pick the A funds and then save Florida from the damage these retards spun out, and do you think Buffett will help pay back losses to pension funds attached to these collusive networks of crooks that should be burned alive? Do you think Buffett will be thankful to God that The Department Of Labor will help underwriters tap into the future cash flows of other peoples money, in the form of exemptions to prohibited actions, which allow these types of crooks to play like this is a casino where these little pension fund accounts are just waiting to go to slaughter?? God bless people like potter and Buffett!
These crooks in Florida are guilty of fraud, providing false and misleading information, mismangement and if we go back to Pottersville:
No securities no stocks no bonds nothing but a miserable little five hundred dollar equity in a life insurance policy. [laughs] You're worth more dead than alive. Why don't you go to the riff-raff you love so much and ask them to let you have eight thousand dollars? You know why? Because they'd run you out of town on a rail...But I'll tell you what I'm going to do for you, George. Since the state examiner is still here, as a stockholder of the Building and Loan, I'm going to swear out a warrant for your arrest. Misappropriation of funds manipulation malfeasance... [George gets up to leave] All right, George, go ahead. You can't hide in a little town like this.
And another thing, this is all about RISK (FRIGGN) TRANSFER!!!!!!
Buffett can not simply pick around the ground for a basket of blemish free apples and not take on excessive risk for his corporations. If he is going to save the bond world, he needs to place himself into a position of great exposure to massive risk. The only way he can do this is to use synthetic derivatives and he is so full of shit to play games and to suggest that he doesnt understand anything about these financial timebombs:
He needs to come clean and step down from the awe shucks im a good olboy con artist magic show....the magic lantern show in his tidy circus tent where derivatives aresoo unsafe.....gimmie a friggn break warren!
Re: To the extent the actuary is asked to quantify the risk transfer described in d. above, it
might be helpful to have available documentation supporting the analysis and
calculations sufficient for another actuary practicing in the area to follow. The risk
transfer documentation will be available to state regulators and auditors. In developing
such documentation, the actuary might wish to refer to Actuarial Standard of Practice
(ASOP) 9, Documentation and Disclosure in Property and Casualty Insurance
Ratemaking, Loss Reserving and Valuations
When evaluating reinsurance contracts as to whether risk transfer is reasonably self-
evident, it should be understood that this is a principles-based standard. Therefore, there
is no bright line that can be used for its application. As a matter of practice, it would be
more conservative to evaluate contracts for risk transfer when there is any doubt as to
whether or not risk transfer is reasonably self-evident
The 10/10 rule is a frequently cited test for determining if there is enough risk in a
contract to satisfy the risk transfer standard laid out in SSAP 62. Specifically, the 10/10
rule equates reasonable possibility with at least a 10 percent chance and significant
loss with a net present value loss at least equal to 10 percent of the reinsurers net
present value premium. The 10/10 rule may be thought of as a specific case of a more
general Value at Risk method for measuring economic losses under a reinsurance
agreement.
The Academys risk transfer report notes that many actuaries believe the 10/10 rule is
inadequate for purposes of testing across the spectrum of all reinsurance agreements,
particularly for agreements that reinsure low frequency/high severity risks. Further,
COPLFR does not believe a bright-line approach, without allowance for judgment, is an
optimal approach. These conclusions were supported by the NAICs CATF in its
comment letter on the Academys risk transfer report
bitching doc -- take your meds.
Reality based lawyer:
Buffett isn't interested in a standard reinsurance transaction. He wasn't interested in the business when it was written, so ceding commissions and expenses are irrelevant. The only thing that matters is future cash flows. The unearned premium should roughly be equal to what was charged less expenses and less the proportion earned. 1.5 gives a margin of safety.
I think he is offering to put up $5 billion in real capital in a monoline structure. I don't know who would want to do that and not take anything out for 10 years. The income into the entity would include new written premium, investment income from the capital, and investment income from the unearned premium. Out of that he would pay losses in cash as they are due.
Obviously the monolines won't like it -- although mbi had to give away 1/2 its equity for an extra $1 billion.
Anyway, the easiest way to look at it from my point of view is that he will do it wholesale for 1.5 unearned premium reserve or retail (via wraps) for 200 bp.
The regulators will have to encourage the companies to go along. The fact that their original mission was protection of municipal bonds gives the regulators an alternative to some convoluted scheme involving banks.
Also, the rating agencies would have cover to do whatever they want.
But, yea....I'm not surprised that the insurers don't like it.
One additional thought.... There really aren't any other true AAA's out there with excess capital. High ratings via structured finance no longer get any respect.
When AIG's super senior AAA's are getting hammered, people want old fashioned capital.
I like Tanta, with disclaimer:
*Everything But Subprime
He is offering to take the fattest, most profitable part of their business,'' said Jerry Bruni, president and portfolio manager, at J.V. Bruni and Co. in Colorado Springs, Colorado. Bruni has $650 million under management including Berkshire shares. The firm sold MBIA last month.I can't imagine why they would want to do that. If I were MBIA or Ambac, this does not sound like a good offer.''
This is a very appealing solution,'' Ackman said.It is a potentially very significant attempt to remove some of the systemic risk.''
Hmmmm, why would Ackman be shilling for Buffy????
Goldman Sachs Group analysts estimate that Buffetts proposal would free up approximately $6 billion in capital for the insurers, including $2 billion for Ambac, $2.5 billion for MBIA and $1.5 billion for FGIC.
from todays wsj
Perhaps looking at what he holds will provide clues?
\t\t SEC Info
\t\t\t\t Home \t\t\t\t Search \t\t\t\t My Interests \t\t\t\t Help \t\t\t\t Sign In \t\t\t\t Please Sign In
Pershing Square Capital Management/L/P · 13F-HR · For 9/30/07
Filed On 11/14/07 5:06pm ET · SEC File 28-11694 · Accession Number 1172661-7-521
His greatest bet is on:
CERIDIAN CORP NEW COM 156779100 419587 12077927 SH SOLE 12077927 0 0
What connection is there between a MBIA and the debts of Ceridian?
SEC Info - Pershing Square Capital Management/L/P - 13F-HR - For 9/30/07
Our other minority-owned investment is Ceridian, a leading information services company in the human resource, retail and transportation markets. Ceridian is probably most well-known as one of the largest payroll processing firms in the United States. We closed our minority investment in Ceridian in November and we are excited about the implementation of a 4 point cost reduction plan.
Specialty insurance revenue was $93 million for the fourth quarter, including $4 million in investment income, a decline of $2 million from the fourth quarter of 2006.
As Bill mentioned, we completed our investments in Ceridian in November. Our equity investment of approximately $500 million represents a 33% ownership stake in Ceridian. As is the case with Sedgwick, we will account for this investment under the equity method of accounting and Ceridian will not be consolidated for financial statement purposes.
Debt on our balance sheet primarily consists of the $490 million in senior notes due in 2011 and 2013; the $535 million drawn under our credit facility to primarily fund our Ceridian investment in November 2007; and debt at Fidelity National Capital, the vast majority of which is non-recourse. The debt to total capital ratio was 26% at December 31, 2007.
Fidelity National Financial Q4 2007 Earnings Call Transcript
This is making sense now:
Re: We believe that MBIA reinsured on a quota share basis 25% of its 2007 CDO transactions with Channel Re. As a result of Moodys and S&P not updating its ratings of Channel Re, these exposures do not appear on MBIAs list of exposures and have not been included in your calculation of MBIAs capital adequacy.
MBIAs second largest reinsurer is Ram Re which has reinsured $11 billion of par as of September 30, 2007. While the rating agencies have not updated their credit ratings of Ram Re, the market appears to have already done so. The publicly traded stock of Ram Holdings Ltd., the parent company of Ram Re, has declined 92% in the last year. The company currently trades as a penny stock with a market value of $32 million.
We believe that Ram Re is substantially undercapitalized and therefore, like Channel Re, is unlikely to be able to meet its obligations to MBIA.
Are Buffett and Ackman trying to crash the value of bond insurers, so that Buffett can steal market share with his new bond business and then scoop up all the good debt to underwrite reinsurance for the bad debts?
Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony
Sorry Warren, you need to go to Fed Prison ASAP!
In U.S. antitrust law, the Sherman Act addresses single-firm conduct by providing a remedy against "[e]very person who shall monopolize, or attempt to monopolize . . . any part of the trade or commerce among the several States."[3] This prohibition does not condemn monopoly per se but only monopoly that has been acquired or maintained through prohibited conduct: Most businessmen don't like their competitors, or for that matter competition. They want to make as much money as possible and getting a monopoly is one way of making a lot of money. That is fine, however, so long as they do not use methods calculated to make consumers worse off in the long run.[4]
With regard to multi-firm conduct, the Sherman Act addresses this by prohibiting "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce."[5] Conduct falls within the scope of this prohibition only if some form of agreement or concerted action can be proven.
concerted action
Wake up!!!!
Warren is a genius.
P.S. The indices are becoming beautiful heading into the close.
rich,
Was interested in your analysis. Glad you were up to the task. I think Unsympathetic is curled up in the fetal position crying right now.
You mean Buffett doesn't want to drink the kool-aid? He wants that case of Perrier sitting over there.
Section one of the Sherman Act prohibits concerted action, which requires more than a unilateral act by a person or business alone. The Supreme Court has stated that an organization may deal or refuse to deal with whomever it wants, as long as that organization is acting independently.
The courts have held that conspiracy requires an additional element such as complex actions that would benefit each competitor only if all of them acted in the same way.
Buffet has $2.4 Billion invested in Moody's rating agency, a condition which presents conflicts of interest and Tying arrangements IMHO.
Buffett needs The new York Insurance Board to bless him for expansion of his market; they said great, go for it and we will push to help you!
Buffett acknowledged to the Journal that there is a risk in local governments deciding that the price of its bond insurance is too high and choosing to do without. "It could be tiny, it could be very large," Mr. Buffett said of his new venture.
In another insurance deal, Buffett's Berkshire Hathaway is buying ING Group of the Netherlands' reinsurance unit for 300 million euros, or $436 million. Reinsurance helps insurers spread their risk.
Karen Richardson in the Wall Street Journal reports that Buffett is starting a bond insurer that opens for business today in New York State. Buffett told the Journal that the business will seek approval to open in California, Puerto Rico, Texas, Illinois, and Florida.
Some lawmakers already are concerned and a House subcommittee has a hearing scheduled for Thursday on the state of the bond insurance industry.
'The written responses of financial regulators to recent inquiries I made about the problems affecting the bond insurance industry and the shortcomings of its current regulatory regime have convinced me of the real need to reform the oversight of this important sector of our financial system,' Paul E. Kanjorski, D-Pa., chairman of the subcommittee on capital markets, insurance, and government sponsored enterprises, said last week.
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Not surprisingly, such developments have the attention of Congress -- particularly of Capital Markets and Insurance Subcommittee Chairman Paul Kanjorski. Already in the midst of an ongoing investigation of state insurance regulation, Kanjorski is planning a mid-February hearing focused exclusively on the monoline sector. Senate Banking Committee Chairman Chris Dodd likewise has an eye on the bond insurers, and may be mulling steps to address their line of business.
Questions abound, and will no doubt be asked during the forthcoming inquiries. Where were state regulators when insurers starting taking on these risks? Where was the solvency monitoring, supposedly the raison d'être of the NAIC? How is it that an industry with more than $2 trillion in insured obligations was permitted to keep so little in reserves?
All fair questions, no doubt, but similar interrogatories also can and will be hurled in the direction of such federal authorities as Housing and Urban Development, the Securities and Exchange Commission, and the Federal Reserve. When it comes to the now-burst housing bubble, there appears no shortage of regulators who could be accused of falling asleep at the switch.
http://www.tradingmarkets.com/.site/news/Stock%20News/1059248/
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On September 23, 1998, around 11:30 a.m., LTCM received a $250 millionoffer for its assets that was to expire within an hour, at 12:30 p.m. Thepurchaser was to be a limited partnership comprising Berkshire Hathaway,American International Group, and Goldman Sachs. 12 According to theterms of the offer, management of the assets would have been under thesole control of the newly created partnership. According to LTCMofficials, the Fund could not be sold without stockholder approval and theapprovals could not be obtained in an hour. The offer was subsequentlywithdrawn because Berkshire Hathaway representatives were unable toalter the terms of the original agreement.According to Federal Reserve officials, the Federal Reserve did notparticipate in the evaluation of the deal. FRBNYs president testified thathe informed an LTCM official that There is no guarantee whatsoever thatthis consortium approach is ever going to come together. At some point,the official telephoned FRBNY to inform it of potential legal issuesconcerning the offer. FRBNYs president testified that he informed theLTCM official that he had only one offer to consider, the BerkshireHathaway offer, and that a bird in the hand is worth two in the bush.FRBNYs president added that this type of involvement is as close to theedge as any central banker should ever go, and [it] may be right at the edgeof getting involved in a situation and encouraging an outcome. We cantget involved and say this has to be the outcome. Later in his testimony,FRBNYs president said that he was informed that the deal did not workand that the offer was off the table
I think MBIA should meet with Warren, listen to him and thank him for the offer. Then, they should buy him lunch at Wendy's, a pair of Dexter shoes for the road and one-way ticket home on US Air, to refresh his memories a little and remind him than he does not walk on water.
Gary writes:
Ha. I guess you've seen one of those National Geographic specials . . . those hyenas are the most frightening thing I have ever seen.
Gary is that you with the red hat?
http://www.oomsa.com/files/admin/nigerians2.jpg
In conclusion, why would the DOJ be opposed to Microsoft manipulating and abusing its monopoly power to crush competition, while on the other hand, the threat if market manipulation and collusion are seemingly blessed by the powers that be. Essentially, the government is looking for a bailout of its own, as they duck responsibility for their part in this collusion and thus are willing to look away at any threat to competition which might be tied to rating agencies and the dissemination of false and misleading information! The conflict of nature here is of great importance and has less and less to do with MBIA, as a hollow shell of a company worth pennies -- but more about the reality that there is not the connection being made that Buffett is not involved here as a simple investor, but a threat to market competition. The liquidity he offers has a very high price and IMHO, he should be investigated just as Microsoft was, because he is using the power of money to place himself in a position of unfair competition, and that creates gross inefficiency and it should be illegal for a person to have a 17.2% interest in a company like Moody's and then come to town, get on TV and then take down a stock and then go in for the kill, while the insurance authorities cheer him on. This is chaos and its not right and this corruption will become worse if not acted upon by an honest DOJ!
Right or wrong Microsoft was judged as a monopoly. During the antitrust case it was revealed that Microsoft had threatened PC manufacturers with revoking their license to distribute Windows if they removed the Internet Explorer icon from the initial desktop, something that Netscape had requested of its licensees.
Judge Jackson issued his findings of fact on November 5, 1999, which stated that Microsoft's dominance of the personal computer operating systems market constituted a monopoly, and that Microsoft had taken actions to crush threats to the monopoly, including Apple, Java, Netscape, Lotus Notes, Real Networks, Linux, and others. Then on April 3, 2000, he issued a two-part ruling: his conclusions of law were that Microsoft had committed monopolization, attempted monopolization, and tying in violation of Sections 1 and 2 of the Sherman Act, and his remedy was that Microsoft must be broken into two separate units, one to produce the operating system, and one to produce other software components.
Judge Jackson's response to this was that Microsoft's conduct itself was the cause of any "perceived bias"; Microsoft executives had "proved, time and time again, to be inaccurate, misleading, evasive, and transparently false. ... Microsoft is a company with an institutional disdain for both the truth and for rules of law that lesser entities must respect. It is also a company whose senior management is not averse to offering specious testimony to support spurious defenses to claims of its wrongdoing."
"Gut the monolines into two parts: the crap and the good, and buy the good." Buffett said he wants to make money in this deal. His main aim is maximise money and minimise competition. He will try to avoid some crap muni bonds too( maximise). If monolines go under or waits longer, he will have compitetion(minimise). Buffett's life time opportunity. Berkshire stock holders are going to laugh all the way to bank.
lunch at Wendy's, a pair of Dexter shoes for the road and one-way ticket home on US Air
Very nice.
Buffett is not the only game in town for bond insurance. Of the "big four" monoline insurers, FGIC is essentially dead, Ambac and MBIA are seriously ailing, BUT FSA is doing just fine. FSA avoided the worst of the structured finance deals and subprime (althought it did some HELOC deals that it now regrets). FSA has hugely increased its market share of bond insurance, in the primary as well as secondary market. After all, what bond emitter is now buying insurance from the other three in the current atmosphere?
Buffett is NOT offering to take all the public finance bonds insured by FGIC, Ambac & MBIA. Following is net par outstanding as of 9/30/2007 in billion $ (with % US public, % US structured finance, % Foreign):
MBIA $673 (59%, 24%, 17%) //
Ambac $556 (54%, 32%, 14%) //
FSA $365 (62%, 25%, 13%) //
FGIC $315 (71%, 23%, 6%) //
[Data is from a FGIC presentation]
This gives $920 billion net par outstanding of US public finance for FGIC, Ambac & MBIA. Uncle Warren only offered to take up $800 billion. Maybe he didn't want the NJ bonds? More seriously, I've had the impression that he is more interested in the general obligation bonds (backed by taxing authority) than the revenue-backed bonds (public hospitals, sports stadia, toll roads ...).
Why should the holders of bonds he doesn't like find themselves lumped with the structured finance part, while Uncle cherry picks the best stuff for himself (AND asks to be paid for his trouble?). I doubt the insurance regulators would choose such a solution.
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I think this discussion misses a big point:
once MBIA et al lose AAA rating, the muni market goes boom (forced sells).
But this does not have direct effect on MBIA et al going under whatsoever. The insurnace is for the actual bond, not for a specific rating.
This means the hot potato is being held by the bond holders, not the MBIA et al, who may very well overcome this (but without AAA rating). At least, they have a chance (without buffett) ... and he knowing this makes his offer senseless.
In the end, if the government will provide re-insurance for MBIA they may very well survive, without actual cost to taxpayers. I think this is the likely actual solution, coming next week!
Keep in mind the fight is about AAA, not bankruptcy. If MBIA et al return to the old business, they may overcome the current losses with the next 10 years' income.