Cramer just proposed a government take-over of the monoline insurers as a way to stabilize the financial markets. Some folks love capitalism until the moment they start to lose some money.
I say let them fail and let the chips fall where they may. The banking system is strong enough to survive this shock, and maybe next time around, executives will use a little more discipline in their lending and insurance strategies.
I say let them fail and let the chips fall where they may. The banking system is strong enough to survive this shock, and maybe next time around, executives will use a little more discipline in their lending and insurance strategies.
There are other options too - between extremes of let shit happen and complete bailout. For example fed gov't can come in and backstop muni's & state bonds but let corp issuance fail (maybe come in later and Hoover them up into some kind of RTC to speed liquidation). That wouldn't bailout principals of the failed institutions but would minimize the collateral damage to the rest of the economy.
Point is its too early for any of that - nothing has actually 'failed' yet except the model.
The insurers, as all of you doubtless already know, is the next shoe to drop. As Conjure and I see it, the muni market goes nuts at that point. When the equity markets get the memo they could easily go into a free fall.
Re: "We have been proactive in raising a substantial amount of new capital to support our Triple-A ratings, he said. We believe our capital plan meets or exceeds the requirements previously outlined by Moodys and the other two major rating agencies."
What a bunch of crap! These people need to be preparing to go to jail for false and misleading information and the idiots at Moody's, Fitch & S&P should all join them, along with Paulson, Bail Out Ben and all The Stooges of this Coup!
This country is rapidly imploding. The monoline bankruptcies will make the housing crash look like a lemonade stand going out out of business in comparison.
These same banks and financial institutions that own all of the toxic loans will now be faced with junk muni's.
These same banks and financial institutions that own all of the toxic loans will now be faced with junk muni's.
From what I understand the munis aren't the worst of it - its all the CDS and stuff they've 'guaranteed'... If I'm wrong I'd sure welcome some one setting me straight.
Do not engage me in relation to pension funds as a timebomb....that would be a mistake to get me started, because, Ive had :
Coffee
Ive researched this for 5 months
Im pissed off
Pension funds are the key to derivative madness
You aint seen nothing yet and Pensions are not the next shoe to drop or the next timebomb to go off, they are the fabric that holds together the last few threads of whats left of America and these pigs at DOL and Wallstreet underwriters have already destroyed your childerns future.
Taxcuts and rebates and then maybe 40 year mortgages with zero down and then we can all hope that other people from other countries will loan us money to buy SUVs.
Cramer just proposed a government take-over of the monoline insurers as a way to stabilize the financial markets. Some folks love capitalism until the moment they start to lose some money.
I think the best long-term solution for stabilizing the financial markets is to let the government take complete control over the money supply and regulate access to money and credit by setting the price of borrowing.
So no problem then. I'll use my tax rebate to buy furniture with no payments due until 2012. By then, the full force of the tax cuts will have kicked in, and the ownership society will take care of the rest...
This country is rapidly imploding. The monoline bankruptcies will make the housing crash look like a lemonade stand going out out of business in comparison.
Then they probably won't be allowed to go bankrupt.
The only thing you need to save them is a good printer and lots of green ink.
I can't stand the crony capitalism that's become of our country over the past several decades. The back scratching, wink-wink system that keeps executives, corporate boards, Wall Street and politicians in clover while the rest of us mucks get fleeced of what little we have.
IMO, executive compensation should move away from stock performance to operating performance of the business. And rather than payout all the bonus at the end of each year - the bonus should go into a pool that can only be drawn down by 20% each year. If there are operating losses then there should be negative bonuses that come out of that bonus accumulation pool. Right now executives have only one incentive - goose the stock in the short term and then bail out before s** hits the fan with a golden parachute severance package. Bob Nardelli trashes HD and walks away with $200 million and then lands up running the Chrysler LBO. WTF!!!
By the response of the equity markets, the Ambac cut was obviously priced in there, either that or there are other forces at play in equity-lala-land.
My personal favorite part of the whole Ambac story is the gaggle of "Buy" ratings right up until this week. Yet more confirmation of the complete ineptitude and delusion that exists in the land of equity and equity research.
Cramer?- "the Dow drops 2000 points when AMBAC fails?"
If he said that, it's the first time I've ever agreed with him on anything. It's certainly possible.
mp | 01.18.08 - 7:28 pm | #
Did you see Cramer's rant yesterday on CNBC? I made my wife watch it from CR's feed - she said it was the best 'Network - Mad As Hell' speech she has ever seen. Way better than August 'Fed Cut Bonanza ' rant.
He's gonna be in the Rant Hall Of Fame if he keeps this up.
As the Sunday NYT Magazine piece on Bernanke reveals, he should have been visiting the CR site for the lowdown on what's going on. Instead, he's been talking with Geithner in New York.
Geithner, of course, is the guy who's supposed to be following all of this, and I'm beginning to think he doesn't get it.
The downgrade throws doubt on the ratings of $556 billion in municipal and structured finance debt guaranteed by Ambac.
Should read:
"The downgrade partially acknowledges the risk of $556 billion in municipal and structured finance debt guaranteed by Ambac. "
Ratings are predictive. Ratings are not magic fairy dust that turns piles of manure into mounds of chocolate mousse. Mmmmm, Ponies. Ponies sprinkled with Fairy Dust. Tastes better than ground up dog balls.
Before I go on my walk, I have to share my stimulus package:
Give every family a $1000 credit; however, if you use it for your mortgage, its tax free, if you use it for stuff like dope or booze, you have to pay tax on it.
That is on top of the associated idea that the credit would be made available for tax year 2007 and thus you would make that choice in the next two months, to either write off that $1000 on your taxes to adjust your income or perhaps if you owe Uncle Sam, you thus deduct it, and if Sam owes you money, they pro rate it and give you the balance, hmmmm, yes somehow your 2007 tax return would trigger the payment...hmmm...yes, that walk.....
Give every family a $1000 credit; however, if you use it for your mortgage, its tax free, if you use it for stuff like dope or booze, you have to pay tax on it.
Why not just distribute "Mortgage Stamps"? I mean, if we're going to turn this thing into a complete circus, let's show a little creativity.
I just listened to Doug Cass on Kudlow & Crooks, who prosposed an RTC-type Trust, "150-200B," to cover AMBAC, PMI,... (all insurers). "Take control of all these," said the dope. I couldn't believe it.
My observation that vast majority of Americans are bred to be total dopes, by massive brainwashing that has gone on for some hundred years, in areas of politics and economics is further confirmed.
Sorry, if someone is offended, but that is the truth.
Cramer just proposed a government take-over of the monoline insurers as a way to stabilize the financial markets. Some folks love capitalism until the moment they start to lose some money.
If you don't think Cramer is shorthing these markets and has been for some time you are very foolish indeed. People are going to lose money but it will be the same ones that did the last time Mom & Pop.
Thank you for the clarification. Taking it a step further, I suppose this implies that the only thing preventing the total failure of the banking system are the TAF auctions? The banking system, as a whole, cannot meet any of its reserve requirement without Fed loans?
Jas, unfortunately that may become what they have to do at this point.
mp | 01.18.08 - 7:51 pm | #
I've come to the same conclusion. I just hope they do it like RTC and wait for AFTER the bastards have cratered and lost all before they step in to mop up.
Having lived at ground zero during the commodity bust on the central plains prior to S&L... there is a difference between stepping in before and after the mayhem. Lessons are learned when done after. I doubt Kudlow would approve of my position... he'd probably say if you aren't going to save investors, then why try to save anyone?
Can you chime in on your opinion re: the negative non-borrowed reserves on deposit with the Fed? I feel like I'm being a little histrionic about it, but this seems quite disturbing.
Where do you draw the line???
tj & the bear | 01.18.08 - 7:52 pm | #
I'd start at the bread lines and work your way up from there. If companies like Ambac fail and trip munis & basic corporates there will be bread lines.
dryfly, I guess I agree with that as well . . . and I'm hoping that nobody will listen to that worthless sh!tbag Kudlow. Of course, THIS administration is peculiarly receptive to his arguments . . . I'm hoping there's enough honest people left in gov't to block any bailout for shareholders.
Cramer can't short stocks and I don't see him in ETF's so I doubt he's talking his book on this subject.
The funny thing is how he used to lambaste other wall st. types for not playing any defense, yet for the last 2 years until August he was all O and no D.
TV ratings tend to queer the mind, yet on the street.com segments he seems quite lucid.
Um, exactly how do you step in "after"? I mean, what would be the point, since Buffet's already made new bond insurance available?
tj & the bear | 01.18.08 - 8:03 pm | #
Buffet isn't going to insure anyone with any serious risk... he will be very choosy. And all the legacy stuff out there... all the San Diego Cty's? Clevelands? Chicagos? Whose gonna step up for them?
And if they go down the social ramifications are very serious - forget the money.
That's where a gov't RTC-like institution steps in and stabilizes the free fall.
But I hope like hell they wait until the spec's and 'investors' get creamed first. Then I won't feel so bad about the clean up.
mp + others - I probably own more munis than any 10 of you here - or maybe all of you here. And I can assure you that I am not going nuts. Just about every - maybe every - AMBAC muni I own is a GO or essential services (water sewer and the like) revenue bond. Do you really think that any half-way sophisticated muni buyer bought a state GO because it was insured by a crummy little company like AMBAC?
Perhaps AMBAC insured Newark New Jersey nursing home bonds. Don't know. Even if it did - I and most muni buyers didn't buy garbage like that. As for anyone did - let them eat their losses.
I agree with Peconic Bay - no bailouts. Don't make people who were prudent pay for those who weren't (especially since a lot of taxpayers who will wind up on the hook can't even handle their health insurance premiums - much less put together muni portfolios). And if I lose money - so be it. Means I didn't do enough "due diligence". Roby
I agree things are pretty grim but a few posters seem to misunderstand - they seem to imply that because the monolines are going bk, the insured bonds will default.
It's the other way around. If the insured bonds default, the monolines will go bk.
If your home insurer goes bk, that doesn't mean your house is going to burn down.
let the stockholders get wiped out, but see that the corporate obligations are met.
Corporate obligations? Hell, there's no stockholder value left anyway, it's only the trillions in bondholder insurance that I'd rather not see transferred to taxpayers.
Why the hell can't we stiff the stockholders and let the bondholders fend for themselves? If the bonds are good, they'll be fine. If they're bad, why should we have to pay for them???
Just about every - maybe every - AMBAC muni I own is a GO or essential services (water sewer and the like) revenue bond. Do you really think that any half-way sophisticated muni buyer bought a state GO because it was insured by a crummy little company like AMBAC?
General Obligation eh? Orange county finds themselves $147m short this month. Hmmmm, pay the deputies or pay Robyn? Decisions, decisions. Oh I know, they'll let you take over the sewer system and run it at a profit until you are paid back.
Here's my problem with an RTC-styled clean up of the monoline insurers. In the 80s the RTC took over failed thrift to protect depositors. Bad loans were made available to investors who risked capital and in some case recovered fortunes. The shareholders got wiped out, as they deserved to be.
If the government steps in and backs the CDO contracts from monolines, the guys who get saved are all the counterparties like Citi, JP Morgan, Merrill Lynch etc. These are the folks that helped engineer this mess in the first place. Their shareholders and employees should not be shielded from the full effect of the recklessness of management.
Does your shoulder hurt from patting yourself of the back?
And believe me, if you want a pissing contest of who owns more munis, you'll lose.
The muni insurance doesn't bother me because I never bought insurance rated paper. I'm just wonderig if it will force a sell off so certain issues will get goosed and start paying a more attractive yield.
I've got some Euros burning a hole in my pocket and have been waiting for this moment for 3 months.
I think the conventional wisdom is that - whatever your feelings about the wrong people getting bailed out - the alternative is that EVERYONE gets hurt badly and in a way that won't correct itself for many many years, if at all.
The problem with this, is that we are trapped beween the Sylla and Charybdis. If we bail out now, history has proven that this nation will concoct another, grander scheme which causes greater pain down the road. We won't learn. If we didn't learn after Enron(!) to put an end to the accounting crap, we're not going to learn now. If we don't pull an RTS, we're looking into the abyss.
Maybe it's time to look into the abyss and be done with it.
I agree things are pretty grim but a few posters seem to misunderstand - they seem to imply that because the monolines are going bk, the insured bonds will default.
It's the other way around. If the insured bonds default, the monolines will go bk.
Yes and No. There are multiple varieties of bonds these guys are 'insuring'... CDO crap and munis and corporates. Historically the munis were very tame... as were vanilla pass through MBS... even most simple industrial corps were tame. And most were well understood safe bets.
This insurance made it possible for a lot of small companies and municipalities to get debt - companies and munis that individually were too small to justify extensive DD but collectively represent a big market... and few failed... and the debt provided a public good. Schools hospitals, equipment, etc.
But the new stuff - the CDS and LBO corps are anything but tame and could take down the system. Then all those small munis & companies will be screwed. Without insurance their market appear (and ratings) collapse. It will leave these markets in chaos for a long time.
Eventually Buffets new org might come in an fill that gap... but it could be years. Meanwhile folks gotta live.
A sensible RTC like clean up AFTER the failures would not reward the risk takers but limit the collateral damage.
If your home insurer goes bk, that doesn't mean your house is going to burn down.
trail | 01.18.08 - 8:11 pm |
And you are OK because you get another insurer. And even if you didn't, it wouldn't affect the value of the house on the market. Or the value of anything else.
But, if I understand it, many bonds insured by these clowns will have their ratings lowered in step - and if those ratings fall below the minimum requirement of those that hold them, onto the market they go. Talk about fire-sales.
Or they don't go on the market, but their value drops. More money being destroyed somewhere in writeoffs.
Oh, and do any assets ever get insured by more than one monoline insurer at the same time? Or be otherwise related to other assets ensured by other monolines?
If so, then:
Ambac downgraded --> asset downgraded --> some other insurer downgraded --> some other asset downgraded --> ????
I need some Xanax.
We already got CDOs downgraded --> Ambac downgraded --> munis about to be downgraded(?) - where does it end?
My understanding is that most of the conventional banking system is fine. There is plenty of capital for good borrowers with viable businesses. Corporate bond spreads have widened somewhat, but we are at historically very low interest rates.
It's the chicanery on Wall Street that burns me up and I think society would benefit from seeing these bad actors get their comeuppance.
Greenspan will have something really important to say about this and I for one will wait to read it before proceeding with my ho hum little life.
FFDIC | 01.18.08 - 8:30 pm | #
The bond issuer was not defrauded. They got what they paid for (AAA). The investor that depended on this was defrauded by both the ratings and the assurance that they would be paid in the event that everything went south.
What needs to looked at is what percentage of the premiums have already evaporated into everyone's pockets.
(mortgage) Pig in a poke.
I'm with Robyn and Peconic. The muni's won't default because the monolines do. What will default is the CDO junk and maybe some muni IRB junk. Let the holders take their lumps. Now the downgrades may cause some holders to have to get out of Muni issues, but not pension funds (they don't own 'em). And new Muni issues can be insured by Buffet (the classic small water utility that isn't big enough to rate).
Will tptb bail out the monolines to bail out the Merrill's. If they do we're living in Jas' world.
As I have said before I come from a money lending and all-purpose business family. My ancestors dealt with credit insurance for centuries! Usually, the top of the ladder guarantor of the letter-of-credit would be the biggest and most prestigious private firm, like the Rothschilds of the local region. No govt, or public companies, was ever involved or imagined! I am aghast at American dopes who think in those terms private gains and socialized risks. It is beyond disgusting. It is flat out evil within American principles, or any fair principles.
My family was never powerful, just middle level, and merely used the credit facilities and insurance for buying local produce and selling in larger towns via agents. Occasionally, also for speculating on commodities. We lent to locals with no insurance, of course, and some lending was with collaterals, e.g., farms and coming crops. My father forgave debt rather than take farmland. He thought very poorly of that practice (taking one's livelihood). Americas lenders are pure Crooks. Only a dope can fail to see an obvious moral problem.
The Feds are going to spend $ 100 or $ 150 billion in economic stimulus. Add in the lost tax revenue (federal, state, local) due to job losses and stock market losses and we're well north of that. Let's just drop the pretense and bail the whole mess out right now (over the long weekend) and move on. Deal with the moral hazard by charging every one of the top execs of those firms with fraud and sending them to jail. They fear that more than losses, which are borne by the shareholders anyway. And throw in some mortgage brokers and scammer borrowers for good measure.
I'm getting bored and disgusted with this. Enough time has been wasted.
Actually, if all she says is true then it is very interesting. She is telling us what her people think. When they start getting panicky you know the drones are getting restive.
I think it was Rockefeller who had 50 cal. machineguns setup at his estate.
Will tptb bail out the monolines to bail out the Merrill's. If they do we're living in Jas' world.
They wouldn't bail out the monolines - the monolines fail. The RTC-like entity could come in take over parts and let the rest of the puke go - take on munis and vanilla small biz corp bonds and pass on CDO and LBO crap. Merril is still fracked due to their CDO exposure but meanwhile schools continue to get built & factories expanded.
Heck they could even take the munis & small biz corps & sell 'em off cheap to Buffets new gig and just shut down the CDO/LBO crap.
It would speed up the liquidation of puke and get the remaining viable assets back in competent hands just like how bank failures are supposed to be handled (Can Bush people do it? Legit question - don't know.)...
But it doesn't have to be one size fits all solution to these insured assets.
Maybe I'm plain stupid, but how does the government spending $150 billion MORE help? Isn't easy money and deficits what got us here in the first place?
Besides the fact that we are talking about a maximum of 1% GDP trickling back to the economy, isn't this simply election year nonsense?
You don't seriously believe this will have any major impact on the current state of affairs? We are in a deflationary spiral and no amount of Keynsian pumping can prevent it.
Dryfly, Strongly agree with you that they should only bailout the muni parts of the business. Probably would cost next to nothing since they rarely default.
Also, I've spent some time looking at the bond insurers. IMO, in a run off situation, there was a good chance of a shortage but they would cover at least the majority of the defaults. The only one that I looked at that was not in that situation was ACA which was a joke.
Hey. what about those Newark New Jersey nursing home bonds? All cash flow modeling aside, these old people just keep getting older and if we were a smart nation or a global derivative affectionado, we would tap into that tasty pie and cut a bigger swath...LOL
Chris, here is a partial answer to your question. The rest will follow later.
First, to ensure that we're both on the same sheet of music, use the first table in the H.3 release, which is the seasonally adjusted data.
"Other borrowings" (right side of table) were 1,377. Add to that the TAF of 40,000. Also add nonborrowed reserves of 200. The sum is 41,577. Required reserves on that date were 39,865. So, subtract 39,865 from 41,577 and you get the "excess reserves" on that date, or 1,712.
This data tells me that the banking system is rapidly burning through their nonborrowed reserves. Had it not been for the TAF, the system would have melted down and the Conjure Clock would have struck 12:00:00.
I haven't finished working with the second section, the not seasonally adjusted data, but will get back to you on it after dinner, on THIS thread. OK?
Conjure says, "Damn it, mp, you're supposed to be keeping up with this. You're spending too much time thinking about ponies!"
Walter P. Buczynski, 58, is our Executive Vice President,Secondary. He has held this position since January 2003 and prior to that time he served as our Senior Vice President,Secondary Marketing. Prior to joining us in 2000, Mr. Buczynski served as the Chief Operating Officer of First Home Mortgage Corporation from December 1999 to August 2000. From 1997 to 1999, while serving as Senior Vice President, Mr. Buczynski directed the capital market activities of G.E. Capital Mortgage Services, Inc. From 1991 to 1997, Mr. Buczynski served as Executive Vice President of Secondary Marketing for Margaretten & Company, now known as Chase Manhattan Mortgage Corporation. Mr. Buczynski also has served as Chairman of The GNMA Liaison Committee and Vice Chairman of the Freddie Mac Liaison Committee of the Mortgage Bankers Association of America. Mr. Buczynski received his B.S. degree from Rutgers University.
Among the employees receiving biggest bankruptcy bonuses: CEO Michael J. Sonnenfeld; Vice President Walter Buczynski and Chief Information Officer John Camp will each receive $99,999. Another 20 or so employees would divvy up the remaining bonus payments.
Guess the bonus wasn't big enough for him.
One notes that the guy murdered his wife before jumping; left two young sons.
I'm sorry... I don't really feel like weeping for subprime vampires who have bought hook line and sinker into bloated materialism of this "boom" and then didn't even have the guts to exit this world alone. There are decent, hardworking people in this country who deserve more tears and deserve more than the canned cat food they're going to be eating while these assholes get their bonuses.
Reality check: one bond insurer has been downgraded from AAA to AA by one rating agency; others will follow. AA is a pretty good rating as far as ability to pay claims goes, even if you think rating agencies are nuts. Check the numbers, do the math; remember this is insurance, not debt, and therefore ability to pay depends on (a) probability of defaults (b) amounts of interest to be timely paid (c) amount and timing of defaulted principal and (d) amount and timing of recoveries vs. (a) premia paid (b) premia payable and timing thereof (c) earnings on investment portfolio and (d) losses on investment portfolio.
The downgrade will cost investors money. Does it mean all bond insurers should be bailed out, by a government guarantee of the guarantors? No.
CDS are an issue. Probably not as to bond insurers, however, who structured their CDS as if they were financial guaranties. (Except for ACA.)
Folks, read the comments on the previous Ambac posts; I don't feel like copying and pasting them, which is inelegant and duplicative, not to mention representing a waste of pixels. The sun will come up tomorrow.
yeah, if "Joe Sixpack" is going to be a generic name for the noninvesting, non-playa grunt... how about "Jumpin Joe's" being the name for the "successful" greedheads who can't handle having to face their own messes?
The overwhelming expectation is the probability of defaults are going exponentially higher, and the amounts required for payment are so considerable, the combination easily surpasses any hope of the bond insurers ability to pay.
We're all talking about MBIA, AMBAC and other publicly traded insurers, what about the hedge funds that have made a killing the past few years doing the same thing. Many without a doubt are in a position of default. Those are the hidden mines we should also fear.
Stuart, Agree defaults will increase by very large amounts that will decimate many lower tranches of CDO's. IMO it is not at all clear losses in the senior tranches of better than average CDO's will be catastrophic. IMO it is in the complex details such as which insurers have expoasure to the poorer
CDO's (especiallly CDO's squared)that will determine their ultimate claim paying ability.
I was not confident in my analysis of the relative merit of the bond insurers except that ACA is massively more risky than all the others. Underwriting choices probably determine the winners and losers.
Alec - If this is bringing about a swell buying opportunity in high grade munis - I haven't seen it yet.
Rob - Do you mean Orange County CA - or Orange County FL? I know very little about CA. But my impression about Orange County CA is fool me once - shame on you. Fool me twice - shame on me. Roby
"Don't count out the potato chip eating Americans. When they collectively get pissed, the government moves."
Most Americans are pretty pissed about this Iraq war clusterf*ck. Yet apparently it will continue forever, or until we finish stealing all the oil, whichever comes first.
Reality check: Things are really going to hell and a crap load of downgraded bonds will impact liquidity and tighten the screws several more rotations! Reality check: A state of illiquidity will impact consumer spending. Reality check: Illiquidity will decrease cash flow and increase cash burn across the spectrum, thus this simple downgrade re-enforces the reality that change is in the air and that the good times are over!
"Add a 100 basis-point rate cut to Cramers plan, and he figures the Dow would add 2,000 points in two weeks"
Sure. That's just what this country needs. A quick fix so the crooks that already pocketed billions can squeeze a bunch more by piling this on the backs of pension funds and retail bagholders.
Chris, in my first reply to you I mis-spoke. I said:
"nonborrowed reserves are your total deposits at the Fed, plus vault cash."
That is not correct. I should have said:
Total reserves are your total deposits at the Fed, plus vault cash.
Table 1 breaks down borrowed and nonborrowed reserves to satisfy the formula:
Total Reserves = Nonborrowed reserves + Borrowed Reserves
Having corrected that error, let's look at Table 2, which contains the not seasonally adjusted, not adjusted for reserve requirements, data.
As I said, total reserves also equals:
Total Reserves = Balance at Fed + Cash
In this case, vault cash is 32,040. We add Balance with Fed of 7,949. The sum is 39,989, which agrees with the first column of Table 2, Total Reserves. This shows us the composition of total reserves.
Now we look at Table 3. On a seasonally unadjusted basis, but adjusted for reserve requirements, total reserves were 39,969. Since total reserves must equal borrowed plus nonborrowed, borrowed reserves must be equal to 41,376 because 41,376 plus -1,387 equals 39,969.
The total reserves number is approximately equal to the TAF of 40,000 plus total "Other Borrowings" from Table 1. In fact, it is off by 1, as the TAF of 40,000 plus Other Borrowings equals 41,377.
In other words, the banking system is borrowing all of its reserves from the Fed, having burned through their own.
I'm wondering, why bother, but think for a moment:
The only people who actually own munis don't seem worried. Robyn doesn't care, and Alec says he owns more then Robyn but never bought insured bonds.
The only person that works in the industry (reality based lawyer) isn't worried about the future of munis. If you care what an insider in the industry thinks, see his earlier posts in the ambak threads.
Individuals don't have to mark to market. That is 60% of the muni market.
Banks and insurance companies, per US GAAP don't have to mark bonds intended to be held to maturity to market. Check out FAS 115 404 Not Found....
As far as nationalization or government intervention, it has happened before. The result is the current monoline regulatory structure. It is all there in the NYT's archives, but since it is paid, I won't bother posting links. There was no bail out then and I don't anticipate a bail out now.
If there is a melt down in muni prices, I will be ready to buy. Not holding my breath. However, I will be there with Alec looking for bargains.
Why all the pumping for bonds here as if they are risk free and then suggesting that outdated FASB links have some relative meaning?
The bonds are used in many ways as collateral and very often they are packaged along with other instruments, so maybe your bonds have less exposure in a simplistic sense, but what about the smart guys in Florida that have frozen assets that were linked to bonds, money markets, CDOs and packaged derivatives? I guess if Im wrong, then Blackrock must be doing a great job of allowing those pension funds to be liquid, but that would be a lie.
I would also suggest you look at FASB 157 versus the old fashioned 1993 link you posted!
Gosh, What a shock FASB caved in and watered down yet another accounting rule and then delayed this until November; isnt that nice! Did you ever think that one of the main reasons we have corruption in this country is because of mafia-like cartels like FASB that play the game any way the crooks want it played? This accounting was to be part of The Patriot Act, but as we all know, wallstreet patriots are fairly difficult to find these days, in between the pimps and whores that lack integrity!
Transition Guidance for Held-to-Maturity Securities- The Board decided to provide an exception that derecognition of a held-to-maturity security, as a result of adopting the proposed FSP, should not be considered a tainting event under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities.
ACA has already seen its rating go from A to CCC, which is basically junk. This puts it out of business, as no one will pay to be rated as junk. ACA now has only $425 million in capital to cover the $69 billion in mortgage and corporate bonds they insure. Interestingly, they added $20 billion of that between April and September of last year. Talk about doubling down on a losing trade. Merrill wrote down almost $2 billion in bonds that were insured by ACA. They will not be alone.
Today, Fitch downgraded Ambac Financial Group two notches from AAA to AA. That doesn't seem like a lot, until you realize that 74% of their revenue comes from that AAA rating that covers $556 billion in municipal and structured finance debt. Fitch did so because Ambac decided not to do an equity offering for $1 billion to stem the bleeding. Six months ago Ambac was at $96 or thereabouts. Today it is as $6.20. Its market cap is only $629 million, so a $1 billion offering would dilute current shareholders by around 70%. Ouch. And you can bet any offering they do now will be on terms that shareholders will not like, most likely a convertible offering that dilutes current shareholders even more.
Oh, and that means that 137,990 municipalities that were insured by Ambac will see their credit ratings drop and their costs rise. Think their customers will hang around?
Moody's says it is going to review MBIA. MBIA, which is rated AAA, raised $1 billion last week from Warburg Pincus and did another offering for surplus notes for $1 billion at 14%. As Michael Lewitt noted, that means 14% is the new price for AAA bonds. Except that today it is 23%. If you bought that note, you are not looking good right now. They are trading at 70 cents on the dollar. Of course, that is better than Ambac's 30-year bonds, which are trading at 35 cents on the dollar.
When Warren Buffett bought Gen Re, the large re-insurer, five years ago, he presciently made the decision to reduce their exposure to credit default swaps. It took them four years to reduce the number of contracts from 23,218 to just 197 at the end of 2006.
"We lost over $400 million on contracts that were supposedly 'safe and properly priced' and we did it in a leisurely way in a benign market," says Mr. Buffett. "If we had to unwind it today in one month, who knows what would have happened?" (The Wall Street Journal)
If you are a bank or regulated entity, and you have mortgage-backed securities that have been written by a AAA monocline company, you can carry that debt on your books as AAA. But as the companies get downgraded, you have to write down the potential loss. Quoting from a recent note from Michael Lewitt:
"MBIA's total exposure to bonds backed by mortgages and CDOs was disclosed to be $30.6 billion, including $8.14 billion of holdings of CDO-squareds (CDOs that own other CDOs, or mortgages piled on top of mortgages, or, to quote Jeff Goldblum's character in Jurassic Park again, 'a big pile of s&
So let me get this straight. If 100% of the reserves on deposit at the Fed is not bank money, but Fed money, then the Fed, at this point, IS the banking system. So, assuming that a collapse of the bond insurance agencies forces an ungodly sum of worthless CDOs onto the books of all of these banks, that's going to require the mother of all TAF auctions to prevent a catastrophe. The question then is, in order to generate the cashflow for a monster TAF auction, won't that require the gov't to have a distressed treasury auction to come up with the green?
In other words, if the bond insurers fail, we're looking at a monster spike in interest rates just to generate the money to cover the shortfall that is waiting backstage, correct? We can't collateralize anything at this point, and if we print that much money out of thin air, it will crash the dollar. There has to be a treasury auction and the rate of interest, I'm guessing, may look like junk - i.e., we will be looking at a subprime Federal Reserve.
Just trying to think this through. It sounds too absurd to be true, so I must be out in left field with this. If I'm correct, it might explain the panic-stricken White House and death-warmed-over Ben Bernanke.
The only people who actually own munis don't seem worried. Robyn doesn't care, and Alec says he owns more then Robyn but never bought insured bonds.
Okay, found a couple of ways that munis may "blow-up".
First
Lots of municipal bonds are held in short term municipal money market funds. Since there is a lot of short term demand, the yield curve is usually fairly steep. Hedge funds have taken advantage of this by chopping long term securities into short term munis called tender option bonds.
This has caused the yield curve on municipal bonds to flatten over the last several years. If investors start to bail on municipal money market funds then the yield curve should steepen (hitting holders like Robyn).
Second
Many municipal bonds are now issued as Auction Rate Securities.
Credit risk associated with auction rate securities mirror those of other municipal and corporate issues in terms of default risk associated with the issuer. Because they do not carry a "put" feature (which allows the bondholder to require the purchase of the bonds by the issuer or by a specified third party), auction rate securities are very sensitive to changes in credit ratings and normally require the highest ratings to make them marketable. This is usually achieved with bond insurance.
And, evidence that it's already "blown-up" in some cases:
Jan. 18 (Bloomberg) -- Lehman Brothers Holdings Inc. faces a $1.14 billion claim from members of a New Jersey family, who say the firm mishandled their fortune by steering $286 million into investments that have become hard to sell. . .
Instead, the Maher brothers say, Lehman put the money into so-called auction-rate securities that have been hit by the contraction in credit markets.
Zigurrat - Who said I don't worry? I worry about everything - from investments to what will happen next hurricane season. I am pretty much a "belt and suspenders" kind of "guy". I have reviewed my muni portfolio in depth at least twice since August. Frankly - I have been worried less about the bond insurers than the mess in the state-run Florida fund - which is holding hostage money which belongs to various issuers whose bonds I hold. I will have to see what happens with that situation over the next few months.
That said - I could never understand people bottom fishing in the credit markets to pick up an extra 20 bp in yield. Makes more sense to speculate by buying way out of the money calls on speculative tech stocks IMO (I don't do that - but if I wanted to gamble - that seems like a better bet to me).
Kicker - I agree with many of your comments about the muni market. Which is why I have never bought a muni money market fund - or an auction rate muni. I won't touch muni bond funds. I just buy very plain vanilla stuff - and hold it until it is called or matures.
I did buy a few unit trusts when I was young - about 30 years ago - from Merrill Lynch. Those guys tried to jack up the yields by larding up the trusts with WHOOPs bonds that defaulted. What a mess. Since then - I have always just bought individual plain vanilla munis. One welcome development in recent years in terms of doing this has been the development of on-line sources for viewing available offerings and buying.
Note that almost all most corporate bonds and munis are very illiquid compared to securities like stocks. I can buy/sell 100 shares of IBM with a spread of a penny or two. With a lot of 100 bonds - you're lucky to be looking at a bid/ask spread of $2-3 per $100. So they are definitely not vehicles for trading. The only time I have sold bonds is when I have been concerned about credit quality (e.g., got rid of Ford and GM bonds years ago - probably too early - but better too early than too late). Roby
To further expand on your muni post related to money markets, think in terms of Florida, where muni money is locked in investments which are called CDs -- among other things -- but those CDs are linked to other bonds and CDOs, etc., which all rely on other links to other alternative ways to seek yield enhancement, thus these safe CDs need to be looked at in many ways, e.g, if the CDs are safe and mature as planned, then they need to roll the dough into a new CD which will have to be even safer in terms of being liquid in the future, and of course the next CD will pay less as credit enhancement opportunities dry up.
As for CD-like investments that are now frozen, the ramifications for what Florida can invest in the future is even more interesting, because the state is changing the rules on the fly to enhance liquidity, which I think somehow triggers next week, and God can only toss dice as to how Blackrock will spin these derivatives!
According to a Wells Fargo bank document obtained by the Las Vegas Review-Journal, more than $2.3 million had to be withdrawn to make up the difference.
Monorail spokeswoman Ingrid Reisman says the drawdown was expected.
Credit rating firm Fitch Ratings estimated in July that the monorail would begin tapping its cash reserves and that they would last at best through 2010.
If the monoline guys like Ambac, etc go down, which seems more likely every day with the Fitch downgrade from AAA to A of Ambac on Friday afternoon, what would you say is the best place to put your assets? Sell all stocks & keep in cash, buy gold and/or commodities, etc?
I have a good chunk alread in cash, but some still in the market and am torn between inflation going crazy with Fed cuts (eg: buy gold and/or commodities) or deflation setting in due to much lower demand due to recession (keep cash).
Wanasurf, I say you put 56% of your money in stocks, 23% in gold bullion, 13% in bonds and 8% in foreign stocks. Any slight change to these percentages will blow up your portfolio. Do THIS only.
Anonymous - If you're talking about state general obligation bonds - I don't think a state has never gone bankrupt (although I must admit I don't have a command of credit issues during the Civil War). I think the worst state in terms of credit quality these days is Louisiana. I don't think it will go bankrupt - at least not in my lifetime. And I think the same of other states. OTOH - many states won't have an easy time of it in the years to come. I know Florida is facing a budget shortfall. And I am sure a lot of people will bash a lot of heads to get a balanced budget (which many states are obligated to do - after all - they can't print money like the federal government) - when the legislature goes into session this year.
Doc Holiday - There is no law which requires local governments and agencies to invest in the state fund. IMO - that fund is toast - and the only issue is how many pennies on the dollar the remaining participants will get. I will note that some of the largest fund participants - like JEA - paid the 2% penalty for getting all of their money and withdrew 100% of their funds. I don't know why everyone didn't do that. If - as I believe - the state fund is toast - it will be up to local governments and agencies to decide how to put their excess cash to work in the future (which is now - tax payments started coming in in November).
Does anyone know what the underlying credit rating for the Las Vegas monorail bonds is - or have a CUSIP number (I can look it up). Bonds like that aren't my radar screen (although I do own Las Vegas general obligation bonds).
Wanasurf - I think it's impossible for anyone here to give specific portfolio advice to someone without knowing a lot about them (which we don't). But with regard to holdings like equities - I'd say - why did you buy them? If the reasons you had for buying were sound - and you think the same reasons are still in effect - then hold. If you don't know why you bought - or conditions have changed - perhaps it is time to sell - sit back - and think about things. There is one general rule that I think applies to everyone - you should have a game plan - regardless of portfolio size - types of investments - investment horizons - or management style (e.g., investor versus trader). The game plan shouldn't be fixed in stone - especially if you're young - it should have some possible forks in the road - a decision tree. But it is worthwhile to sit down and sketch out the options - and come up with a plan.
Note that I had a couple of drinks with some ladies I played golf with this week. Both the lady to my right - and the lady to my left - had bought spec houses/condos for the first time in 2005. No game plan. These are women in their 60's. What business do they have speculating in real estate? But that is apparently what a lot of people in Florida did. Which is one reason our real estate market is - to put it mildly - troubled. Roby
Then what? Cascade failures?
Cramer just proposed a government take-over of the monoline insurers as a way to stabilize the financial markets. Some folks love capitalism until the moment they start to lose some money.
I say let them fail and let the chips fall where they may. The banking system is strong enough to survive this shock, and maybe next time around, executives will use a little more discipline in their lending and insurance strategies.
This bailout is a joke (so is Cramer).
Begging for interest rate cuts, tax rebates, bailouts, etc...Who is running this country? jezzz.
Maybe Jas is right. UGH!!
Yeah, all the rip roaring, deregulation capitalists love the invisible hand of the free market until it gives them the finger.
Then they want to socialize the losses via taxpayers...and wonder where the regulators were.
Fitch's downgrade affects over 137,000 Ambac-insured issues. Now THAT'S a Friday afternoon bomb...
skippy - what is the dollar amount? This is the number I have been watiting for.
As I stated some time back the time bomb is with the pension funds and what they do with this former AAA debt that is now junk (soon)...
I say let them fail and let the chips fall where they may. The banking system is strong enough to survive this shock, and maybe next time around, executives will use a little more discipline in their lending and insurance strategies.
There are other options too - between extremes of let shit happen and complete bailout. For example fed gov't can come in and backstop muni's & state bonds but let corp issuance fail (maybe come in later and Hoover them up into some kind of RTC to speed liquidation). That wouldn't bailout principals of the failed institutions but would minimize the collateral damage to the rest of the economy.
Point is its too early for any of that - nothing has actually 'failed' yet except the model.
The insurers, as all of you doubtless already know, is the next shoe to drop. As Conjure and I see it, the muni market goes nuts at that point. When the equity markets get the memo they could easily go into a free fall.
Conjure says, "Are we having fun yet?"
Re: "We have been proactive in raising a substantial amount of new capital to support our Triple-A ratings, he said. We believe our capital plan meets or exceeds the requirements previously outlined by Moodys and the other two major rating agencies."
What a bunch of crap! These people need to be preparing to go to jail for false and misleading information and the idiots at Moody's, Fitch & S&P should all join them, along with Paulson, Bail Out Ben and all The Stooges of this Coup!
Not sure about the dollar amount - but it's probably measured in something Seussian (Boatloadillions? Squadrillions?)
Pension funds (at least public ones) tend to avoid munis because, as tax-exempts, the pension funds don't benefit from the munis' tax advantages.
This country is rapidly imploding. The monoline bankruptcies will make the housing crash look like a lemonade stand going out out of business in comparison.
These same banks and financial institutions that own all of the toxic loans will now be faced with junk muni's.
When does the panic button get pressed?
BigDaddy- "When does the panic button get pressed?"
Conjure pressed it when the Bear Stearns funds failed, but everyone thought he was crazy.
These same banks and financial institutions that own all of the toxic loans will now be faced with junk muni's.
From what I understand the munis aren't the worst of it - its all the CDS and stuff they've 'guaranteed'... If I'm wrong I'd sure welcome some one setting me straight.
skippy - they do buy AAA corporates though
dryfly, you are correct. However, it will nevertheless wreak havoc in the muni market.
One of the smart bankers here explain what it means to have negative nonborrowed reserves? (table 2)
FRB: H.3 Release--Aggregate Reserves of Depository Institutions--December 3, 2009
crispy&cole
Do not engage me in relation to pension funds as a timebomb....that would be a mistake to get me started, because, Ive had :
Dont engage!
DH
DH -- Won't tax cuts fix everything? (-;
I view the insurers as the little Dutch boy. All hell starts to break loose when they go. It'll make what's happened up to now look like chump change.
What happens to the $900 million muni bonds issued by Chicago's O'Hare Airport?
Chicago Leads Muni Borrowers; Sales Fall on Insurer Concerns - Bloomberg.com
crispy&cole:
Please engage
CR-
got any predictions on a bailout of the monolines?
btw... how do I turn off a tag after I've engaged it? I can't seem to figure that one out.
Detroit,
Yah,
Taxcuts and rebates and then maybe 40 year mortgages with zero down and then we can all hope that other people from other countries will loan us money to buy SUVs.
Unemployment rate up in 46 US states in Dec-gov't
Unemployment rate up in 46 US states in Dec-gov't
| Reuters
Cramer just proposed a government take-over of the monoline insurers as a way to stabilize the financial markets. Some folks love capitalism until the moment they start to lose some money.
I think the best long-term solution for stabilizing the financial markets is to let the government take complete control over the money supply and regulate access to money and credit by setting the price of borrowing.
Oh, wait...
So no problem then. I'll use my tax rebate to buy furniture with no payments due until 2012. By then, the full force of the tax cuts will have kicked in, and the ownership society will take care of the rest...
DH - step away from the ledge...
This country is rapidly imploding. The monoline bankruptcies will make the housing crash look like a lemonade stand going out out of business in comparison.
Then they probably won't be allowed to go bankrupt.
The only thing you need to save them is a good printer and lots of green ink.
Did I hear Cramer say the Dow drops 2000 points when AMBAC fails? Holy cheesedip Batman. Cramer has been on a tear the last two days...
"he only thing you need to save them is a good printer and lots of green ink."
which is worse, giving us all $1 Million each now, or dribbling it out over time as inflation grows?
Did I hear Cramer say the Dow drops 2000 points when AMBAC fails? Holy cheesedip Batman. Cramer has been on a tear the last two days...
BigDaddy63
May be due to this - 'MAD' JIM CRAMER LOSES GOLDEN $50K BET
'MAD' JIM CRAMER LOSES GOLDEN $50K BET - NYPOST.com
Did I hear Cramer say the Dow drops 2000 points when AMBAC fails?
It's possible I guess. The 'stop all trading' circuit breaker is set at 2700 points.
I can't stand the crony capitalism that's become of our country over the past several decades. The back scratching, wink-wink system that keeps executives, corporate boards, Wall Street and politicians in clover while the rest of us mucks get fleeced of what little we have.
IMO, executive compensation should move away from stock performance to operating performance of the business. And rather than payout all the bonus at the end of each year - the bonus should go into a pool that can only be drawn down by 20% each year. If there are operating losses then there should be negative bonuses that come out of that bonus accumulation pool. Right now executives have only one incentive - goose the stock in the short term and then bail out before s** hits the fan with a golden parachute severance package. Bob Nardelli trashes HD and walks away with $200 million and then lands up running the Chrysler LBO. WTF!!!
crispy,
Your right, I need to take a walk and prepare myself for battle and back away until fully prepared.
I am humbled by your wisdom and will click my heals and bow as I leave, not wishing to offend.
My apology for having been so reactive and combative; I will seek wisdom and return soon.
DH
DH -- LOL (-:
malabar -- I like your ideas. This economy of ours needs fixin'...
mp: Conjure pressed [the panic button] when the Bear Stearns funds failed, but everyone thought he was crazy.
I did too, but I'm just a poet ...
Cramer?- "the Dow drops 2000 points when AMBAC fails?"
If he said that, it's the first time I've ever agreed with him on anything. It's certainly possible.
mp,
I'm way behind on today's threads, so I have to ask... has the clock moved?
Conure Clock
11:59:03
My apology for having been so reactive and combative; I will seek wisdom and return soon.
Hey DH - when you find wisdom, share it with the rest of us... all I've got is a pint of Guinness and a dog at my feet.
By the response of the equity markets, the Ambac cut was obviously priced in there, either that or there are other forces at play in equity-lala-land.
My personal favorite part of the whole Ambac story is the gaggle of "Buy" ratings right up until this week. Yet more confirmation of the complete ineptitude and delusion that exists in the land of equity and equity research.
DH - LOL!!
Cramer?- "the Dow drops 2000 points when AMBAC fails?"
If he said that, it's the first time I've ever agreed with him on anything. It's certainly possible.
mp | 01.18.08 - 7:28 pm | #
Did you see Cramer's rant yesterday on CNBC? I made my wife watch it from CR's feed - she said it was the best 'Network - Mad As Hell' speech she has ever seen. Way better than August 'Fed Cut Bonanza ' rant.
He's gonna be in the Rant Hall Of Fame if he keeps this up.
As the Sunday NYT Magazine piece on Bernanke reveals, he should have been visiting the CR site for the lowdown on what's going on. Instead, he's been talking with Geithner in New York.
Geithner, of course, is the guy who's supposed to be following all of this, and I'm beginning to think he doesn't get it.
The downgrade throws doubt on the ratings of $556 billion in municipal and structured finance debt guaranteed by Ambac.
Should read:
"The downgrade partially acknowledges the risk of $556 billion in municipal and structured finance debt guaranteed by Ambac. "
Ratings are predictive. Ratings are not magic fairy dust that turns piles of manure into mounds of chocolate mousse. Mmmmm, Ponies. Ponies sprinkled with Fairy Dust. Tastes better than ground up dog balls.
Before I go on my walk, I have to share my stimulus package:
Give every family a $1000 credit; however, if you use it for your mortgage, its tax free, if you use it for stuff like dope or booze, you have to pay tax on it.
That is on top of the associated idea that the credit would be made available for tax year 2007 and thus you would make that choice in the next two months, to either write off that $1000 on your taxes to adjust your income or perhaps if you owe Uncle Sam, you thus deduct it, and if Sam owes you money, they pro rate it and give you the balance, hmmmm, yes somehow your 2007 tax return would trigger the payment...hmmm...yes, that walk.....
Dryfly- "Did you see Cramer's rant yesterday on CNBC?"
Dryfly, we don't watch TV, sorry.
Run. Run away!
Did anyone answer the question about negative nonborrowed reserves in the banking system?
That seems a tad troubling. I'm sure the TAF auction is feeding the frenzy, but where all the non-borrowed reserves going to?
Give every family a $1000 credit; however, if you use it for your mortgage, its tax free, if you use it for stuff like dope or booze, you have to pay tax on it.
Why not just distribute "Mortgage Stamps"? I mean, if we're going to turn this thing into a complete circus, let's show a little creativity.
Dryfly, we don't watch TV, sorry.
mp | 01.18.08 - 7:37 pm | #
See CR's feed - it's almost 'historic'... the first time I've seen anything that candid and 'naked' on the tube since Watergate.
My wife said after seeing it... "I'm surprised he hasn't had an 'car accident' talking about markets like that..."
Chris, nonborrowed reserves are your total deposits at the Fed, plus vault cash.
If your nonborrowed reserves are negative, it means you're borrowing your reserves from the Fed.
--
Real-time news...
Holy Pig!
I just listened to Doug Cass on Kudlow & Crooks, who prosposed an RTC-type Trust, "150-200B," to cover AMBAC, PMI,... (all insurers). "Take control of all these," said the dope. I couldn't believe it.
My observation that vast majority of Americans are bred to be total dopes, by massive brainwashing that has gone on for some hundred years, in areas of politics and economics is further confirmed.
Sorry, if someone is offended, but that is the truth.
Jas
Jas- ""Take control of all these," said the dope. I couldn't believe it."
Jas, unfortunately that may become what they have to do at this point.
Where do you draw the line???
Cramer just proposed a government take-over of the monoline insurers as a way to stabilize the financial markets. Some folks love capitalism until the moment they start to lose some money.
If you don't think Cramer is shorthing these markets and has been for some time you are very foolish indeed. People are going to lose money but it will be the same ones that did the last time Mom & Pop.
--
Crispy: "Maybe Jas is right."
Ye of so little faith!
I have been known to be early in my warnings but deadly accurate when the problems come to surface and everyone can see what I was talking about.
The Crooks will do America IN. For good. There is absolutely no doubt about it.
Jas
mp:
Thank you for the clarification. Taking it a step further, I suppose this implies that the only thing preventing the total failure of the banking system are the TAF auctions? The banking system, as a whole, cannot meet any of its reserve requirement without Fed loans?
dryfly -- Is there a video online of the latest Cramer rant? I wanna see it!
Jas, unfortunately that may become what they have to do at this point.
mp | 01.18.08 - 7:51 pm | #
I've come to the same conclusion. I just hope they do it like RTC and wait for AFTER the bastards have cratered and lost all before they step in to mop up.
Having lived at ground zero during the commodity bust on the central plains prior to S&L... there is a difference between stepping in before and after the mayhem. Lessons are learned when done after. I doubt Kudlow would approve of my position... he'd probably say if you aren't going to save investors, then why try to save anyone?
Jas -
Can you chime in on your opinion re: the negative non-borrowed reserves on deposit with the Fed? I feel like I'm being a little histrionic about it, but this seems quite disturbing.
Where do you draw the line???
tj & the bear | 01.18.08 - 7:52 pm | #
I'd start at the bread lines and work your way up from there. If companies like Ambac fail and trip munis & basic corporates there will be bread lines.
Chris, I was looking at the H3 report to which you linked and I need to have a little more time to study it. Thank your for providing a link.
Having said that, my first impression is that the situation is deteriorating faster than I thought it would. I need a little more time with this.
dryfly, I guess I agree with that as well . . . and I'm hoping that nobody will listen to that worthless sh!tbag Kudlow. Of course, THIS administration is peculiarly receptive to his arguments . . . I'm hoping there's enough honest people left in gov't to block any bailout for shareholders.
Um, exactly how do you step in "after"? I mean, what would be the point, since Buffet's already made new bond insurance available?
mp -
Thank you very much for your input. It seems a bit unwieldly and I'm not sure my assumptions are correct.
Ye of so little faith!
Faith is our next step.
tj, the same way you step in "after" a bank fails . . . let the stockholders get wiped out, but see that the corporate obligations are met.
I'm not sure yet what kind of measures might be necessary to prevent a total meltdown.
That's it! A "faith based initiative" to restore the economy. That Bush is a genius.
Cramer can't short stocks and I don't see him in ETF's so I doubt he's talking his book on this subject.
The funny thing is how he used to lambaste other wall st. types for not playing any defense, yet for the last 2 years until August he was all O and no D.
TV ratings tend to queer the mind, yet on the street.com segments he seems quite lucid.
Um, exactly how do you step in "after"? I mean, what would be the point, since Buffet's already made new bond insurance available?
tj & the bear | 01.18.08 - 8:03 pm | #
Buffet isn't going to insure anyone with any serious risk... he will be very choosy. And all the legacy stuff out there... all the San Diego Cty's? Clevelands? Chicagos? Whose gonna step up for them?
And if they go down the social ramifications are very serious - forget the money.
That's where a gov't RTC-like institution steps in and stabilizes the free fall.
But I hope like hell they wait until the spec's and 'investors' get creamed first. Then I won't feel so bad about the clean up.
mp + others - I probably own more munis than any 10 of you here - or maybe all of you here. And I can assure you that I am not going nuts. Just about every - maybe every - AMBAC muni I own is a GO or essential services (water sewer and the like) revenue bond. Do you really think that any half-way sophisticated muni buyer bought a state GO because it was insured by a crummy little company like AMBAC?
Perhaps AMBAC insured Newark New Jersey nursing home bonds. Don't know. Even if it did - I and most muni buyers didn't buy garbage like that. As for anyone did - let them eat their losses.
I agree with Peconic Bay - no bailouts. Don't make people who were prudent pay for those who weren't (especially since a lot of taxpayers who will wind up on the hook can't even handle their health insurance premiums - much less put together muni portfolios). And if I lose money - so be it. Means I didn't do enough "due diligence". Roby
tj, the same way you step in "after" a bank fails . . . let the stockholders get wiped out, but see that the corporate obligations are met.
And average depositors.
Chris, I will get back to you re the H3 report on THIS thread before the evening is over. OK?
I agree things are pretty grim but a few posters seem to misunderstand - they seem to imply that because the monolines are going bk, the insured bonds will default.
It's the other way around. If the insured bonds default, the monolines will go bk.
If your home insurer goes bk, that doesn't mean your house is going to burn down.
mp - thanks
let the stockholders get wiped out, but see that the corporate obligations are met.
Corporate obligations? Hell, there's no stockholder value left anyway, it's only the trillions in bondholder insurance that I'd rather not see transferred to taxpayers.
Why the hell can't we stiff the stockholders and let the bondholders fend for themselves? If the bonds are good, they'll be fine. If they're bad, why should we have to pay for them???
Gary, Maybe, it could after we accept that we are bankrupt. I cannot imagine our current leaders coming clean, but it feels necessary to me.
Just about every - maybe every - AMBAC muni I own is a GO or essential services (water sewer and the like) revenue bond. Do you really think that any half-way sophisticated muni buyer bought a state GO because it was insured by a crummy little company like AMBAC?
General Obligation eh? Orange county finds themselves $147m short this month. Hmmmm, pay the deputies or pay Robyn? Decisions, decisions. Oh I know, they'll let you take over the sewer system and run it at a profit until you are paid back.
Here's my problem with an RTC-styled clean up of the monoline insurers. In the 80s the RTC took over failed thrift to protect depositors. Bad loans were made available to investors who risked capital and in some case recovered fortunes. The shareholders got wiped out, as they deserved to be.
If the government steps in and backs the CDO contracts from monolines, the guys who get saved are all the counterparties like Citi, JP Morgan, Merrill Lynch etc. These are the folks that helped engineer this mess in the first place. Their shareholders and employees should not be shielded from the full effect of the recklessness of management.
One day, I aspire to be a sophisticated muni investor like Robyn.
Robyn,
Does your shoulder hurt from patting yourself of the back?
And believe me, if you want a pissing contest of who owns more munis, you'll lose.
The muni insurance doesn't bother me because I never bought insurance rated paper. I'm just wonderig if it will force a sell off so certain issues will get goosed and start paying a more attractive yield.
I've got some Euros burning a hole in my pocket and have been waiting for this moment for 3 months.
Peconic -
I think the conventional wisdom is that - whatever your feelings about the wrong people getting bailed out - the alternative is that EVERYONE gets hurt badly and in a way that won't correct itself for many many years, if at all.
The problem with this, is that we are trapped beween the Sylla and Charybdis. If we bail out now, history has proven that this nation will concoct another, grander scheme which causes greater pain down the road. We won't learn. If we didn't learn after Enron(!) to put an end to the accounting crap, we're not going to learn now. If we don't pull an RTS, we're looking into the abyss.
Maybe it's time to look into the abyss and be done with it.
I agree things are pretty grim but a few posters seem to misunderstand - they seem to imply that because the monolines are going bk, the insured bonds will default.
It's the other way around. If the insured bonds default, the monolines will go bk.
Yes and No. There are multiple varieties of bonds these guys are 'insuring'... CDO crap and munis and corporates. Historically the munis were very tame... as were vanilla pass through MBS... even most simple industrial corps were tame. And most were well understood safe bets.
This insurance made it possible for a lot of small companies and municipalities to get debt - companies and munis that individually were too small to justify extensive DD but collectively represent a big market... and few failed... and the debt provided a public good. Schools hospitals, equipment, etc.
But the new stuff - the CDS and LBO corps are anything but tame and could take down the system. Then all those small munis & companies will be screwed. Without insurance their market appear (and ratings) collapse. It will leave these markets in chaos for a long time.
Eventually Buffets new org might come in an fill that gap... but it could be years. Meanwhile folks gotta live.
A sensible RTC like clean up AFTER the failures would not reward the risk takers but limit the collateral damage.
If your home insurer goes bk, that doesn't mean your house is going to burn down.
trail | 01.18.08 - 8:11 pm |
And you are OK because you get another insurer. And even if you didn't, it wouldn't affect the value of the house on the market. Or the value of anything else.
But, if I understand it, many bonds insured by these clowns will have their ratings lowered in step - and if those ratings fall below the minimum requirement of those that hold them, onto the market they go. Talk about fire-sales.
Or they don't go on the market, but their value drops. More money being destroyed somewhere in writeoffs.
Oh, and do any assets ever get insured by more than one monoline insurer at the same time? Or be otherwise related to other assets ensured by other monolines?
If so, then:
Ambac downgraded --> asset downgraded --> some other insurer downgraded --> some other asset downgraded --> ????
I need some Xanax.
We already got CDOs downgraded --> Ambac downgraded --> munis about to be downgraded(?) - where does it end?
Point well taken, dry...
Chris,
My understanding is that most of the conventional banking system is fine. There is plenty of capital for good borrowers with viable businesses. Corporate bond spreads have widened somewhat, but we are at historically very low interest rates.
It's the chicanery on Wall Street that burns me up and I think society would benefit from seeing these bad actors get their comeuppance.
Greenspan will have something really important to say about this and I for one will wait to read it before proceeding with my ho hum little life.
Checked Robyn's IP address - He is a 50 year old man in the bay area working from the public library...
Greenspan will have something really important to say about this and I for one will wait to read it before proceeding with my ho hum little life.
FFDIC | 01.18.08 - 8:30 pm | #
Priceless - that made my night.
The bond issuer was not defrauded. They got what they paid for (AAA). The investor that depended on this was defrauded by both the ratings and the assurance that they would be paid in the event that everything went south.
What needs to looked at is what percentage of the premiums have already evaporated into everyone's pockets.
(mortgage) Pig in a poke.
I'm with Robyn and Peconic. The muni's won't default because the monolines do. What will default is the CDO junk and maybe some muni IRB junk. Let the holders take their lumps. Now the downgrades may cause some holders to have to get out of Muni issues, but not pension funds (they don't own 'em). And new Muni issues can be insured by Buffet (the classic small water utility that isn't big enough to rate).
Will tptb bail out the monolines to bail out the Merrill's. If they do we're living in Jas' world.
--
Personal perspective, just in case it helps...
As I have said before I come from a money lending and all-purpose business family. My ancestors dealt with credit insurance for centuries! Usually, the top of the ladder guarantor of the letter-of-credit would be the biggest and most prestigious private firm, like the Rothschilds of the local region. No govt, or public companies, was ever involved or imagined! I am aghast at American dopes who think in those terms private gains and socialized risks. It is beyond disgusting. It is flat out evil within American principles, or any fair principles.
My family was never powerful, just middle level, and merely used the credit facilities and insurance for buying local produce and selling in larger towns via agents. Occasionally, also for speculating on commodities. We lent to locals with no insurance, of course, and some lending was with collaterals, e.g., farms and coming crops. My father forgave debt rather than take farmland. He thought very poorly of that practice (taking one's livelihood). Americas lenders are pure Crooks. Only a dope can fail to see an obvious moral problem.
Jas
The Feds are going to spend $ 100 or $ 150 billion in economic stimulus. Add in the lost tax revenue (federal, state, local) due to job losses and stock market losses and we're well north of that. Let's just drop the pretense and bail the whole mess out right now (over the long weekend) and move on. Deal with the moral hazard by charging every one of the top execs of those firms with fraud and sending them to jail. They fear that more than losses, which are borne by the shareholders anyway. And throw in some mortgage brokers and scammer borrowers for good measure.
I'm getting bored and disgusted with this. Enough time has been wasted.
I love Robyn! I see a black spandex snuggly suit.
Actually, if all she says is true then it is very interesting. She is telling us what her people think. When they start getting panicky you know the drones are getting restive.
I think it was Rockefeller who had 50 cal. machineguns setup at his estate.
Oh...you mean there is a chance Ambac is solvent?
Don't count out the potato chip eating Americans. When they collectively get pissed, the government moves.
A clever lawyer may be able to create a RICO case out of all of this.
Will tptb bail out the monolines to bail out the Merrill's. If they do we're living in Jas' world.
They wouldn't bail out the monolines - the monolines fail. The RTC-like entity could come in take over parts and let the rest of the puke go - take on munis and vanilla small biz corp bonds and pass on CDO and LBO crap. Merril is still fracked due to their CDO exposure but meanwhile schools continue to get built & factories expanded.
Heck they could even take the munis & small biz corps & sell 'em off cheap to Buffets new gig and just shut down the CDO/LBO crap.
It would speed up the liquidation of puke and get the remaining viable assets back in competent hands just like how bank failures are supposed to be handled (Can Bush people do it? Legit question - don't know.)...
But it doesn't have to be one size fits all solution to these insured assets.
RICO-yes that takes care of the moral hazard. But we need to put this issue behind us. NOW. Cramer is right, Fix it then jail the bastards.
Mish,
Maybe I'm plain stupid, but how does the government spending $150 billion MORE help? Isn't easy money and deficits what got us here in the first place?
Besides the fact that we are talking about a maximum of 1% GDP trickling back to the economy, isn't this simply election year nonsense?
You don't seriously believe this will have any major impact on the current state of affairs? We are in a deflationary spiral and no amount of Keynsian pumping can prevent it.
"Americas lenders are pure Crooks."
Are we thinking in the same poster child?
mish?
wrong blog, daddy-o
robyn-
you're nauseating me again.
"Fix it then jail the bastards."
Without insurance, perhaps a good muni bond drop in price. That's likely digestible. If you own garbage and slime, you're likely to lose some money.
Let's count the chips, settle, and move on.
Lesson learned - Any financial market above a certain threshold should be regulated and have a robust clearing mechanism.
Dryfly, Strongly agree with you that they should only bailout the muni parts of the business. Probably would cost next to nothing since they rarely default.
Also, I've spent some time looking at the bond insurers. IMO, in a run off situation, there was a good chance of a shortage but they would cover at least the majority of the defaults. The only one that I looked at that was not in that situation was ACA which was a joke.
No comments
The article requested is no longer available.
Wow.
Hey. what about those Newark New Jersey nursing home bonds? All cash flow modeling aside, these old people just keep getting older and if we were a smart nation or a global derivative affectionado, we would tap into that tasty pie and cut a bigger swath...LOL
DH
"Mortgage Company Exec Jumps to Death
53 minutes ago"
Canary in the coal mine.
Chris, here is a partial answer to your question. The rest will follow later.
First, to ensure that we're both on the same sheet of music, use the first table in the H.3 release, which is the seasonally adjusted data.
"Other borrowings" (right side of table) were 1,377. Add to that the TAF of 40,000. Also add nonborrowed reserves of 200. The sum is 41,577. Required reserves on that date were 39,865. So, subtract 39,865 from 41,577 and you get the "excess reserves" on that date, or 1,712.
This data tells me that the banking system is rapidly burning through their nonborrowed reserves. Had it not been for the TAF, the system would have melted down and the Conjure Clock would have struck 12:00:00.
I haven't finished working with the second section, the not seasonally adjusted data, but will get back to you on it after dinner, on THIS thread. OK?
Conjure says, "Damn it, mp, you're supposed to be keeping up with this. You're spending too much time thinking about ponies!"
Walter P. Buczynski, 58, is our Executive Vice President,Secondary. He has held this position since January 2003 and prior to that time he served as our Senior Vice President,Secondary Marketing. Prior to joining us in 2000, Mr. Buczynski served as the Chief Operating Officer of First Home Mortgage Corporation from December 1999 to August 2000. From 1997 to 1999, while serving as Senior Vice President, Mr. Buczynski directed the capital market activities of G.E. Capital Mortgage Services, Inc. From 1991 to 1997, Mr. Buczynski served as Executive Vice President of Secondary Marketing for Margaretten & Company, now known as Chase Manhattan Mortgage Corporation. Mr. Buczynski also has served as Chairman of The GNMA Liaison Committee and Vice Chairman of the Freddie Mac Liaison Committee of the Mortgage Bankers Association of America. Mr. Buczynski received his B.S. degree from Rutgers University.
Forbes.com File Not Found
Among the employees receiving biggest bankruptcy bonuses: CEO Michael J. Sonnenfeld; Vice President Walter Buczynski and Chief Information Officer John Camp will each receive $99,999. Another 20 or so employees would divvy up the remaining bonus payments.
Guess the bonus wasn't big enough for him.
One notes that the guy murdered his wife before jumping; left two young sons.
I'm sorry... I don't really feel like weeping for subprime vampires who have bought hook line and sinker into bloated materialism of this "boom" and then didn't even have the guts to exit this world alone. There are decent, hardworking people in this country who deserve more tears and deserve more than the canned cat food they're going to be eating while these assholes get their bonuses.
Fuck him.
mal,
couldn't agree more. These self important, entitled pri*ks really think its all about them when they are destroying everything around them.
I have a vision of Conjure Bag on the loose while mp is asleep, wreaking vengeance upon malfeasants of the credit bubble.
Reality check: one bond insurer has been downgraded from AAA to AA by one rating agency; others will follow. AA is a pretty good rating as far as ability to pay claims goes, even if you think rating agencies are nuts. Check the numbers, do the math; remember this is insurance, not debt, and therefore ability to pay depends on (a) probability of defaults (b) amounts of interest to be timely paid (c) amount and timing of defaulted principal and (d) amount and timing of recoveries vs. (a) premia paid (b) premia payable and timing thereof (c) earnings on investment portfolio and (d) losses on investment portfolio.
The downgrade will cost investors money. Does it mean all bond insurers should be bailed out, by a government guarantee of the guarantors? No.
CDS are an issue. Probably not as to bond insurers, however, who structured their CDS as if they were financial guaranties. (Except for ACA.)
Folks, read the comments on the previous Ambac posts; I don't feel like copying and pasting them, which is inelegant and duplicative, not to mention representing a waste of pixels. The sun will come up tomorrow.
I'm going to enjoy Friday.
yeah, if "Joe Sixpack" is going to be a generic name for the noninvesting, non-playa grunt... how about "Jumpin Joe's" being the name for the "successful" greedheads who can't handle having to face their own messes?
The overwhelming expectation is the probability of defaults are going exponentially higher, and the amounts required for payment are so considerable, the combination easily surpasses any hope of the bond insurers ability to pay.
We're all talking about MBIA, AMBAC and other publicly traded insurers, what about the hedge funds that have made a killing the past few years doing the same thing. Many without a doubt are in a position of default. Those are the hidden mines we should also fear.
Stuart, Agree defaults will increase by very large amounts that will decimate many lower tranches of CDO's. IMO it is not at all clear losses in the senior tranches of better than average CDO's will be catastrophic. IMO it is in the complex details such as which insurers have expoasure to the poorer
CDO's (especiallly CDO's squared)that will determine their ultimate claim paying ability.
I was not confident in my analysis of the relative merit of the bond insurers except that ACA is massively more risky than all the others. Underwriting choices probably determine the winners and losers.
I have a vision of Conjure Bag on the loose while mp is asleep, wreaking vengeance upon malfeasants of the credit bubble.
...and neighborhood dogs.
Alec - If this is bringing about a swell buying opportunity in high grade munis - I haven't seen it yet.
Rob - Do you mean Orange County CA - or Orange County FL? I know very little about CA. But my impression about Orange County CA is fool me once - shame on you. Fool me twice - shame on me. Roby
"Don't count out the potato chip eating Americans. When they collectively get pissed, the government moves."
Most Americans are pretty pissed about this Iraq war clusterf*ck. Yet apparently it will continue forever, or until we finish stealing all the oil, whichever comes first.
ok , it's midnight ... any word on ACA ??????
Reality check: Things are really going to hell and a crap load of downgraded bonds will impact liquidity and tighten the screws several more rotations! Reality check: A state of illiquidity will impact consumer spending. Reality check: Illiquidity will decrease cash flow and increase cash burn across the spectrum, thus this simple downgrade re-enforces the reality that change is in the air and that the good times are over!
"Add a 100 basis-point rate cut to Cramers plan, and he figures the Dow would add 2,000 points in two weeks"
Sure. That's just what this country needs. A quick fix so the crooks that already pocketed billions can squeeze a bunch more by piling this on the backs of pension funds and retail bagholders.
PonsiNomics.
Chris, in my first reply to you I mis-spoke. I said:
"nonborrowed reserves are your total deposits at the Fed, plus vault cash."
That is not correct. I should have said:
Total reserves are your total deposits at the Fed, plus vault cash.
Table 1 breaks down borrowed and nonborrowed reserves to satisfy the formula:
Total Reserves = Nonborrowed reserves + Borrowed Reserves
Having corrected that error, let's look at Table 2, which contains the not seasonally adjusted, not adjusted for reserve requirements, data.
As I said, total reserves also equals:
Total Reserves = Balance at Fed + Cash
In this case, vault cash is 32,040. We add Balance with Fed of 7,949. The sum is 39,989, which agrees with the first column of Table 2, Total Reserves. This shows us the composition of total reserves.
Now we look at Table 3. On a seasonally unadjusted basis, but adjusted for reserve requirements, total reserves were 39,969. Since total reserves must equal borrowed plus nonborrowed, borrowed reserves must be equal to 41,376 because 41,376 plus -1,387 equals 39,969.
The total reserves number is approximately equal to the TAF of 40,000 plus total "Other Borrowings" from Table 1. In fact, it is off by 1, as the TAF of 40,000 plus Other Borrowings equals 41,377.
In other words, the banking system is borrowing all of its reserves from the Fed, having burned through their own.
I apologize for confusing you earlier.
I'm wondering, why bother, but think for a moment:
The only people who actually own munis don't seem worried. Robyn doesn't care, and Alec says he owns more then Robyn but never bought insured bonds.
The only person that works in the industry (reality based lawyer) isn't worried about the future of munis. If you care what an insider in the industry thinks, see his earlier posts in the ambak threads.
Individuals don't have to mark to market. That is 60% of the muni market.
Banks and insurance companies, per US GAAP don't have to mark bonds intended to be held to maturity to market. Check out FAS 115 404 Not Found....
As far as nationalization or government intervention, it has happened before. The result is the current monoline regulatory structure. It is all there in the NYT's archives, but since it is paid, I won't bother posting links. There was no bail out then and I don't anticipate a bail out now.
If there is a melt down in muni prices, I will be ready to buy. Not holding my breath. However, I will be there with Alec looking for bargains.
Welcome back Robyn.
Factoid....
http://64.233.167.104/search?q=cache:woVnrU0EGFoJ:https://www.calpers.ca.gov/eip-docs/investments/policies/invo-risk-mang/credit-enhancement.pdf+calpers+credit+enhancement+policy&hl=en&ct=clnk&cd=2&gl=us
FAS 115 link - first one didn't work:
FASB: Financial Accounting Standards Board
Why all the pumping for bonds here as if they are risk free and then suggesting that outdated FASB links have some relative meaning?
The bonds are used in many ways as collateral and very often they are packaged along with other instruments, so maybe your bonds have less exposure in a simplistic sense, but what about the smart guys in Florida that have frozen assets that were linked to bonds, money markets, CDOs and packaged derivatives? I guess if Im wrong, then Blackrock must be doing a great job of allowing those pension funds to be liquid, but that would be a lie.
I would also suggest you look at FASB 157 versus the old fashioned 1993 link you posted!
Gosh, What a shock FASB caved in and watered down yet another accounting rule and then delayed this until November; isnt that nice! Did you ever think that one of the main reasons we have corruption in this country is because of mafia-like cartels like FASB that play the game any way the crooks want it played? This accounting was to be part of The Patriot Act, but as we all know, wallstreet patriots are fairly difficult to find these days, in between the pimps and whores that lack integrity!
Transition Guidance for Held-to-Maturity Securities- The Board decided to provide an exception that derecognition of a held-to-maturity security, as a result of adopting the proposed FSP, should not be considered a tainting event under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities.
FASB: Financial Accounting Standards Board
ACA has already seen its rating go from A to CCC, which is basically junk. This puts it out of business, as no one will pay to be rated as junk. ACA now has only $425 million in capital to cover the $69 billion in mortgage and corporate bonds they insure. Interestingly, they added $20 billion of that between April and September of last year. Talk about doubling down on a losing trade. Merrill wrote down almost $2 billion in bonds that were insured by ACA. They will not be alone.
Today, Fitch downgraded Ambac Financial Group two notches from AAA to AA. That doesn't seem like a lot, until you realize that 74% of their revenue comes from that AAA rating that covers $556 billion in municipal and structured finance debt. Fitch did so because Ambac decided not to do an equity offering for $1 billion to stem the bleeding. Six months ago Ambac was at $96 or thereabouts. Today it is as $6.20. Its market cap is only $629 million, so a $1 billion offering would dilute current shareholders by around 70%. Ouch. And you can bet any offering they do now will be on terms that shareholders will not like, most likely a convertible offering that dilutes current shareholders even more.
Oh, and that means that 137,990 municipalities that were insured by Ambac will see their credit ratings drop and their costs rise. Think their customers will hang around?
Moody's says it is going to review MBIA. MBIA, which is rated AAA, raised $1 billion last week from Warburg Pincus and did another offering for surplus notes for $1 billion at 14%. As Michael Lewitt noted, that means 14% is the new price for AAA bonds. Except that today it is 23%. If you bought that note, you are not looking good right now. They are trading at 70 cents on the dollar. Of course, that is better than Ambac's 30-year bonds, which are trading at 35 cents on the dollar.
When Warren Buffett bought Gen Re, the large re-insurer, five years ago, he presciently made the decision to reduce their exposure to credit default swaps. It took them four years to reduce the number of contracts from 23,218 to just 197 at the end of 2006.
"We lost over $400 million on contracts that were supposedly 'safe and properly priced' and we did it in a leisurely way in a benign market," says Mr. Buffett. "If we had to unwind it today in one month, who knows what would have happened?" (The Wall Street Journal)
If you are a bank or regulated entity, and you have mortgage-backed securities that have been written by a AAA monocline company, you can carry that debt on your books as AAA. But as the companies get downgraded, you have to write down the potential loss. Quoting from a recent note from Michael Lewitt:
"MBIA's total exposure to bonds backed by mortgages and CDOs was disclosed to be $30.6 billion, including $8.14 billion of holdings of CDO-squareds (CDOs that own other CDOs, or mortgages piled on top of mortgages, or, to quote Jeff Goldblum's character in Jurassic Park again, 'a big pile of s&
I didn't provide a very good explanation because the Fed manipulates nonborrowed reserves through open market operations.
I'm going to look into it. These numbers are incredible.
mp -
So let me get this straight. If 100% of the reserves on deposit at the Fed is not bank money, but Fed money, then the Fed, at this point, IS the banking system. So, assuming that a collapse of the bond insurance agencies forces an ungodly sum of worthless CDOs onto the books of all of these banks, that's going to require the mother of all TAF auctions to prevent a catastrophe. The question then is, in order to generate the cashflow for a monster TAF auction, won't that require the gov't to have a distressed treasury auction to come up with the green?
In other words, if the bond insurers fail, we're looking at a monster spike in interest rates just to generate the money to cover the shortfall that is waiting backstage, correct? We can't collateralize anything at this point, and if we print that much money out of thin air, it will crash the dollar. There has to be a treasury auction and the rate of interest, I'm guessing, may look like junk - i.e., we will be looking at a subprime Federal Reserve.
Just trying to think this through. It sounds too absurd to be true, so I must be out in left field with this. If I'm correct, it might explain the panic-stricken White House and death-warmed-over Ben Bernanke.
The only people who actually own munis don't seem worried. Robyn doesn't care, and Alec says he owns more then Robyn but never bought insured bonds.
Okay, found a couple of ways that munis may "blow-up".
First
Lots of municipal bonds are held in short term municipal money market funds. Since there is a lot of short term demand, the yield curve is usually fairly steep. Hedge funds have taken advantage of this by chopping long term securities into short term munis called tender option bonds.
MyDollar: Opportunity in Long Term Municipal Bonds
This has caused the yield curve on municipal bonds to flatten over the last several years. If investors start to bail on municipal money market funds then the yield curve should steepen (hitting holders like Robyn).
Second
Many municipal bonds are now issued as Auction Rate Securities.
Credit risk associated with auction rate securities mirror those of other municipal and corporate issues in terms of default risk associated with the issuer. Because they do not carry a "put" feature (which allows the bondholder to require the purchase of the bonds by the issuer or by a specified third party), auction rate securities are very sensitive to changes in credit ratings and normally require the highest ratings to make them marketable. This is usually achieved with bond insurance.
Auction rate securities: a primer for finance officers. - Entrepreneur.com
And, evidence that it's already "blown-up" in some cases:
Jan. 18 (Bloomberg) -- Lehman Brothers Holdings Inc. faces a $1.14 billion claim from members of a New Jersey family, who say the firm mishandled their fortune by steering $286 million into investments that have become hard to sell. . .
Instead, the Maher brothers say, Lehman put the money into so-called auction-rate securities that have been hit by the contraction in credit markets.
Lehman Clients Demand $1.1 Billion in Auction Dispute (Update2) - Bloomberg.com
Thank you, thank you very much...
Kicker has left the building
Zigurrat - Who said I don't worry? I worry about everything - from investments to what will happen next hurricane season. I am pretty much a "belt and suspenders" kind of "guy". I have reviewed my muni portfolio in depth at least twice since August. Frankly - I have been worried less about the bond insurers than the mess in the state-run Florida fund - which is holding hostage money which belongs to various issuers whose bonds I hold. I will have to see what happens with that situation over the next few months.
That said - I could never understand people bottom fishing in the credit markets to pick up an extra 20 bp in yield. Makes more sense to speculate by buying way out of the money calls on speculative tech stocks IMO (I don't do that - but if I wanted to gamble - that seems like a better bet to me).
Kicker - I agree with many of your comments about the muni market. Which is why I have never bought a muni money market fund - or an auction rate muni. I won't touch muni bond funds. I just buy very plain vanilla stuff - and hold it until it is called or matures.
I did buy a few unit trusts when I was young - about 30 years ago - from Merrill Lynch. Those guys tried to jack up the yields by larding up the trusts with WHOOPs bonds that defaulted. What a mess. Since then - I have always just bought individual plain vanilla munis. One welcome development in recent years in terms of doing this has been the development of on-line sources for viewing available offerings and buying.
Note that almost all most corporate bonds and munis are very illiquid compared to securities like stocks. I can buy/sell 100 shares of IBM with a spread of a penny or two. With a lot of 100 bonds - you're lucky to be looking at a bid/ask spread of $2-3 per $100. So they are definitely not vehicles for trading. The only time I have sold bonds is when I have been concerned about credit quality (e.g., got rid of Ford and GM bonds years ago - probably too early - but better too early than too late). Roby
Robyn would you recommend only looking at munis in states where there is no projected budget deficit like Penn for example?
Chris- "It sounds too absurd to be true..."
Not really. I can see the scenario you propose as a possible outcome, but remember there are a lot of steps between here and there.
Hey Kicker,
To further expand on your muni post related to money markets, think in terms of Florida, where muni money is locked in investments which are called CDs -- among other things -- but those CDs are linked to other bonds and CDOs, etc., which all rely on other links to other alternative ways to seek yield enhancement, thus these safe CDs need to be looked at in many ways, e.g, if the CDs are safe and mature as planned, then they need to roll the dough into a new CD which will have to be even safer in terms of being liquid in the future, and of course the next CD will pay less as credit enhancement opportunities dry up.
As for CD-like investments that are now frozen, the ramifications for what Florida can invest in the future is even more interesting, because the state is changing the rules on the fly to enhance liquidity, which I think somehow triggers next week, and God can only toss dice as to how Blackrock will spin these derivatives!
Do you see where these thoughts go?
Conjure and I expect the muni market to roil when the insurers go down.
There is a very recent article in Bloomberg, I think, that talks about the Las Vegas monorail bonds, insured by AMBAC. Good example. It's toast.
Hmmm:
According to a Wells Fargo bank document obtained by the Las Vegas Review-Journal, more than $2.3 million had to be withdrawn to make up the difference.
Monorail spokeswoman Ingrid Reisman says the drawdown was expected.
Credit rating firm Fitch Ratings estimated in July that the monorail would begin tapping its cash reserves and that they would last at best through 2010.
If the monoline guys like Ambac, etc go down, which seems more likely every day with the Fitch downgrade from AAA to A of Ambac on Friday afternoon, what would you say is the best place to put your assets? Sell all stocks & keep in cash, buy gold and/or commodities, etc?
I have a good chunk alread in cash, but some still in the market and am torn between inflation going crazy with Fed cuts (eg: buy gold and/or commodities) or deflation setting in due to much lower demand due to recession (keep cash).
Thanks for any input you have.
Wanasurf, I say you put 56% of your money in stocks, 23% in gold bullion, 13% in bonds and 8% in foreign stocks. Any slight change to these percentages will blow up your portfolio. Do THIS only.
Anonymous - If you're talking about state general obligation bonds - I don't think a state has never gone bankrupt (although I must admit I don't have a command of credit issues during the Civil War). I think the worst state in terms of credit quality these days is Louisiana. I don't think it will go bankrupt - at least not in my lifetime. And I think the same of other states. OTOH - many states won't have an easy time of it in the years to come. I know Florida is facing a budget shortfall. And I am sure a lot of people will bash a lot of heads to get a balanced budget (which many states are obligated to do - after all - they can't print money like the federal government) - when the legislature goes into session this year.
Doc Holiday - There is no law which requires local governments and agencies to invest in the state fund. IMO - that fund is toast - and the only issue is how many pennies on the dollar the remaining participants will get. I will note that some of the largest fund participants - like JEA - paid the 2% penalty for getting all of their money and withdrew 100% of their funds. I don't know why everyone didn't do that. If - as I believe - the state fund is toast - it will be up to local governments and agencies to decide how to put their excess cash to work in the future (which is now - tax payments started coming in in November).
Does anyone know what the underlying credit rating for the Las Vegas monorail bonds is - or have a CUSIP number (I can look it up). Bonds like that aren't my radar screen (although I do own Las Vegas general obligation bonds).
Wanasurf - I think it's impossible for anyone here to give specific portfolio advice to someone without knowing a lot about them (which we don't). But with regard to holdings like equities - I'd say - why did you buy them? If the reasons you had for buying were sound - and you think the same reasons are still in effect - then hold. If you don't know why you bought - or conditions have changed - perhaps it is time to sell - sit back - and think about things. There is one general rule that I think applies to everyone - you should have a game plan - regardless of portfolio size - types of investments - investment horizons - or management style (e.g., investor versus trader). The game plan shouldn't be fixed in stone - especially if you're young - it should have some possible forks in the road - a decision tree. But it is worthwhile to sit down and sketch out the options - and come up with a plan.
Note that I had a couple of drinks with some ladies I played golf with this week. Both the lady to my right - and the lady to my left - had bought spec houses/condos for the first time in 2005. No game plan. These are women in their 60's. What business do they have speculating in real estate? But that is apparently what a lot of people in Florida did. Which is one reason our real estate market is - to put it mildly - troubled. Roby
It's the other way around. If the insured bonds default, the monolines will go bk.Tactical Flashlights
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