S&P should be cutting very quickly.... they stated the same rationale for contemplating cutting ABK AAA Status ( decision to forgo raising capital ) that Fitch used to cut this afternoon.... Fitch must feel pretty stupid with much egg on their faces... didn't they just afirm last week or so ? LOL
Ambac has a write-down equivalent to nearly two-thirds of its net worth, and Ambac's implied chance of default is 73 percent, according to JPMorgan data, and they still get that AA?
Without its AAA rating Ambac may be unable to write the top- ranked bond insurance that makes up 74 percent of its revenue. Ambac may have to stop making insurance or sell itself, said Robert Haines, an analyst at CreditSights Inc., a bond research firm in New York.
As many of you may recall: The regulatory VaR is the multiple of the average of the last 60 days 1% 10-day VaR estimate when netted across the whole firm, or the previous days VaR, whichever isgreater. Model backtesting takes place backtesting 1% 1 day VaR requires 250 days trading data to be used. A multiplier of 3 4 is generally applied to the VaR according to how wellthe model performs. The 3 4 factor is arbitrarily determined allowing for operationalfactors. (The rationale underlying the multiplier is to guard against systemic risk) Scenario analysis is usually required by regulators to understand the effect of moving underlying risk factors from their current state. This is also included in Basel 2 but isnot formalised
If "more write-downs" means more MTM losses, you're probably right - but this downgrade was telegraphed long ago and should be mostly priced in by the bond market.
If "more write-downs" means more putting risk back on the books a la ACA, probably not. Under FAS 133, a CDS is a good hedge as long as it's effective, and a AA counterparty should still be able to provide an effective hedge (80-125% protection, I think).
ACA was able to provide an effective hedge as long as it was A-rated. When it fell to CCC, those who've written off their ACA swaps decided it wasn't a credible counterparty and the hedge was no longer effective.
As for the gloom and doom: I still believe Ambac should be able to cover claims as they come due. Look at the numbers, do the probability/timing analysis. Fitch says it's a AA probability now, and S&P and Moody's are likely to agree. That's not the same as default.
One of those little bits of (melancholy) serendipity that the world throws off now and then: Ambac was founded by Russ Fraser back in the 70s. Fitch was recapitalized by Russ in the late 80s. And ACA was founded by Russ in the late 90s....
This coodanode character is VERY suspicious.Hu is definitely chinese,and coodanode is just not an American name.Should someone notify Homeland Security?
You're going to get a lot of MTM from sales by mutual, pension, and other funds that are required to hold nothing worse than Aaa paper. That should be fun. Anybody know how long that'll take?
Conjure clock was still at 11:59:01 last I checked... he reminds me of Gizmo... don't feed him tofu, don't get him wet, and keep him away from direct sunlight?
Last night I posted this about Florida, which relates to this bond issue me thinks;
BlackRock is the New York-based investment firm overseeing investments on an interim basis while the SBA conducts a formal evaluation to appoint a permanent fund manager.
"We are pleased with the improved liquidity we've been able to achieve this month, and will release new liquidity rules -- an increase from the current 15 percent to close to 40 percent -- during the week of January 14," he said. "We are very focused on rebuilding investor confidence in the fund."
I tried to watch that interview with the two RE promoters. Couldn't get past the first few minutes -- when the guy claimed this is the best time to buy a home in his 33 years in real estate I almost threw up.
Reality-based lawyer , for ABK isn't the greater issue / impact the question as to how this plays out for their municipal bond insurance business , not the structured product business which is a disaster these days ? Plus , if S&P follows with a comparable AA writedown , wouldn't this then require the bonds covered by thaeir insurance to be dropped to AA status as well ?
I think today marks the end of the bond insurance business as we have known it. Warren Buffett? I don't think so.
For a long time to come, bond insurance is going to smell like tainted meat.
Investors drank the kool-aid and believed in it, and now insurance doesnt' count for much at all. It can't be counted on. How would you like to have a life or health insurance policy where there's a 55% chance it will pay off 78% of the claim?
MBIA and Ambac have had a great 35-year run. I watched it take MBIA from a hole in the wall office in downtown White Plains to that big glass castle on the hill in Armonk. But the castle was a symbol of the arrogance and greed that consumed them.
Can anyone explain to me why this insurance is necessary? Shouldn't sophisticated investors be able to figure out for themselves the creditworthiness of the bond issuer?
Seems to me they are about as useless as stock anal-ists; fools with models who have never run a business who think they should set expectations for people that are actually running businesses in the real world...
Can anyone explain to me why this insurance is necessary? Shouldn't sophisticated investors be able to figure out for themselves the creditworthiness of the bond issuer?
Sophisticated investors... that's a good one. And who might they be?
BTW - do you really think any of us could figure out what's in these things unless that became our full time job? And considering the tonnage of stuff the professional fund buyers buy (and the 'control' they have as in 'little' compared to the 'sell side') that real due diligence is going to 'just happen'?
It's like knowing what's in your dinner tonight by reading the labels and then 'believing'... better hope somebody else is also 'checking'.
Another option - based on the food analogy - is only eat what you grow... only invest in the company you own. Everyone starts doing that an' we'll have one helluva credit crunch.
Like it matters in today's political world - they have morphed into left wing and right wing cheeks of the same ass. A perfectly matched set staring at you.
I don't follow Ambac closely enough to guess the magnitude of the effect on their muni business. Clearly not good (even though it's been telegraphed for so long, sentiment on the muni side was almost certainly that they'd manage to keep their AAA rating) - a business that had probably shrunk will now come close to vanishing. There's some room for a AA (Radian's been there for years), but it's a different business plan. And very hard for a recently-downgraded insurer on Watch Negative to move into.
All Ambac's Fitch-rated bonds (muni as well as structued) are AA as of now. Downgrades by S&P and Moody's will affect the bonds rated by them.
Fitch's action affects investors with bonds either having a Fitch-only rating or not permitted a split rating (where one agency has a different rating from another, such as AAA S&P/AA Fitch). Don't remember offhand what the rule for money market funds is -- it's been too long since I looked at it.
This is actually bad for all bond insurers, even those whose AAA ratings are still secure. One of the big selling points was the stability of the industry as a whole and the absence of downgrades.... Oh, well.
BTW, in mentioning melancholy serendipity I forgot that it was Mike Callen, formerly of Citibank, who pulled the plug on Ambac's rating. I think he was at Citi when they acquired Ambac, saving its rating, lo these many years ago. Or maybe this only proves what a small world this is.
dryfly-If you're buying paper from Mongolia maybe. But let's say you're the OH state teachers pension fund buying muni bonds. The state comptroller ought to be a pretty good source as to which municipalities are in good shape. You could send your financial people to check them out. Just what you'd do before you gave me a loan (I'm good for it, I swear!)
Can anyone explain to me why this insurance is necessary? Shouldn't sophisticated investors be able to figure out for themselves the creditworthiness of the bond issuer?
Can anyone explain why fire insurance is necessary? Shouldn't a home buyer be able to figure out for themselves the odds the house burns down and adjust their offer accordingly?
These "monoline" insurers sprang up around 40 years ago to insure municipal bonds. So when Podunk, SomeState wants to build a new aqueduct, they can get more money for their bonds if they purchase insurance. The insurance alleviates investors' concerns of Podunk falling on hard times and becoming a ghost town.
By offering such insurance across broad geographic and demographic swaths, Ambac/MBIA/etc. cancel out the specific risk of any particular Podunk defaulting on its debt. Just like all the houses in the state are not likely to burn down at once and bankrupt the fire insurance company, all of the municipalities in the nation are not likely to default.
So the municipality wins because it can charge more for the bond; the insurer wins because they can collect the premium from lots of different Podunks, most of whom will not default; and the investor wins because his bond is insured. This has actually worked just fine for decades.
The problem is that the monolines got greedy and started insuring other stuff like MBSes and CDOs, and they drank the Kool-Aid. They believed in the same models that everybody else believed in but nobody really understood. And now they pay the price and some real fun begins.
Note that Buffett's new company is specifically going to insure municipal bonds. You know, the stuff where the models actually work because they make some kind of sense.
I beleive mp reported the Conjure Clock at 11:59:03 BEFORE this downgrade...with a direct communique from CB hisself...but get comfirmation from mp, I'm just sayin'...
"Reality-based lawyer , for ABK isn't the greater issue / impact the question as to how this plays out for their municipal bond insurance business , not the structured product business which is a disaster these days ? Plus , if S&P follows with a comparable AA writedown , wouldn't this then require the bonds covered by thaeir insurance to be dropped to AA status as well ?
fredw | 01.18.08 - 3:42 pm | #"
It really isn't a question -- their ability to write new business has gone from difficult to impossible.
The idea that most holders of munis care about AAA isn't true. In addition, most holders don't mark to market and most aren't required to hold AAA. Those that are have had plenty of time to prepare.
If not, I am anxious to buy AA munis real cheap. Especially since taxes on investment income is almost certain to increase.
Nemo-I get what you're saying. Still, for me personally, if I bought a muni bond, I would stay within 100 miles of my home so I could check out the community and have some idea if the mayor had a reservation on the next flight to Rio, rather than trusting some ratings agency. Same for lending mony to dryfly.
Note that Buffett's new company is specifically going to insure municipal bonds. You know, the stuff where the models actually work because they make some kind of sense.
Buffett's new company is going to insure high-quality (mainly GO) bonds, not Podunk or revenue bonds. That model is dead.
Your explanation is pretty good.
Insurance homogenized far-flung municipal bonds, making them all similar quality. It saved underwriters a lot of airplane tickets out to Podunk to do due diligence. Remember that the main market for munis (two-thirds) is high-income individuals. Insurance made it easy for Wall Street firms to create compelling pitches for stockbrokers to give such investors. It overcame objections about "Where's Podunk" and "Will I ever get my money back?" It made it easier to package munis into funds and unit trusts.
I could check out the community and have some idea if the mayor had a reservation on the next flight to Rio, rather than trusting some ratings agency. Same for lending mony to dryfly.
You're forgetting that a lot of munis aren't backed by towns. They're backed by things like the Podunk Water & Sewer District #14. How would you check that out?
Bottom line is, there is no substitute for knowing who you're lending to, whether it's a town, a homeowner, a sewer district or your spouse's no-good cousin.
I'd add that it's likely that part of the problem was the proliferation of financial guaranty insurers: XL/SCA, Assured, CIFG and the resuscitation of FGIC. Created a situation where competitive pressures made it difficult/impossible to properly price for risk.
Assured benefited from fortunate timing, having been unable to do the CDOs due to its (previously) split rating and having cleaned up its book in order to get a full slate of Aaa/AAA ratings. FSA got burned in CDOs only a few years ago, relatively speaking, and apparently hadn't forgotten.
This is a recurring problem in reinsurance, where you only survive for more than one cycle if you have the discipline to step back out of the market when it's at the top. Just hadn't happened in the primary financial guaranty market until now.
Still, for me personally, if I bought a muni bond, I would stay within 100 miles of my home so I could check out the community and have some idea if the mayor had a reservation on the next flight to Rio, rather than trusting some ratings agency. Same for lending mony to dryfly.
Smart move - dryfly won't lend money to dryfly...
As for your point - you miss the reason for insurance & truly independent ratings... bias and the inability to judge the future. You are right that insurance can't help against 'systemic risk'.
Say you go out and do your own DD and you choose only 'healthy communities' to invest in... isn't that a lot like only choosing last years hottest mutual fund (with fund mgr equivalent to mayor in your mini example)?
So you pick Orange County a decade ago (smokin' hot growth & innovative) over Des Moines... ooops not so hot when they default. So maybe you pick a Des Moines like burg instead (conservative - they'd never mess up)... not a good choice if we have another farm crisis (towns failed right and left out there then although DM never did to my knowledge).
What a functioning insurance system does in lump risk for a premium and cover against the unusual outlier 'tail' event... the black swan shitting on you.
What it can't do is protect you from systemic risk - one where they completely mis-modeled the risk. Where the risk was baked in the cake and we're all in the kitchen waiting for the timer to go off...
That's what we got today with MBS, CDO and such... and unfortunately no one was watching the watchers.
"By offering such insurance across broad geographic and demographic swaths, Ambac/MBIA/etc. cancel out the specific risk of any particular Podunk defaulting on its debt. Just like all the houses in the state are not likely to burn down at once and bankrupt the fire insurance company, all of the municipalities in the nation are not likely to default.
So the municipality wins because it can charge more for the bond; the insurer wins because they can collect the premium from lots of different Podunks, most of whom will not default; and the investor wins because his bond is insured. This has actually worked just fine for decades.
The problem is that the monolines got greedy and started insuring other stuff like MBSes and CDOs, and they drank the Kool-Aid. They believed in the same models that everybody else believed in but nobody really understood. And now they pay the price and some real fun begins."
Good explanation Nemo.... Not that greed wasn't a motivator -- this is capitalism after all, but I think the problem was that the premiums for insurance were too low, primarily because of competition. This was part of the overall underpricing of credit risk. Too much capital chasing too little perceived risk.
The economic rationale for the business was based on efficiency of insurance vs other forms of risk management. Any way you look at it, munis were able to borrow at a rate that was lower then justified by their true credit risk. Now their costs will likely rise.
dryfly-I see your point. I suppose where it's headed is the Feds will have to bail them out. If you think about how much tax revenue the Feds lose if the economy tanks, it's cheaper for them to make an RTC and bail the whole mess out. That would make more sense than giving out tax rebates, IMO.
I'm not sure that either the revenue-bond/conduit model or Ambac's muni business is dead. (That's not a statement that they're thriving.) It's amazing how fast things can turn around; if I remember correctly, ACA's muni business had fully recovered less than a year after its first capital crisis (2000, I think). The market has a short memory, and the muni insurance business makes sense for the reasons you and others have been giving.
As for revenue bonds and conduits, people still need the stuff being funded, and the issuers still don't want to go to the taxpayers to ask for approval of GO debt. Don't think they're going away, although the credit and the pricing (from the insurer's/investor's perspective) will improve.
Buffett's new insurer's business plan is more than a little ironic, considering that the rating agencies nixed Depfa's plan to start up a AAA muni-only bond insurer just a couple of years ago. The agencies thought a structured finance business was required for stability....
"This is a recurring problem in reinsurance, where you only survive for more than one cycle if you have the discipline to step back out of the market when it's at the top. Just hadn't happened in the primary financial guaranty market until now.
realty-based lawyer | 01.18.08 - 4:32 pm | #"
Do you know what Partner Re was thinking when they got involved with Channel Re?
Obviously it wasn't a major problem for them -- no worse then a typical hurricane. Still I expected more of them.
For the same reason that no one insurer should insure every structure in Florida, no one, two or three should control 80% of muni market....too much concentration of risk.
ABK and MBI will be out of business this year. Buffet entering the municipal bond insurance business was the final nail in the coffin... that gave municipal bond issuers that want insurance a reliable option with reputational / financial strength rather than weakness. Now that Fitch has made the first move , Moody's and S&P will kick ABK while its down. MBI will be next in short order. ACA is probably dead after midnight when their standby agreement with their counterparties terminates. Next week should be interesting to see how this plays out for ABK , MBI and ACA...
Re: Buffett's new company is going to insure high-quality (mainly GO) bonds, not Podunk or revenue bonds. That model is dead.
Buffett also has $33 Billion in goodwill which will need to be brought above the table this year with new accounting and disclosure rules related to observable assets which are level 3's, however, FASB is more than willing to look the other way these days after delaying that kind of shareholder protection concept, which goes hand-in-hand with the fact that rating agencies will also look the other way and be unregulated, so if Buffett wants to run a mafia-like insurance cartel, is there anyone that will stop people like him from being part of a corrupt system? Makes me want to have safe bonds, how about you? In all honesty, Id rather they round up the crooks and bring integrity and honesty back to My Country!
Isn't painfully obvious that the amounts of leverage allowed in insurance, banking, mortgages, and a million other financial instruments is far too much?
Isn't this what the pigmen thrive on? Using leverage to increase their profits and ultimately the socialized costs?
"
Buffett also has $33 Billion in goodwill which will need to be brought above the table this year with new accounting and disclosure rules related to observable assets which are level 3's, however, FASB is more than willing to look the other way these days after delaying that kind of shareholder protection concept, which goes hand-in-hand with the fact that rating agencies will also look the other way and be unregulated, so if Buffett wants to run a mafia-like insurance cartel, is there anyone that will stop people like him from being part of a corrupt system? Makes me want to have safe bonds, how about you? In all honesty, Id rather they round up the crooks and bring integrity and honesty back to My Country!
Anonymous | 01.18.08 - 4:48 pm | #"
You keep repeating this, but the number isn't $33 billion and goodwill isn't a level 3 asset.
What would you propose to do about KO's goodwill or JNJ's goodwill?
is it not likely that banks -- who knew this was coming -- went out and duplicated insurance with other counterparties on those securities which they cannot tolerate loss-reserving against? the cost of that insurance has risen, of course, but it seems to me that with so many players in the space that it was more than possible.
it seems to me that any large cascade effect is going to have to eat through more than one insurer.
I think Partner Re was thinking AHERF. This time it didn't work out.
Background: AHERF was a hospital deal that MBIA guaranteed. The AHERF group defaulted, and MBIA discovered that it would have a large loss; not wanting to recognize the loss, MBIA purchased retroactive reinsurance, simultaneously entering into agreements that provided its reinsurers with profits that offset their losses under the reinsurance arrangement. MBIA then proclaimed to all and sundry that they had no losses on AHERF. Very creative, in its own way. (They were forced to unwind it years later.)
I think that there isn't enough potential profit over a credit cycle justify the overhead. When the incumbents started, markets were less efficient.
In catastrophe reinsurance, you are in a similar cyclical business but in the hardest markets you can charge obscene rates.
Speaking of irony....everyone was trying to use capital markets approaches to deal with property catastrophe risk. It's still going on, but financial innovation has taken such a beating that I wonder if we won't see a little more respect for traditional approaches.
Insurance companies base their financial structure on experience. They know how many policy holders will suffer death, burned-out houses and crashed cars. So they know what to charge for those policies.
Monolines knew all about muni bonds--how many would default? Not many. Insuring them was a nice, safe, boring, slow-growth business.
Nobody knew anything about MBS and how these things would perform over time. The monolines insured them anyhow, because they wanted the money. But it was like issuing flight insurance to the Wright Brothers. They had no way of knowing how safe or dangerous this new vehicle was going to be. Now they are finding out: not safe enough.
You may be right about the margins. Depends to some extent, I suppose, on the number of surviving AAAs (right now, it looks like FSA, Assured and Hathaway). With 3 or 4, I think the business might be sustainable, given the plethora of small muni conduit/special revenue issuers. We'll see. One thing I've learned is that "you can't make this stuff up" (ACA's informal mantra). That's because, even if you can see the problems and the dimension of the problems, something you didn't count on happens, drastically changing the results. Then you slap yourself on the forehead and say "I should've seen that coming!"
Actually, as someone pointed out here the other day, MBS used to be like munis: a nice, safe, boring business, with LTVs and DTIs and sellers retaining a significant interest and servicers with back offices. That was one reason I got out of it and into other asset classes.
Then things changed. I'm still in shock - I don't even recognize what's called MBS now. But that's one reason the insurers wrapped the new MBS, and investors bought them: as old-time MBS guys, their instincts were, based on long experience, that MBS were safe. We knew things had changed, but we didn't think they'd changed THAT much.
Let's see. Would I let me fire insurerer come to my house and write me a policy while he was on fire? Why would anyone value insurance from MBIA or AMBK again?
They walking dead and should just collect their premiums and pay out whatever they can. Nice knowing ya.
Another thing I was thinking about is the total size of the market. If the total premium is $1 billion, then it doesn't support all that much, given the capital requirements, overhead, etc.
If insurance is the most efficient way to deal with credit risk, then it is viable. If there are substitutes, then that provides an upper bound to what you can charge.
It sounds like you are a lot closer to the business then I am....I just know what I read in the papers. That plus a little reading about the history of the monolines. Speaking of ironies, the beta for securitization happened in the 1920's, with the bonds being sold to individuals in small chunks. The monoline structure was a reform to the failure of 1920's financial engineering. And as you have noted, the regulatory requirements actually make the monolines pretty robust, even with the current meltdown. Reserve requirements are based on regulation rather then modeling, etc. Anyway, there may well be a future, but I don't see myself first in line to invest. Plus I wouldn't want Buffett as a competitor.
Almost a decade inside the industry and an interested observer for a while before that. Agree about Buffett: if he stays in, I wouldn't want to compete with him. On the other hand, a lot of muni insurance is sold by bidding, which will hamper Buffett as a competitor. He hasn't exactly jumped in with both feet yet, though; may be checking wind direction daily. Doubt if he'll move forward until he's thought things through.
While as I've said I don't expect the monolines to default (except maybe ACA), I don't have any stock or any plans to buy. One reason is what dryfly said: what happened to MBS does make me wonder about munis too. Especially, but not only, the conduits.
dun dun....dun dun dun du
A nice call
AA is still too high a rating for Ambac.
AAA to AA that big of a deal?
AA means that numerous bonds will need to be adjusted in price...Market down on this news.
S&P should be cutting very quickly.... they stated the same rationale for contemplating cutting ABK AAA Status ( decision to forgo raising capital ) that Fitch used to cut this afternoon.... Fitch must feel pretty stupid with much egg on their faces... didn't they just afirm last week or so ? LOL
dryfly, you downgrading Fitch with that?
Lets see when they get downgraded again. Although I think MBIA is in worse shape. Im sure that will come later.
mp, what time is it?
Do you thing we'll see the DOW under 12,000 today?
dryfly, you downgrading Fitch with that?
calmo | 01.18.08 - 2:58 pm | #
Ya it was a cheap shot - I should hold my thoughts a little longer.
does anybody recall how long it took to take (english is funny!) ACA out of the market?
Ruh-roh...wasn't this the LAST THING the rating agencies wanted to do?
Correct me if I'm wrong but doesn't this mean there will now be a cascading downgrade of whatever debt Ambac guarantees?
Ambac has a write-down equivalent to nearly two-thirds of its net worth, and Ambac's implied chance of default is 73 percent, according to JPMorgan data, and they still get that AA?
Yeah, right. What a bunch of scumbags.
CR - To your point re futures issues:
Bond-insurer woes may trigger more write-downs, turmoil - MarketWatch
Will T - lets forget if you purchased this just one year ago your YoY return is -92%.
Without its AAA rating Ambac may be unable to write the top- ranked bond insurance that makes up 74 percent of its revenue. Ambac may have to stop making insurance or sell itself, said Robert Haines, an analyst at CreditSights Inc., a bond research firm in New York.
PPT is in the room
Everything is fine in housing according to these two guys:
Video - CNBC.com
As many of you may recall: The regulatory VaR is the multiple of the average of the last 60 days 1% 10-day VaR estimate when netted across the whole firm, or the previous days VaR, whichever isgreater. Model backtesting takes place backtesting 1% 1 day VaR requires 250 days trading data to be used. A multiplier of 3 4 is generally applied to the VaR according to how wellthe model performs. The 3 4 factor is arbitrarily determined allowing for operationalfactors. (The rationale underlying the multiplier is to guard against systemic risk) Scenario analysis is usually required by regulators to understand the effect of moving underlying risk factors from their current state. This is also included in Basel 2 but isnot formalised
don't they have to put all the wrapped issuance on review as well?
CR,
If "more write-downs" means more MTM losses, you're probably right - but this downgrade was telegraphed long ago and should be mostly priced in by the bond market.
If "more write-downs" means more putting risk back on the books a la ACA, probably not. Under FAS 133, a CDS is a good hedge as long as it's effective, and a AA counterparty should still be able to provide an effective hedge (80-125% protection, I think).
ACA was able to provide an effective hedge as long as it was A-rated. When it fell to CCC, those who've written off their ACA swaps decided it wasn't a credible counterparty and the hedge was no longer effective.
As for the gloom and doom: I still believe Ambac should be able to cover claims as they come due. Look at the numbers, do the probability/timing analysis. Fitch says it's a AA probability now, and S&P and Moody's are likely to agree. That's not the same as default.
One of those little bits of (melancholy) serendipity that the world throws off now and then: Ambac was founded by Russ Fraser back in the 70s. Fitch was recapitalized by Russ in the late 80s. And ACA was founded by Russ in the late 90s....
This coodanode character is VERY suspicious.Hu is definitely chinese,and coodanode is just not an American name.Should someone notify Homeland Security?
I wonder if other companies will pull a AHM-type announcement tonight (Friday before a 3 day holiday).
You're going to get a lot of MTM from sales by mutual, pension, and other funds that are required to hold nothing worse than Aaa paper. That should be fun. Anybody know how long that'll take?
More hair-cuts than the Zeds!
Conjure clock was still at 11:59:01 last I checked... he reminds me of Gizmo... don't feed him tofu, don't get him wet, and keep him away from direct sunlight?
Last night I posted this about Florida, which relates to this bond issue me thinks;
BlackRock is the New York-based investment firm overseeing investments on an interim basis while the SBA conducts a formal evaluation to appoint a permanent fund manager.
"We are pleased with the improved liquidity we've been able to achieve this month, and will release new liquidity rules -- an increase from the current 15 percent to close to 40 percent -- during the week of January 14," he said. "We are very focused on rebuilding investor confidence in the fund."
Ambac's new corporate slogan:
"There's only two "As" in Ambac!"
Brian23,
I tried to watch that interview with the two RE promoters. Couldn't get past the first few minutes -- when the guy claimed this is the best time to buy a home in his 33 years in real estate I almost threw up.
{insert obvious Alcoholics Anonymous joke here}
that video is really, really awesome. I'm inviting people into my office to watch.
ShortCourage -
It made me just as sick. I dont know where they get their info from, but its certainly not from anywhere in this galaxy.
Grrrr - ever since I upgraded quicktime, my videos never seem to work anymore. UGH!
I wonder how this ABK pumper feels right now?
Can Turtles Fly? A Contrarian Investing Blog
Ambac's new corporate slogan:
"There's only two "As" in Ambac!"
A marketing genius is born.
Reality-based lawyer , for ABK isn't the greater issue / impact the question as to how this plays out for their municipal bond insurance business , not the structured product business which is a disaster these days ? Plus , if S&P follows with a comparable AA writedown , wouldn't this then require the bonds covered by thaeir insurance to be dropped to AA status as well ?
I think today marks the end of the bond insurance business as we have known it. Warren Buffett? I don't think so.
For a long time to come, bond insurance is going to smell like tainted meat.
Investors drank the kool-aid and believed in it, and now insurance doesnt' count for much at all. It can't be counted on. How would you like to have a life or health insurance policy where there's a 55% chance it will pay off 78% of the claim?
MBIA and Ambac have had a great 35-year run. I watched it take MBIA from a hole in the wall office in downtown White Plains to that big glass castle on the hill in Armonk. But the castle was a symbol of the arrogance and greed that consumed them.
Bloomberg's piece:
Ambac Insurance Loses AAA Ranking at Fitch Ratings (Update6) - Bloomberg.com
Gary --
{insert obvious Alcoholics Anonymous joke here}
I was going to go with "Wait, you mean Fitch downgraded Ambac from American Automobile Association to Alchoholics Anonymous?"
But you beat me to it.
Maybe this would be a good time to found a new ratings agency.
"How would you like to have a life or health insurance policy where there's a 55% chance it will pay off 78% of the claim?"
Umm, isn't that basically what we have? Life insurance odds might be a little higher. Car or homeowners' probably lower.
Can anyone explain to me why this insurance is necessary? Shouldn't sophisticated investors be able to figure out for themselves the creditworthiness of the bond issuer?
Seems to me they are about as useless as stock anal-ists; fools with models who have never run a business who think they should set expectations for people that are actually running businesses in the real world...
Nemo, I've been in talks with those two old guys from the Muppets about founding our own ratings agency.
rich, I think you've inadvertently hit on a solution to their woes. HELOC the glass castle!
According to Atrios Cramer just called for the Feds to agree to bail out any insurer.
Aren't these people supposedly republicans?
Can anyone explain to me why this insurance is necessary? Shouldn't sophisticated investors be able to figure out for themselves the creditworthiness of the bond issuer?
Sophisticated investors... that's a good one. And who might they be?
BTW - do you really think any of us could figure out what's in these things unless that became our full time job? And considering the tonnage of stuff the professional fund buyers buy (and the 'control' they have as in 'little' compared to the 'sell side') that real due diligence is going to 'just happen'?
It's like knowing what's in your dinner tonight by reading the labels and then 'believing'... better hope somebody else is also 'checking'.
Another option - based on the food analogy - is only eat what you grow... only invest in the company you own. Everyone starts doing that an' we'll have one helluva credit crunch.
Aren't these people supposedly republicans?
Not Crammer - he's a dem turned indy I believe.
Like it matters in today's political world - they have morphed into left wing and right wing cheeks of the same ass. A perfectly matched set staring at you.
No Cramer is not a GOPer . . . but he does fall into the rich corporate hack wing of the Dem side.
BTW, when was the last time the S&P lost over 5% in a week? Curious, I have no idea.
fredw -
I don't follow Ambac closely enough to guess the magnitude of the effect on their muni business. Clearly not good (even though it's been telegraphed for so long, sentiment on the muni side was almost certainly that they'd manage to keep their AAA rating) - a business that had probably shrunk will now come close to vanishing. There's some room for a AA (Radian's been there for years), but it's a different business plan. And very hard for a recently-downgraded insurer on Watch Negative to move into.
All Ambac's Fitch-rated bonds (muni as well as structued) are AA as of now. Downgrades by S&P and Moody's will affect the bonds rated by them.
Fitch's action affects investors with bonds either having a Fitch-only rating or not permitted a split rating (where one agency has a different rating from another, such as AAA S&P/AA Fitch). Don't remember offhand what the rule for money market funds is -- it's been too long since I looked at it.
This is actually bad for all bond insurers, even those whose AAA ratings are still secure. One of the big selling points was the stability of the industry as a whole and the absence of downgrades.... Oh, well.
BTW, in mentioning melancholy serendipity I forgot that it was Mike Callen, formerly of Citibank, who pulled the plug on Ambac's rating. I think he was at Citi when they acquired Ambac, saving its rating, lo these many years ago. Or maybe this only proves what a small world this is.
dryfly-If you're buying paper from Mongolia maybe. But let's say you're the OH state teachers pension fund buying muni bonds. The state comptroller ought to be a pretty good source as to which municipalities are in good shape. You could send your financial people to check them out. Just what you'd do before you gave me a loan (I'm good for it, I swear!)
Aheadofthecurve --
Can anyone explain to me why this insurance is necessary? Shouldn't sophisticated investors be able to figure out for themselves the creditworthiness of the bond issuer?
Can anyone explain why fire insurance is necessary? Shouldn't a home buyer be able to figure out for themselves the odds the house burns down and adjust their offer accordingly?
These "monoline" insurers sprang up around 40 years ago to insure municipal bonds. So when Podunk, SomeState wants to build a new aqueduct, they can get more money for their bonds if they purchase insurance. The insurance alleviates investors' concerns of Podunk falling on hard times and becoming a ghost town.
By offering such insurance across broad geographic and demographic swaths, Ambac/MBIA/etc. cancel out the specific risk of any particular Podunk defaulting on its debt. Just like all the houses in the state are not likely to burn down at once and bankrupt the fire insurance company, all of the municipalities in the nation are not likely to default.
So the municipality wins because it can charge more for the bond; the insurer wins because they can collect the premium from lots of different Podunks, most of whom will not default; and the investor wins because his bond is insured. This has actually worked just fine for decades.
The problem is that the monolines got greedy and started insuring other stuff like MBSes and CDOs, and they drank the Kool-Aid. They believed in the same models that everybody else believed in but nobody really understood. And now they pay the price and some real fun begins.
Note that Buffett's new company is specifically going to insure municipal bonds. You know, the stuff where the models actually work because they make some kind of sense.
I beleive mp reported the Conjure Clock at 11:59:03 BEFORE this downgrade...with a direct communique from CB hisself...but get comfirmation from mp, I'm just sayin'...
Full endorsement of Nemo @ 4:17. Good uber comment.
dry,
You have a gift for political metaphor, sir!
"Reality-based lawyer , for ABK isn't the greater issue / impact the question as to how this plays out for their municipal bond insurance business , not the structured product business which is a disaster these days ? Plus , if S&P follows with a comparable AA writedown , wouldn't this then require the bonds covered by thaeir insurance to be dropped to AA status as well ?
fredw | 01.18.08 - 3:42 pm | #"
It really isn't a question -- their ability to write new business has gone from difficult to impossible.
The idea that most holders of munis care about AAA isn't true. In addition, most holders don't mark to market and most aren't required to hold AAA. Those that are have had plenty of time to prepare.
If not, I am anxious to buy AA munis real cheap. Especially since taxes on investment income is almost certain to increase.
Nemo-I get what you're saying. Still, for me personally, if I bought a muni bond, I would stay within 100 miles of my home so I could check out the community and have some idea if the mayor had a reservation on the next flight to Rio, rather than trusting some ratings agency. Same for lending mony to dryfly.
Buffett's new company is going to insure high-quality (mainly GO) bonds, not Podunk or revenue bonds. That model is dead.
Your explanation is pretty good.
Insurance homogenized far-flung municipal bonds, making them all similar quality. It saved underwriters a lot of airplane tickets out to Podunk to do due diligence. Remember that the main market for munis (two-thirds) is high-income individuals. Insurance made it easy for Wall Street firms to create compelling pitches for stockbrokers to give such investors. It overcame objections about "Where's Podunk" and "Will I ever get my money back?" It made it easier to package munis into funds and unit trusts.
You're forgetting that a lot of munis aren't backed by towns. They're backed by things like the Podunk Water & Sewer District #14. How would you check that out?
I guess you'd have to go down into the sewer and smell the sh*t
Bottom line is, there is no substitute for knowing who you're lending to, whether it's a town, a homeowner, a sewer district or your spouse's no-good cousin.
Nemo,
Agreed.
I'd add that it's likely that part of the problem was the proliferation of financial guaranty insurers: XL/SCA, Assured, CIFG and the resuscitation of FGIC. Created a situation where competitive pressures made it difficult/impossible to properly price for risk.
Assured benefited from fortunate timing, having been unable to do the CDOs due to its (previously) split rating and having cleaned up its book in order to get a full slate of Aaa/AAA ratings. FSA got burned in CDOs only a few years ago, relatively speaking, and apparently hadn't forgotten.
This is a recurring problem in reinsurance, where you only survive for more than one cycle if you have the discipline to step back out of the market when it's at the top. Just hadn't happened in the primary financial guaranty market until now.
Still, for me personally, if I bought a muni bond, I would stay within 100 miles of my home so I could check out the community and have some idea if the mayor had a reservation on the next flight to Rio, rather than trusting some ratings agency. Same for lending mony to dryfly.
Smart move - dryfly won't lend money to dryfly...
As for your point - you miss the reason for insurance & truly independent ratings... bias and the inability to judge the future. You are right that insurance can't help against 'systemic risk'.
Say you go out and do your own DD and you choose only 'healthy communities' to invest in... isn't that a lot like only choosing last years hottest mutual fund (with fund mgr equivalent to mayor in your mini example)?
So you pick Orange County a decade ago (smokin' hot growth & innovative) over Des Moines... ooops not so hot when they default. So maybe you pick a Des Moines like burg instead (conservative - they'd never mess up)... not a good choice if we have another farm crisis (towns failed right and left out there then although DM never did to my knowledge).
What a functioning insurance system does in lump risk for a premium and cover against the unusual outlier 'tail' event... the black swan shitting on you.
What it can't do is protect you from systemic risk - one where they completely mis-modeled the risk. Where the risk was baked in the cake and we're all in the kitchen waiting for the timer to go off...
That's what we got today with MBS, CDO and such... and unfortunately no one was watching the watchers.
"By offering such insurance across broad geographic and demographic swaths, Ambac/MBIA/etc. cancel out the specific risk of any particular Podunk defaulting on its debt. Just like all the houses in the state are not likely to burn down at once and bankrupt the fire insurance company, all of the municipalities in the nation are not likely to default.
So the municipality wins because it can charge more for the bond; the insurer wins because they can collect the premium from lots of different Podunks, most of whom will not default; and the investor wins because his bond is insured. This has actually worked just fine for decades.
The problem is that the monolines got greedy and started insuring other stuff like MBSes and CDOs, and they drank the Kool-Aid. They believed in the same models that everybody else believed in but nobody really understood. And now they pay the price and some real fun begins."
Good explanation Nemo.... Not that greed wasn't a motivator -- this is capitalism after all, but I think the problem was that the premiums for insurance were too low, primarily because of competition. This was part of the overall underpricing of credit risk. Too much capital chasing too little perceived risk.
The economic rationale for the business was based on efficiency of insurance vs other forms of risk management. Any way you look at it, munis were able to borrow at a rate that was lower then justified by their true credit risk. Now their costs will likely rise.
dryfly-I see your point. I suppose where it's headed is the Feds will have to bail them out. If you think about how much tax revenue the Feds lose if the economy tanks, it's cheaper for them to make an RTC and bail the whole mess out. That would make more sense than giving out tax rebates, IMO.
By the way, can you lend me $ 100?
Ziggurat and rich,
I'm not sure that either the revenue-bond/conduit model or Ambac's muni business is dead. (That's not a statement that they're thriving.) It's amazing how fast things can turn around; if I remember correctly, ACA's muni business had fully recovered less than a year after its first capital crisis (2000, I think). The market has a short memory, and the muni insurance business makes sense for the reasons you and others have been giving.
As for revenue bonds and conduits, people still need the stuff being funded, and the issuers still don't want to go to the taxpayers to ask for approval of GO debt. Don't think they're going away, although the credit and the pricing (from the insurer's/investor's perspective) will improve.
Buffett's new insurer's business plan is more than a little ironic, considering that the rating agencies nixed Depfa's plan to start up a AAA muni-only bond insurer just a couple of years ago. The agencies thought a structured finance business was required for stability....
"This is a recurring problem in reinsurance, where you only survive for more than one cycle if you have the discipline to step back out of the market when it's at the top. Just hadn't happened in the primary financial guaranty market until now.
realty-based lawyer | 01.18.08 - 4:32 pm | #"
Do you know what Partner Re was thinking when they got involved with Channel Re?
Obviously it wasn't a major problem for them -- no worse then a typical hurricane. Still I expected more of them.
It's the leverage and concentration of risk.
For the same reason that no one insurer should insure every structure in Florida, no one, two or three should control 80% of muni market....too much concentration of risk.
ABK and MBI will be out of business this year. Buffet entering the municipal bond insurance business was the final nail in the coffin... that gave municipal bond issuers that want insurance a reliable option with reputational / financial strength rather than weakness. Now that Fitch has made the first move , Moody's and S&P will kick ABK while its down. MBI will be next in short order. ACA is probably dead after midnight when their standby agreement with their counterparties terminates. Next week should be interesting to see how this plays out for ABK , MBI and ACA...
Re: Buffett's new company is going to insure high-quality (mainly GO) bonds, not Podunk or revenue bonds. That model is dead.
Buffett also has $33 Billion in goodwill which will need to be brought above the table this year with new accounting and disclosure rules related to observable assets which are level 3's, however, FASB is more than willing to look the other way these days after delaying that kind of shareholder protection concept, which goes hand-in-hand with the fact that rating agencies will also look the other way and be unregulated, so if Buffett wants to run a mafia-like insurance cartel, is there anyone that will stop people like him from being part of a corrupt system? Makes me want to have safe bonds, how about you? In all honesty, Id rather they round up the crooks and bring integrity and honesty back to My Country!
Isn't painfully obvious that the amounts of leverage allowed in insurance, banking, mortgages, and a million other financial instruments is far too much?
Isn't this what the pigmen thrive on? Using leverage to increase their profits and ultimately the socialized costs?
"
Buffett also has $33 Billion in goodwill which will need to be brought above the table this year with new accounting and disclosure rules related to observable assets which are level 3's, however, FASB is more than willing to look the other way these days after delaying that kind of shareholder protection concept, which goes hand-in-hand with the fact that rating agencies will also look the other way and be unregulated, so if Buffett wants to run a mafia-like insurance cartel, is there anyone that will stop people like him from being part of a corrupt system? Makes me want to have safe bonds, how about you? In all honesty, Id rather they round up the crooks and bring integrity and honesty back to My Country!
Anonymous | 01.18.08 - 4:48 pm | #"
You keep repeating this, but the number isn't $33 billion and goodwill isn't a level 3 asset.
What would you propose to do about KO's goodwill or JNJ's goodwill?
they have morphed into left wing and right wing cheeks of the same ass.
Now you know why the ones I really hate are the "centrists."
is it not likely that banks -- who knew this was coming -- went out and duplicated insurance with other counterparties on those securities which they cannot tolerate loss-reserving against? the cost of that insurance has risen, of course, but it seems to me that with so many players in the space that it was more than possible.
it seems to me that any large cascade effect is going to have to eat through more than one insurer.
Zigurrat,
I think Partner Re was thinking AHERF. This time it didn't work out.
Background: AHERF was a hospital deal that MBIA guaranteed. The AHERF group defaulted, and MBIA discovered that it would have a large loss; not wanting to recognize the loss, MBIA purchased retroactive reinsurance, simultaneously entering into agreements that provided its reinsurers with profits that offset their losses under the reinsurance arrangement. MBIA then proclaimed to all and sundry that they had no losses on AHERF. Very creative, in its own way. (They were forced to unwind it years later.)
reality....
I think that there isn't enough potential profit over a credit cycle justify the overhead. When the incumbents started, markets were less efficient.
In catastrophe reinsurance, you are in a similar cyclical business but in the hardest markets you can charge obscene rates.
Speaking of irony....everyone was trying to use capital markets approaches to deal with property catastrophe risk. It's still going on, but financial innovation has taken such a beating that I wonder if we won't see a little more respect for traditional approaches.
Correct me if I'm wrong with this summary:
Insurance companies base their financial structure on experience. They know how many policy holders will suffer death, burned-out houses and crashed cars. So they know what to charge for those policies.
Monolines knew all about muni bonds--how many would default? Not many. Insuring them was a nice, safe, boring, slow-growth business.
Nobody knew anything about MBS and how these things would perform over time. The monolines insured them anyhow, because they wanted the money. But it was like issuing flight insurance to the Wright Brothers. They had no way of knowing how safe or dangerous this new vehicle was going to be. Now they are finding out: not safe enough.
Zigurrat -
You may be right about the margins. Depends to some extent, I suppose, on the number of surviving AAAs (right now, it looks like FSA, Assured and Hathaway). With 3 or 4, I think the business might be sustainable, given the plethora of small muni conduit/special revenue issuers. We'll see. One thing I've learned is that "you can't make this stuff up" (ACA's informal mantra). That's because, even if you can see the problems and the dimension of the problems, something you didn't count on happens, drastically changing the results. Then you slap yourself on the forehead and say "I should've seen that coming!"
That's why you buy insurance....
John Stark,
Actually, as someone pointed out here the other day, MBS used to be like munis: a nice, safe, boring business, with LTVs and DTIs and sellers retaining a significant interest and servicers with back offices. That was one reason I got out of it and into other asset classes.
Then things changed. I'm still in shock - I don't even recognize what's called MBS now. But that's one reason the insurers wrapped the new MBS, and investors bought them: as old-time MBS guys, their instincts were, based on long experience, that MBS were safe. We knew things had changed, but we didn't think they'd changed THAT much.
Now you know why the ones I really hate are the "centrists."
rolls his eyes
Let's see. Would I let me fire insurerer come to my house and write me a policy while he was on fire? Why would anyone value insurance from MBIA or AMBK again?
They walking dead and should just collect their premiums and pay out whatever they can. Nice knowing ya.
reality...
Another thing I was thinking about is the total size of the market. If the total premium is $1 billion, then it doesn't support all that much, given the capital requirements, overhead, etc.
If insurance is the most efficient way to deal with credit risk, then it is viable. If there are substitutes, then that provides an upper bound to what you can charge.
It sounds like you are a lot closer to the business then I am....I just know what I read in the papers. That plus a little reading about the history of the monolines. Speaking of ironies, the beta for securitization happened in the 1920's, with the bonds being sold to individuals in small chunks. The monoline structure was a reform to the failure of 1920's financial engineering. And as you have noted, the regulatory requirements actually make the monolines pretty robust, even with the current meltdown. Reserve requirements are based on regulation rather then modeling, etc. Anyway, there may well be a future, but I don't see myself first in line to invest. Plus I wouldn't want Buffett as a competitor.
regards, zig.
Then things changed. I'm still in shock - I don't even recognize what's called MBS now.
Makes you wonder about muni's too, doesn't it? Like the old 70s 'Firesign Theater' gig "Everything You Know is Wrong"...
Zigurrat,
Almost a decade inside the industry and an interested observer for a while before that. Agree about Buffett: if he stays in, I wouldn't want to compete with him. On the other hand, a lot of muni insurance is sold by bidding, which will hamper Buffett as a competitor. He hasn't exactly jumped in with both feet yet, though; may be checking wind direction daily. Doubt if he'll move forward until he's thought things through.
While as I've said I don't expect the monolines to default (except maybe ACA), I don't have any stock or any plans to buy. One reason is what dryfly said: what happened to MBS does make me wonder about munis too. Especially, but not only, the conduits.
"Now you know why the ones I really hate are the "centrists".
To quote my quadri-lingual(with English being language number four) friend, Jenny: Tanta, you crack me out!
For a long time to come, bond insurance is going to smell like tainted meat.Tactical Flashlights
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