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Ah, I was getting worried that you took a holiday and I wasn't going to get my daily fix.
FT Alphaville quotes RBS with a timeline for the downfall of the monolines:
FT Alphaville » Blog Archive » Monoline dominoes - who falls when
They could always have a really big bake sale or maybe a raffle or something...
Alternatives?
It's ludicrous to think $1B will fix AMBAC..
Alternatives?
dryfly
My thought exactly, BK is the only alternative and it is painless.
liquidate, liquidate, liquidate, or sell what you can to Berkshire.
Well, it says here on this cocktail napkin, "in the event of default, Buffet will buy us out."
Who needs a Conjure Bag when you've so many options scrawled on so many cocktail napkins to cover you.
Fire and Ice
Some say the world will end in fire,
Some say in ice.
From what I've tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.
Robert Frost
Boy I gotta start keeping a log of stuff I read and from where. I read yesterday a significant investor was screaming bloody murder to Ambac management about stock dilution. Could have cleared out some of the cotton in management's heads.
"BK is the only alternative and it is painless."
Kinda like suicide? But I agree. It's the only alternative. The stock is almost cheaper than toilet paper, and it's assets are likely worth mere pennies on the dollar.
Cheers,
CDS protection will save us all! There's nothing to worry about!
Ambac pursuing?
Or being pursued?
Guest shill on CNBC this morning kept saying "it can't happen", "it won't be allowed to happen", "there will be a rescue".
From MarketWatch:
BofA analyst cuts bond insurers to neutral from overweight
So these bozos were still overweight as of yesterday?
Why would BK be the only option? The open letter from a hedge fund shareholder suggests run-off mode. Abandon the AAA, stop looking for new business, and keep paying off claims. If things aren't as bad as the market thinks in a couple of years they'll look great. If things ARE as bad as the market thinks, then you go to BK.
mort_fin: "keep paying off claims"
And for how long can they keep that up once they've lost the AAA? Means BK anyway once they default.
The winner is....
BofA analyst cuts bond insurers to neutral from overweight
When does the downgrade happen and the resultant write-offs begin? How long until Armageddon?
Where is mp/CB when we need a time check!
I also suspct that the enormous losses in muni investments that are being kicked around are a little overblown. Say Ambac goes to AA and the securities they insured are downgraded to AA. Why wouldn't the big pension funds that own the larger issues get together and buy reinsurance from Buffet, instead of selling at fire insurance prices. The value of Ambac's insurance doesn't go to 0, they'll still pay 60 cents on the dollar, or 95 cents on the dollar, or whatever (I haven't seen any estimates of what the likely liquidation scenarios look like) so why wouldn't Buffet sell them reinsurance for 10%, or 30%, or something like that, of what Ambac originally charged for the isurance? If that costs a lot less than dumping the securities at a fire sale price, then I assume that's what they'd do.
Am I the only one who saw that MBIA has been placed for review?? not just Ambac, now MBIA too
Carlomagno asks the key question. So far I haven't seen any analysis that would provide the answer to that question. Until we see that, we're all just taking shots in the dark.
"BK is the only alternative and it is painless."
BK/foreclosure being painful is so 80's.
mort_fin: Not educated enough in this stuff to really know, but one guess as to why Buffet wouldn't step up and sell them reinsurance at rates near some small fraction of the original insurance is that the original rates for recent issue bonds were based on property valuation projections which we may gently say are no longer valid. If big swaths of socal get 40 or 50% taken off their res. prop tax base and similar amounts off commercial... the default rates may be significant! (? as I said... uneducated, unquantitative response!)
Where is Hank Paulson with another "Superfund".... ?
Should be a busy weekend for the rating agencies, Paulson, Fed, Pimco & Co...
Wouldn´t surpise me if we will hear some rumors flying high on Monday....
estupido - I assume that Buffet wouldn't do this for all bonds. Iowa and N. Carolina bonds might get reinsured for 10%, and CA bonds for 50%, and there'd be a lot of takers for the IA deals but not so many for the CA.
Guest shill on CNBC this morning kept saying "it can't happen", "it won't be allowed to happen", "there will be a rescue".
Ed | 01.18.08 - 11:10 am | #
I am as disgusted as you, Ed, but I do think that there are things that won't be allowed to fail--Citi, Countrywide, and yes, the big monolines. If the gov't is willing to send taxpayers $100B to 150B in "rebate" checks, they'll orchestrate a bailout of MBIA.
mort_fin
The problem is that Buffett is not going to insure any of this stuff.
And if he does, he will insure it at fire-sale pricing current with approriate risk ratios and models.
That is the reason why we are where we are at.
Because guys like Buffett weren't running the show.
I'm sure it's not all ambac, but with SKF (proshares ultrashort fin.) up almost 20% in 1.5 trading days, I thought a look at SKF vs. PRFF since June was in order:
SKF vs. PRFF
Why doesn't the government just buy the shares of Ambac for $800 and send those instead of a rebate check? Kind of targeting where the money goes.
I think the major stickiness against re-insurance of the munis is regulations keeping them from doing so (but IANAL...yet.)
Buffett is going to ask an arm & a leg to insure muni bonds (his original argument was that the insurance was underpriced) so people aren't going to use him. They will likely take the loss (likely somewhat small since you are only going from AAA to AA).
Speaking as Ambac shareholder, I don't think bankruptcy is as imminent as many of you think. Yes, I've been wrong with my investment but it's still clear to me that the losses will overwhelm the company.
BofA analyst cuts bond insurers to neutral from overweight
jmf | Homepage | 01.18.08 - 11:16 am | #
Talk about closing the barn door after Elvis has left the building... but then, they're still a bit "overweight" in CFC!
sdtfs: I love it... the fed. budget may have killed state-directed funding over the past few years, but now we can bail out the cities and counties by subsidizing their bond ratings with a nationalization of bond insurance! Brilliant.
Bush calls for a growth package worth 1% of GDP.
MBIA got screwed by the rating agencies. They diluted shareholders by $2 billion and still may lose their rating. At least Ambac shareholders haven't been diluted...
mort_fin,
Your correct, the hedgie did say that about AAA. However, you assume a AAA to AA drop. That would be as insipid as AAA. AA doesn't need to pay 18% or more to borrow. No any write down would be harsh.
Cheers,
Why would Buffett need to buy ABK and/or MBI? He can build this from scratch, insure only the low-risk muni bonds, and charge enough to make it worth while (since the ABK and MBI will be out of business or so encumbered with debt that they no longer be competative).
Bush just screwedup. He called for the tax cuts for the rich to be made permanent. No way that he'll get that past Congress.
Dow continuing to drop while he talks...
SivaramVelauthapillai,
Can you help me with something? What price did you buy Ambac at? And what price is it now?
If I'm not mistaken, the answer to #1 is high and #2 is very low ($6.35 now, was $20+ three days ago).
If I were in your shoes, I'd slink away. I wouldn't show my face. But here you are stating, "I don't think bankruptcy is as imminent as many of you think."
I'm just wondering what's going through your head. I'm just wondering what happened to the phenomenon of shame.
And for how long can they keep that up once they've lost the AAA? Means BK anyway once they default.
Carlomagno | 01.18.08 - 11:15 am | #<
They really have nothing to lose at the moment. Just think about it. Their current ability to write new business is essentially nil, so there rating doesn't matter to them at that point.
Think about how insurance works. You pay premiums in advance. They have already been paid and already have all the cash they will ever have, except for new business.
They don't have to do anything except sit back and see how thing develop. It isn't their problem anymore.
The people with problems are people that have insured bonds. And the rating agencies.
They don't need capital to wait things out. They get to go from AAA to impared, based on mark to model. This could take a long, long time. Impaired is defined by state insurance regulations regarding minimum surplus requirements.
At that point, the licensed subs will be taken over by the state regulators and they will be in rehabilitation/liquidation.
They pay claims until it is estimated that are insolvent. That is, they have negative capital. Then they go into liquidation which is similar to BK.
Remember that on a cash basis, they have paid very little, if anything. Further, they don't pay immediately, but rather make the bond payments as they come due. So they still have investment income.
You don't have a "run" on an insurance company. They were paid in advance.
Seems to be a little over-reaction here. A downgrade is NOT the same as bankruptcy; at worst (and there are other possibilities) it's a precursor to run-off, in which the insurer stops originating business and confines its activities to paying claims. Downgrading an AAA to AA inflicts losses, yes, but it's not catastrophic and certainly doesn't mean the insurance is worthless (Radian's been doing business as a AA for years).
Below is an attempt that will probably fail to paste in a spreadsheet that's based on yesterday's S&P release estimating stress-case losses and adjusted capital cushions (after providing for the stress-case losses). Since pasting failure is likely, let's go to the bottom line: all of the guarantors have cushions. (AGC still has a cushion after subtracting 5x the new losses from the cushion, and FSA has one after subtracting 3x the new losses. CIFG and MBIA have cushions after subtracting the new losses; Ambac, XL(SCA) and FGIC don't, but still have a capital cushion after covering the new stress-case losses.)\t\t\t\t
S&P isn't predicting default. It's analyzing the probability of downgrade.
I think the default risk suggested by the CDS spreads is unrealistic.
\t\t\t\t\t\t\t\t\t\t
\t(348.1)\t(2,229.7)\t489.4 \t(2,312.9)\t(1,320.
\t(1,321.2)\t(4,784.4)\t403.8 \t(5,300.8)\t(11,870.
\t(2,294.3)\t(7,339.1)\t318.2 \t(8,288.7)\t(22,420.
\t(3,267.4)\t(9,893.8)\t232.6 \t(11,276.6)\t(32,970.
\t(13,828.5)\t(9,415.
\t(4,240.5)\t(12,448.5)\t147.0 \t(14,264.5)\t(43,520.
\t\t\t
STRESS TEST RESULTS AS OF JAN. 17, 2008\t\t\t\t\t\t\t\t\t\t
Summary of Losses and Capital Position (Mil.
\t\t\t\t\t\t\t\t\t\t
Rating Category\tAAA\t\t\t\t\t\t\tAA\tCCC\t
\tAGC\tFSA\tCIFG\tMBIA\tAmbac\tXLCA\tFGIC\tRadian\tACA\tTotal
After-tax net\t\t\t\t\t\t\t\t\t\t
RMBS losses\t29.4 \t219.6 \t91.0 \t1,694.2 \t968.9 \t339.4 \t1,315.0 \t2.4 \t0.0 \t4,657.5
After-tax net\t\t\t\t\t\t\t\t\t\t
CDO losses\t2.2 \t1.1 \t909.2 \t1,826.5 \t1,280.1 \t633.7 \t1,239.7 \t83.2 \t2,987.9 \t5,892.5
Total aftertax\t\t\t\t\t\t\t\t\t\t
losses\t31.6 \t220.7 \t1,000.2 \t3,520.7 \t2,249.0 \t973.1 \t2,554.7 \t85.6 \t2,987.9 \t10,550.0
Adjusted capital\t\t\t\t\t\t\t\t\t\t
cushion at\t\t\t\t\t\t\t\t\t\t
12/31/2007\t275.0 \t725.0 \t175.0 \t1,775.0 \t1,575.0 \t625.0 \t325.0 \t575.0 \t675.0 \t5,475.0
Identified hard\t\t\t\t\t\t\t\t\t\t
and soft capital\t\t\t\t\t\t\t\t\t\t
additions\t\t\t1,500.0 \t2,000.0 \t255.0 \t\t\t\t\t3,755.0
\t\t\t\t\t\t\t\t\t\t
New adj cushion\t275.0 \t725.0 \t1,675.0 \t3,775.0 \t1,830.0 \t625.0 \t325.0 \t575.0 \t675.0 \t9,230.0
\t\t\t\t\t\t\t\t\t\t
Less: losses\t243.4 \t504.3 \t674.8 \t254.3 \t(419.
Less: 2x losses\t211.8 \t283.6 \t(325.4)\t(3,266.4)\t(2,668.
Less: 3x losses\t180.2 \t62.9 \t(1,325.6)\t(6,787.1)\t(4,917.
Less: 4x losses\t148.6 \t(157.8)\t(2,325.8)\t(10,307.8)\t(7,166.
Less: 5x losses\t117.0 \t(378.5)\t(3,326.
\t\t\t\t\t\t\t\t\t\t
Cushion % losses\t870%\t329%\t167%\t107%\t81%\t64%\t13%\t672%\t23%\t87%
I'm just wondering what's going through your head. I'm just wondering what happened to the phenomenon of shame.
That's not fair--the guy's got the balls to say he made a mistake! Not many of us would do the same.
And if there's a bailout, there may be a pop in the stock, although it would only be appropriate for common holders to lose their investment.
MBIA got screwed by the rating agencies.
Exactly!
realty-based lawyer: thx. IIRC MBIA has well over $10bn exposure to CDOs. Difficult to read that table, but at the rate that CDOs are defaulting (and it's only going to get worse) I don't think the future looks bright nor that it will be long. BK looms.
R
Good points. He bet that the monolines would be deemed TBTF like CFC, FNM and FRE. So far, he appears to be wrong. Although there is no way I would have made his bet, I do see his logic.
Throwing salt in his wounds is simply childish and uncalled for.
The word is that Ambac will be able to send subsidary Ambac Financial Services into bankruptcy, thus defaulting on it's CDS claims. The primary business Ambac Assurance Corp will continue to operate, though likely in the "run-down" mode mentioned above.
Is this fact? Absolutely not, just scuttlebutt I've discussed with some vultures this morning.
Don't underestimate the intelligence of lawyers. They may have truly set up the CDS insurance business in an arms-length entity.
Long the Dec '10 calls at strikes of 10 (small notional amount) and 30 (slightly larger) to play the asymmetry while limiting losses.
MBIA got screwed by the rating agencies.
Exactly!
Now you're staring to understand the bear case. You know... I simply marvel at how people constantly forget that the word "credit" devires from the word "credibility", especially value investors. The financial sector is all about TRUST TRUST TRUST. We have a situation where MBIA Ambac Moody's auditors... and whoever else are in this ugly mix, lack trust for one another. That's the bear case.
As far as the notion that this will cause havoc in the municipal bond markets -- once again, why?
60% of munis are owned by individuals. Banks and insurance companies who own most of the rest DO NOT have to mark to market if they are intended to be held to maturity -- i.e. not in their trading portfolio. If a security is impaired, then it needs to get written down, but regardless of rating, it does not get marked to market under current GAAP.
I am still waiting to see who is required to own AAA munis. Calpers owns common stocks as well as 'alternative investments' which include hedge funds.
To the extent there are problems, Buffett has billions available for the right price to solve anyone's problem. He has enough capital to insure trillions of dollars in munis.
grumpy realist,
There aren't any regulations against reinsuring muni deals. Happens all the time.
Did you have something in mind?
I am as disgusted as you, Ed, but I do think that there are things that won't be allowed to fail--Citi, Countrywide, and yes, the big monolines. If the gov't is willing to send taxpayers $100B to 150B in "rebate" checks, they'll orchestrate a bailout of MBIA.
R | 01.18.08 - 11:34 am | #<
The big monolines are really dinky companies.
Allstate writes over $30 billion in premium annually and has over $20 billion in capital. It is larger then the entire credit insurance industry combined.
Carlomagno,
MBIA also has something like $16B of claims-paying resources, plus the investment earnings on its portfolio from now through the maturity of insured debt that defaults. It's an insurer - it's more complicated than looking at assets minus liabilities; the game is in the default probability, net recoveries and investment earnings over time. Can argue about dependability of reinsurance (especially Channel Re), but I still don't think default is probable. (If that's what you mean by BK.)
Not at all saying that won't be downgraded. Or shouldn't be downgraded - I've thought for several years they took more risk than was appropriate for their AAA.
Zigurrat: is the issue mark-to-market or portfolio diversification requirements for some types of investors, e.g. pension funds, insurance companies, mutual funds, etc.? That's certainly how it goes in Europe. If the bonds get downgraded, some players have to sell to stay within their limits. That would then impact the price. Maybe not quite as bad as a firesale from a wholescale liquidation, but still...
Ugh,
Yes, the CDS are written by affiliates of the bond insurer, not the bond insurer itself. But they're guaranteed by the bond insurer.
They're not your normal CDS, though: they operate like bond insurance. Except for ACA (and maybe Radian), no collateral-posting requirements, no downgrade triggers for the monolines. And no immediate payments on default of the underlying security; instead, they make timely payments of interest and ultimate payment of principal. (There are a few exceptions, but not many.)
The monoline business model is to cover credit default by replicating the payments on the underlying security. Not market risk.
That would then impact the price
Ya but it would not hamper muni valuations. The price will return unless you have a protracted lack of demand for them.
Carlomagno....I am sure that there are some entities that need an enhanced rating. However, if they were relying on the insurers, then it isn't breaking news that they were under rating agency pressure. For example, PIMCO probably has some funds that require high credit quality. I would be shocked if they got themselves in a position where they had to sell munis in a panic.
By the way, I am only talking about munis, not structured finance.
I would be shocked if they got themselves in a position where they had to sell munis in a panic.
PIMCO, despite being huge, is the exception & not the rule. Do you know many fixed income managers who felt so many bearish things about the economy as Gross?
MTHood,
Do you have a point or do you just like attacking people? If you have a point, go ahead and fire at me. Otherwise, you have as little credibility as anyone. Sure, the investment looks to be wrong but if you can't tell me what is wrong with it, then you are no different than those that have been saying the economy is going to collapse for the last 10 years.
Anyway, there is something that is kind of different with me, versus other monoline shareholders. I only bought the stock this week (unfortunately before the collapse but oh well). So I went in knowing the risks and the possibility of increasing losses. What surprised me was the inability to raise capital (Ambac management fault... they were sitting on it for over a month). Apart from that, I STILL don't see the superbear case put forth by Ackman et al. Sure, people like Cramer are screaming at the monolines but he doesn't know what he is talking about (his inability to understand how you can post a per share loss greater than the share price without bankrupting the company or cooking the books kind of rules him out on this matter IMO. Claiming that monolines are more fake than Enron also makes me question his thoughts (do note that he was the one who was superbullish on tech stocks before the collapse; he also never called out the monolines and other banks before the collapse; when commodities, something he was really bullish on last year, collapse, he'll be blaming some lame CEO in some emering market; at least Ackman has been doing it for 5 years).
Except for some vague notion that default rate may be higher than high, what actually makes you think bankruptcy is imminent.
Realty-based Lawyer, can you e-mail me if you have some free time? I want to ask some questions about what happens during a run-off. I want to get your thoughts... thanks...
probert....
There may be problems. I just think that it is a mistake to assume that munis will have huge problems because of this.
If they do, it will be a great investment opportunity.
To the extent that the fed lowers rates and taxes on investment income increase, getting munis cheap would be a great investment.
Zigurrat, realty-based lawyer: thanks for your comments. I'm not fully reassured, but let's see.
Carlomagno,
I'm not fully reassured, but let's see.
freudian slip there?
zigurrat,
I agree about munis
SV,
What surprised me was the inability to raise capital
Honestly, it's none of my business and I can't tell you what to do, but if I may express my opinion, one day you will realize that you had absolutely no justification for getting involved with Ambac other than the fun of pure speculation. I also do not know enough about these companies, though I did short, them, again, with small speculative amounts of money.
Siv:
I think the biggest problem with your analysis is your view of the underlying economics of the business.
I don't see how you can consider yourself a value investor and then blow off Buffett's point of view.
The fact that Kramer is a blowhard or Ackman is biased doesn't change reality.
probert: "freudian slip there?"
Sorry, don't follow you (English is not in fact my native language. This one's prolly too subtle for me.)
Carlomagno:
Where are you located?
Zig.
Siv, since you seem to be transparent and honest I will offer some unsolicited advice.
The next time a fully-gased, blade recently sharpened, operating chainsaw falls out of the sky, do NOT try to catch it.
Seriously dude, why didn't you just buy some cheap out-of-the money calls on ABK?? All you would have lost would have been the premium.
SV
A problem that the monolines have is that their business model is flawed. Insuring shaky credits is tough business when the credit markets are imploding and the underlying credit is getting shakier. The question you have to ask is do they have the capital to payout on the default losses of the credits they have insured? Note that ACA did not.
Marty Whitman thinks there is something there. His portfolio is not looking very good right now but he may be right in the long term but in the mean time he has sunk a lot of investor capital.
Zig.: continental western europe.
SivaramVelauthapillai
"Sure, the investment looks to be wrong but if you can't tell me what is wrong with it, then you are no different than those that have been saying the economy is going to collapse for the last 10 years."
What's wrong with the investment?
Umm, it lost 67% in three days.
Siv,
Let me say something else just for some perspective: on that cold 2003 winter night when fortune.com published Buffett's argument that derivatives are weapons of mass destruction, and, like reinsurance, they are easy to enter and impossible to exit, I started right away to search for "who is Buffett talking about". Within 2 days I found a sector that I never heard of before, monoline insurers, with companies I never heard of before like Ambac, Radian, PMI. Only 1 company's name was familiar to me because I had read a bearish piece on it from this dude called Ackman. And I said to myself: "one day these companies shall implode". Almost exactly 5 years ago.
Siv, two more words of advice:
STOP LOSS
probert....regarding financial wmd's.....
I am a little surprised that you connected the dots -- since I thought that Buffett was talking more about derrivatives in general. I was thinking that someone that had a similar operation to Gen Re's....but couldn't distinguish between conservative hedging vs speculative trading.
I'm wondering if you have any other candidates. The investment banks are obvious candidates.
Zig...
MBIA also has something like $16B of claims-paying resources, plus the investment earnings on its portfolio from now through the maturity of insured debt that defaults. It's an insurer - it's more complicated than looking at assets minus liabilities; the game is in the default probability, net recoveries and investment earnings over time.
I wonder how much of their claims paying resources are in the form of the investments they are currently insuring?
Sort of like State Farm insuring homes in New Orleans back by investments in REITs of properties in New Orleans.
'Correlated risk' risk?
dryfly,
Your comments are usually pretty good, or so they seem to one like me who's unfamiliar with your business. This time you're off. Insurers' investments are prescribed/proscribed by statute and regulation, which are quite detailed, and by the rating agencies, ditto. Insurers - including financial guaranty insurers - aren't allowed to invest in the securities they insure. That was a little too obvious a loophole.
That said, sure there may be some correlation, and some of the investments may default; as someone said, in a crisis, correlation goes to 1. I wasn't trying to get into the details of the financial guaranty business. Assuming the guarantors (and their regulators) are just stupid, though, doesn't make a lot of sense.
MBIA's using Channel Re to reinsure itself is a pretty sophisticated game. So were some of its other innovations (AHERF accounting, for example). But that's another discussion.
MALABAR: "A problem that the monolines have is that their business model is flawed. Insuring shaky credits is tough business when the credit markets are imploding and the underlying credit is getting shakier. "
Ambac and its peers may or may not be toast but I don't think the business model is flawed. If that was the case, why did Buffett enter the business? Remember that, not 6 months ago, people like Bill Ackman were saying the whole model was flawed (including muni bonds). Right now, these people have scaled back their views to only talk about structured products. And I'll bet in 6 months from now then they will limit their "flawed business model" argument to RMBS structured products only.
Your criticism of the difficulty of insuring risky products is valid, but you are speaking in hindsight. Insurers, whether bond insurance, or casulty insurance, or mega-catastrophic insurance, or whatever else, are in the business of insuring risky stuff. That's their business! Ambac, MBIA, FGIC, SCA, and others, may or may not have miscalculated on their insurance underwriting but there is a difference between arguing the industry doesn't make any sense (this is what Ackman was arguing 6 months ago) to saying that some companies made mistakes.
MALABAR: "The question you have to ask is do they have the capital to payout on the default losses of the credits they have insured? Note that ACA did not."
This is what I'm trying to figure out. Given that the stock price still has some value, if I thought they can't cover their losses, I would bail out right now... in fact, I just invested early this week (after all the news came out--except for the difficulty of raising capital by Ambac) so I'm reasonably confident that the losses won't wipe out the company.
MALABAR: "Marty Whitman thinks there is something there. His portfolio is not looking very good right now but he may be right in the long term but in the mean time he has sunk a lot of investor capital."
Yeah... his views have heavily influenced my thinking and that's why I'm feeling what I do. Of course, he can be wrong (even Buffett is wrong at times) but his arguments seem solid. The run-off value still looks to be much higher than the stock price. The risk that I perceive in the stock is if the state regulator blocks payments to the holding company, causing an insolvency problem for the holding company. Ackman and others have been trying to get the state regulator to investigate the monolines for many years and although there is little merit to anything in my eyes, political actions cannot be predicted.
ziggurat,
I am a little surprised that you connected the dots
Well, I connected them, but not right away. On the night the article came out, within 2 hours, I got to a couple of gold-bug articles called "The JPMorgan derivatives monster". This sounded good because it matched with Buffett's assertion that "Charlie and I do not understand how much risk is being taken when we read the footnotes of big banks". So right away I thought "Citi and JPMorgan".During 2003-2005 everyone discussing derivatives was speaking about JPM because the OCC's quarterly derivatives report portrayed them as the biggest, and growing. Furthermore, JPM got an award for basically being willing to take more credit risk than most.
So I shorted JPM in 2003, and lost like 15%. Five years later, Harrison is gone and Jamie Dimon is in. Dimon cleaned up the joint, to an extent. So that goes to show you... but still, in late 2006 I bought puts on JPM, BAC GS due to growing valuations. Again, not the best picks, but still it was successful.
And what about the monolines, you ask? Well, going back to 2003, as I said, it took me a few more days to connect the dots on the monolines. In 2006 I shorted MTG and in late 2007 I shorted all of them, and this morning I cashed out of what is likely to be my final MBIA put, but overall I didn't get as involved with the monolines as with banks, because monolines were not in my circle of competence (Ackman was just a good starting point). So I knew they'd lose money but... how do you know whether it's too late to short or not if you can't value it...
Right now I'm not short any financials, I'm short Russell 2000.
malabar,
ACA was only single-A at best and so doesn't shed a lot of light on the triple-A business. Yes, Marty Whitman was one of the original investors (David Barse is still on the board) and, yes, his investment isn't looking good right now.
That doesn't mean the business model is flawed - Buffett seems to want in. The current situation is obviously stress-testing the stress tests, and downgrades are by no means out of the question (downgrades of some of the AAAs seem quite probable). As I've said before, however, I don't think default by one of the AAAs is likely (or even AA Radian, which is looking pretty good right now). Even assuming S&P's latest figures are still overly optimistic, it looks like they still will be able to pay all claims as they become due.
Even ACA might be able to do that, if you look at the underlying securities and NOT at its obligation to post collateral. Maybe.
Remember that, not 6 months ago, people like Bill Ackman were saying the whole model was flawed (including muni bonds).
Did Ackman actually say and mean that insuring muni bonds ABSOLUTELY cannot be done profitably? Can you post an actual quote?
On the topic, there was an interesting piece from Doug Noland going back to 2001 regarding MTG where he argued credit insurance is not like car insurance because credit events are correlated. Car accidents are not, unless you have a pileup accident of like 1000 cars!!
Here it is:
Safe Haven | Its Wildness Lies in Wait
Accordingly, MGIC and the other mortgage insurers are placed very precariously at the frontline of what will surely develop into a mortgage credit bloodbath.
Well, insuring against falling home values is not an "insurable event." To make a certain type of insurance coverage viable, it must be possible to pool a large number of random and independent risks, with actuarial probabilities capable of predicting the future incidence of loss. It must also be possible to charge enough that sufficient policy premiums are available to settle future claims. An insurance company can pool fire protection policies throughout the country specifically because the incidence of fire is random and independent. Coverage for auto, casualty, health and life insurance are similar. An insurance company, however, would certainly not write coverage against a decline in home prices because such a risk is clearly not random (changing home values are cyclical!) or independent (as we have witnessed with the strong correlation of price gains nationally over this boom). The risk of catastrophic losses in the event of a general decline in home prices is too great.
Whatever I won't paste the whole thing, but it's an interesting read... this is 2001 !! ...
I see he might have some holes. He says credit insurance begets higher home values, which begets more credit insurance, which begets bigger potential future losses for the monolines, and so the whole system is unstable and it is tough to predict how far we might fall. Well, it sounds horrific but actually there should be a way to figure out how to insure this ANYWAY, even if you need genius actuaries. In the housing market, for example, you can look at price/income ratios.
look at this prophetic quote... again...2001
We've also seen an explosion of asset-backed commercial paper that incorporates liquidity and credit protection to garner pristine credit ratings (and marketability to the money fund complex).
Probert,
this thread is going off the page so not worth discussing stuff here but jsut to quickly answer some of your points...
I don't have anything handy but my impression was that Ackman was saying that the whole bond insurance business makes no sense. I have to double-check but I believe this was his point in his presentation from last year (not the presentation from a few months ago at the Value Investing Congress but his other 100-page one from before).
David Einhorn, another hedge fund manager who was short the monolines, also said that the whole business makes no sense. He even went as far as saying that monolines are defrauding municipalities and others who are buying the insurance.
Gold bugs have been calling for the collapse of the credit bubble for 15 years. They thought the dot-come implosion would do it but have been wrong for many years. Anyway, the argument against mortgage insurers is very flimsy, just like muni bond insurance. Mortgage insurance has a much longer history--many decades--and companies have survive many decades through ups and downs (including the 1990 housing bust).
The only legitimate argument that bears can stand on is dissing structured products. Claiming muni bond insurance and mortgage bond insurance makes no sense is kind of dumb IMO...
Reality Based Lawyer:
I think the business model is flawed for a number of reasons. It works for Buffett only in a situation where there is a capacity crisis and he can get historically high prices.
Note that I am talking about munis only. The muni market is really pretty small, which is why the incumbents felt they needed to get into structured finance in the first place.
In a sense, the monoline bond insurers were directly competing with structured finance in credit enhancement. The idea that there is a profit in insuring the defects of a competing credit enhancer makes no sense.
Now that structured finance has taken a major blow regarding credibility and the monolines are under pressure, the immediate market is viable for someone like Buffett who has excess capital and the ability to exit the business in the event that pricing deteriorates.
The upper bound to pricing is the market based credit spreads. The only way it works is if insurance is more efficient then other market mechanisms -- primarily through underwriting and because of the frictional costs in credit markets.
Regardless of this, I think that the monolines have been subject to cheap shots, especially the Kramer rant yesterday.
Siv:
Airlines are bad businesses but not a fraud. There is even room for a low cost operator like Southwest to prosper. Do airlines make sense as an investment? Ask Warren Buffett.
How do you make money in airlines? I would look at GE. They have a great business in aircraft engines. They build them, finance them, and service them. The weaker the airlines, the larger the profit potential for GE.
The vast majority of statistically cheap stocks aren't bargains. They are cheap for a reason.
You need to forget what everyone else thinks and convince yourself that muni insurance offers a good return on capital over a credit cycle. This requires an in depth knowledge of the business, including its history and regulatory constraints.
SivaramVelauthapillai,
OK, OK, you win. Monolines are a good investment -- ABK in particular.
You're right. You're a good person. Everyone likes you.
You took a 67% loss, but it will probably come back.
You're the man. Seriously. You're great.
Can you drop it now?
Siv,
The monolines DID defraud the municipalities in some small ways, that i am NOT ready to discuss here, but I heard some stories where basically, monolines acted in such a way that municipal taxpayers' money was wasted faster.
Gold bugs have been calling for the collapse of the credit bubble for 15 years. They thought the dot-come implosion would do it but have been wrong for many years.
Huh??? first of all, a gold bug is someone who believes in buying gold to deal with inflation. Many, actually, most, big bearish people are not gold bugs.
More importantly, it is absolutely wrong that bears were right "only" on structured products.
Bears were right on:
1 - Structured products
2 - Housing market, people loving their homes and investing in their homes, showing off, etc, spending a lot of money on cars, food, dishes, landscaping, etc
3 - Thriftsville squanderville, U.S. dollar declining, trade deficit.
4 - [Almost for sure now] that all this will be enough to cause a recession
Soon the bears will be proven right on three more things:
1 - hedge fund bubble
2 - junk corporate credit bubble
3 - corporate profit margins reverting to ~5-6%
ZIGURRAT,
Thanks for your comments. Unlike MTHood, who seems to have nothing valuable to say (seems like the Jim Cramer type who pays sole attention to stock prices), I appreciate your thoughts--and advice. However, I haven't changed my mind much.
For example, you cite the airline industry. Admittedly one of the worst industries for investors in the last 50 years! But I'm a stock picker--or trying to be one. I don't simply invest because the industry looks good. I have to like the company as well. Using that logic, I would have no problem investing in airlines (I was actually seriously looking at Air France-KLM and Ryan Air a few years ago and it would have worked out well). Conversely, everyone is tripping over themselves for commodities right now. But I think nearly all the companies are risky (low ROE--some can't even cover cost of capital; speculative demand; totally driven by supply & demand; etc). This sounds crazy but I have greater confidence in the bond insurance industry than some commodity industries right now...
ZIGURRAT: "You need to forget what everyone else thinks and convince yourself that muni insurance offers a good return on capital over a credit cycle. This requires an in depth knowledge of the business, including its history and regulatory constraints."
I would not disagree with any of that! But if you looked at the monolines over the last 30 years (they were only publicly listed around 15 years ago AFAIK though), they survived all the credit booms and busts, recessions, and so forth. I mean, we had a huge inflationary period in the 70's, junk bond boom & bust in the 80's, real estate collapse in 1990, tech com bust in 2000, and so forth. I mean, if things look risky for the monolines now, imagine the 70's and early 80's when municipalities, quasi-govt entities, and others, actually had deteriorating credit and were on the verge of defaulting (didn't the City of New York default (or was close to it)? Not sure if that was insured by any monoline).
The problem, of course, is that structured products were new. I think all the problems begin and end with that.
Whatever I say is not going to reverse my losses (although I still think Ambac can recover given their book value) but I'm just expressing my view that the industry seems viable to me...
Probert,
I actually respect your opinion since you actually back up your stance but... How can you say there was defrauding of "municipalities" in some "small ways"? If that was indeed the case, speaking as an Ambac shareholder, I will be the first to ask you to send your police forces, lawyers, and judges against the industry. Government is stronger than the puny bond insurance industry. Do you seriously think the govt was defrauded? Come on...
Furthermore, insurance is OPTIONAL. How can a municipality be defrauded on an optional product? If they don't like the bond insurer they don't have to use them!!! It's a free market after all (with the government being much stronger than even the largest bond insurer).
Think about it: how can a bond insurer defraud the municipal issuer when the issuer has the option of issuing the bond without insurance? In fact, I know I am right because watch municipal bond issuance costs go up. That's going to be the first casulty of the monolines using their AAA rating.
I'm not going to respond to your comment about bears (some of which I agree with) cuz this is getting too off-topic and I would rather just limit it to the bond insurance topic...
Do you seriously think the govt was defrauded? Come on...
How can a municipality be defrauded on an optional product?
Let me just steer you into the right direction. I am not suggesting fraud during the insurance negotiations process.
I am suggesting sidal fraud, in the form of influence by monolines exerted on conflicted 3rd parties, such as employees of private companies who get government contracts (municipal government contracts)...and well...you can try to think in this direction. Beyond this I don't want to say anything more in public; don't want to get involved in having to argue such accusations back and forth because I've heard second-hand. But... we're talking about some pretty detailed stories that I heard so I tend to believe them.
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.
Pig in a poke.
hdude,
You said:
The bond issuer was not defrauded. They got what they paid for (AAA).
Again, I am not talking about the insurance premium, the insurance contract, or anything about the municipal insurance DIRECTLY. What I am talking about is an INDIRECT intervention by the insurers, an indirect unethical meddling, designed to shore up the financials of the municipalities they insure, by using bribes. Can I make this any clearer?
HDUDE,
Since none of the monolines have failed to pay any claims, this is all hypothetical on your part. We'll see how things shake out when claims materialize but so far none seem to have any problems (except SCA). But, of course, if the superbearish case being thrown around occurs then most monolines probably won't be able to pay...
PROBERT,
I don't know anything about what you are talking about. There is little reason to suspect what you are saying is widespread and systematic. But whatever it is, if you really think there was questionable behaviour (what you described sounds criminal) then contact the law enforcemnt agencies.