Are you saying that the financial firms took out insurance against such losses and now the insurance company can't pay it?
If this is true, then I take back all the bad things I said about the financial companies. That is just brilliant. They should be marking down as much as they can for the write downs.
I wouldn't be surprised if we then hear about back room deals being made with the finance companies letting off the debtors to get the insurance payment and then something later from the debtors. "I will let you off the hook now for a favor later because I insured against you not paying."
Sheer brilliance if this is what they really did...and phenomenally amazing that the insurance company is not prepared to pay up!
Maybe I should be buying some puts on the insurance companies ETF?
From Bloomberg, article about Bush stimulus proposal:
Jan. 18 (Bloomberg) -- The Bush administration is close to completing an economic-stimulus proposal that economists say may have a modest effect on boosting the economy and averting a recession.
The plan, which is subject to revision, will include $800 rebates for individuals and $1,600 for households as well as tax breaks to encourage businesses to invest, people familiar with the package said.
Thank god we have a large budget surplus to pay for all this.
Thank god we have a large budget surplus to pay for all this.
Yep, this is just deferred inflation. And inflation is just stealth taxation on savings.
Nevermind whether or not we need a stimulus package.
So long as we don't address, or even acknowledge, the epidemic of irresponsible fiscal and monetary behavior, I don't see that we're doing anything to ultimately make things better.
The WSJ needs to get the term "counterparty risk" out of quotation marks and into headlines.
That story will be retold many times as companies try to figure out who was on the other side of their trades or who they were counting on for risk management and in any event how solvent they are now.
Unfortunately that will also lead to more fear and loathing along the way.
"If they default, everyone is supposed to settle up with each other, the way gamblers settle up with their bookies after a game. Even if there isn't a default, if the market value of the debt changes, parties in a swap may be required to make large payments to each other."
You see, with gamblers, it's a bit different. When you don't pay up, they don't collude with each other to pretend you are good for the money. They call Vinny, he grabs a two by four, and busts your knee caps.
and phenomenally amazing that the insurance company is not prepared to pay up!
Maybe I should be buying some puts on the insurance companies ETF?
Keith
I struggle to understand the amazement - I actually mean that - tell me, has the whole MBIA, ABK, MTG, ACA, PMI, ORI, Radian stuff just been happening in the bg and you just felt it wasn't relevant to the issue and to you ? Or you didn't know about that stuff at all until today/recently ?
This is a chart of MBIA against the S&P 500
http://finance.yahoo.com/charts#chart5:symbol=mbi;range=6m;compare=^gspc;indicator=volume;charttype=line;crosshair=on;logscale=on;source=undefined
The story starts to unfold in mid-Oct, even if you knew nothing about nuthin'. I picked up on it mid-Nov. I really don't mean to be snarky - I want to understand - please clarify if you wish.
Bet the wise ones at GS who secretly shorted the crap their own traders were selling, then patted themselves on the back for dodging the bullets that took down so many other IBs, are having lots of sleepless nights right about now about whether they are truly "short" the market... or just short the insurance payments.
You read this article and you see how utterly desparate the situation is. Mortgage losses have so far to go still. So many housing-related companies will go bust. Job losses are rising so quickly.
How much of an effect can any government bailout package have, really?
This does not look like a garden-variety economic downturn. This looks like a "thousand year flood".
I don't see how an $800 cheque will help much. It might forestall foreclosure for a month for some but won't change the outcome. Many will blow it on some useless trinket they don't need and then be in exactly the same dire straits as before the cheque. Yes I know it should work in theory but in practice I'm not really seeing how this is going to help America avoid a recession.
"Thank god we have a large budget surplus to pay for all this."
And spend 690 billion on "defense" at the same time. But of course "defense" is the most important expenditure of all. We simply must stop those dastardly Iraqis from flying over here and dropping their bombs on us. Thank God Bush prevented that. But still it is always a possibility and we must be "prepared".
Anyway, here it is: I predict that this is the year that the US discovers that reserves (for people and governments and insurance companies and banks and, yes, even manufacturing companies) are okay. Nay, they are better than okay they are good.
"At the center of these concerns is a vast, barely regulated market in which banks, hedge funds and others trade insurance against debt defaults. This isn't like life insurance or homeowners' insurance, which states regulate closely. It consists of financial contracts called credit-default swaps, in which one party, for a price, assumes the risk that a bond or loan will go bad. This market is vast: about $45 trillion, a number comparable to all of the deposits in banks around the world.
Not everyone who buys one of these contracts has bonds to insure; because the value of an insurance contract rises or falls with perceptions of risk, some players buy them just to speculate. In much the way gamblers make side bets on football games, a financial institution, hedge fund or other player can make unlimited bets on whether corporate loans or mortgage-backed securities will either strengthen or go sour."
For those that don't have access to the article.
These aren't insurance companies in general, although it just turned out that the entity in the news is ACA, which is an insurance company. ACA was never rated higher then A.
It isn't just insurance, it's speculation. The notional amounts are higher then the total dollar amounts of insurable bonds.
The BIS or bank of international settlements has stuff on this....fun reading.
In theory your risk management should have everything under control....list of acceptable counterparties, total exposure, collateral when necessary, etc.
and phenomenally amazing that the insurance company is not prepared to pay up!
Maybe I should be buying some puts on the insurance companies ETF?
Keith
I want to understand - please clarify if you wish.
sk
Two things SK...
1. I didn't quite get it until now. I admit that.
2. But if my insurance company came to me after a fire at my house and said "we're sorry we didn't think this actually could happen so we didn't put enough into reserves to pay for it in case it did; so we can't pay for it", I would be phenomenally amazed (and pissed!). That is their business, they should have prepared for it.
Yes I figured the puts were a great bet a year ago, but I got from this article that this was the first company admitting that they might not be able to pay. That I would guess will cause a real effect on the price of the puts tomorrow (now later today).
But alas the homebuilders EFT keeps going up despite all the bad news we talk about here...
Keith,
On the homebuilders it is probably just short covering. Most of the futures being up this morning is also short covering. The chimp used todays natural rise to make his plan seem better than it is.
Please take a look at the January 10 article in the FT by Saskia Scholtes and Gillian Tett on Gross's numbers. With their typical (and atypical to most of the financial press who love all this Cassandra stuff) sangfroid they actually examine this area of the credit markets.
Here is the money quote:
"It could also be that $45,000bn overstates the real credit risk. Banks and other investors typically conduct offsetting trades in the CDS market, which tend to get counted twice. When the figures are netted, real gross credit exposure often falls by about 80 percent or more, according to the Bank of International Settlements.
"Indeed, a 2007 ISDA survey of cret risk found the 'real' credit exposure of the largest derivatives dealers to their bigges counterparties averaged just 6 percent of notional expousres after accounting for netting and other factors. If Gross's default assumptions are applied to the ISDA figure, impending CDS losses for pretection sellers are neare to $17bn -- not $250bn."
"On Friday, analysts at Citi and Bank of America downgraded MBIA and Ambac shares - to hold from buy. Skeptics might note that the move comes with Ambac stock down 94 percent over the past year and MBIA down 88 percent, suggesting that the previous buy call wasnt totally spot on."
Zigurrat: "In theory your risk management should have everything under control....list of acceptable counterparties, total exposure, collateral when necessary, etc."
OK, so who are the counterparties for Fannie Mae's $740-odd billion of QSPE "sales," and what are the chances that OFHEO used the wrong multiplier to calculate the required capital to offset the risk for the big GSE's nearly three-quarters of a trillion dollars of retained portfolio?
Anyone sure of the accounting treatment for bonds one has insured with a swap? If you bought a swap then booked the profit on the bond right away, but then the insurer goes splat, what happens to your own book? Or Goldmans? Anyone...anyone?
I heard that the $800/$1600 rebate will limited to lo/mid income households. $80k/$110y per year to get the max. Most people here wont see the full amount if they see anything at all.
Don't worry,be Happy! Not only does GW have an MBA from Harvard,A prominent Holy Man has assured us that he was appointed President by GOD! Everything is Wonderful!! Buy,Buy,Buy
theories are like a-holes. everyone seems to have someone. Bond insurers need to model out 5x average default ratios and have the capital to pay all claims. Then they need to be short all the bonds they are insuring just to be safe.
Pureguess- The key words in your statement are "offsetting trades." Party A is hedged with Party B, who is hedged with Party C, who is hedged with Party A. Do you see the problem here? If only one of the parties defaults, the entire chain collapses.
AZ-Cowboy,
The point of the article was not that the positions were not at risk, it was that single positions were counted multiple times. While, the attempt to hedge with an offsetting position might fail, it would not create a double or triple loss. The problem would be that the hedge would not pay out to cover losses on the original position. But since, on a bank's books, the offsetting positions are not matched up with an underlying position, it might appear that a double loss would be possible. So that a 10 million position with a 10 million hedge would show up as a 20 million exposure.
Keith, you should ignore anyone who uses the term "snarky".
SK admits to not being on top of what's going on in the market, proceeds to throw around some monoline insurer acronyms, and then proves he does not even grasp that the story is about counterparties and only uses a monoline as an example, ending it all with the notion that everyone in the country now understands CDS (except Keith, right?), structured products, and everything else that the journalists attempt to describe now that subprime is a household word.
Has anyone started to game this whole thing out long-term?
Let's assume that the Gubmint determines that these monolines can't fail, and that the investment banks need rescuing, and the banks need rescuing from the mortgage failures. I mean, can we really raise enough money from China/Japan/etc to pay for all this stuff?
I mean, let's assume worst case scenario, and we need like $1-2T to keep the whole ball of string together (even though pieces are obviously going to be lost - we can't save everyone). Could we even borrow that much? What happens to other economies when we're tanking? Would they have money to lend? Would they even lend money? What would we have to pay to get that money? What does the US economy look like at super-usurious rates?
At what point do we need to start worrying about a cataclysmic problem here? Because as I watch the dominos fall, I can see how we could potentially (how ever remote) get to that point, and I think a lot of other people can see the potential as well.
These folks bought insurance against blame, not insurance against loss.
And it ain't "counterparty risk".
It's "counterparty certainty", as in
I'm certain I won't be blamed, and
I'm also certain the counterparty
cannot cover what they supposedly
insure.
Bring on the write downs.
Are you saying that the financial firms took out insurance against such losses and now the insurance company can't pay it?
If this is true, then I take back all the bad things I said about the financial companies. That is just brilliant. They should be marking down as much as they can for the write downs.
I wouldn't be surprised if we then hear about back room deals being made with the finance companies letting off the debtors to get the insurance payment and then something later from the debtors. "I will let you off the hook now for a favor later because I insured against you not paying."
Sheer brilliance if this is what they really did...and phenomenally amazing that the insurance company is not prepared to pay up!
Maybe I should be buying some puts on the insurance companies ETF?
From Bloomberg, article about Bush stimulus proposal:
Jan. 18 (Bloomberg) -- The Bush administration is close to completing an economic-stimulus proposal that economists say may have a modest effect on boosting the economy and averting a recession.
The plan, which is subject to revision, will include $800 rebates for individuals and $1,600 for households as well as tax breaks to encourage businesses to invest, people familiar with the package said.
Thank god we have a large budget surplus to pay for all this.
Full article:
Bush Nears Plan That Economists Say May Boost Growth (Update3) - Bloomberg.com
So it seems there's a growing concensus at high levels that the government has to stop the liquidiation of mortages.
Do we have to stop the liquidiation of junk bonds too now?
I'm not sure which screws with my head more--the Irish whiskey or Bush's ideas on a "stimulus"
But, but, the risk was supposed to be dispersed and distributed away!
Liquidity! Liquidity! Where fore art thou, liquidity!
Thank god we have a large budget surplus to pay for all this.
Yep, this is just deferred inflation. And inflation is just stealth taxation on savings.
Nevermind whether or not we need a stimulus package.
So long as we don't address, or even acknowledge, the epidemic of irresponsible fiscal and monetary behavior, I don't see that we're doing anything to ultimately make things better.
Let's stop pretending tax cuts are free money.
Clusterparty risk
The WSJ needs to get the term "counterparty risk" out of quotation marks and into headlines.
That story will be retold many times as companies try to figure out who was on the other side of their trades or who they were counting on for risk management and in any event how solvent they are now.
Unfortunately that will also lead to more fear and loathing along the way.
Let me check my cocktail napkins and see what kind of coverage I have...
"If they default, everyone is supposed to settle up with each other, the way gamblers settle up with their bookies after a game. Even if there isn't a default, if the market value of the debt changes, parties in a swap may be required to make large payments to each other."
You see, with gamblers, it's a bit different. When you don't pay up, they don't collude with each other to pretend you are good for the money. They call Vinny, he grabs a two by four, and busts your knee caps.
"Clusterparty Risk"
I kinda like that...
and phenomenally amazing that the insurance company is not prepared to pay up!
Maybe I should be buying some puts on the insurance companies ETF?
Keith
I struggle to understand the amazement - I actually mean that - tell me, has the whole MBIA, ABK, MTG, ACA, PMI, ORI, Radian stuff just been happening in the bg and you just felt it wasn't relevant to the issue and to you ? Or you didn't know about that stuff at all until today/recently ?
This is a chart of MBIA against the S&P 500
http://finance.yahoo.com/charts#chart5:symbol=mbi;range=6m;compare=^gspc;indicator=volume;charttype=line;crosshair=on;logscale=on;source=undefined
The story starts to unfold in mid-Oct, even if you knew nothing about nuthin'. I picked up on it mid-Nov. I really don't mean to be snarky - I want to understand - please clarify if you wish.
-K
David Pauly in cozy dreamy land - facts not required. All evidence to the contrary, but hey, that never stopped him.
Lewis is my hero!
Countrywide May Be Bank of America's One Good Deal: David Pauly - Bloomberg.com
Bet the wise ones at GS who secretly shorted the crap their own traders were selling, then patted themselves on the back for dodging the bullets that took down so many other IBs, are having lots of sleepless nights right about now about whether they are truly "short" the market... or just short the insurance payments.
You read this article and you see how utterly desparate the situation is. Mortgage losses have so far to go still. So many housing-related companies will go bust. Job losses are rising so quickly.
How much of an effect can any government bailout package have, really?
This does not look like a garden-variety economic downturn. This looks like a "thousand year flood".
The incompetence of the Bush Administration needed to be rounded off, so it will go down in history as complete.
They're doin' a fine job.
Wasn't the sign to abandon all hope when the US electorate voted the chimp and his Bismark crew into office a 2nd time?
At that moment, I quit. It's theirs, and on that date, it became a short, and has remained so.
After a nearly 3% loss in the US equity market, Shanghai is down around 1/2% today, Friday.
And it will get worse, much worse. This is not recession, it's depression. If it's not obvious to you now, wait just one more day.
I don't see how an $800 cheque will help much. It might forestall foreclosure for a month for some but won't change the outcome. Many will blow it on some useless trinket they don't need and then be in exactly the same dire straits as before the cheque. Yes I know it should work in theory but in practice I'm not really seeing how this is going to help America avoid a recession.
"Thank god we have a large budget surplus to pay for all this."
And spend 690 billion on "defense" at the same time. But of course "defense" is the most important expenditure of all. We simply must stop those dastardly Iraqis from flying over here and dropping their bombs on us. Thank God Bush prevented that. But still it is always a possibility and we must be "prepared".
It may help some with their BK filing fees.
Is it too late to make predictions for 2008?
Anyway, here it is: I predict that this is the year that the US discovers that reserves (for people and governments and insurance companies and banks and, yes, even manufacturing companies) are okay. Nay, they are better than okay they are good.
I think the $1,600 per family is a wonderful idea.
Now both my wife and I can reload our shorts.
Bushie - you're doin a hellofajob.
"At the center of these concerns is a vast, barely regulated market in which banks, hedge funds and others trade insurance against debt defaults. This isn't like life insurance or homeowners' insurance, which states regulate closely. It consists of financial contracts called credit-default swaps, in which one party, for a price, assumes the risk that a bond or loan will go bad. This market is vast: about $45 trillion, a number comparable to all of the deposits in banks around the world.
Not everyone who buys one of these contracts has bonds to insure; because the value of an insurance contract rises or falls with perceptions of risk, some players buy them just to speculate. In much the way gamblers make side bets on football games, a financial institution, hedge fund or other player can make unlimited bets on whether corporate loans or mortgage-backed securities will either strengthen or go sour."
For those that don't have access to the article.
Two things SK...
1. I didn't quite get it until now. I admit that.
2. But if my insurance company came to me after a fire at my house and said "we're sorry we didn't think this actually could happen so we didn't put enough into reserves to pay for it in case it did; so we can't pay for it", I would be phenomenally amazed (and pissed!). That is their business, they should have prepared for it.
Yes I figured the puts were a great bet a year ago, but I got from this article that this was the first company admitting that they might not be able to pay. That I would guess will cause a real effect on the price of the puts tomorrow (now later today).
But alas the homebuilders EFT keeps going up despite all the bad news we talk about here...
Keith,
On the homebuilders it is probably just short covering. Most of the futures being up this morning is also short covering. The chimp used todays natural rise to make his plan seem better than it is.
Also hell lets squeeze the shorts yet again.
We are truly all subprime now.
Bye bye LBOs
Please take a look at the January 10 article in the FT by Saskia Scholtes and Gillian Tett on Gross's numbers. With their typical (and atypical to most of the financial press who love all this Cassandra stuff) sangfroid they actually examine this area of the credit markets.
Here is the money quote:
"It could also be that $45,000bn overstates the real credit risk. Banks and other investors typically conduct offsetting trades in the CDS market, which tend to get counted twice. When the figures are netted, real gross credit exposure often falls by about 80 percent or more, according to the Bank of International Settlements.
"Indeed, a 2007 ISDA survey of cret risk found the 'real' credit exposure of the largest derivatives dealers to their bigges counterparties averaged just 6 percent of notional expousres after accounting for netting and other factors. If Gross's default assumptions are applied to the ISDA figure, impending CDS losses for pretection sellers are neare to $17bn -- not $250bn."
This does not look like a garden-variety economic downturn. This looks like a "thousand year flood".
Unfortunatly, in this case, it looks like FEMA outsourced the plotting of the flood maps to the NAR.
CR, Tanta, and you Fancy Fellers:
Thanks for the warning to get my chips off the table. You saved me and my sister a bunch.
God Bless
A little too late?
"On Friday, analysts at Citi and Bank of America downgraded MBIA and Ambac shares - to hold from buy. Skeptics might note that the move comes with Ambac stock down 94 percent over the past year and MBIA down 88 percent, suggesting that the previous buy call wasnt totally spot on."
CNNMoney.com: 404 Page Not Found
Zigurrat: "In theory your risk management should have everything under control....list of acceptable counterparties, total exposure, collateral when necessary, etc."
OK, so who are the counterparties for Fannie Mae's $740-odd billion of QSPE "sales," and what are the chances that OFHEO used the wrong multiplier to calculate the required capital to offset the risk for the big GSE's nearly three-quarters of a trillion dollars of retained portfolio?
"in theory...." was of course sarcasm.
Anyone sure of the accounting treatment for bonds one has insured with a swap? If you bought a swap then booked the profit on the bond right away, but then the insurer goes splat, what happens to your own book? Or Goldmans? Anyone...anyone?
I heard that the $800/$1600 rebate will limited to lo/mid income households. $80k/$110y per year to get the max. Most people here wont see the full amount if they see anything at all.
Andrew
Don't worry,be Happy! Not only does GW have an MBA from Harvard,A prominent Holy Man has assured us that he was appointed President by GOD! Everything is Wonderful!! Buy,Buy,Buy
hmmm if a stock has lost 94% of its value,why not hold it? cheaper than TP at costco.
theories are like a-holes. everyone seems to have someone. Bond insurers need to model out 5x average default ratios and have the capital to pay all claims. Then they need to be short all the bonds they are insuring just to be safe.
Pureguess- The key words in your statement are "offsetting trades." Party A is hedged with Party B, who is hedged with Party C, who is hedged with Party A. Do you see the problem here? If only one of the parties defaults, the entire chain collapses.
AZ-Cowboy,
The point of the article was not that the positions were not at risk, it was that single positions were counted multiple times. While, the attempt to hedge with an offsetting position might fail, it would not create a double or triple loss. The problem would be that the hedge would not pay out to cover losses on the original position. But since, on a bank's books, the offsetting positions are not matched up with an underlying position, it might appear that a double loss would be possible. So that a 10 million position with a 10 million hedge would show up as a 20 million exposure.
Keith, you should ignore anyone who uses the term "snarky".
SK admits to not being on top of what's going on in the market, proceeds to throw around some monoline insurer acronyms, and then proves he does not even grasp that the story is about counterparties and only uses a monoline as an example, ending it all with the notion that everyone in the country now understands CDS (except Keith, right?), structured products, and everything else that the journalists attempt to describe now that subprime is a household word.
This may be a stupid question but do the problems at ACA Financial Guaranty Corp intersect with sham reinsurance used to inflate profits?
Has anyone started to game this whole thing out long-term?
Let's assume that the Gubmint determines that these monolines can't fail, and that the investment banks need rescuing, and the banks need rescuing from the mortgage failures. I mean, can we really raise enough money from China/Japan/etc to pay for all this stuff?
I mean, let's assume worst case scenario, and we need like $1-2T to keep the whole ball of string together (even though pieces are obviously going to be lost - we can't save everyone). Could we even borrow that much? What happens to other economies when we're tanking? Would they have money to lend? Would they even lend money? What would we have to pay to get that money? What does the US economy look like at super-usurious rates?
At what point do we need to start worrying about a cataclysmic problem here? Because as I watch the dominos fall, I can see how we could potentially (how ever remote) get to that point, and I think a lot of other people can see the potential as well.
These folks bought insurance against blame, not insurance against loss.
And it ain't "counterparty risk".
It's "counterparty certainty", as in
I'm certain I won't be blamed, and
I'm also certain the counterparty
cannot cover what they supposedly
insure.
TPB had it right: Inconceivable!