Cramer is a loose cannon, but here he's largely on the mark and says some stuff that's usually considered far too rude (because it's far too true) to discuss.

Does anyone else think we're going to get a "well anchored" distrust of wall street.

Putting aside the early adopters on this and other blogs, I sense mainstreet is getting fed (pun intended) up of being fleeced.

It's kind of interesting that Cramer has no compunction speaking about things he doesn't understand. The AAA rating on most SF bonds is not achieved via wrap but via credit enhancement.

I mean most of the wrapped stuff by monolines is not MTM and is all the way at the top of the capital structure. The idea that what was done at Enron was more honest than what the monolines is insulting and uninformed.

Yeesh.

cramer talks of $32 charge vor ambac, but what about that huge charge over at GM?

"But saying some of the monolines might go away - that their AAA rating is "fiction" is probably true."

Agreed, but it's not particularly interesting or informative, I mean the agencies have been putting these guys on notice for ummm the past 2 months.

As someone who has actually negotiated a half dozen wraps as an issuer I can tell you that the monolines took an exceedingly aggressive stance in preserving their rights with respect to the issues they've wrapped. They also were actually quite good in picking their spots wrt the deals they'd cover.

In addition to the ability to accelerate and liquidate deals, they typically have the right to delay payment of principal on the wrapped piece until at least the stated and in many cases the final maturity of the deal which can be 10-30 years from now. Like all insurance companies they have ways of delaying or not paying claims at all.

I'm not going to be shocked if some ratings get cut, but I don't think that they were fraudulant to begin with. Reasonable people are of course free to disagree with this, but where was the level of outrage when the market was good?

crammer rant was planned and set-up, maybe to give the broadcast folks some cover for all the recent and past happy talk. Crammer can take a bow while the financial media in general looks worse and worse. Also a good tip off to what's coming regarding the AAA loss.

I tried to listen to the Cramer clip but his grunts and squeals reminded me of when I used to have to castrate young pigs. Not a pleasant memory.

Wamu should have listened to those stodgy old bankers!

I agree with ya idoc- bought 40 dawas for an average of 52 cents today- they should blow up to about 2.75 tomorrow just to begin to cover the incredible damage the option sellers have had on the put side. They gotta move up to at least 125/6 on the dow to get even.

A news driven bounce could even take it to 12800 on the dow tomorrow before settling in for total damage later in the month.

But first the folks who provide options liquidity have to get back to at least even.

Gonna be sick with the losses for quite a while will any big long hedgies.

1000 points in three weeks of trading.

Gulp.

Someday this war's gonna end...

What does monoline mean?

And why are people buying into the middle of the yield curve when they could get higher interest at 30yr?

ac,

What does the chart in Leverage-O-Meter portend? Are we heading for a crash?

maybe evercore has a point... but it shows you how far down we've gone

Dirk van Dijk,

I'll take a shot. The U-shaped curve implies to me that the market is predicting that the next 3 years are going to be extremely interesting (read: rough). Credit will be tight in the near term before the before the buy short/lend long bank credit game works again. In my opinion therefore, the market is pricing in a 3-year slowdown...

Just an informed guess

"Do we want the communists or the terrorists to own the banks?"

Highlarious!!!

Stocks do funny things all the time. Again I think a lot of the drop has to do with the spectre of a ratings cut, which effectively shutters their business or forces them to retool dramatically.

I have a hard time believe that a short term efficient market exists for a company with a decent portion of revenues tied to insuring bonds that no one claims they can understand or properly value. May just be me though.

SivaramVelauthapillai,

My condolence for your loss. Glad that you're moving on. That's the spirit!

Not that I spit in the face of anyone donating their own scratch, but this news came out after MBIA had traded off. Additionally it's his personal share, not his funds share. Admirable all the same but it's not as though he hasn't had an agenda for nearly 6 years.

If you think he didn't do shady shit at Gotham, that's your business. Shareholders in FUREE and Hallwood would beg to differ.

Ok i just did a search for Hallwood and Gotham. I concede - you are right that this he is fishy. Up until today I was only aware of the demise of the hedge fund, which if I recall correctly involved an illiquid golf course investment and a parking lot operation...anyway...

complained about their plans to raise costly equity capital

Maybe this has already been posted; if not here it is. Better Ambac throw in the towel than try to save itself. Know when to commit suicide, as it were.

"And those that paid 3X will get murdered, because their bonds are crap without insurance and refunding. At the same time that insurance goes away, the bond refunding market is drying up. There will be another round of writedowns in the billions on 3X bonds. Some muni bond dealers may have to write down big inventories."

I'm curious who you think is going to get hurt by this. I don't think the bond dealers will be surprised. 60% of munis are held by individuals and the rest by insurance companies and banks. They don't need to be marked to market if they are intended to be held to maturity, as far as I can see.

The default rate on them has been low and mbi has/had reasonably strict underwriting policy regarding munis.

When mbi's monoline subs lose their AAA as long as they remain investment grade, so will the bonds.

One of Ackman's arguments is that you don't "need" insurance if you have a diversified portfolio. The economic justification for bond insurance is that it is cheaper then the frictional costs of active management of a portfolio.

As far as new bonds are concerned, if it is needed, Buffett will insure it for an appropriate price (from his perspective).

I am just wondering if I am missing something, since to me, the issues are in structured finance and I don't see it having a big impact on munis.

In addition, to the extent that interest rates fall, and people anticipate higher tax rates post election, the value of munis, excluding credit risk will increase.

Suggested thread song:

"Knock-Knock-Knockin'...."

GUNS N ROSES - KNOCKING ON HEAVEN'S DOOR Lyrics
.

ZIGGURAT: "The default rate on them has been low and mbi has/had reasonably strict underwriting policy regarding munis...When mbi's monoline subs lose their AAA as long as they remain investment grade, so will the bonds. "

Yes, you are right. The way I see it, the only ones impacted by the municipal bond downgrades would be banks that have to mark-to-market, and mutual/hedge funds whose rules call for them to only hold AAA-rated bonds. Since almost any insured bond likely had a sub-AAA rating originally (otherwise what's the point of insurance or credit enhancement), many bonds will likely fall back to their underlying rating (likely AA or A).

So most of this only impacts people who can't hold AA and hence will be forced to sell the AAA-insured bond which drops to AA. This will still cause a mass sell-off in the bonds that were downgraded to their underlying rating.

SV, "all it meant was that the pricing by some of these companies was incorrect"

That may be true. But that's what made the model work, the pricing. If the insurance pricing reflects actual risk then any company with assets will get priced out by those without assets since they can sell the AAA rating cheap, like ACA, with little consequences, thus forcing every other insurer in a race to the bottom.

I think structured credit is dead for the foreseeable future.

Someone needs to say something about this! http://www.fakepaycheckstubs.com IS THIS LEGAL? No wonder why we have the subprime mess we have when lenders USE FAKE DOCUMENTATION to help PUSH the loan through Quickly SO THAT EVERYONE DOWN THE FOOD CHAIN (from loan processor to the loan officer to the actual lender) can make the commissions they "WERE" making during the booming 90's!!! Now we are BAILING OUT THESE CROOKS....SOUNDS LIKE the good ol' 1980's Savings and Loan BAILOUT DAYS to me! http://www.fakepaycheckstubs.com see it with YOUR OWN EYES!

BARLEY: "If the insurance pricing reflects actual risk then any company with assets will get priced out by those without assets since they can sell the AAA rating cheap, like ACA, with little consequences, thus forcing every other insurer in a race to the bottom. "

I have a somewhat radical view that is different from all of you...

In theory, I would imagine that investors will not invest in a company that takes imprudent risks. In your scenario, who will finance ACA? Such companies will not survive. The reason cmopanies like ACA (or even Ambac and MBIA) exist right now is because no one thought they were taking imprudent risks (we were wrong obviously in hindsight).

Furthermore, if things are really out of whack, then the monolines won't write new business or look elsewhere. Consider catastrophe insurance. There are many cases where insurers simply won't write insurance. In some areas they will never write flood insurance for your home. In other areas, they won't write anything if hte price is too low. I'll admit that this takes discipline and is hard to do but that's why Berkshire Hathaway is the best.

"I think structured credit is dead for the foreseeable future."

It's going to decline but I'm not sure if it will die off. There are other non-mortgage related areas (eg. credit card debt, auto loans, commerical loans, student loans, etc) so it will depend on how those areas shake out.

Although this isn't a fashionable view riht now, but I think it makes sense to package risk and offload onto investors. This is just my guess but watch the US economy not do as poorly because the risk is spread out. If all the risk was held by Americans and American corporations, I think the current housing meltdown will definitely result in a depression. However, that's not the case. Banks in Germany are absorbing some losses; Chinese funds are taking some losses; investors in the Middle East are taking losses (haven't heard of any yet but I'm sure they have som exposure); investors in Canada are taking some losses (me ).

Spreading risk seems to be a good thing and, as a free market guy, I think it is a natural advancement of capital markets. Where I think they went wrong is when it was taken to the nth degree. Things like CDO-squareds are crazy (small movement in price wipes out the whole thing).

I also think that what made the whole thing a disaster is not the structured product itself but the DECLINE IN THE COST OF CAPITAL! Basically there was too much money sloshing around, depressing returns everywhere. Needless to say, investors invested in assets with low yields and high risks. If they had been investing in high yields and high risk, it wouldn't be so bad. The risk premium on all these risky assets was too low. Sadly for me, the monolines wrote insurance without charging enough (as Buffett remarked). This likely happened because the market itself was accepting these assets with a lower yield.

Man did Cramer finally find jesus? I have had zero respect for that guy....but that was classic. It makes you wonder what he has really been thinking all along. I remember a few months ago him calling for the Fed to cut faster because all his poor cronies on Wall Street were going to lose their cushy jobs. But this is something entirely different. It's amost if he said F*** it...I am telling it like it is. It's almost like he is daring them to fire him. Remember...GE pays his salary....

A few weeks back, when Buffet made his announcement that he was getting into the credit insurance business, I posted on PBear that he he just signed the death sentence for the impaired monolines.

Better yet, he could have set in motion cascading failures (countery party risk) in the credit markets that prove his own views about derivative balances being powder kegs waiting to explode. Instruments of mass financial desctruction I think he has called them. We guess what...he himself lit one of the matches.

Things get really interesting when the monolines lose their AAAs. There are only a few choices that I see:

1. Systemic chaos as chartered entities (like pension funds) are forced to sell asset that lose their AAA ratings as a result of a monoline downgrade. There are not enough buyers for those assets, resulting in huge paper losses, etc etc. In other words, Muni bonds start behaving like subprime CDOs simly due to liquidy reasons....not that they are in fact junk.
2. Scramble to change thousands of charters to let pension funds, etc hold lower grade assets. This will have to be done on a case by case basis.
3. Don't downgrade any monolines. See no evil, hear no evil. They will stay AAA in name until they go belly up and shut their doors. When the first one goes down, then their will be complete panic.