House Price Crash forum > Ambac, Mbia Default Swaps Trading As Deep Junk

up2nogood

Nov 3 2007, 11:48 PM

QUOTE

NEW YORK, Nov 2 (Reuters) - Credit derivative traders are valuing bond insurers Ambac Financial Group (ABK.N: Quote, Profile , Research) and MBIA Inc (MBI.N: Quote, Profile , Research) as deep junk credits, while their stock prices have also plunged on concerns the companies may need more capital to shore up their high ratings.

Credit default swaps on Ambac have surged to around 620 basis points, or $620,000 per year for five years to insure $10 million in debt, from 185 basis points a month ago, according to data provided by CMA DataVision.

Its shares have tumbled nearly 60 percent since the beginning of October, 41 percent this week alone.

Default Swaps

The mainstream press have not caught onto the significance of this situation yet as they are too busy fretting about the write downs at Merrill and Citigroup but Elaine Meinel Supkis described it as follows on her blog

QUOTE

This is a major failure. This is deep beneath the surface of the waters, like the Titanic ripping its hull underwater, these organizations we will visit tonight are similar: they are the hull of the banking system. They are the ones who are supposed to protect the banking system from failure and they are now failing, themselves. This is serious.

Money Matters

This is not getting any better

REP013

Nov 15 2007, 06:09 PM

There is part 2 now on Bloomberg

MBIA, Ambac Downgrades May Cost Market $200 Billion (Update2)

Too big to post ...

QUOTE

Nov. 15 (Bloomberg) -- The crisis of confidence in bond insurers that bestow top credit ratings on debt sold by borrowers from the New York Yankees to Citigroup Inc. may cost investors as much as $200 billion.

The AAA ratings of MBIA Inc., Ambac Financial Group Inc. and their five smaller competitors are being reviewed by Moody's Investors Service and Fitch Ratings. Without guarantees, $2.4 trillion of bonds may fall in value and some issuers would get shut out of the capital markets.

``We shudder to think of the ramifications,'' said Greg Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest U.S. securities firm by market value. ``You have politicians, taxpayers, municipalities, states. It just opens up a Pandora's box. That is a huge destabilizing force.''

newbie

Nov 15 2007, 07:57 PM

QUOTE (REP013 @ Nov 15 2007, 07:09 PM)

There is part 2 now on Bloomberg

MBIA, Ambac Downgrades May Cost Market $200 Billion (Update2)

Too big to post ...

Thanks for this. One to watch.

I must add that it is most kind of the taxpayer* to rescue the rich and powerful when their speculative plays go wrong to the tune of $200 Billion:

QUOTE

Losses may be so big that governments would step in to prevent losses from hurting municipal bondholders, many of them retirees, and states and municipalities, which may be prevented from selling debt, he said.

``A form of bailout would probably be worked out,'' Charpin said in a Nov. 6 note to investors. ``A politically engineered solution will insure an acceptable way out where the innocent pensioner does not lose out and states are able to continue funding themselves and build more roads and schools.''

* Note that one of the big enterprises that is in danger of failing is actually not even registered in the US but in Bermuda, obviously to minimise tax. Oh the irony!

Yoss

Nov 15 2007, 08:15 PM

I like the bloomberg coverage. The banks won't let them fail, they can't afford to....

Better to take the 5 Bill hit on propping them up than have a nasty very big tranche of AAA rated paper being re-rated into uninsured junk.

Scary stuff! If I was dozey enough to take a pension I would be on the emailling the trustees right now with this link.

FreeTrader

Nov 15 2007, 08:36 PM

I don't think it's entirely true to say the mainstream press haven't caught on to the significance of this yet - if we're talking the Daily Mail, then yes, but the WSJ, FT, Business Week etc have had plenty of coverage. Companies such as MBIA have bounced off their lows (I left a comment here when it was tanking). It's around $37.50 today, but was below $30 just a few days ago.

The one to watch at present is ACA Capital, which has continued to plunge even while the others have been recovering. ACA is insuring $16 billion of CDOs with something like $325 million capital. Want to see a scary chart?

ACA Capital 1-year

Optobear

Nov 20 2007, 11:20 PM

QUOTE (FreeTrader @ Nov 15 2007, 08:36 PM)

I don't think it's entirely true to say the mainstream press haven't caught on to the significance of this yet - if we're talking the Daily Mail, then yes, but the WSJ, FT, Business Week etc have had plenty of coverage. Companies such as MBIA have bounced off their lows (I left a comment here when it was tanking). It's around $37.50 today, but was below $30 just a few days ago.

The one to watch at present is ACA Capital, which has continued to plunge even while the others have been recovering. ACA is insuring $16 billion of CDOs with something like $325 million capital. Want to see a scary chart?

ACA Capital 1-year

Looks like the watching time is over...

http://www.streetinsider.com/Rumors/ACA+Ca...nt/3142622.html

Also AMBAC and others taking the plunge...

http://www.forbes.com/markets/economy/2007...6markets49.html

the bad news keeps on getting better

FreeTrader

Nov 20 2007, 11:49 PM

QUOTE (Optobear @ Nov 20 2007, 11:20 PM)

Looks like the watching time is over...

<a href="http://www.streetinsider.com/Rumors/ACA+Ca...nt/3142622.html" target="_blank">http://www.streetinsider.com/Rumors/ACA+Ca...nt/3142622.html</a>

Also AMBAC and others taking the plunge...

<a href="http://www.forbes.com/markets/economy/2007...6markets49.html" target="_blank">http://www.forbes.com/markets/economy/2007...6markets49.html</a>

the bad news keeps on getting better

It seems it's even worse than I indicated earlier. ACA Capital's subsidiary ACA Financial Guaranty is apparently insuring $69 billion of asset backed/corporate bonds, and if the company loses it's credit rating then these will have to be revalued by the 31 exposed counterparties.

The truth behind all this is now emerging, and it's not pretty. It's becoming clear that holders of underwater bonds have been able to disguise their losses by taking out low-cost CDS insurance with ACA due to its credit rating. This has enabled these counterparties to argue that they are not exposed to losses on the bonds because they are insured, even though ACA has barely a bean to actually cover any claim.

In an earlier thread today when Goldman Sachs' apparent skill in avoiding losses (due to taking out insurance) was being discussed, I pointed out that we can't be sure that their risk is fully offset because we don't know who the counterparty insurer is. This is exactly the scenario I was alluding to. If ACA goes down then someone, somewhere, is going to have a sh!tload of problems coming their way, and this is just going to create more uncertainty and fear in the markets.

I said in another post last week that ACA could be the canary in the coalmine, and that's now looking even more likely.

I know this story seems somewhat arcane and irrelevant everyone, but it's now looking really serious.

Here's the CNBC piece where they announced the trading halt:

Credit Rating Concerns

[Edited for typo]

Goldfinger

Nov 21 2007, 12:14 AM

Good stuff.

crash2006

Nov 21 2007, 12:51 AM

i posted something like that few weeks ago, once the insurance can't cover the losses then its time to rethink everything as the crap hits the fan, when they say it isnt widespread it isnt true. think itstime to bet against insurance companys in the money markets, could see a profit in than.

Goldfinger

Nov 21 2007, 03:15 PM

Meltdown in process.

http://www.bloomberg.com/apps/news?pid=206...&refer=home

QUOTE

ACA Capital May Get `Thrown to Wolves' By S&P, JPMorgan Says
...
Nov. 21 (Bloomberg) -- ACA Capital Holdings Inc. will likely be the first bond insurer to have its credit rating cut, forcing banks to take on as much as $60 billion of collateralized debt obligations, JPMorgan Chase & Co. analyst Andrew Wessel said.

FreeTrader

Nov 21 2007, 03:29 PM

QUOTE (Goldfinger @ Nov 21 2007, 03:15 PM)

Meltdown in process.

Share price is currently down 20% - now a penny stock at 88c.

Almost comical really - a company with a market cap of $31 million insuring over $60 billion of CDOs.

Goldfinger

Nov 21 2007, 03:36 PM

QUOTE (FreeTrader @ Nov 21 2007, 03:29 PM)

Share price is currently down 20% - now a penny stock at 88c.

Almost comical really - a company with a market cap of $31 million insuring over $60 billion of CDOs.

Yes. It's a a little like the market cap to nominal options ratio of the leading US investment banks.

bleakhouse

Nov 21 2007, 07:19 PM

ACA
http://secfilings.nyse.com/filing.php?doc=...5&repo=tenk

QUOTE

As discussed in Note 5 to the condensed consolidated interim financial statements, the financial statements include derivative assets and derivative liabilities valued at $152.4 million (3% of net assets) and $1,897.2 million (33% of net liabilities), respectively, as of September 30, 2007, whose fair values have been estimated by management in the absence of readily determinable fair values. Management’s estimates are based on market quotes from dealers or internal models, which utilize current market information. Additionally, as discussed in Note 10, the financial statements include investments valued at $2,772.6 million (56% of net assets) as of September 30, 2007, whose fair values have been estimated by management in the absence of readily determinable fair values. Management’s estimates are based on market quotes from dealers or internal models, which utilize current market information.

Market quotes or internal models at 30th September. Well, well, well. What would happen if they used the ABX CMBX markets as their 'model'.

tbatst2000

Nov 21 2007, 07:30 PM

QUOTE (bleakhouse @ Nov 21 2007, 07:19 PM)

Market quotes or internal models at 30th September. Well, well, well. What would happen if they used the ABX CMBX markets as their 'model'.

Something akin to the effect of a road roller on a mosquito I think.

bleakhouse

Nov 21 2007, 07:53 PM

QUOTE (tbatst2000 @ Nov 21 2007, 07:30 PM)

Something akin to the effect of a road roller on a mosquito I think.

2d image.

Optobear

Nov 22 2007, 10:10 PM

QUOTE (bleakhouse @ Nov 21 2007, 07:19 PM)

ACA
http://secfilings.nyse.com/filing.php?doc=...5&repo=tenk

Market quotes or internal models at 30th September. Well, well, well. What would happen if they used the ABX CMBX markets as their 'model'.

ACA Capital do seem to be having one of those weeks

http://money.cnn.com/news/newsfeeds/articl...wire/131945.htm

http://www.guardian.co.uk/feedarticle?id=7095238

Optobear

Nov 22 2007, 10:14 PM

Not just insurers, funny how it seems to be rolling back onto banks.

Have they all had their snouts in the same troughs?

http://investing.reuters.co.uk/news/articl...85353-OISBN.XML

In case link doesn't work - search CIFG and NATIXIS in google news.

FreeTrader

Nov 29 2007, 12:04 AM

On a day when the DJIA rose 331 points, ACA Capital fell 9c to 71c, a new low. The company now has a market cap of less than $25m, even though it's insuring over $60 billion of ABS derivatives.

According to an article in Fortune magazine today, Barclays is on the hook in the insurance game, acting as a sort of guarantor. I wonder how many BARC investors are even aware of this?

QUOTE

Enter CIBC and Barclay's, relative newcomers to the bond insurance business. With sound balance sheets and lots of cash, they were eager to help guarantee these insurance contracts for a fee. Bond insurers even packaged and sold their own debt in the form of credit derivatives -- risks that CIBC and Barclay's took on as well.

As one person close to the situation explained, it's like when someone with little savings wants to buy a house. The banks want their parents to co-sign the documents. CIBC and Barclays effectively co-signed for the bond insurers.

It seemed like a good idea when financial exotica looked like easy money. Now, with mortgages in an asset-backed securities defaulting and ratings downgrades galore, those banks may pay dearly for these deals. That's because, if the insurers are downgraded, their cost of doing business will become a lot more expensive, which means they'll have less money to meet their guarantees on troubled bonds. The responsibility for these guarantees will fall to the likes of CIBC and Barclay's.

Goldfinger

Nov 29 2007, 12:06 AM

QUOTE (FreeTrader @ Nov 29 2007, 12:04 AM)

..Barclays is on the hook in the insurance game, acting as a sort of guarantor. I wonder how many BARC investors are even aware of this?

Man, this is toxic.

NoIdea

Nov 29 2007, 12:40 AM

QUOTE (FreeTrader @ Nov 21 2007, 07:49 AM)

It seems it's even worse than I indicated earlier. ACA Capital's subsidiary ACA Financial Guaranty is apparently insuring $69 billion of asset backed/corporate bonds, and if the company loses it's credit rating then these will have to be revalued by the 31 exposed counterparties.

The truth behind all this is now emerging, and it's not pretty. It's becoming clear that holders of underwater bonds have been able to disguise their losses by taking out low-cost CDS insurance with ACA due to its credit rating. This has enabled these counterparties to argue that they are not exposed to losses on the bonds because they are insured, even though ACA has barely a bean to actually cover any claim.

In an earlier thread today when Goldman Sachs' apparent skill in avoiding losses (due to taking out insurance) was being discussed, I pointed out that we can't be sure that their risk is fully offset because we don't know who the counterparty insurer is. This is exactly the scenario I was alluding to. If ACA goes down then someone, somewhere, is going to have a sh!tload of problems coming their way, and this is just going to create more uncertainty and fear in the markets.

I said in another post last week that ACA could be the canary in the coalmine, and that's now looking even more likely.

I know this story seems somewhat arcane and irrelevant everyone, but it's now looking really serious.

Here's the CNBC piece where they announced the trading halt:

Credit Rating Concerns

[Edited for typo]

QUOTE

CNBC's discussion of ACA Capital's CDO exposures was factually incorrect in several important respects. ACA Capital's $25 billion of exposure to CDOs referenced by CNBC were all underwritten by the Company with significant cushions above the initial "AAA" rating rather than "A" as reported by CNBC. Further, it is not correct that many of these insured risks are now lower in credit quality than "A" as reported. Rather, they remain overwhelmingly at the "AAA" level and the Company continues to view the likelihood of loss payments in the near term as highly remote.

http://phx.corporate-ir.net/phoenix.zhtml?...&highlight=

Not sure if its any significance.

Mr Parry

Nov 29 2007, 02:01 AM

Okay, here we go again,

WHAT DOES ANY OF THIS MEAN?

Cue Mr. Goldfinger . . . in that Economics Made Simple language a total idiot like me can understand.

Thank you

Optobear

Dec 3 2007, 06:26 PM

QUOTE (FreeTrader @ Nov 29 2007, 12:04 AM)

On a day when the DJIA rose 331 points, ACA Capital fell 9c to 71c, a new low. The company now has a market cap of less than $25m, even though it's insuring over $60 billion of ABS derivatives.

According to an article in Fortune magazine today, Barclays is on the hook in the insurance game, acting as a sort of guarantor. I wonder how many BARC investors are even aware of this?

ACA Capital looks to be getting even dodgier

http://today.reuters.com/news/articleinves...KMAN-URGENT.XML

I note that they have dropped to 4.2% of their highest share price over the last twelve months - that is even worse than Northern Crock.

If Northern Rock go bust, the treasury will have to hold the mortgages, but at least someone will want to pick up the cash flow of the interest payments.

If ACA Capital goes bust, then that leaves lots of banks and funds deep in the mire... so I would guess that ACA Capital is a much more serious problem the Northern Crock, but one that most people (probably myself included) don't really understand the seriousness of.

Methinkshe

Dec 3 2007, 06:36 PM

Anyone who is wiser please correct me, but it seems to me that we are beginning to see the domino effect in action....first the weak banks, then the middling, and finally even the best banks will fail due to the devalueng of assets brought about by necessitated fire sales from the weak banks. Or is this too simplistic a view....

Goodness, we live in confusing times.........! The only way I can visulaise the current situation is in terms of trapeze artists (interbank lending) which so long as all the trapeze artists' flights end up in a safe landing, the momentum continues, but once a single trapeze artist falls, the whole act disintegrates. The interdependency is truly frighhtening....

Optobear

Dec 3 2007, 11:21 PM

QUOTE (Methinkshe @ Dec 3 2007, 06:36 PM)

Anyone who is wiser please correct me, but it seems to me that we are beginning to see the domino effect in action....first the weak banks, then the middling, and finally even the best banks will fail due to the devalueng of assets brought about by necessitated fire sales from the weak banks. Or is this too simplistic a view....

Goodness, we live in confusing times.........! The only way I can visulaise the current situation is in terms of trapeze artists (interbank lending) which so long as all the trapeze artists' flights end up in a safe landing, the momentum continues, but once a single trapeze artist falls, the whole act disintegrates. The interdependency is truly frighhtening....

FASB 157 means mark to market. If many banks have year end at end of Dec, then maybe that is when it will all hit the fan. With insurers of this toxic debt already out of the picture, it falls the banks' balance sheets to survive the fallout.

FreeTrader

Dec 4 2007, 07:59 PM

ACA Capital is currently trading at just 53c, down 25% on the day.

I'm still wondering whether a 'white knight' will come along and inject some equity into this train wreck, or at least make a loan. Maybe it's gone beyond that now.

newbie

Dec 4 2007, 11:32 PM

QUOTE (FreeTrader @ Dec 4 2007, 08:59 PM)

ACA Capital is currently trading at just 53c, down 25% on the day.

I'm still wondering whether a 'white knight' will come along and inject some equity into this train wreck, or at least make a loan. Maybe it's gone beyond that now.

Why would you invest in a pot of bad bets that someone else made?

BREAKING NEWS: There's been a media blackout - Media Coverage If you have nothing good to say, say nothing at all...

newbie

Dec 4 2007, 11:58 PM

duplicate

newbie

Dec 4 2007, 11:59 PM

QUOTE (FreeTrader @ Dec 4 2007, 08:59 PM)

ACA Capital is currently trading at just 53c, down 25% on the day.

I'm still wondering whether a 'white knight' will come along and inject some equity into this train wreck, or at least make a loan. Maybe it's gone beyond that now.

Is it still rated investment grade?

Optobear

Dec 5 2007, 02:39 PM

QUOTE (newbie @ Dec 4 2007, 11:59 PM)

Is it still rated investment grade?

Nice article about all this mess

http://money.cnn.com/news/newsfeeds/articl...NLINE000640.htm

Looks as though many were relying on these insurers to shore up the ratings, and actually the insurers had nothing like enough capital to guarantee against the defaults.

Do people know if the buck stops with these specialist bond insurers? Or does it spill out into the wider insurance market?

FreeTrader

Dec 5 2007, 06:48 PM

QUOTE

NEW YORK, Dec 5 (Reuters) - Bond insurer MBIA Inc. (MBI.N: Quote, Profile, Research) is at greater risk of a capital shortfall than previously communicated, and a shortfall is now considered somewhat likely, Moody's Investors Service said on Wednesday.

The conclusion was based on an analysis of MBIA's residential mortgage-backed portfolio, Moody's said in a statement.

Of five large bond insurers being reviewed by Moody's, CIFG, owned by French bank Natixis (CNAT.PA: Quote, Profile, Research), is most likely to fall below the capital benchmarks for a "triple-A" rating, Moody's said.

Reuters

Stock immediately dropped 12%.

-----------------
Newbie: ACA still has its 'A' rating, but if that goes then it's basically goodnight.

Optobear: Some monoline bond insurers have been trying to reinsure recently, but I don't really see why anyone would want to bother. Also, the Fortune article I linked to earlier implies that Barclays may be liable (and for how much we don't know) due to its acting as a guarantor.

newbie

Dec 5 2007, 07:02 PM

I'm not sure it would be prudent to pay for insurance with a counterparty whose chart looks like this Chart Unless someone pumps some money in, they're toast. Their 115 employees mustn't be underwriting too much new business.

FreeTrader

Dec 5 2007, 07:10 PM

QUOTE (newbie @ Dec 5 2007, 07:02 PM)

I'm not sure it would be prudent to pay for insurance with a counterparty whose chart looks like this Chart

AKA 'Shorters' Porn'

bleakhouse

Dec 5 2007, 07:34 PM

http://www.washingtonpost.com/wp-dyn/conte...7120402186.html

QUOTE

It's Not 1929, but It's the Biggest Mess Since

By Steven Pearlstein
Wednesday, December 5, 2007; Page D01

QUOTE

If all this sounds like a financial house of cards, that's because it is. And it is about to come crashing down, with serious consequences not only for banks and investors but for the economy as a whole.

That's not just my opinion. It's why banks are husbanding their cash and why the outstanding stock of bank loans and commercial paper is shrinking dramatically.

It is why Treasury officials are working overtime on schemes to stem the tide of mortgage foreclosures and provide a new vehicle to buy up CDO assets.

It's why state and federal budget officials are anticipating sharp decreases in tax revenue next year.

And it is why the Federal Reserve is now willing to toss aside concerns about inflation, the dollar and bailing out Wall Street, and move aggressively to cut interest rates and pump additional funds directly into the banking system.

This may not be 1929. But it's a good bet that it's way more serious than the junk bond crisis of 1987, the S&L crisis of 1990 or the bursting of the tech bubble in 2001.

As the guy says earlier in the article you ain't seen nothing yet.

bleakhouse

Dec 5 2007, 07:47 PM

Just notice ACA trading at 35cents today against year high of usd16.55.

FreeTrader

Dec 5 2007, 08:07 PM

QUOTE (bleakhouse @ Dec 5 2007, 07:47 PM)

Just notice ACA trading at 35cents today against year high of usd16.55.

I don't know what suddenly caused it to tank. It was trading around 52c even after the MBI news came out. Then it dropped about 30% in just a few minutes.

newbie

Dec 5 2007, 08:22 PM

QUOTE (FreeTrader @ Dec 5 2007, 09:07 PM)

I don't know what suddenly caused it to tank. It was trading around 52c even after the MBI news came out. Then it dropped about 30% in just a few minutes.

Dear me. It dropped to 22c at one point. Now it's back to 38c. At that price its market cap is now $13M. The end must be near. I feel a bit sorry for the staff.

Optobear

Dec 5 2007, 08:50 PM

QUOTE (FreeTrader @ Dec 5 2007, 06:48 PM)

Reuters

Stock immediately dropped 12%.

-----------------
Newbie: ACA still has its 'A' rating, but if that goes then it's basically goodnight.

Optobear: Some monoline bond insurers have been trying to reinsure recently, but I don't really see why anyone would want to bother. Also, the Fortune article I linked to earlier implies that Barclays may be liable (and for how much we don't know) due to its acting as a guarantor.

This seems to be the latest

http://money.cnn.com/news/newsfeeds/articl...NLINE000899.htm

Free trader:
Why are they known as monoline insurers? I've done as search and see what they do, but can't see why they are called monoline (unless it is just because they don't do anything else?)

DrBob

Dec 5 2007, 09:13 PM

MBIA Shares Drop After Moody's Says Capital in Doubt
http://bloomberg.com/apps/news?pid=2060108...id=aV9H1COF7V8g
Dec. 5 (Bloomberg)

MBIA Inc. fell the most in more than 20 years in New York trading after Moody's Investors Service said the biggest bond insurer is ``somewhat likely'' to face a shortage of capital that threatens its AAA credit rating. A review of MBIA and six other AAA rated guarantors will be completed within two weeks, Moody's said in a statement today...

``The guarantor is at greater risk of exhibiting a capital shortfall than previously communicated,'' New York-based Moody's said. ``We now consider this somewhat likely.''

The loss of MBIA's top ranking would cast doubt over the ratings of $652 billion of state, municipal and structured finance bonds that the company guarantees. MBIA is among at least eight bond insurers seeking to ward off potential credit-rating downgrades by Moody's, Fitch Ratings and Standard & Poor's. The insurers guarantee $2.4 trillion of debt and downgrades could cause losses of $200 billion, according to Bloomberg data...

Ambac Financial Group Inc., the second-largest bond insurer, Financial Guaranty Insurance Co., the fourth-largest, and Security Capital Assurance Ltd. are also ``somewhat likely'' to have a capital shortfall, Moody's said today...

``If any major monoline were to have a rating change it would have a real impact on all of the business of the monolines,'' MBIA Chief Financial Officer Chuck Chaplin told a Bank of America conference in New York on Nov. 27...

``It's Moody's firing a warning shot saying `you have two weeks, so do something,''' said Paul Berliner, a trader at Schottenfeld Group, which manages $100 million in New York. ``The drama behind MBIA and Ambac should be the most important focus for the entire financial sector right now. Everyone should be on the edge of their seats wondering how this plays out.''

Bondholders may lose about $9 billion on municipal bonds if the insurers falter, according to data compiled by Bloomberg and Lehman Brothers Holdings Inc. indexes. More than $30 billion would disappear from the value of collateralized debt obligations held by banks, based on the values that Citigroup Inc. and Merrill Lynch & Co. assigned to their holdings in the past month. Another $150 billion may evaporate from bonds backed by home- equity lines of credit and other mortgages and loans, according to investors and traders.

Goldfinger

Dec 5 2007, 09:23 PM

QUOTE (newbie @ Dec 5 2007, 07:02 PM)

I'm not sure it would be prudent to pay for insurance with a counterparty whose chart looks like this Chart Unless someone pumps some money in, they're toast. Their 115 employees mustn't be underwriting too much new business.

The people who trade the stock seem not to be the typical amateurs. It dropped quite a bit before the first wave of the beginning of this depression (i.e. it dropped BEFORE 09/08/07).

Yoss

Dec 5 2007, 09:55 PM

Can they not just sell on all those default contracts to some charity based fund in Jersey? Problem solved.

newbie

Dec 5 2007, 10:33 PM

QUOTE (Yoss @ Dec 5 2007, 10:55 PM)

Can they not just sell on all those default contracts to some charity based fund in Jersey? Problem solved.

I've got a better idea. Darling and the Treasury can take them over. They can diversify their NR business. In for a penny, in for a pound. If it prevents the US sneezing, it precents the UK from catching a cold.

FreeTrader

Dec 6 2007, 12:48 AM

QUOTE (Optobear @ Dec 5 2007, 08:50 PM)

Why are they known as monoline insurers? I've done as search and see what they do, but can't see why they are called monoline (unless it is just because they don't do anything else?)

They simply specialise in insuring ABS and muni bonds. They're members of the Association of Financial Guaranty Insurers (ACA's main insurance liability lies with its subsidiary ACA Financial Guaranty Corp). The AFGI sound soothingly reassuring:

A bond or other security insured by an AFGI member has the unconditional and irrevocable guarantee that interest and principal will be paid on time and in full in the event of a default.

And on this page it gets even better:

By providing credit enhancement to capital markets transactions, monoline insurers provide investors and issuers with financial security and liquidity. Core benefits of monoline credit enhancement include:

confidence that an insured security will pay in full, even under worst-case stress scenarios
an expertise in credit analysis allowing for the application of conservative, zero-loss underwriting criteria to insured transactions
monitoring of collateral and servicer performance in order to take any action necessary to avoid deterioration of assets or underlying credit quality
a level of scrutiny and analysis beyond the rating agencies, ensuring that most transactions are believed to be investment-grade before they are wrapped

Well, thank goodness for the AFGI. For a moment there I thought we had a problem.

tbatst2000

Dec 6 2007, 05:35 AM

A quick post on this one, I don't have time for full details but I'm sure others can fill it. MBIA et al are far more important than might first appear. They are at the end of the line when it comes to many synthetic CDOs. If they fail, a whole bunch of banks will have to take the full value of their issued CDOs onto their balance sheet, some, including some large well known ones, will not have the capital to do that. Very scary stuff.

FreeTrader

Dec 7 2007, 01:22 AM

QUOTE

Dec. 6 (Bloomberg) -- Canadian Imperial Bank of Commerce had its biggest decline in more than two years after the bank said it may take additional writedowns on investments tied to the U.S. mortgage market.

Canada's fifth-biggest bank said it expects pretax writedowns of C$225 million ($223 million) for November, bringing total pretax costs to almost C$1 billion. The bank also said it has about $4.3 billion in hedged derivatives contracts tied to subprime mortgages that may face ``significant future losses.''

Bloomberg

What's interesting about this latest admission from CIBC is that the bank is now admitting to potential risks from subprime exposure which is supposedly covered by credit default swaps. The counterparties are almost certainly the monoline insurers we're discussing on this thread.

QUOTE

The bank also said it has about $9.9 billion in U.S. subprime investments through derivative contracts hedged with counterparties. The derivatives contracts have a ``fair value'' of about $4.3 billion, according to Canadian Imperial.

Canadian Imperial has insurance against these investments through credit default swaps, McCaughey said. He said 47 percent of the hedged investments are spread across five AAA-rated guarantors, while 18 percent is with two AA-rated guarantors. The rest, with a face value of $3.47 billion, is with one A- rated guarantor that's under credit watch.

It seems likely that the $3.47 billion mentioned in that last sentence is hedged with ACA Capital, because AFAIK it's the only 'A' rated insurer out there.

Gradually the losses are being revealed. You can either view it as death by a thousand cuts, or alternatively a sensibly managed write-down spread over several quarters that will avoid a panic.

up2nogood

Dec 7 2007, 02:44 AM

It is the credit insurance and Credit Default Swaps where some of the biggest risks of systematic counterparty failure lie.

There have been some interesting posts on the latter subject on the excellent Sudden Debt blog

CDS - The Phantom Menace
Further on CDS
CDS - Equity Valuations
More on CDS and Equity Valuations

Well worth a read.

FreeTrader

Dec 10 2007, 03:24 PM

Trading on MBIA has been halted pending an announcement.

This may be news relating to a capital injection.

Optobear

Dec 10 2007, 03:33 PM

QUOTE (tbatst2000 @ Dec 6 2007, 05:35 AM)

A quick post on this one, I don't have time for full details but I'm sure others can fill it. MBIA et al are far more important than might first appear. They are at the end of the line when it comes to many synthetic CDOs. If they fail, a whole bunch of banks will have to take the full value of their issued CDOs onto their balance sheet, some, including some large well known ones, will not have the capital to do that. Very scary stuff.

Does that mean that the large banks will drip capital into MBIA and others to stave off bankrupty to avoid that scenario? That must be a much cheaper process. I guess that would take a brave investor to try to short against the big banks, and if MBIA and other are intact, then they don't need to admit the defaults.. cunning chaps these bankers...

still it would require the banks to act together, and I can't see too many willing to be first to put the money in...

A job for the plunge protection team I suppose. Still, I can easily see those plongeurs thrusting their hands into a sink of dirty stuff, and coming out catching something very nasty indeed.

Andy Jones

Dec 10 2007, 03:35 PM

$1bn investment in capital from someone sounding like Warburs Pincus but I missheard it.

The Market loves this news.

ANDY

FreeTrader

Dec 10 2007, 04:01 PM

MBIA Increases Capital with $1 Billion Warburg Pincus Commitment

This announcement has put a real squeeze on the monoline shorters.

$1 billion isn't much in the scheme of things, but the cynics are going to say that this is all a sham (Optobear's point above). It may be enough to allow the ratings agencies to maintain MBI's 'AAA' rating and consequently keep the CDO horror show off the banks' balance sheets for at least another quarter.

chris c-t

Dec 10 2007, 05:38 PM

QUOTE (FreeTrader @ Dec 10 2007, 04:01 PM)

MBIA Increases Capital with $1 Billion Warburg Pincus Commitment

This announcement has put a real squeeze on the monoline shorters.

$1 billion isn't much in the scheme of things, but the cynics are going to say that this is all a sham (Optobear's point above). It may be enough to allow the ratings agencies to maintain MBI's 'AAA' rating and consequently keep the CDO horror show off the banks' balance sheets for at least another quarter.

I, for one, really hope it doesn't work. I'd just like to see the effect of this rating bomb go off.