Saturday, February 16, 2008

Monolines Death Throes

"Rescue plans are starting to take shape for struggling bond insurers, but they aren't likely to prevent further ratings downgrades for many of the companies. ... A group of banks--betting that the insurers still have some value--are working with the management and investors of New York-based Financial Guaranty Insurance Co. on a potential plan for FGIC. ... The banks, then would share in the proceeds that the bond insurers could make as they collect premiums and wait for their existing portfolio of policies to 'run off.' In this scenario, the most the banks are hoping for is that the bond insurers' credit ratings don't fall below double-A. ... 'It's just an indeterminable amount of losses on these assets and the final number could be far more significant than we had been envisioning,' Thomas Abruzzo, managing director at Fitch says. ... A key hurdle for the banks and the bond insurers is determining how much the banks should get in exchange for tearing up their credit-default swaps, and whether owning stakes in companies that could get further downgraded is fair compensation, says one person familiar with the discussions. Another option being banded about by the analysts and others is to form a new company, funded by the banks, which could take responsibility for meeting the obligations of some of their insurance policies--mainly the credit-default contracts--weighing on the bond insurers", WSJ, 7 February 2008.

"The financial crisis plauging municipal-bond insurers has some people wondering what the world would look like without them. The answer: maybe not as bad as you would think. ... Yesterday, Moody's Investors Service cut its triple-A rating on units of Security Capital Assurance Ltd., saying the bond insurer had been weakened by its exposure to the U.S. residential-mortgage market. ... But some regulators, investors and municipalities are starting to question the value of all that insurance. ... Municipal bonds with a double-B rating from credit-rating services have a cumulative average 10-year default rate of 1.74% since 1970. That is much lower than double-B rated corporate bonds which have a 29.93% 10-year cumulative default rate during the same period. ... Before the bond-insurer crisis, bond investors charged about 30% of the interest-rate savings an issuer would get. In recent months, that has climbed to 80% or 90% as the bond insurers try to extract as much premium as possible. For the issuers, though, that has reduced the value of the coverage. ... The market is also pricing municipal debt as though the insurance didn't exist anyway, says John Mousseau, vice president and portfolio manager at Cumberland Advisors. 'You're seeing insured bonds trading at 5% levels, as if they had no insurance', says Mr. Mousseau. ... Robert Shoback, managing director at Ambac, in U.S. public finance, says municipal-bond insurance 'has been and continues to be cost effective' for many issuers who choose to use the service because it reduces their payments. He also noted that insurance provides individual investors with a sense of security about the bonds they own", my emphasis, Liz Rappaport and Karen Richardson at the WSJ, 8 February 2008.

"What is good for Ambac, the bond insurer, is good for the country. Well, perhaps in the short run if it prevents a run on the shadow banking system. ... But not in the long run. ... The Ambac business model is as faulty now as was chairman Charles Wilson's forecast for General Motors more than half a century ago. ... In combination with overly generous triple-A ratings on not only these assets [subpime mortgages, SIVs and CDOs squared] but the monoline companies themselves, they have fostered a bubble of immeasurable but clearly significant proportions. ... How could Ambac, through the magic of its triple-A rating, with equity capital of less than $5bn (Pound 2.5bn) insure the debt of the state of California, the world's sixth-largest economy? How could an investor in California's municipal bonds be comforted by a company that during a potential liquidity crisis might find the capital markets closed to it, versus the nation's largest state with its obvious ongoing taxing authoroty? Apply the same logic to the gargantuan size of the asset-backed securities market it has insured in recent years--subprimes and CDOs in the trillions of dollars--and you must come to the same logical conclusion--this is absurd. ... As long as the illusion lasted, however, it is clear that monoline insurers fostered an expansion of our modern shadow banking system and therefore an extension of US and even global economic prosperity. ... But like General Motors a half century back, the sense of stability imparted to an oligopolistic industry with visible flaws is not likely to last, nor may the hope for a return to economic growth of recent years", my emphasis, William Gross (WG) at http://www.ft.com/, 8 February 2008.

Now Fitch says there may be "an indeterminable amount of lossses". Who needs these guys? The banks don't know how much to "get in exchange for tearing up their credit-default swaps". Poor babies. How anyone ever thought the monolines could honor their swaps is beyond me.

"The market is also pricing municipal debt as though the insurance didn't exist". It's about time. The insurance never existed. Shoback of Ambac states, "insurance provides individual investors with a sense of security about the bonds they own"; the insurance is and always was, a public relations stunt. Think about this: the 10-year default on double-B corporates was 17.2X (29.93% / 1.74%) that of double-B munis. What does "double-B" mean anyway? Anything? Also see my 13 December post.

WG says, "this is absurd". It always was. I long thought the monolines were akin to the Wizard of Oz, an illusionist. Yves Smith's post on WG's article at http://www.nakedcapitalism.blogspot.com/, 8 February 2008, is worth reading.

9 comments:

Buzz Saw said...

Good stuff. It was always a scam, they were never going to pay off any claims. All Dr. Monoline did was give the bond buyers a placebo and a security blanket then he presented them with an exorbitant bill for services rendered. Now Buffett and Ross are sniffing around, trying to get a foot in the door. How funny, no-one will ever trust them again, they are fighting over a dead carcass now.

Buzz Saw said...

Here is a comment I made when arguing with a deflationista (italics) over at kd's forum:

Address my points wrt the current failure of muni and ABCP rolls...

This is a silly exercise. The auctions failed because the likes of C and GS are trying to show the rest of us that we can't live without them. They are going to punish everyone until they get their bailout. This makes the inflation case. You said come back in a year and see if lending hasn't gotten tighter on J6P. Fair enough, but by that logic we should come back in a year and see if the muni bond market is still locked up. Of course it won't be, muni's are a gold mine. Let Buffett or Ross get up to speed and I myself will start buying muni's and get the eff out of stupid fed gubmint bonds. Really amusing stuff here people. Carry on.

Buzz Saw said...

This just gets better and better (sorry for the threadjack):

Address my points wrt the current failure of muni and ABCP rolls...

This is a silly exercise. The auctions failed because the likes of C and GS are trying to show the rest of us that we can't live without them. They are going to punish everyone until they get their bailout. This makes the inflation case. You said come back in a year and see if lending hasn't gotten tighter on J6P. Fair enough, but by that logic we should come back in a year and see if the muni bond market is still locked up. Of course it won't be, muni's are a gold mine. Let Buffett or Ross get up to speed and I myself will start buying muni's and get the eff out of stupid fed gubmint bonds. Really amusing stuff here people. Carry on.

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Last modified: 2008-02-16 16:07:59 by buzzsaw97
2008-02-16 16:05:43
Agxli
Posts: 403
Incept: 2007-11-02
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Report This As A Bad Post "They are going to punish everyone until they get their bailout. This makes the inflation case. "

What bailout are you talking about? The 6 that haven't happened so far (MLEC, project hopeless-now, optional rate freezes, project I need a lifeline, monoline bailout, the 36 people helped so far through secure FHA) or the next bailout?

The auctions failed because no-one wanted to buy the munis and C and GS refused to cover. But I guess that's just C and GS "showing us" and nothing to do with them not wanting to take losses.

2008-02-16 16:13:29
Buzzsaw97
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Report This As A Bad Post I consider rate cuts and accounting shenanigans a bailout too. GS and C are just having a tizzy.

Seriously, do you not see this for what it is, a shakedown?

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Play rough, but try not to lose your ass.

Last modified: 2008-02-16 16:22:26 by buzzsaw97
2008-02-16 16:18:10
Wyocowboy
Posts: 589
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Report This As A Bad Post Townfire:

Tariff's were mentioned and used in the last depression!!!!!

Why does the debtor status of the US and its citizens matter when comparing to the saver status of Japan and their citizens during their horrible downturn? Are you kidding with me? I hope so.

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2008-02-16 16:18:19
Genesis
Posts: 19599
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Quote:

This is a silly exercise. The auctions failed because the likes of C and GS are trying to show the rest of us that we can't live without them. They are going to punish everyone until they get their bailout.


They're more likely to garner indictments than a bailout if this is indeed what they're doing, with this one potentially extending to a RICO charge.

The SEC is already looking into whether there were undisclosed and potentially illegally-hidden "liquidity backstops" that were effectively "sold" by these institutions.

NY's Cuomo latches onto this and gets his fingers in that pie, and finds that indeed this is the case, and The Martin Act may get yet another exercise in the park.

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2008-02-16 16:20:05
Buzzsaw97
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Report This As A Bad Post They're more likely to garner indictments than a bailout...

Ah, good, comic relief. Those same regulators that help them cook the books are going to come down hard. I hear that crissy cox is a real tiger. LMAO!! This is a shakedown, they either get a bailout or they will squeeze the muni's. It will work in the short term.

Buzz Saw said...

NEWS FLASH, KD RESORTS TO INTIMIDATION!!

Evidence for this "shakedown" Buzzsaw?

Note that tinfoil is locked and if you're alleging a felonious conspiracy you better have some evidence for it.

Independent Accountant said...

Thanks for the vote of confidence. As I see it, whether or not Citigroup and Goldman Sachs are trying to "shake the public down" is irrelevent. Uncle Sam shouldn't bail them out, no matter what. If they fail, they fail. If they're in trouble, too bad. Each made its mess, let each get out of it as best it can, or file for bankruptcy. I am not familar with KD's Forum. I will look at it.

Buzz Saw said...

Hello IA,

First, I agree completely.

Second, KD is a daytrader, I am through over there. There is way too much I don't like about him and his for me to overcome.

Buzz Saw said...

Congrats, you are on the 13th Google search page for the term: municipal corporate bond default rate.

Anonymous said...

I think what is missing about your insurance post, is that the municipal bond has been expanded in recent years to include all sorts of non-municipal type investments. A firm I worked with had to wait a year until a retirement home (quite broke) went from private status to a semi-publice status, financed with a muni bond. The muni bond bailed out the home, paying off vendors such as my firm. The retirement home now was open to lower income individuals, such was the excuse for the muni bailout. However, what everyone missed was that this home could not make money at the rate base it was charging as a private home. It was not about to be profitable, even with all its debt repackaged at a lower muni rate. In time, it will go broke again. Now, without insurance, would you buy into this thing?
No - you wouldn't. That is why the insurance is needed. A lot of junk is now masquerading under a cloak of a muni bond. Amusement parks, parking garages and much more is now buried under the muni tagline. More problems lie ahead for these bonds.

Independent Accountant said...

I missed nothing. The home was uninsurable because it lost money. No, I wouldn't buy its bonds. That raises the question: how could a monoline insure them unless the home changed its business practices?