Thomas Adams on AIG, Goldman and Citi

Thomas Adams has a 29 November 2009 post at Naked Capitalism about AIG, Goldman Sachs, Citigroup, the monolines and our Treasury. I have said similar things for over a year. Here's a link: http://www.nakedcapitalism.com/2009/11/cant-get-enough-goldmans-profit-is-citis-pain.html.

AIG-Vampire Squid

"TARP Inspector General Neil Barofsky keeps committing flagrant acts of political transparency, which if nothing else ought to inform the debate going forward over financial reform. In his latest bombshell, the IG discloses that the New York Federal Reserve did not believe that AIG's credit-default swap (CDS) counterparties posed a systemaic financial risk. ... Yet now we learn from Mr. Barofsky that saving the counterparties was not the reason for the bailout. ... The Fed's taxpayer-funded vehicle, Maiden Lane III, bought out the counterparties' mortgage-backed securities at 100 cents on the dollar, effectively cancelling out the CDS contracts. This was miles above that those assets could have fetched in the market at that time, if they could have been sold at all. ... In April we noted in these columns that Goldman Sachs [GSG], a major AIG counterparty, would certainly have suffered from an AIG failure. And in his latest report, Mr. Barofsky comes to the same conclusion. But if Mr. Geithner now says the AIG bailout wasn't driven by a need to rescue CDS counterparties, then what was the point? Why pay [GSG] and even foreign banks like Societe Generale billions of tax dollars to make them whole? ... Regulators say that having taxpayers buy out the counterparties improved AIG's liquidity position, but why was it important to keep IG liquid if not to protect some class of crediutors? ... Yet, if there is one thins that all observers seemed to agree on last year, it was that AIG's money to pay policyholders was segregated and safe inside the regulated insurance subsidiaries. If the real systemic danger was the condition of these highly regulatyed subsidiaries--where there was no CDS trading--then the Beltway narrative implodes. ... For example, if AIG's CDS contracts were not the systemic risk, then what is the argument for resturcturing the derivatives market? After Lehman's failure, CDS contracts were quickly settled according to the industry protocol. Despite fears of systemic risk, none of the large banks, either acting as a counterparty to Lehman or as a buyer of CDS on Lehman itself, turned out to have major exposure", my emphasis, WSJ Editorial, 20 November 2009: http://online.wsj.com/article/SB10001424052748704204304574543822135042160.html.

Thomas Adams (TA), an attorney has a 24 November 2009 post at Naked Capitalism, about AIG-Vampire Squid (VS) Conspiracy Theories. TA writes, "I hate to get sucked into the vampire squid line of thinking about Goldman, but the only explanation I can think of for why AIG got rescued and the monolines did not is because Goldman had significant exposure to AIG and did not have exposure to the monolines". I have no problem with VS conspiracy theories, link: http://www.nakedcapitalism.com/2009/11/goldmanaig-conspiracy-theories-theres-a-reason-they-wont-go-away.html.

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"Insurer [AIG] closed two transactions with the Federal Reserve Bank of New York [NYFed] that will reduce its debt to the government by $25 billion and position the two units for spinoff or sale. AIG said its outstanding debt with the [NYFed] now stands at $127 billion, down from $42 billion, excluding interest and fees. ... The moves will result in an fourth-quarter charge of $5.7 billion, on top of $11.7 billion in write-downs already recognized, AIG said", WSJ, 2 December 2009: http://online.wsj.com/article/SB10001424052748704107104574569250847894362.html.

The WSJ has this down. Maiden Lane III is a Fed vehicle on its financials. Did Deloitte & Touche (D&T), which audited the Fed know these things as of 20 April 2009? Did D&T do anything at the Fed aside from some bookeeping? What did PriceWaterhouseCoopers which "audited" AIG and GSG know and when did it know it?

I presume VS realized the monolines could never pay off. Here's a link to my 30 October 2007 post: http://skepticaltexascpa.blogspot.com/2007/10/business-i-never-understood.html. I keep coming back to the Big 87654. How good are these firms if they did not understand the monolines were Ponzi schemes? Here's a link to my 13 December 2007 post: http://skepticaltexascpa.blogspot.com/2007/12/business-i-never-understood-7.html.

Will Zimbabwe Ben record a loss in the Fed's financials from this?

MBIA Split Attacked-2

"Three weeks ago, Wells Fargo served a notice that it had failed to receive $5.5m of insurance payments. ... The use of their triple A rated guarantees was the backbone of huge parts of the credit industry such as securitisation and structured finance, their demise is one reason these parts of the financial markets remain dysfunctional. ... In spite of the pressures wrought by the credit crisis on the biggest bond insurers. or monolines, none of them had been forced to cease paying claims. ... The Syncora saga has put the spotlight on just one of the concerns around bond insurers--that of solvency. The solvency concerns around Ambac and MBIA are playing out in different ways. MBIA received regulatory approval to split into two: one business with municipal bonds and one which would have the structured bonds it insured. This, in effect, is seen as a way of protecting municipal holders at the expense of banks and investors who bought insurance on structured finance. ... 'Those seeking to sue MBIA may have an uphill battle on their hands to prove that the rationale behind the transaction was not well founded but rather was irrational, capricious and/or arbitrary,' said Rob Haines, analyst at Credit-Sights, Mr. Haines regards MBIA as a better credit risk than Ambac", Aline van Duyn at the FT, 14 May 2009.

"A group of 18 financial institutions sued MBIA Inc., claiming the bond issuer's decision to split its businesses earlier this year was fraudulent and left one of the units effectively 'insolvent.' The lawsuit, filed in New York state court, was brought by US and foreign banks, including JP Morgan Chase & Co., Bank of America Corp., Morgan Stanley, Canadian Imperial Bank of Commerce, Barclays PLC and UBS AG. ... MBIA in February separated its troubled mortgage exposures from its profitable US municipal-bond insurance portfolio in an attempt to resume writing guarantees on municipal debt. The original MBIA Insurance unit was left with $10 billion in claims-paying resources to back guarantees on about $240 billion in structured-finance securities and non-US bonds, and its rating was downgraded to 'junk' by credit-rating agencies. ... Many of the banks had bought credit derivatives from MBIA that insured them against losses on securities backed by subprime mortgage assets and commerical real-estate loans. ... In mid-March, representatives of about 15 financial institutions complained to New York State Insurance Superintendent Eric Dinallo [ED], who had approved MBIA's split. ... 'Our lawsuit simply seeks to ensure that policy holders receive what they have paid premiums for: contractually guaranteed insurance protection,' said Vince DiBlasi, a lawyer at Sullivan & Cromwell [S&C], who is representing the banks suing MBIA. ... MBIA and insurance regulators have said their internal projections and estimates of future losses indicate the original insurance unit remains solvent", my emphasis, Serena Ng at the WSJ, 14 May 2009.

MBIA's split is an obvious fraudulent conveyance. How can Haines miss this? I agree with the banks here. Let MBIA file bankruptcy. Now. See my 30 April 2009 post, link: http://skepticaltexascpa.blogspot.com/2009/04/mbia-split-attacked.html.

Let's look at some numbers. At 31 December 2008 MBIA had $994 million in book equity, $233 and $554 billion in insurance in force on structured finance products and municipal bonds respectively. I looked at MBIA's financials, PWC, the guys who "audit" AIG and GSG, had no problem with MBIA's numbers for $4.6 million in fees. MBIA's financials are laughable as is PWC's opinion. I wouldn't pay $1.26 billion for MBIA at its current $6.06 per share price. MBIA should be sent to sleep with the fish. I wish the banks, yes the banks, well with their suit. If they win, they may teach ED a badly needed lesson. What did ED know and when did he know it? Well PWC, where do you stand on this, my 13 May 2009 post, link: http://skepticaltexascpa.blogspot.com/2009/05/pricewatergates-waterloo.html.

These are the end times. S&C, a "New York BigLaw'" is on the right side here! Hey, Vince, I have a pro bono idea for S&C, if S&C is not conflicted out. You have 18 banks. File bankruptcy against AIG and kill it. You may expose why ED let AIG's insurance subs upstream $20 billion to the AIG parent. Of course, if any of your 18 banks were recipients of $120 billion paid to AIG's counterparties, you can't touch this. Aren't you impressed with MBIA's projections? Tell us ED, did you "project" AIG was solvent in September 2008? Will S&C hire its client Moody's as an "expert" to discredit MBIA's projections, my 30 May 2008 post, http://skepticaltexascpa.blogspot.com/2008/05/broken-models.html.

MBIA Split Attacked

"Veteran investor Martin Whitman's Third Avenue Management LLC sued units of MBIA Inc., saying the bond insurer's decision to separate its busineses 'greatly harmed' Third Avenue as a bondholder. ... In a statement Monday night, MBIA Chief Executive Joseph 'Jay' Brown said: 'We appreciate Third Avenue's past support of MBIA and regret that they felt today's action was necessary.' He added that the insurer's split 'should not have been a surprise,' and believes the allegations in the complaint are without merit. ... In mid-February this year, MBIA split its municipal-bond guaranty business from its problematic exposures in an attempt to resart its business of writing new bond guarantees. The move left the original insurance unit with less capital and fewer financial resources to support guarantees on toxic securities, such as collateralized debt obligations backed by subprime mortgages", Serena Ng at the WSJ, 7 April 2009.

MBIA's maneuver is transparent, Whitman should win his case on summary judgment. See my 5 April 2009 post: http://skepticaltexascpa.blogspot.com/2009/04/mbia-aig-maybe-not.html.

MBIA = AIG, Maybe Not

"Representatives of about 15 financial institutions will meet Thursday with New York State Insurance Superintendent Eric Dinallo [ED] to complain about MBIA Inc.'s decision to split its bond-insurance unit into two companies, people familiar with the matter said. The group includes many banks that feel disadvantaged by MBIA's move last month to separate its municipal-bond business from its commitments to insure mortgage-backed bonds and other structured securities. The banks are counterparties to MBIA on derivatives called credit-default swaps that were written on securities they own, many of which have deteriorated since the onset of the credit crisis. MBIA and New York State's insurance regulator--which endorsed the restructuring--are facing a growing backlash from banks, investment funds and other policyholders. ... On Wednesday, a group of hedge funds sought class-action status for a lawsuit against MBIA and the two operating units. ... In the lawsuit, filed in a New York federal court, the funds said MBIA's restructuring 'was nothing short of a looting' of MBIA Insurance Corp., the firm's main operating unit. The funds are asking the court to reverse MBIA's plan", my emphasis, Serena Ng and Lavonne Kukendall at the WSJ, 12 March 2009.

These must be the last days. I agree with the banks. We see a fraudulent transfer in process, approved by ED. Compare MBIA's situation to AIG's, where ED approved a $20 billion bailout of the AIG parent to protect the banks. Looting indeed. ED, why did you let AIG loot its insurance subsidiaries in September?

Mortgage Insurance, RIP

"Bond insurer MBIA Inc., in an attempt to salvage what is left of its business, is separating its troubled mortgage exposure from its U.S. municipal-bond insurance portfolio. Insurance regulators touted the move, announced Wednesday, as the only way for the nation's largest insurer of municipal bonds to restart its underwriting business for new debt, which stalled over the past year in investor concerns about the company's long-term solvency. ... The move divides its muncipal-bond insurer from the business that guaranteed 'structure-finance' securities, including the subprime mortgage-backed bonds and [CDOs] whose performance has deteriorated with the housing downturn. ... MBIA's move to ring-fence its relatively good positions from questionable ones dovetails with thinking on Wall Street and in Washington that segregating assets may be the best way to revive the financial system. ... [S&P] cut MBIA Insurance Corp.'s credit rating five notches to triple-B plus", Serena Ng at the WSJ, 19 February 2009.

This looks like a zero-sum game to me. Who was hurt by it? Anyone holding guaranteed CDOs and such.

Goldman Sachs, Fools or Knaves?

"Many Americans believe that any bonuses for top executives paid by rescued banks would constitute 'excess compensation,' a phrase used by Barack Obama. ... But the Wall Street bonus system has some serious flaws. The most important is the amount of moral hazard that the system creates. Great rewards to executives are paid for successful risk-taking, but the penalties for unsucessful risk-taking end up being borne by taxpayers. One remedy for this is to charge traders a cost for the capital they use based on the risk that they intend to put it into. Many firms just charge the firm's own cost of the capital, and therefore overstate the profits they record on the riskiest trades. This also ovestates the bonuses that should be paid on them. ... Public anger is hard to deny, but we shouldn't let it weaken an important industry', Roy Smith (RS) at the WSJ, 7 February 2009.

"Why did the union [Ken] Lewis lauded as the 'deal of a lifetime' spin so quickly into disaster? ... A 24-year veteran of Goldman Sachs, [John] Thain was viewed as a Wall Street wizard. ... Peter Kraus, whom Thain lured from Goldman to head strategic planning, got a guarantee of around $25 million, which he received even though he left the company after three months. ... But despite his earlier words, he did little to rein in Merrill's proprietary trading operation, which took supposedly low-risk positions in currencies, commodities, and especially bonds, and had been a reliable profit center for years. That decision would come back to haunt him. ... Merrill also bought protection from the so-called monoline insurers, such as MBIA and Ambac. But when those insurers were downgraded by the rating agencies, the protection Merrill had paid for was less valuable, and Merrill had to add to its reserves to make up the difference", my emphasis, Shawn Tully at Fortune, 16 February 2009.

RS, MBA Harvard, 1966, "former" Goldman Sachs (GSG) partner, now a finance professor at New York's Stern School. Is RS an idiot or a criminal? RS admits what I've said for decades: major commerical and investment bank cost accounting stinks, causing excessive trader compensation. Imagine, firms hire GSG and its competitors for "financial advice". Why? What do these guys know? Alternatively, RS and his fellow partners knew all along what they were doing and should be indicted for fraud, i.e., defrauding their outside shareholders. This is a disgace. Further, a "former" GSG partner was a our last TreasSec. Treasury is infested with these parasites, on 14 October 2007 I called for a 25-year moratorium on GSG personnel working for Uncle Sam, http://skepticaltexascpa.blogspot.com/2007/10/party-like-its-1929.html. That may not be long enough to purge our system of these parasites. What risk-taking is RS talking about? GSG executives are not capitalists, they are grossly overpaid hired help. Did RS scream about this at GSG? Did he tell GSG's shareholders? Why listen to RS now? Who is he protecting? Where were the compensation consultants like say Hewitt Associates and Pearl/Meyer while this went on? Who needs those guys either? See my 23 and 30 November 2008 posts: http://skepticaltexascpa.blogspot.com/2008/11/bank-accounting.html and http://skepticaltexascpa.blogspot.com/2008/11/more-good-news.html.

Get this, it's "public anger" that weakened Wall Street. This clown's arrogance is amazing.

Another Wall Street idiot. A GSG "wizard" would be a fool in any other industry. Thain thought monoline insurance had value, fool. He thought Merrill's trading business was "a reliable profit center". Under what kind of accounting regime? Wall Street must be the most poorly managed business on earth, except for its senior employees.

Muni Bond Insurance-RIP

"Bond insurer Ambac Financial Group Inc. paid $850 million to Citigroup Inc. to terminate a guaranty contract tied to $1.4 billion in troubled mortgage-related securities. The move sent shares of Ambac and other bond insurers higher, as investors anticipated more cancellations of similar contracts, which could help the insurers clear out some of their losing positions. ... While the terminations of CDO guarantees appears to be positive for many bond insurers, it could spark a rush by financial institutions to get as much capital as they can from the insurers. If the insurers make significant payouts now 'there could be less protection left for the rest of their policyholders,' which include investors that hold municipal bond guarantees, said Rob Haines, an analyst at Credit-Sights", Lavonne Kuykedall and Serena Ng at the WSJ, 2 August 2008.

I think Eric Dinallo, NY State Insurance Commisioner should prohibit this. It looks like a "preferential payment" prior to bankruptcy to me. I agree with Haines, these kind of payouts are bad news for muni bond holders. Muni bond issuers should be screaming over this.

Yves Smith on MBIA

Yves Smith (YS) at Naked Capitalism has 18 and 19 June 2008 posts worth reading on MBIA I have nothing to add to, 18, www.nakedcapitalism.com/2008/06/mbia-refuses-to-downstream-cash-uses.html. They show how desparate MBIA must be to stay alive and how NY's Insurance Commissioner is reluctant to kill it. 19, www.nakedcapitalism.com/2008/06/mbia-lies-in-attacks-on-new-york-times.html. Way to go YS!

The Monolines are Dead, the Rating Agencies Should Follow

"It finally happened. One of the major credit-rating firms stripped bond insurers MBIA Inc. and Ambac Financial Group Inc. of their vital triple-A ratings. Thursday [S&P] dropped the bond insurers' ratings to double-A and warned of further downgrades, just one day after Moody's Investors Service warned that it would likely knock down the ratings of the two companies. ... U.S. Treasury's a haven for funds seeking safety, barely saw any buying from worried investors, while the [DJIA] posted a gain of 213.97 points. ... The $2.6 trillion municipal-bond market has been in the process of valuing insured debt based on its underlying rating rather than that of the insurers, also known as monolines. ... Shares of both insurers actually rose after S&P cut them to double-A and warned of further downgrades", WSJ, 6 June 2008.

"Even as Moody's Investors Service was handing out triple-A ratings last year on a huge number of securities tied to mortgages, a senior Moody's analyst involved in rating them was warning about the housing market and asking if the ratings were too optimistic. In late 2006 and early 2007, the Moody's Corp. unit continued to rate new [CDOs] even as the analyst, Eric Kolchinsky, aired his concerns to his colleagues and his boss, people familar with the matter said. ... As the credit crunch drags on, regulators and lawmakers are pressing for answers on why ratings firms gave investment grade ratings to subprime bonds and [CDOs] and didn't respond more aggressively to signs of trouble. ... Kolchinsky, a managing director, was one of many people involved in the discussions. He specifically took his concerns to his boss at the time, Yuri Yoshizawa, a group managing director at Moody's, who said she would take Mr. Kolchinsky's point of view under consideration, according to people familar with the matter. Mr. Kolchinsky wasn't available to comment, according to a spokesman. ... 'We all wanted to downgrade as soon as possible, but we wanted to downgrade based on information we could rely upon,' says Ms. Yoshizawa. For example, she says, the firm studied the performance of each subprme securitization it had rated instead of making what she calls a 'blanket cut.' ... Moody's also might have been seen as doubting its own ratings on subprime mortgages if the CDO group expressed doubts on mortgage-backed CDOs. A Moody's spoksman says that 'vigorous discussion among analysts is encouraged and expected in ratings committees,' so debates about CDOs 'would not be unsual.' He added that 'commerical considerations do not influence our ratings,'" WSJ, 7 June 2008.

It's good S&P works in the public interest. It cut MBIA and Ambac's ratings after the muni bond market concluded their guarantees are worthless. I await public apologies to William Ackman, long-time MBIA nemesis. Right. See my 19 and 20 December 2007 and 17 January 2008 posts. I never "understood" the monolines business, see my 30 October, 8, 18, and 30 November and 8, 13 and 15 December 2007 posts. Apparently the S&P and Moody's geniuses never understood it either. Hey guys, for a mere $10 million I'll "splain" it to you. Waddayasay? I got it: the S&P and Moody's geniuses read Marilyn Cohen's Forbes article, my 16 May 2008 post. Who needs these guys? Shut 'em down.

Why? It's the: fee arrangements, NRSRO designation and public inability to sue the rating agencies (RA) for bad ratings that's why. The RA have the same problem as the CPA industry: lack of user accountability. Moody's says "commerical considerations do not influence" its ratings. What does then? Should we also believe "six impossible things before breakfast", citing the White Queen of Alice in Wonderland? I wonder if it's required reading at Moody's like the Little Red Book was in Mao's China? Yoshizawa wants "information [she] could rely upon". What qualifies? Marilyn Cohen's Forbes article, no doubt. Yoshizawa, the best case I can make for you after this statement and my 9 May 2008 post, is what I said before: you're an overpaid clerk. You said, "We're not underlying asset experts". What then? Kolchinsky, you have a unique opportunity to do well and good at the same time. Approach some venture capitalists for money and set up your own ratings firm. You don't need Moody's. Base your firm on these operating principles: never assert a first amendment defense against users, i.e., stand by your ratings; only accept an assignment if paid in advance, never participate in a "show down"; avoid conflicts of interest like rating mortgage securities and related CDOs. Go get 'em fella. Leave Moody's! Lastly, tell Chris Cox, the RA "cartel enforcer" you expect: an end to the NRSRO designation, or one for yourself. Alternatively, you will see him in court on the the wrong end of an anti-trust case.

Rating Agency Follies

"Bond insurers MBIA Inc. and Ambac Financial Group Inc. landed back on the hot seat Tuesday, as Moody's Investors Service said mounting losses are raising fresh questions about whether they deserve their key triple-A insurer ratings. ... Losses on complex securities backed by mortgages are now meaningfully higher than the rating agency's prior expected-case losss estimates, elevating existing concerns about capitalization levels relative to the AAA benchmark,' Moody's said in a news release", WSJ, 14 May 2008.

"Moody's Corp.'s Moody's Investors Service and Fimalac SA's Fitch Ratings acknowledge they have switched analysts assigned to rate bonds after receiving requests to do so from bond insurers or their bankers. Changes usually were made after a specific bond was rated, meaning the analyst wouldn't work on the bond insurer's next deal, according to current and former officials at the credit-rating firms. While switching analysts appears to be infrequent, there are situations 'where an analyst doesn't get the message that you're expected to be responsive,' Bill May, a Moody's managing director said in an interview. ... The little-known practice could spur even more questions about whether bond insurers have too much influence over how their bonds are rated before being sold to investors. ... Lawmakers and regulators are weighing new rules to beef up analyst independence. ... Moody's ... is investigating reports it tried to cover up a bug in its computer models that caused Moody's to overrate securities known as constant-proportion debt obligations or CPDOs. ... Another mortgage analyst at Moody's was moved to the firm's surveillance unit after a Moody's official agreed with an investment banker's opinion that the analyst was too fussy, a person familar with the situation said. ... 'Wall Street is not switching our analysts,' a Moody's spokesman says. 'Moody's makes decisions based on the best interest of the rating.'," my emphasis, WSJ, 23 May 2008.

This is a joke. Moody's should never have rated these entities AAA as soon as they began insuring CDOs, CPDOs, etc.

Hey Bill May, what does "doesn't get the message", mean? That the analyst did what he thought was his job, i.e., to be objective, then found out his job was to "get the deal done"? Rules and regulatory actions nothwithstanding there are few substitutes for lawsuits and indictments. If Mike Garcia wants to do something for investors, he should he handing out indictments by the dozen. This Moody's fiasco reminds me of the Marv Roffman (MR) incident of 1990. The story was reported in Barron's. MR was an analyst working for Janney, Montgomery Scott (JMS). He wrote a report about the Trump Taj Mahal (TTM) that Donald Trump (DT) disliked. DT complained to JMS, which fired him. The TTM eventually went bankrupt just as MR predicted. MR won a $750,000 arbitration award from JMS and got a settlement rumored to be $6 million from DT. Did the SEC learn anything from the MR incident? Apparently not. See my 6 October and 28 December 2007 posts.

Monoline Hijinks

"Back in the dot-bomb days, companies liked to guide investors to rosy variations of their stated profit. These profit figures became known as EBBS, or 'earnings before bad stuff.' ... MBIA ... prefers a metric it calls 'analytic adjusted book value' that 'provides an economic basis for investors to reach their own conclusions about the fair value of the company.' ... So MBIA's variation on book value excludes things like the $3.5 billion mark-to-market loss on derivatives that drove its $2.4 billion net loss in the first quarter. Rather, it includes management's expectations of losses, plus gains from future expected premium payments. ... Investors shouldn't forget the lessons of the Internet-stock bubble; they should stick to figures the company compiles according to generally accepted accounting principles. On the basis of that $8.70-a-share figure, the stock, even at its current level [$9.85], isn't a bargain", David Reilly (DR) at the WSJ, 13 May 2008.

"When you shop for groceries, the checkout clerk asks, 'Paper or plastic?' When your broker calls to sell you municipal bonds in the depths of the credit crisis, he should ask, 'Insured or uninsured?' Your correct answer: 'Uninsured, and what is the credit rating?' ... We who manage municipal portfolios care a lot about credit ratings and give credence to insurance from just three firms: Financial Security Assurance, which carefully managed its exposure to CDOs; Berkshire Hathaway, the new insurer on the block; and, to a lesser extent, Assured Guaranty, which just received an infusion of capital from W.L. Ross & Co. ... For months now, good-quality uninsured municipal bonds, A-rated or better, have yielded less than insured ones. The fact is, no one in the business gives any value to the insurance coverage, and you shouldn't either", my emphasis, Marilyn Cohen (MC) at Forbes, 19 May 2008.

I agree with DR, MBIA's creating its own metrics reeks of the dot-com bust. Investors, beware. MBIA CFO C. Edward Chaplin is pushing his own metric. I did a google search to see when Chaplin last filed a Form 4, it was 15 February 2007, when he bought 20,181 MBIA shares at $70.86 each or $1,430,026. Has he taken a beating. Let's take up a collection for him.

MC gets it. See my 16 February 2008 post, among others.

MBIA Strikes Out

"MBIA Inc. has asked Fitch Ratings to withdraw its insurer ratings on six of its units, saying it disagrees with the ratings company's approach. MBIA spokesman Willard Hill said Fitch's models would require it to put too much capital to back its business of guaranteeing now-troubled structured-finance debt, which MBIA intends to separate from its less risky business of insuring municipal bonds. ... While MBIA said it wants Fitch to continue rating outstanding debt obligations from MBIA and MBIA Insurance Corp. Fitch said it will 'evaluate its ability to maintain coverage' on MBIA in the coming days. ... Fitch has been the most aggressive of the three main rating firms in issuing negative assessments of bond insurers", WSJ, 10 March 2008.

Mike Shedlock has a nice 10 March 2008 post on this at http://www.globaleconomics.com/. I note the SEC might develop a 8-K reporting requirement for circumstances like this similar to the one for changing CPA firms.

Ambac Bailout?

"A consortorium of banks is considering injecting $3 billion into Ambac, the mono-line insurer that relies on its AAA rating to insure, amongst others, municipal bonds and CDOs (collateralized debt obligations). What appears as a rescue plan and may appease the markets short-term, may plant the seeds for disaster. ... The two developments caused the insurers to veer from their path: as public companies, mono-line insurers were looking for new income streams. Not only that, rating agencies told these insurers that they are not very diversified, that they may have to have a second look at the credit ratings if they did not broaden their insurance coverage to, say, securitized mortgage products. Rating agencies were eager to see the market of debt derivatives expand, so that they could facilitate a market by providing credit ratings to structured products. ... Think of a credit default swap as a put option that will pay you if a company or a security fails. With a perceived foolproof arsenal of financial tools, banks felt encouraged to carry a lot of complex financial products on their balance sheets. By buying insured securities, or by protecting against the default of an issuer, the banks reasoned, they could show stellar balance sheets. Banks are in the business of lending money; to do so, they require reserves. That arsenal of financial tools, however, is at risk of turning into an asinine collection of toxic waste if the securities held are not as secure as they seem or of the credit default swaps are not worth the paper they are written on. One risk that few talked about until recently, is counterparty risk. ... In [municipalities] view, mono-line insurers have betrayed them by risking their credit ratings through reckless veering into riskier lines of business. ... Banks are closer to being their own counterparty to their credit default swaps. ... We used to criticize Japanese shareholder crossholdings, building a house of cards that eventually had to collpase. U.S. financial institutions are laying the foundation for the same mistakes", Axel Mark (AM) at http://www.financialsense.com/, 27 February 2008.

I think AM has this knocked. None of the monoline bailout plans make sense.

Municipal Revolt

"Does Wall Street underrate Main Street? A growing number of states and cities say yes. ... A complex system of credit ratings and insurance policies that Wall Street uses to set prices for municipal bonds make borrowing needlessly expensive for many localities, some officials say. .. States and cities rarely dishonor their debts. ... But some officials complain that ratings firms assign municipal borrowers low credit scores compared with corporations. Taxpayers ultimately pay the price, the officials say, in the form of higher fees and interest costs on public debt. ... California ... is soliciting support from other municipalities for a letter it intends to send the ratings agencies, arguing that municipal bonds should be rated on the same scale as the one used for corporate bonds. ... Officials at ratings firms and bond insurance companies defend the system, saying it gives investors the information they need to buy bonds with confidence. The recent turmoil, they say, highlights the need for insurance. They further add that rating municipal bonds like corporate debt would not save taxpayers much money, if any. ... The plunging fortunes of bond guarantors, meantime, have cast doubt over the value of the insurance polices municipalities buy. 'We are learning essentially that the emporer may have no clothes, that there is no real reason to require these towns to have insurance in many instances,' said Richard Blumenthal, the attorney general of Connecticut, who is investigating the ratings firms on antitrust grounds. 'And it simply serves the bottom lines of the ratings agencies, the insurers, or both'. ... Ratings firms, bond insurance companies and some bond investors defend the separate ratings scales, arguing that it allows investors to make distinctions among various debt and ultimately, set appropriate interest rates. ... Gail Sussman, the Moody's executive in charge of public finance ratings, likened the firm's dual ratings scale to a ruler that measures in inches on one side and centimeters on the other", my emphasis, Julie Criswell and Vikas Bajaj at http://www.nytimes.com/, 3 March 2008.

What a pile of self-serving claptrap from Moody's Sussman. I have an idea: end letter ratings. Instead give bonds classes by expected default rate, less than .001 over ten years, less than .002 over ten years, etc.. If this means Moody's and S&P have 50 classes, so be it. At least we will be able to see how good these organizations are based on their ex ante default rate estimates. Unwittingly, officials at the rating agencies let the cat out of the bag, "the system .... gives investors ... confidence", i.e., it's a con game.

Death to the Rating Agencies

"Standard & Poor's rewarded bond insurer MBIA Inc. for raising $2.6 billion in capital by affirming the company's triple-A financial-strength rating while keeping its outlook 'negative'. ... S&P also kept its triple-A rating on the other large bond insurer, Ambac Financial Group Inc. ... As part of its action, S&P took MBIA's rating off 'credit watch negative,' a state in which downgrade is an iminent threat over the next three months", WSJ, 26 February 2008.

"What happens when the feds license only a few companies to provide a service, and then require investors to buy that service? For the answer, take a look at the mess in today's bond market, where investors have been hanging on whether the main government-appointed credit-rating agencies--[S&P] and Moody's would downgrade bond insurers MBIA and Ambac. ... But why were the bond insurers facing downgrades in the first place? ... By now no one should care what the rating agencies [RAs] think, but the problem is that by law we have to care. Since 1975, the [SEC] has limited competition in the market for credit ratings by anointing only certain firms as 'Nationally Recognized Statistical Rating Organizations' (NRSROs). ... Over time, federal and state laws and regulations have explicitly required NRSRO-rated securities to be held by money market funds, insurers and others. This is turn has created the impression that these ratings are something more than merely financial opinions, which are often less informed than opinions you can read in a newspaper. ... Not surprisingly, the rating agencies are coming up with their own ideas for 'reform', none of which seem to include more competition. .. No doubt, S&P and Moody's would love Congress to add rules that raise the cost of entry for new competitors. If Congress takes the bait, it will repeat the mistakes of Sarbanes-Oxley", Editorial at the WSJ, 26 February 2008.

"In the latest sign that the clouds are starting to clear over an important part of the financial markets, Moody's Investor Service affirmed its top-notch credit ratings to MBIA Inc, the world's biggest bond insurer", WSJ, 27 February 2008.

It's time the RAs were sent to sleep. With the fish. Their carefully considered opinions are worthless. The CPA profession has its Big Four, the RAs, their Big Three (TBT). Anything TBT do should be viewed skeptically. Mike Shedlock (MS) has a nice post on this topic at http://www.globaleconomicanalysis.blogspot.com/ 26 February 2008 . MS makes it clear the RAs retention of AAAs for the monolines is absurd by comparing them to Pfizer, a real company. I have an idea for Moody's and S&P: lobby Congress to become subject to PCAOB oversight. The PCAOB can form a sister organization to create standards for the RAs then fill it with former rating agency employees and harass the non-NRSROs to show the PCAOB does something. We'll call it: Rating Organization Bullying Oversight Team, ROBOT. ROBOT can go on its "tick and tie" adventures and do nothing to protect the public from bad TBT ratings. If Mark Olson (MO), PCAOB head, doesn't like ROBOT, how about Rating Agency Craven Knavish Enforcement Thespians, or RACKET. How about it MO? You can have RACKET start by reviewing Egan-Jones. Whadda say?

Buffett's Bargain

"Municipal bonds seldom if ever default. ... Let's pause, however, to consider how some crazy rules helped inadvertently bring [Warren Buffett] his present opportunity--and put the world seemingly on the brink of financial chaos. In the abstract, of course, neither bond insurance nor bond raters should exist. The market ought to be able to assess and price bond issues efficiently itself, leaving no profit opportunity for raters and insurers. ... In effect, a triple-A insurer turns every bond issuer into a triple-A issuer, and does it more cheaply than the bond issuer could do it for himself. ... Hooray for an efficient market solution. Or it would be an efficient market solution if participation by all parties were voluntary, therefore conditoned by appropriate skepticism. ... We're not so sure the result [downgrades of thousands of municipal bonds] would be the financial catastrophe that some forecast. The market might well recognize the value of the downgraded bonds despite any downgrades. ... Enter Mr. Buffett, who offers to solve the problem is his own way, no doubt hoping regulators will quietly pressure the big bond insurers to acquiesce in his proposal to take their bread-and-butter business away from them, leaving them to sink into the mire along with their remaining subprime bets. ... We should quickly note that he's not offering to solve the problem for many banks that own mortgage-backed securities also insured by the bond insurers--but these banks have already shown themselves capable of facing up to their losses", Holman Jenkins (HJ) at the WSJ, 13 February 2008.

Buffett's "offer yesterday to wade into the bond-insurance market was only half-brave, so its worth paying attention to where he thinks the risks lie. ... The argument goes that if the bond insurers are downgraded across the board, the bonds they've insured go south too, causing writeoffs and another cascade of financial-industry losses. ... But the notion that a spare billion or two for the 'monolines' could forestall many billions more in writedowns never made any sense. ... That's why the calculating Mr. Buffett only wants to reinsure the municipal business, which is pretty much all premiums and no claims. ... And a few billion dollars in capital won't be nearly enough to make a dent in the $1 trillion in exposure that the bond insurers have to the asset-backed market", my emphasis , Editorial at the WSJ, 13 February 2008.

"More fundamentally, however, Buffett's bid should remind us that most municipal bonds don't need insurance at all. They haven't been very risky. After studying the history of bond defaults, a research firm called Municipal Market Advisors found that only 2.65% of munis rated Ba or better by Moody's had defaulted, compared with 19.12% of similarly rated corporate bonds. [S&P's] discrepancy was even greater: 1.74% of municipals rated double-B or better defaulted compared with 29.93% of like-rated corporates. ... The muni-rating scale increases taxpayers' cost of borrowing, and it has lined the pockets of municipal-bond insurers. The [SEC], which handed the rating agencies far too much power, should stop this long-running scam, not let Buffett join the feast", my emphasis, Thomas Donlan (TD) at Barron's, 18 February 2008.

I agree with HJ, the monolines' end will not be the catastrophe many believe it will be. I think the market already prices bonds as if the monolines don't exist. See my 16 February 2008 post.

I never saw any value provided by the monolines in their muni business since it: "is pretty much all premiums and no claims". If so, who needed them? Consider, a municipality wants to sell a bond. How is the bond buyer's position improved by paying a monoline a premium in excess of the expected value of its default rate? We have a "fallacy of composition", all municipalities are weakened by the premiums they pay to the detriment of muni bond holders. The muni bond holders could more cheaply "self-insure" by buying a muni bond fund. TD says it all: muni bond insurance is a "scam". It's time it ended

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.

Monoline Bailout

"At a time when most investors would be counting their winnings, William Ackman, head of hedge fund Pershing Square Capital Management LP, is ramping up his high-profile campaign against bond insurers, even as news swirls that a possible bailout is in the works for the insurers. Mr. Ackman, who has been criticizing the bond insurers for five years, says he still has a multibillion-dollar wager against them, including credit-default swaps he used to bet specifically against MBIA Inc. shares in 2002. ... In recent weeks, ratings agencies have started to come around to his argument that the bond insurers have flawed risk-management practices that have left them with significant shortfalls in capital. ... He characterized the bailout as an attempt by banks to 'arbitrage' the stringent capital requirements of federal bank regulators with what he says are the less-stringent requirements of the ratings agencies, which oversee the bond insurers. ... 'But if the bailout is a mechanism for the banks to continue to hide losses off balance sheet, then we think it's very bad for the capital markets'," Karen Richardson (KR) at the WSJ, 2 February 2008.

Bravo KR. Go Ackman go. Also see my 20 December 2007 post.

The Treasury and the Banks-2

"'You people created this mess,' [Eric Dinallo, ED] told senior officials of Wall Street's top firms, including Citigroup Inc., Goldman Sachs Group Inc. Merrill Lynch & Co. and Morgan Stanley. 'And the headline on this is going to be: How Wall Street Ate Main Street.' ... Eight banks and brokerage firms are working on a possible rescue of Ambac Financial Group Inc., one of the nation's biggest bond insurers, which recently lost its top rating from one credit-rating firm and faces a possible downgrade by another. ... But the no-holds-barred strategy ... also is ruffling feathers on Wall Street. ... After last month's meeting, some participants who were alarmed by the aggressive tone of Mr. Dinallo's remarks called senior officals at the Treasury Department and the New York Federal Reserve [FRBNY], appealing for them to take a substantial role in any rescue effort. After that, Treasury Undersecretary Robert Steel and Timothy F. Geithner, president and chief executive of the [FRBNY], encouraged Mr. Dinallo to hire an outside adviser with credibility among the various banks, say people familiar with the discussion. ... While working at the Manhattan district attorney's office, [ED] helped prosecute now-defunct A.R. Baron & Co., a brokerage firm whose top officials pleaded guilty to defrauding investors", my emphasis, WSJ, 6 February 2008.

"Mortgage companies have stepped up their efforts to work with delinquent borrowers, but their actions aren't keeping up with the rapid rise in bad loans, a new study by state officials suggests. ... The mortgage companies expect less than 7% of the troubled borrowers to come up with the funds to make the loan current. ... The state report also found that resets aren't the key issue for many homeowners who are falling behind. More than 30% of borrowers with subprime or Alt-A ARMs .... are already at least 30 days past due even though they haven't yet seen their first reset, according to the report. ... Meanwhile, just 3% of borrowers with subprime or Alt-A ARMS who are currently delinquent fell behind on their payments in the first three months after the intererst rate on their loan first reset. That suggests that many borrowers were put into loans they could never have afforded, says [Mark] Pierce of North Carolina. The report also highlights the tensions between state and federal officials. J.P. Morgan Chase & Co. and Wells Fargo refused to provide data to the working group 'on the advice or direction' of the Office of the Comptroller of the Currency [COOC], according to the report. ... 'We think it's better if we collect the information we think is important for the national banks we supervise,' says [COOC] John C. Dugan, adding that 'it's great for the state to focus on the banks they supervise'," my emphasis, WSJ, 7 February 2008.

Here we go again. "Ruffling feathers"; Wall Streeters are so "sensitive", they're "New Age Men". I bet they cry regularly. The Treasury and the Fed are apparently trying to strong-arm state prosecutors to protect Wall Street's "malefactors of great wealth". I think ED should show brass 'cohones", call a press conference and tell Robert Steel (RS), super "former" GS guy, him again, and the NY Fed, "nuts" citing General McAuliffe's 1944 statement. Alternatively, ED may be biding his time. ED may get the "advice" vetted by a RS-approved "advisor", then reject it and explain why in excruciating detail. On television. What would RS do then? Attempt to have ED arrested for interfering with the operations of a federal agency under 18 USC 1505 for rejecting RS's "disinterested" advice? Suppose Joe Schmoe called RS to complain his savings were being depleted to protect the banks, would RS take his call? Get serious. Would RS or Timothy Geithner answer Joe Schmoe's phone call?

Dugan's concern for the banks is touching. Is he afraid the state regulators will expose the real reasons for the Fed-Treasury bank bailout are inconsistent with the stated reasons? The party of Abraham Lincoln, who said something about "government, of the people, by the people and for the people", in 1863 has morphed into a government, of, by and for, the banks. What a country.