Bond Insurer Defaults - The Next Debacle?
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Bond insurer defaults threaten big banks
NEW YORK (Fortune)(20 Dec 2007) -- Wall Street banks may inject cash into ACA Financial Guaranty Corporation, which was dramatically downgraded to junk while nearly the entire bond insurance industry was put on negative credit watch by S&P yesterday.
But don't believe for a second that the bailout team of CIBC, Merrill Lynch, and Bear Stearns believe in the company or its business model. They're just trying to avoid another round of extremely damaging write downs on top of the $76 billion in losses that securities firms and banks have posted this year.......
......The stakes are very high given that the other big bond insurers are on S&P's negative watch list and that Fitch is in the process of scrutinizing the industry and expected to downgrade. As more bond insurer ratings are cut, banks will have to write down losses on the securities they guaranteed. Bloomberg estimates that an industrywide downgrade would lead to $200 billion in losses. The two biggest guarantors alone, MBIA and Ambac Financial Group, stand behind about $652 billion and $546 billion in debt respectively that could fall in value if those companies are downgraded. S&P estimates that MBIA (MBI) faces $3.1 billion in losses on securities backed by subprime mortgages, that Ambac faces a $1.8 billion loss and Financial Guaranty Insurance Co. could take a $2.2 billion hit.
By virtue of their business model and high credit ratings (until ACA's downgrade they were all among the highest investment grade), none of these companies have the capital to cover these losses. "What's significant about ACA is that it's the first monoline to blow up. There's nothing materially different about Ambac, FGIC, MBIA or XL Capital. They all have the same problem, that they are highly leveraged, have risky exposures and inadequate reserves. It's just a question of degree," says Bill Ackman, founder Pershing Square, a hedge fund that has long been short MBIA and negative on the bond insurance industry......
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Bond insurer defaults threaten big banks
NEW YORK (Fortune)(20 Dec 2007) -- Wall Street banks may inject cash into ACA Financial Guaranty Corporation, which was dramatically downgraded to junk while nearly the entire bond insurance industry was put on negative credit watch by S&P yesterday.
But don't believe for a second that the bailout team of CIBC, Merrill Lynch, and Bear Stearns believe in the company or its business model. They're just trying to avoid another round of extremely damaging write downs on top of the $76 billion in losses that securities firms and banks have posted this year.......
......The stakes are very high given that the other big bond insurers are on S&P's negative watch list and that Fitch is in the process of scrutinizing the industry and expected to downgrade. As more bond insurer ratings are cut, banks will have to write down losses on the securities they guaranteed. Bloomberg estimates that an industrywide downgrade would lead to $200 billion in losses. The two biggest guarantors alone, MBIA and Ambac Financial Group, stand behind about $652 billion and $546 billion in debt respectively that could fall in value if those companies are downgraded. S&P estimates that MBIA (MBI) faces $3.1 billion in losses on securities backed by subprime mortgages, that Ambac faces a $1.8 billion loss and Financial Guaranty Insurance Co. could take a $2.2 billion hit.
By virtue of their business model and high credit ratings (until ACA's downgrade they were all among the highest investment grade), none of these companies have the capital to cover these losses. "What's significant about ACA is that it's the first monoline to blow up. There's nothing materially different about Ambac, FGIC, MBIA or XL Capital. They all have the same problem, that they are highly leveraged, have risky exposures and inadequate reserves. It's just a question of degree," says Bill Ackman, founder Pershing Square, a hedge fund that has long been short MBIA and negative on the bond insurance industry......
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Comments
Morgan Staley analysts were shocked, totally SHOCKED by this development
MBIA Tumbles on $8.1 Billion of CDOs, Fitch Warning (Update9)
Dec. 20 (Bloomberg) -- MBIA Inc. fell the most since 1987 in New York trading after the world's biggest bond insurer disclosed that it guarantees $8.1 billion of collateralized debt obligations that investors say have a greater chance of losses.
``We are shocked management withheld this information for as long as it did,'' Ken Zerbe, an analyst with Morgan Stanley in New York, wrote in a report yesterday. ``MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors.''
Oh-oh. Here come the lawsuits
MBIA, Ambac Financial Group Inc., and other insurers are being reviewed by credit-rating companies on concern they don't have enough capital to cover potential losses stemming from mounting downgrades of the securities they guarantee. Fitch Ratings ratcheted up the pressure on MBIA today, saying it would reassess its AAA insurance rating for a possible downgrade and gave the company four to six weeks to raise at least $1 billion.
More than $2 trillion of insured securities would lose their AAA ratings amid mass downgrades of bond guarantors. MBIA fell $7.07, or 26 percent, to $19.95 at the close of regular New York Stock Exchange trading. Ambac rose 24 cents to $27.70.
MBIA posted a document on its Web site late yesterday showing it insured $8.1 billion of so-called CDOs-squared, which repackage other CDOs and securities linked to subprime mortgages. Rising delinquencies on subprime loans contributed to downgrades on 2,007 CDOs last month alone, according to Morgan Stanley.....
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Fun new term for the day – CDO squared
A CDO collateralised by or referenced to other CDOs. Most CDO squared are synthetic CDOs referenced to a portfolio of synthetic CDOs created specifically for that purpose.
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Nutballs on Wall Street
....The credit insurance problem with the monolines is totally unappreciated and is likely the 900lb gorilla that is going to smash all the china, starting in the credit markets.
It won't be for long when the swaps that they put together (many of which they were stupid enough to hold as "super senior" CDO components!) are written off as worthless.
See, what most people don't understand is that "super-senior" tranches of most of these issues aren't really debt (a bond) at all - they're effectively an insurance policy, or swap, written by these guys. In some cases they're written by banks and then laid off on these guys. When that goes "boom" its like dropping a bomb on the top of the pyramid of these structures instead of losses being taken from the "bottom up" as everyone expected......
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I've been reading more about Kondratieff Waves after running across them on The Market Ticker. Check it out if you haven't yet- while one can argue every era is different, the data strongly suggests we;re in for a nasty reset!
Scotsman -
Other than the increased cost of gas and groceries, I would agree that most people seem oblivious to recent economic developments. I try to keep informed and recently have been vacillating between numb confused indecision and stark fear. I am currently obsessing as to whether or not it would be prudent to sell all of the stock I own.
As a fellow CMAF, I'm tending to share your perspective.
Today took me completely negative for about the 6th time in three months. This is why I have put nothing more into it for tax year 2007 yet, and may put it in Savings (maybe Euros), by the April tax deadline.
Funny, they keep saying it was running 9-11% up this year, but my statement shows negative. Shows you that what they use for a "measurement" of gain, is totally subjective. The price at the time I bought it in March was not much higher than it was in January. Certainly NOT more than 2 percent. The management fees are miniscule, so that is not a factor either.
One cannot expect the same majority who have behaved like Lemmings the last few years to suddenly realize they are Lemmings and a cliff looms in front of them. All the diversions (TV, video games, computers, etc.) are fairly effective in keeping them "medicated" and in a stupor...
Ambac, MBIA Shares Tumble After Estimates Are Cut (Update1)
MBIA Inc. and Ambac Financial Group Inc. tumbled in New York Stock Exchange trading after Morgan Stanley cut its estimates for the insurers' earnings and speculation grew that Countrywide Financial Corp. may file for bankruptcy.
MBIA, based in Armonk, New York, fell 21 percent and Ambac dropped 17 percent. Calabasas, California-based Countrywide declined 28 percent on concern the lender may default on its debt. Countrywide announced it had no plans to seek protection from creditors.
Morgan Stanley cut its earnings prediction for MBIA and Ambac, saying "headwinds facing guarantors appear to be worsening.'' The two largest bond insurers are facing losses from the guarantees they made on mortgage-related debt. The decline in credit quality of the debt prompted scrutiny from credit-rating companies. Fitch Ratings has given Ambac and MBIA until the end of the month to raise $1 billion each in capital.
"There's a lot of uncertainty surrounding the bond insurers,'' said Peter Plaut, an analyst at New York-based hedge fund manager Sanno Point Capital Management. "The largest mortgage broker in the country having liquidity issues and potential capital issues doesn't bode well for the housing market in general and for the financial guarantors in particular.'' ......
Fitch Cuts AMBAC Rating to AA
Ambac Financial Group Downgraded; Analysts Say Cities, Banks Could Be at Financial Risk
A downgrade of bond insurer Ambac Financial Group Inc. is likely to have far-reaching effects, making it more difficult for cities to issue new bonds and forcing further write-downs at financial services companies, analysts said Friday.
After Ambac scrapped plans to raise $1 billion in capital, Fitch Ratings cut the company's crucial financial strength rating to "AA" from "AAA."
The downgrade likely means Ambac will not underwrite any more business, said John Flahive, director of fixed income for BNY Mellon Wealth Management. Market prices of existing bonds insured by Ambac and MBIA Inc. were trading lower before the downgrade, and Flahive suggested any downgrade could accelerate the decline.
Ambac and chief competitor MBIA together insure $700 billion in municipal bonds, and MBIA's "AAA" rating is also under threat. The company issued $1 billion in bonds this week to preserve the rating, though that may not be enough to satisfy the ratings agencies. MBIA said in a statement Friday it intends to keep working toward maintaining its "AAA" rating.......
Wall Street's Next Crisis: Bond Insurers?
The growing crisis at Ambac Financial, one of the biggest bond insurers, is raising questions about Wall Street's exposure as counterparties to the bond-insurance industry coming off a period in which the big banks are reeling from more than $100 billion in write-downs of mortgage-related securities, according to Forbes.
Shares of Ambac, which has already had $8 billion wiped off its value since the start of 2007, and its rival, MBIA, both battered by losses from the collapse of the subprime mortgage market, fell sharply Thursday on concern they would lose their AAA credit ratings.
Ambac dropped 52 percent and MBIA fell 31 percent as Moody's Investors Service and Standard & Poor's increased their scrutiny of bond insurers. Credit-default swaps on both guarantors rose to records, signifying that investors see a growing chance that the companies will not be able to pay their debt.......
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As it is today, the whole system is "smoke and mirrors" and I think if such an analysis were done, it would uncover some pretty shocking revelations about the "structure" of our financial system.
Still to have a computer simulation of how many underlying components could fail before it all came down, would be most illuminating...or depressing.
Because it sure seems a lot of the "girders" holding up this house of cards...are buckling.
I think Cramer is right about the need to do a wrap around on the bond insurers. If they fail it all fails. Not just mortgages but Munis too.
I liken this to the advise given airline passengers: if the oxygen masks fall down first put your own on and THEN assist your children or the infirm. You can't help them if you are yourself unable to function.
The end game to all these bailouts is a huge amount of money from the goverment, which can only be inflationary.....
not so sure about this. If the end result of a bailout is to increase the perception of risk in lending - that could further seize up credit markets. decreasing the willingness of banks to lend, which decreases the velocity of money - and hence the money supply.
these are deflationary indicators. I guess it depends on how you think the credit markets would react to a bailout. (not the equity markets)
Actually I think the Muni portion of their line is in great shape. There will be buyers for that line.
What that would leave is a very naked insurer holding a bomb that could blow up at any moment.
I could choke the insurers for not managing their risks to the detriment of all.
If the Federal goverment turn into some type of quasi bond insurer, it guarantees the state bonds, they by making them no different than T-Bills. I think it would be highly inflationary. Then there is the complexity of these bonds being tax exempt.....
Can of worms if you ask me.
I think you've made an implicit assumption that a T-Bill before the bailout is the same as a T-Bill after. I am not saying that is incorrect - but I think there is a possibility that opening the "can of worms" could drive up the risk free rate (e.g. cost of borrowing for the Fed). Perhaps the gov't just takes on the risk and goes on it's merry way - but I think bond traders and sovereign wealth funds might be a bit more demanding.
If I recall correctly, the risk free component of interest rate rising has different implications that the inflation component w/r/t inflation vs. deflation. One says I think you'll pay me back, but in less valuable dollars. The other says I'm not so sure you'll pay me back...
As a condition of making rescue efforts I would require that the FDIC set standards for compensation of bank managers.. severance packages, bonuses and the like. There is too much incentive to manage for short term results.
FGIC Loses AAA Rating at Fitch After Missing Deadline
Jan. 30 (Bloomberg) -- Financial Guaranty Insurance Co., the world's fourth-largest bond insurer, lost its AAA credit rating at Fitch Ratings after missing a deadline to raise capital.
Financial Guaranty, a unit of New York-based FGIC Corp., was cut two levels to AA, New York-based Fitch said today in a statement. The company had been AAA since at least 1991. Moody's Investors Service and Standard & Poor's are also reevaluating their ratings.
The loss of the AAA stamp jeopardizes ratings on bonds Financial Guaranty insured and limits the company's ability to generate new business. FGIC, along with MBIA Inc. and Ambac Financial Group Inc., are paying a price for expanding beyond their traditional business of backing municipal bonds to guaranteeing debt linked to riskier subprime mortgages and home- equity loans, as well as collateralized debt obligations.... ..
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A Warning on Insurers Frays Nerves
While the Federal Reserve tried to soothe Wall Street's nerves on Wednesday, a hedge fund manager frayed them by warning that two pillars of the financial markets might crumble.
Even as the Fed delivered another big cut in interest rates, William A. Ackman, a prominent money manager, fanned growing fears that the bond insurance industry might suffer crippling losses.
Mr. Ackman, who runs a New York hedge fund called Pershing Square and has bet against the insurers' shares, issued a report late in the afternoon predicting that two of the companies, MBIA and the Ambac Financial Group, might lose $24 billion on complex mortgage investments they have guaranteed. Such a hole might threaten their survival and touch off a chain reaction of losses at some of Wall Street's biggest banks, as well as raise borrowing costs for states and municipalities......
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Goldmans warns on $15bn monoline rescue
Goldman Sachs' chief financial officer predicted today that bailing out US monoline insurers will prove "more complicated" than the 1998 rescue of Long-Term Capital Management, the notorious hedge fund that was saved from collapse by a multi-bank finance package.
David Viniar told a conference today: "It is likely that you will see some solutions to what's going on with the monolines."
A group of eight banks, including Britain's Barclays and Royal Bank of Scotland, are working with the New York Insurance Department, on a $15 billion bail-out plan for the monoline insurance industry.
Monoline insurers underwrite one type of debt i.e. bonds, against default. The combined industry insures $2.4 trillion worth of bonds and, after branching out to underwrite bonds containing sub-prime mortgage debt, these companies are now facing huge losses.......
......Last week, MBIA, the world's largest bond insurer, announced a $2.3 billion loss for the fourth quarter. William Ackman, of the Pershing Square hedge fund, calculated that the sub-prime crisis would eventually cost MBIA $11.6 billion.......
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MBIA, Ambac Bond Risk Jumps as Buffett Offer Shuns `Toxic' Debt
Feb. 12 (Bloomberg) -- The risk of bond insurers MBIA Inc. and Ambac Financial Group Inc. defaulting rose after billionaire Warren Buffett offered to assume responsibility for $800 billion of municipal debt, excluding subprime-linked securities......
.....Buffett is attempting to take advantage of bond insurers as they seek to raise capital and avoid downgrades to their AAA credit ratings. Buffett's Berkshire Hathaway Inc. plans to insure municipal debt for 1.5 times the premium charged by the bond insurers to take on the guarantee and will put up $5 billion of capital, he said in an interview with CNBC television.
``It's taking away their cash cow and leaving them with the toxic waste,'' said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California......
.......``Buffett is trying to get hold of the most secure section of financial guarantee market for a modest price,'' David Roche, who runs London-based research firm Independent Strategy, said in a note to investors. ``But it does not really solve the problem of credit defaults in structured finance or the danger of counterparty failure if the monolines go belly up.''......
.......The cost of protecting corporate bonds from default reached a record for a third day. Credit-default swaps on the benchmark Markit CDX North America Investment-Grade Index soared 7.5 basis points to 143 and traded at 136 basis points at 11:07 a.m. in New York, according to Deutsche Bank AG.
Traders speculated credit losses will widen after American International Group Inc. said faulty accounting caused a bigger- than-expected drop in its holdings......
.....AIG, the world's largest insurer by assets, said auditors found ``material weakness'' in the way it accounted for credit- default swaps and that the value of its investments fell $4.88 billion, four times more than previously disclosed for October and November.
``We're in kind of uncharted territory for accountants in a lot of these products,'' said Ricardo Kleinbaum, a credit analyst at BNP Paribas SA in New York. ``Internally, all financials are grappling with this issue of how to value.''.....
New Losses at A.I.G. Trouble Wall Street
Accounting flaws at the American International Group significantly understated the insurance giant's losses on complex financial instruments linked to mortgages and corporate debt, A.I.G. said on Monday, raising new questions about the deteriorating health of financial companies.
The disclosure stunned Wall Street and raised concern that other companies could report similar problems related to instruments known as credit default swaps. The news sent A.I.G. stock tumbling 12 percent, or $5.94, to $44.74, its lowest level in a year.
"We are going to see more and more problems come to light like this," Lynn E. Turner, a former chief accountant at the Securities and Exchange Commission, told The New York Times. "This is an indication that these large financial institutions do not have the risk management systems in place to give us accurate data."
In a securities filing, A.I.G. said it would take a $4.88 billion charge related to a decline in the value of credit default swaps. That is roughly five times the charge the company suggested it would take in early December.....
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NEW YORK, Feb 14 (Reuters) - Moody's Investors Service on Thursday cut its top "AAA" ratings on FGIC Corp's bond insurance arm, citing the insurer's weakened capital position and business profile.
Moody's cut Financial Guaranty Insurance Co's "AAA" insurer financial strength rating by six notches to "A3," the seventh-highest investment grade rating. It also cut parent company FGIC Corp's senior debt rating to "Ba1," the highest junk level, from "Aa2.".........
MBIA, Ambac Rescue May Be Set Before Ratings Are Cut (Update2)
Feb. 15 (Bloomberg) -- A rescue plan for troubled bond insurers MBIA Inc. and Ambac Financial Group Inc. may be in place before they lose their top AAA ratings, New York Insurance Department Superintendent Eric Dinallo said.
Regulators are trying to help the companies raise $15 billion of capital to avert downgrades and may consider splitting their municipal bond and subprime-mortgage debt businesses, Dinallo said yesterday in an interview on Bloomberg Television. New York Governor Eliot Spitzer told Bloomberg Radio today that the insurers must get new money within days or he will step in.
``You are either going to see capital infusion plans or some kind of a more dramatic structural change,'' Dinallo said from Washington, where he testified at a hearing of the House Financial Services subcommittee on capital markets into the insurers. ``A few months from now, the companies are not going to look exactly the same.''....
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