The second big monolithical insurer is Ambac, Inc.
yitbos
Posted on 01/31/2008 8:07:03 PM PST by bruinbirdman
"The monoline bond insurance industry provides services to one industry - the capital markets."
The beams are creaking. Plaster is falling from the ceiling. The cracks in the walls are widening. The entire edifice of wholesale financial markets is under the greatest strain in years. No one any more believes the soothing noises from the builders (aka investment bankers), who say the worst will soon be over. The Federal Reserve’s drastic cuts in interest rates amount to little more than a bit of cosmetic repointing.
Yesterday there was a fresh buckling noise coming from the foundations, where the monoline insurers reside. These are the institutions that insure trillions of dollars of bond issues against default. Having strayed from their original safe but dull role of insuring municipal bonds to underwriting racy sub-prime-backed securities, they are paying the price. One of the biggest, MBIA, announced a $2.3 billion loss yesterday, while another, FGIC, was downgraded by Fitch. All have seen their shares thumped and face further downgrades.
No one quite knows how bad the impact would be if one failed. Together they insure bonds with a face value of $2,400 billion. Most are rock solid, but there is still a residual $231 billion of more questionable securities, a large chunk of them backed by US sub-prime mortgages. Defaults by struggling American homeowners are going to work their way back along the food chain, ultimately to the monoline insurers.
Monolines played a key role in the gigantic game of financial pass-the-parcel that has characterised the credit markets in the past few years. The basic rule was to make a quick turn and pass the risk on to the next mug as quickly as possible. Monolines were where the buck was supposed to stop. If one of these insurers were to fail, the liability would be passed back to the banks.
Toby Nangle, a fund manager with Baring Asset Management, reckons a failure would create panic “on the same scale as Long Term Capital Management”. LTCM, the hedge fund that failed in 1998, was of itself tiny, but was at the centre of a cat’s cradle of trillions of dollars of bets with counterparties comprising most of the world’s biggest banks.
It was the number of zeros on the face value of those bets, plus the uncertainty of who the counterparties actually were, that created the jitters ten years ago. This time around, markets are again unnerved by the size, complexity and opacity of both the underlying assets and the insurance policies supposedly underpinning them.
Private sector attempts to shore them up have not been happy thus far. Warburg Pincus appears to be sitting on a nasty loss from its rescue investment in MBIA, although its shares perked up last night after some encouraging words from its chief executive.
An industry-wide lifeboat orchestrated by the New York State Insurance Superintendent could work, but has dispiriting echoes of Treasury Secretary Hank Paulson’s doomed super-SIV plan.
Researchers at Oppenheimer say there is no systemic risk and insurers could fail and not spark a cataclysm. But it would certainly sort the sheep from the goats: the limping trio of Citigroup, Merrill Lynch and UBS would bear the brunt of an additional $40 billion in writedowns this year. It isn’t yet time to doff the hard hats.
No, not until I googled him, I might have read some of his stuff though about 10 years ago when I started investing I read everything I could get my hands on.
Nothing beats just diving in and learning a few tough lessons. The theory gets rigorously applied after a few stinging losses. A cattle prod would not be a better motivator. LOL I hate to lose money
I just took a look at the option chains on MBI.
Heh.
There’s darn few people bettin’ long.
Pull up an options chain on MBI. Look at out Aug ‘08 and Jan ‘09.
NB that they created a $2.50 strike put in Jan ‘09.
Look at the volume of puts at $5.00 out past May.
Heh.
OK i see that over on istockanalyst....interesting..
The second big monolithical insurer is Ambac, Inc.
yitbos
Big spill. Little sponge.
I predict dampness...
Do you watch the foreign markets. It seems several, if not many, of the Euro banks have been dealing with the ECB under the table to keep their problems away from the public. SocGen seems to have been an embarrassment that got public. Of course, it is being blamed on an individual.
yitbos
Yep...and i think that dampness is going to trickle down to Washington DC for a Federal Bailout...No way the NYC banks are going to ante up $140B just because NY State says ‘cough’...The Feds told the banks to shelter the homeless, never thinking the homeless are also income-less or income-short...chickens coming home to roost..Then again, it’s trickle down economics in action...
I do not pay much as much attention to the European markets as I do the Asian markets. The scandals in the Europe financials are not as transparent as the ones here. I am not so shocked about the European cover-up as I am what has gone on here with our financials. What has occured here seems to me some kind of fraud and although depositors have not suffered to my knowlege, stockholders in companies like Citibank have been killed. I cannot help but believe there is going to be a lot of litigation against the companies on improprieties that occured. Right now most people do not understand what occured other than there was a lot of highly leveraged products being treated and managed as if they were commodities with value which they evidently were not.
Market cap yes, or less. But their assets are considerable after a shakeout, perhaps 1/2 the paper value.
All those muni bonds are not worthless. Cities, counties, states, sewer districts tend to meet their obligations.
That's why Buffett likes that sector. His new company can go into distressed insurers and cherry pick munis.
yitbos
I recall part of the history of that prediction, he was ''going for the double'', i.e. trying to enhance his rep after his absolutely fabulous prediction in 1980.
Just shows ta go ya; there's no broad technical method for longer-term predictions. Short-term, undoubtedly (ask Buzzy Schwartz if you don't believe it (if he'll talk to you -- not a given)).
I'm not going anywhere. Short of dying, I'll be around when the prediction above comes true.
Fan and Fred have for years made a joke out of the notion of 'sound lending' and 'prudent banking'. And, just as (almost) everyone who believe they are smarter than markets, and operating with a continuous, if false-to-fact, gov't propping-up, they believe their game will go on forever, undisturbed.
Morons.
You’re right - it has come in. However, NB LIBOR depends on banks lending. The Fed can (and has, to date) induced LIBOR downwards, but enough write-downs and LIBOR can go up again. When the write-downs started, the Fed started cutting and LIBOR didn’t track.
We’re not out of the woods yet.
Out of the woods? We’re barely into the woods.
Patriotic Americans spend like there's no tomorrow.
That's why we're cutting interest rates again, to encourage patriotism.
(irony mode off)
The “real” unemployment numbers have been obscured for years...
I don’t need them to tell me the real numbers. And I don’t need them to send me some nice glossy piece of paper telling me the real inflation numbers.
I see the numbers at the supermarket. And at the gas pump. And in my electric bill. And my conclusion is they are a bunch of lying sunzabitches!
There.
I said it.
Don’t give me all the crap about the stock market. It can go up till hell freezes over. If it goes up tomorrow, the only thing that means, without real growth and real increases in our manufacturing capability, is that is takes more dollars to buy the same amount of stock.
Shouldn’t take a freakin PHD to figure that out.
Uh, no — this stuff matters. What you’re seeing at the gas pump and in the supermarket today took months to work its way through the pipeline. What seems abstract today — those employment numbers, etc. — will seem very real to you tomorrow at the gas pump and supermarket.
And as for those manufacturing jobs...well, they ain’t coming back.
Did you see what happened to the yield on the 3 month bond yesterday? It looks like someone is anticipating more rate cuts from the Fed, probably before the next meeting. The yield curve is almost looking normal for the first time in a long time.
That’s how I see it too.
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