Posted on 02/06/2008 11:33:06 PM PST by TigerLikesRooster
February 7, 2008
Fears for bond insurance market put Federal Reserve on red alert
Tom Bawden and Suzzy Jagger in New York
Ben Bernanke, chairman of the US Federal Reserve, yesterday acknowledged that the bank is worried about the impact of an impending implosion of bond insurers on the US economy.
In a letter published yesterday, Mr Bernanke said that the Fed is “closely monitoring” problems with US bond insurers: “Given the adverse effects that problems of financial guarantors can have on financial markets and the economy, we are closely monitoring developments,” Mr Bernanke said in the letter to Paul Kanjorski, a Pennsylvania Democrat who chairs a House of Representatives sub-committee that oversees capital markets and the insurance industry.
Mr Bernanke was joined in his concerns by David Viniar, the chief financial officer of Goldman Sachs, who gave warning yesterday that some key mortgage bond insurers could collapse. He predicted that Wall Street bailouts would be able to satisfy only some of the need for extra cash.
Speaking at a Credit Suisse investor conference in Naples, Florida, Mr Viniar said that he expected some so-called monolines to receive cash injections as banks with a stake in their fortunes worked to prop them up.
Yet Wall Street would be able to solve only some of the bond insurers’ problems, he said. “You will see some solutions to what’s going on. Over the next few weeks, months, there will be some solutions, but not all solutions. You have a number of companies who are involved in a lot of different things, so I think it’s going to be more complicated than the industry bailout of the Long Term Capital Management hedge fund in 1998, where you just had one company and ten banks.”
His comments came as MBIA, the bond insurer, said that it was seeking to raise $750 million by issuing new shares to shore up its balance sheet. The fundraising came after Fitch, the credit-rating agency, warned that it may strip the main unit of MBIA of its top AAA rating because of its exposure to sub-prime-backed bonds.
American bond insurers, which guarantee the interest and principal payments on the securities that they underwrite in the event of a default, face a surge in claims on sub-prime mortgage bonds as defaults rise on the underlying home loans. If they are unable to meet these claims, the value of the bonds that they underwrite would fall, prompting another round of multibillion-dollar writedowns at some of Wall Street’s biggest banks.
Those banks are trying to establish whether it is cheaper to prop up the bond insurers through a capital injection or to suffer the losses that their implosion would bring.
In the most high-profile rescue attempt, a consortium of eight banks, including Barclays and Royal Bank of Scotland, is working to orchestrate a bailout of Ambac. The consortium, which is working with the New York State Insurance Department, will also consider other capital injections after it has dealt with Ambac.
Separately, Mr Viniar declared Goldman’s eagerness to invest in the mortgage market. “There will be a purchasing of distressed assets and, at the right price, we will be buyers,” he said.
Ping!
Promising approaches or Ponzi?
Nam Vet
Bernanke, the fear monger. He should learn to keep his mouth shut.
He’s doing the best he can. This problem was not really his doing. I don’t think Greenspan was particularly at fault either. Given the events of the dot-com bust, 9/11, and the recession, the low rates were warranted. There was some unscrupulous lenders for sure, but the real problem is that there were lots of non-worthy (financially speaking) people who bought into the idea that the American dream is to own a house with a lawn and a white picket fence. Banks then got greedy by underwriting and taking on derivatives and other tier-3 assets supported by repackaged securities. All hell broke loose from that. And we’re still suffering through it. It’s a difficult situation. Although mortgage lenders are much more cautious now, there’s nothing preventing this (or something similar) from happening without more regulation. All kinds of things are securitized, repackaged, and sold. This kind of activity has been happening with credit card loans, for example, since the Mid 80s.
I wonder if he regrets inverting the yield curve and keeping it that way for so long.
Inverting the yield curve too long?, naaaahhhh, just following orders to advert the eventual collapse of the Ponzi scheme as long as possible.
Yes, but everyone has known all along that credit card debt is unsecured. And nobody has been selling credit cards to the consumers by promising that buying more than you can afford on your card is a way to secure financial independence...(as was done with supposedly "prices are going up forever" real estate investments).
Cheers!
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