Today's LTCM? If so, watch out! (my title)

MBIA could be the catalyst for much of what we're seeing. I'm wondering how much WCOME debt they're going to be asked to cover after the bankruptcy filing becomes official.

Abstract: MBIA is the LTCM that is about to set off the powderkeg of a global financial market we have. They are effectively sporting a "debt" to equity ratio in the triple digits, and apparently occupy a blind spot in the financial reulatory picture. They insure over $400B par value of bonds, and $720B total value, on - get this - a mere $4B equity! All it would take is one major bankruptcy of an insured party, and they're under. The ramifications of an MBI bankruptcy are non-obvious, but enormous. Instantly, the triple-A financial rating of $440B par value of bonds vanishes. Hundreds of billions of dollars in debt is exposed as the junk that it is, which results in the forced liquidation of a huge portion of that by parties that are not permitted or are not comfortable holding junk. You think the billions lost on Worldcom bonds was bad? You ain't seen nuttin' yet. Instant junk bond chaos. Liquidity vaporized. No more asset-backed securities market. All it would take is one $4B knock - and it may have already happened in WCOM.

1. They do not just 'bless' the securities, they insure them.
2. The securities that they insure contain a lot of 'support' for the higher rated tranches. Basically, they have several tiers of bonds that are rated from AAA to BB and such.. Basically the payments to the higher rated tranches (the insured ones) are made first, and the lower, uninsured tranches last. The losses in the portfolio of loans are first allocated to the lower rated securities, and then to the insured, higher rated tranches.
3. MBIA buys re-insurance (in tiers), and hence spreads the risk out even further.

This is an unbelievably complicated area of finance, and should not be used as a scapegoat for the problems that have been popping up in the market. I agree with the post that we should be vigilant, but too many people are going ape on the market without considering all of the realities...

When it comes to structured finance, people need to realize that the market efficiencies (as the one described in the post) have allowed us to lower borrowing costs (through rationalizing credit risk) for all Americans. If we did not have a system that allowed people to generalize the credit risk of individuals the reasearch costs banks/credit card companies would face to determine our eligibility to borrow would be so high as to be prohibitive. Granted it is not perfect, but it has brought consumer borrowing rates to levels that would not have been possible under any other system that I can think of.

That being said -- be careful out there, this market sucks.

MBI is ugly, for sure, but there are worse looking charts.

And...

As Fitch reported in its June 28 press release, WorldCom exposure is not expected to affect the 'AAA' rated primary financial guarantors Ambac Assurance Corp., Financial Security Assurance Inc., MBIA Insurance Corp., and XL Capital Assurance Inc. due to first loss protection within the CDOs in which those companies participate. Financial Guaranty Insurance Co. and CDC IXIS Financial Guaranty have no exposure to WorldCom.

The system is complex and levered, to be sure. But if there's a train wreck, I don't think MBI is the most likely trigger.

On prudentbear.com, there is a weekly column by Doug Noland called Credit Bubble Bulletin--his archieves are available; he has been on this exposure for some time and he too argues that it is a threat to bring the monetary system down.

His analysis is based on the threat of a general debt implosion where the array of overfinanced real estate, consumer debt, insured debt and securitized debt can no longer be serviced which I believe would have broad enough consequences to bring the system down.

However if you just take the narrow MBIA collapse, I do not follow that through to the end of the money system. For one thing, as somebody else points out, if MBIA goes down, it is still in first place in the underlying bankruptcy (MCI etc.) and reaches some assets that have value--so the end of MBIA is not a complete zero.

At that point, sure there is pain to holders of debt instruments who do not get paid because the MBIA insurance did not pay--those holders have a bad investment. How does that end the system? There is also lots of debt that was formerly triple A because it was insured that is now junk but again so what? Those investors also have some issues. In fact some of those instruments, at the moment look like opportunities for someone who is capitalized to handle the problem.

Incidentally, while we are looking at opportunities, World Com is not exactly valueless either. MCI has some real hard assets in the way of an existing network. By the way, (and AOL is a lousy system) but the current impediment to AOL is no access to a highspeed capacity, probably ever. What do you suppose MCI would be worth to AOL?

No one who reads my posts can mistake me for any kind of bull--the Dow is going to end somewhere around 1200; but as long as the system stays afloat, there are going to be lots of opportunities in the reconstruction and salvage business.

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