Monday, 01 November 2010 09:16

The Inevitable Has Come To Pass and Those That Insured Guaranteed Blowups Are Being Blown Up!

Zerohedge had posted an article this morning that brought back memories of how lonely it can be to have a contrarian, dissenting opinion - Ambac Does Not Make November 1 Coupon Payment, To File Bankruptcy Within A Month If Unable To Raise Additional Capital . You see, I have alleged Ambac to be insolvent for 3 years now - seriously, Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion in Equity! This post was written in November of 2007. On November 1st, 2010 the chickens are now coming home to roost (again). Of course, the sell side never really agreed with me. After all, there are two sides to every trade (excerpted from the afore-linked article)...

Bank of America Top Picks (June 2007)

Ticker Rating Price Target Price as of 11/29/07 Profit on the BofA Call % Profit
SCA B $23.60 $37.00 $6.69 ($16.91) -71.65%
MBI B $60.33 $85.00 $30.04 ($30.29) -50.21%
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You really can't get rich listening to these guys. Hopefully, you can see where the use of their default data is a conservative approach (even a bit rosy), albeit tweaked ever so slightly for the sake of reality. As you may have ascertained, I do not put a lot of faith in sell side research. I have even less faith in the big three rating agencies research (although Fitch is trying to be taken seriously). Thus, even if they deem ABK and MBIA not in need of more capital, that is near meaningless in my book. These are the same companies that rated the insured portfolios AAA a year or two ago that are now taking up to 20%+ losses.

Of course, this may not be surprising to some, since the best performing sell side analyst during this time period (save yours truly, of course) only racked up 38% in accurate calls: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

We also have to contend with the moral hazard/bailout issue. If you read my earlier missive on MBIA, I detailed the rating agencies' dilemma.

Six Degrees of Separation: Guess who Ambac insures!

Bank of America issued a report on the monoline insurers on July 30th, 2007 that states that ABK’s RMBS exposure to troubled companies is limited to only 4 cos. with vintages primarily in the early years excluding two relatively well performing underwritings. Despite this, they failed to include in this caveat the consumer finance insureds:

    • Countrywide, which probably has one of the worst performing portfolios in the industry;
    • GMAC, who has also suffered significant losses that GM has been forced to cover, hence hampering a clean sale of the company;
    • Indymac, another company that is saddled with mortgage related losses that is on the insured’s list (Indymac and Countrywide have had their shares more than halved in the last few months. I was short these companies. CFC may go bankrupt);
    • Lehman brothers has some losses to contend with as well, but I don’t know to what extent since I don’t follow it – I do know that they are the 2nd largest MBS house on the street, next to Bear Stearns;
    • Greenpoint Mortgage Funding is defunct, wound down due to losses;
    • Then we also have Citimortgage (SIV king whose own mortgage portfolio is a mess);
    • Accredited Mortgage Loan (bankrupt or close to it);
    • Wachovia (just reported a billion plus writedown on mortgage assets);
    • Countrywide Revolving Equity Trust/Alt-A trust (need I say more about undocumented 2nd lien loans from this lender);
    • Option One Mortgage Trust (nearly defunct due to mortgage losse);
    • BofA, mulit-billion dollar mortgage asset writedown;
    • and Newcastle – who I believe is either out of business or close to it. I stopped following it some time ago.

These are the companies and exposure that I am familiar with, at first glance in the consumer finance portion of Ambac’s portfolio, without any research. Just imagine if I took a real hard look at the insureds.

Now, using some common damn sense, would you think that the company that is insuring these guys’ mortgage and finance products with 90x leverage may be having some problems that they may not be coming forward with. I have over 100 pages of proprietary analysis and calculations costing me weeks of analyst hours, that tell me Ambac may be out of business soon – but I really didn’t need to do all of that math and research if I just glanced at the bullet list above.

Now, as my longer term readers now, the list above was literally a who's who of Reggie's Short Parade...

  1. The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?

  2. The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC. The question is, “Can they monetize those hedges?”. I’m curious to see how the options on Lehman will be priced tomorrow. I really don’t have enough. Goes to show you how stingy I am. I bought them before Lehman was on anybody’s radar and I was still to cheap to gorge. Now, all of the alarms have sounded and I’ll have to pay up to participate or go in short. There is too much attention focused on Lehman right now. ) | I just got this email on Lehman from my clearing desk Monday, March 17th, 2008 by Reggie Middleton | Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008 | May 2008
  3. The collapse of state and municipal finances, with California in particular (May 2008): Municipal bond market and the securitization crisis – part 2
  4. The collapse of the regional banks (32 of them, actually) in May 2008: As I see it, these 32 banks and thrifts are in deep doo-doo! as well as the fall of Countrywide and Washington Mutual

Despite what, in retrospect, appeared to be overwhelming evidence of insolvency, I received a lot of flack over the Ambac article. Well, all is well that ends well. For those who don't believe the big banks are in a very similar position, I suspect you will be reading an article similar to this one on banking in a year or two.

Last modified on Tuesday, 09 November 2010 10:39


  • Comment Link Reggie Middleton Monday, 01 November 2010 13:11 posted by Reggie Middleton

    No, I haven't looked at the Canadian banks.

  • Comment Link Chris Edwards Monday, 01 November 2010 13:08 posted by Chris Edwards

    Have you had a good look at the Canadian Banks recently, They seemed to come through the last shakeout better than any other country but I keep thinking that they all have a large US exposure

  • Comment Link Reggie Middleton Monday, 01 November 2010 11:54 posted by Reggie Middleton

    Timing is difficult without a crystal ball. The banks should have taken their medicine last year, but the government is apparently complicit in keeping dead matter afloat. The key question is which will come to fore firs, a change in political mindset, or the true nature of the market that will force true price discovery.

    I would doubt it would take two years, but then again I said that in 2008 and here we are two years later...

  • Comment Link Reggie Middleton Monday, 01 November 2010 11:53 posted by Reggie Middleton

    Timing is difficult without a crystal ball. The banks should have taken their medicine last year, but the government is apparently complicit in keeping dead matter afloat. The key question is which will come to fore firs, a change in political mindset, or the true nature of the market that will force true price discovery.

  • Comment Link Andrew Macpherson Monday, 01 November 2010 11:36 posted by Andrew Macpherson

    ditto that, and after following you for a while I'll commit to paying for next year.

    do you really think we have to wait a year or two for the banking system to slide? reading you JPM info makes me think that the slippery slope is much closer?

  • Comment Link Reggie Middleton Monday, 01 November 2010 11:08 posted by Reggie Middleton

    When the writing is on the wall, make sure your money is not up against that wall!
    Of course, I would suggest you become a paying subscriber. How dare you ask such a question? :-)

  • Comment Link Maria dos Santos Monday, 01 November 2010 11:04 posted by Maria dos Santos

    Reggie just how do I,a peasant,make some money from this logic?

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