This is post is primarily to document my assertions of self insurance by the banks in their alleged efforts to prop up the monoline (or should I say multilines?). Below you will find a chart with links that provide, in extreme detail, the insured holdings of a handful of banks and one homebuilder with a large mortgage operation (I do mean extreme detail, including asset name, CUSIP #, ratings by all major agencies, vintage, etc.). Let me add that I don't know how much of this is actually bank inventory versus what was sold off, but my guess is that the banks got stuck with the vast majority of everything from the last year or so. In addition, most of the underwriting banks can get stuck with the stuff that was found to violate the agreed upon underwriting guidelines (which is potentially a lot) for a certain period, even if it was sold off. This is something that can sink the smaller equity base banks such as First Franklin.

This is $120 billion dollars right here, and it is nowhere near comprehensive. These are RMBS, CMBS, and a smattering of consumer finance ABS insured by MBIA and Ambac. I know everybody thinks that we may be coming to the end of the writedowns from real estate related devaulations, but if that is what everybody thinks then everybody is wrong. This bubble took at least 6 years to build, it is not going to dissipate in 1 year. We are about 50% through the subprime crisis, but since this problem was never a subprime issue to begin with, we have lot more to go. There are all of the other classes of mortgages, the commercial real estate market, which I went over in detail , there is the consumer finance markets (recession, anyone?), then the big grand daddy of them all, the leveraged loan, junk bond CDO and CDS market - crashing at a financial institution near you. I am 50% through a forensic analysis that will expose the junk bond CDOs held by monolines that will probably knock your socks off. Alas, I digress...

This credit problem and real asset bubble is a result of combining very cheap money with the lax, "other people's money", moral hazard to be had whenyou don't need to be responsible for your own underwriting - otherwise known as the natural consequence of asset securitization. Why fret over due diligence when we're just going to sell the stuff off. The following are a sampling of whose holding the bag...

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I came across an interesting story in, and am including an excerpt. I would like to hear your feedback:

Henry Blodget of Silicon Alley Insider, Barry Ritholtz of FusionIQ, Nouriel Roubini of RGE Monitor and Jonathan Glick of Gerson Lehrman Group were on a Money:Tech panel chaired by Paul Kedrosky called Blogs, Analysts and the Future of Equity Research. Part of the discussion was about the value of research being largely related to how much trust a reader will place in a writer. Years ago it was believed you could only trust the recommendations of an analyst employed by a well-known sell-side shop. Now a blogger can established a track record as a knowledgeable analyst and can develop trust and an audience. And Gerson Lehrman will connect a trusted blogger, who has a specific area of expertise, with a hedge fund or private equity investor for private consultation.

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I remember just a few months ago, Mervyn King et. al. were quite harsh on the US and the Federal Reserve for coddling our markets instead of having it take its medicine. Fast forward few months and a few billion pounds of "bailout money" and here we have the same crew nationalizing banks. Hmmm!!!

The US may have some rough waters ahead, but we damn sure won't be swimming in them alone!

Alistair Darling on Sunday announced the first nationalisation of a sizable British bank in a quarter of a century as he put Northern Rock into public ownership, infuriating shareholders and shocking the two private bidders hoping to take over the stricken mortgage lender.

Visibly concerned to avoid queues forming outside branches this morning, the chancellor and Ron Sandler, Northern Rock's new executive chairman, insisted it would be "business as usual".

News of an emergency loan to Northern Rock from the Bank of England last September triggered the first run on a British bank in more than a century. The government has been trying since then to find a buyer for the bank that would enable the £25bn in Bank of England loans to be repaid.

Shares in the bank, which closed at 90p on Friday, will be suspended this morning and shareholders can expect virtually no compensation for their equity.

Mr Darling said the legislation to be brought to parliament on Monday would appoint independent arbiters to determine what the shares were worth, but the legislation would propose that the government should not be required to compensate shareholders for any value that is dependent on taxpayers' support.

The government's move stunned shareholders, who were last night considering action. Jon Wood of the SRM hedge fund, the bank's biggest shareholder, said: "This is a very sad day for the stock market, banking industry and the reputation of the UK as a financial centre."

Noting that the chancellor insisted the bank was solvent, he added: "We will pursue all avenues to protect that value for shareholders."

Robin Ashby, founder of the Northern Rock small shareholders group, said he was "shocked and appalled" that shareholders "were having the bank stolen away from them".

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Yep, I said it. The government bailout. The builders are now looking to get into the tax refund business in lieu of the house selling business. This actually exacerbates their problem in the medium term to gain a short term advantage. They need capital, so they are taking a big negative mark to market to do so. This accelerates the devaluation of home prices which accelerates the problems associated with it, devaluation of mortgages, foreclosures, etc. This does quicken the arrival of affordable homes (the lack of which is one of the key drivers to the diminished demand), but it also hastens the demise of the companies that just can't hang in there by making supply even more abundant at even lower prices: be it builders or financial concerns such as banks.

The interesting thing is that the federal government is subsidizing this directly through tax refunds. If you add it up, a couple of dollars from your stimulus package refund check went directly to the builder tax refund/bailout (that is assuming all of the builders wish to take advantage of this financial engineering, and I believe all of the big ones are aggressively looking into it as I type this post) - and the bailout may not even work for some builders. Lennar raised over a billion dollars in cash between tax refunds and asset sales, and they are still squarely in bankruptcy territory according to their z score.

Due to the abrupt nature of the home building lobby's cutting off of campaign financing, I assume the 5 yr tax loss extension may not be going as well as anticipated.

"The association's president, Brian Catalde, said in a statement that the group's political action committee, BUILD-PAC, had halted all disbursements to federal congressional candidates "until further notice." The statement added, "More needs to be done to jump-start housing and ensure the economy does not fall into a recession.""

"experts said the lobby's move illustrated how closely interest groups tie their donations to the decisions they hope lawmakers will take on their behalf -- a connection that usually goes unspoken.

"This demonstrates in a starker fashion than we're used to seeing how groups use political contributions to promote their positions in Congress," said Kenneth A. Gross, a campaign finance lawyer at Skadden, Arps, Slate, Meagher & Flom."

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Why in the world would the media (rhetoric question) report the
street rallying when Buffet offers to buy the only thing keeping
monolines afloat? He is effectively holding the sword labeled monoline
hari kari.

From Bloomberg :

Berkshire would put up $5 billion as capital for the plan and is
offering to insure the municipal debt for 1.5 times the premium charged
by the bond insurers to take on the guarantee. The insurers could
accept the offer and back out within 30 days for a fee, Buffett said.

course, management (at least the ones with any gray matter left) are
saying thanks, but no thanks. Wait a minute, though. They say that CDOs
have value and the mark downs are a temporary thing that will amortize
and revert back to par or above by maturity. If that was truly the
case, and you are strapped for capital that no one appears to want to
give to you, Buffet's offer makes plenty of sense. After all, he is
willing to pay you 2/3rds of what you paid for this low growth risk, but you get the capital that you seek so desperately and you get to capitalize on those structured products that you feel the market undervalues so foolishly. That
's a damn good deal for someone who is scrambling for money. Then
again, that's only if you really believe your own structured product
story. I don't think they do.

The only stock that should be rallying
is Berkshire Hathaway. Outside of potential for Buffet's stock holders,
nothing has changed. Even the Buffet equity potential has not changed
much. We all knew this is what he wanted to do - take advantage of the
mistakes that the monolines made with very little risk.

Published in BoomBustBlog

We actually had a modern day run on the bank in the UK and the equity markets shrugged it off.

It is a mistake, plain and simple. I normally don't like to tell people who specialize in a business how to run it, since they probably know more about their business than I do - but sometimes the mistakes are just so glaring. I don't care how many analysts are poring over how many books at Countrywide. BAC's error is not misjudging the value of Countrywide now, but misjudging the macro environment in which Countrywide operates.

My experience has been primarily understanding and evaluating companies from the equity perspective, but that definitely doesn't mean that I ignore the fxed income side. I am just not better at it than the other guys. What I have been noticing of late is that credit markets have been screaming murder for some time now, and the equity markets have been humming along new bullish highs and trading runs as if nothing is truly wrong. This is a strong indicator that momentum trading has again taken control of the markets. It is an environment where price trumps value. The last time this came to a head was the dot com bust. It took many institutional and individual investors 5 to 6 years to break even. Some never recouped their losses. Well, my gut has been telling me for about a year and change now that we are back there again. 2008 thus far has done nothing but confirm that we have come to a head. The pic above was an actual shot (one of very many at various locations) of the run on Northern Rock Bank in the U.K. This was real, and it was indicative of a real problem.

Well, we had a very recent run on the bank here in the states as well. There were pictures all over the web when it occurred, and now mysteriously, they are all gone. All I was able to retrieve was this screen capture of a thumbnail from Just as the pictorial remnants of the run have somehow disappeared, so has the equity markets prudence in the face of such a run. You can guess which bank got ran on.

Published in BoomBustBlog
Now, I am far from a fixed income specialist, but I just couldn't resist commenting on this...
From Reuters:
Investors may snap up a planned $1 billion debt sale by a unit of MBIA Inc, after the beleaguered bond insurer was forced to ramp up the deal's yield to about 14 percent to attract greater interest, according to investors familiar with the deal on Friday. The issue of so-called surplus notes by MBIA Insurance Corp. is part of an effort by the bond insurer to buoy capital and preserve its "AAA" rating. Investors on Thursday said dealers were negotiating a coupon rate between 9 percent and 12 percent, or as much as double what similarly rated bonds offer. "They had problems getting it done at the levels that were initially talked about," said Mirko Mikelic, a portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. "When they bumped it out to 14 percent, it got a lot of people out of the wood work." At nearly twice the prevailing rates, what do you expect?

Surplus notes, unique to insurers, can bolster MBIA's balance sheet since they can be classified as equity. Pricing on the issue, initially expected this week, is uncertain, said another investor, who declined to be named. Delayed pricing may be due to negotiations over protections demanded by some large investors against a five-year call feature, he said.

Not mentioned here is the risk of MBIA tripping its net worh covenants, due to the drawdown caused by marking to market. I warned of this at least two months ago, but I am not going to say I told you so. Specifically, Ambac is at risk with their Citibank $400 million credit line, and MBIA with their $500 million credit line.

From Marketwatch:

A general pricing guideline for surplus notes would be 100 basis points higher than the spread of an existing bond from the company with a similar maturity. MBIA's 7.15% issue due 2027 is being traded at 488 basis points over Treasurys, according to data from MarketAxess.

From Dow Jones:

MBIA Inc. (MBI) faces a purported class-action lawsuit for violating federal securities law from Jan. 30, 2007 through Jan. 9, 2008, according to the law firm Bernstein Litowitz Berger & Grossman LLP.

Representatives from MBIA couldn't be immediately reached for comment.

The Armonk, N.Y., financial services company is alleged to have issued false and misleading press releases, financial statements, filings with the Securities and Exchange Commission and statements during investor conference calls regarding its expose to losses stemming from MBIA's insurance of residential mortgage-backed securities. I am not going to say I told you so, am I?.

The suit alleges that in doing so, MBIA violated section 10b of the Securities Exchange Act of 1934 and rule 10b-5.

MBIA's chief executive and financial chief were also named in the suit.

From Bloomberg:

MBIA Inc., the largest bond insurer, is offering to pay a yield of about 14 percent on its $1 billion of AA rated notes, a rate usually charged to the lowest-ranked borrowers.

The yield would be 3.125 percent higher than what Greenwood Village, Colorado-based First Data Corp. paid in October when it sold $2.2 billion of bonds to finance its leveraged buyout by Kohlberg, Kravis Roberts & Co., according to Merrill Lynch & Co. index data. It is also more than a 140% (or 840 basis points) premium over B of A's AA notes, indicating AA can mean a lot of different things to a lot of different people. If surplus notes normally demand a 100 point spread, we are in uncharted territory here. I know Moody's and I have two dstinct interpetations "investment grade". I think the market differs with Moody's on this one as well. But hey, I am not a fixed income guy so I don't know this stuff that well. I'm rather well endowed in the good 'ole common sense department, though.

Short interest in MBIA was 46 million shares as of Dec. 31, more than double that of a year earlier as hedge funds including William Ackman's Pershing Square Capital Management bet the stock will decline further. Short sellers sell borrowed stock in the hope of profiting by repurchasing the securities later at a lower price and returning them to the holder. Credit-default swaps on MBIA rose to distressed levels as investors demanded 12 percentage points upfront and 5 percentage points a year to protect MBIA bonds from default for five years, according to broker Phoenix Partners Group in New York. The price means it costs $1.2 million upfront and $500,000 a year to protect MBIA bonds from default for five years. So, Moody's/Fitch and the market are at least 500 basis points in disagreement. Somebody's wrong. Fitch admitted that they factored into their investment grade modeling HPA (housing price appreciation) that would go on in perpetuity- that is that housing prices would never go down. Taking this into consideration, my bet is against the ratings agencies.

CDO Losses - MBIA, which gets 90 percent of its revenue from insuring state, municipal and structured finance bonds, reported profits every year for at least the past 16 years. Net income in 2006 rose 15 percent to $819 million. But they are taking unprecedented losses now. The $737 million expense includes $614 million set aside to cover losses on home-equity loans, MBIA said today. The value of CDOs the company insures has slumped by $3.3 billion before tax, MBIA said. That includes about $200 million that MBIA expects to pay claims on. I'm not going to say I told you so.

The losses forced MBIA to ask Barclay's Bank Plc to change terms of a credit agreement to help it avoid breaching a net- worth condition because of the losses, according to a regulatory filing today. I'm still not going to say I told you so.

The company said the losses aren't ``predictive'' of future claims. He's right. Future claims are probably going to be worse...

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The National Association of Realtors released results stating sales actually rose .04% (statistically significant?), but were down 20% from last year with prices down across the board. The Times Online is reporting Shiller Says America could plunge into Japan-Style Recession.

lerah book"Losses arising from America's housing recession could triple over the next few years and they represent the greatest threat to growth in the United States, one of the world's leading economists has told The Times.

Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years.

Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: "American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars' worth of losses."

He said that US futures markets had priced in further declines in house prices in the short term, with contracts on the S&P Shiller index pointing to decreases of up to 14 per cent.

"Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years," he said."

My take: I believe that my blog's readers are considerably above average in financial acumen and common sense. The NAR is simply not an entity to be taken too seriously, due to the obvious conflict of interest exemplified by their ex-economist, [[David Lereah]], who published some of the most absurd BS I have ever seen come from a nationally reknown organization. Examples of his work from Wikipedia: Are You Missing the Real Estate Boom?: Why Home Values and Other Real Estate Investments Will Climb Through The End of The Decade�And How to Profit From Them was published in February 2005 at just about the tippy top of the bubble (that takes some talent). One year later in February 2006, as the market is already on it's way down, Lereah retitled his book Why the Real Estate Boom Will Not Bust and How You Can Profit from It. Lereah's previous book The Rules for Growing Rich: Making Money in the New Information Economy touting investment in technology company equities was published in June 2000 at the onset of the collapse of the dot-com bubble. This extreme cheerleading has died down substantially, but the overly optimistic spin is still evident with their new economist, Lawrence Yun.

Mr. Shiller, is a different story, though. He is to be taken seriously and has no such conflicts that I can see. BUT (there always is a but, isn't there?), you should know what it is you are looking at when you stare at his numbers. In September of last year (Happy New Year, everybody) I cautioned about misreading the numbers from the Case-Shiller index (see The Real Trend in US Housing Prices... ).

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Okay folks, now its official! According to Moody's, you can now rest asured that your retirement portfolio insured by Ambac is just as safe as those insured by Berkshire Hathaway, et. al., - AAA safe! Moody's has spoken...

"Moody's gave a tentative pass to the biggest bond insurer, MBIA Inc., by affirming its rating late Friday but changing the outlook to "negative," in a move sure to cause howls from bearish investors and sighs of relief from Wall Street. Moody's also affirmed the triple-A rating of Ambac Financial Group Inc., another major bond insurer.

Moody's update of its view of the bond insurers had been awaited because of concern about the impact of troubles in the mortgage market on securities that bond insurers cover. Bond insurers guarantee the principal and interest payments on more than $2 trillion in debt, including securities that are backed up by mortgages.

Both MBIA and Ambac are top-rated insurers, and both have announced moves this month to boost their capital, which could help protect those ratings. This month, a private equity firm agreed to provide up to $1 billion to MBIA, which said at the time that it was also considering additional capital options. And Ambac struck a deal under which it bought reinsurance for a $29 billion portfolio."


Published in BoomBustBlog
Friday, 07 December 2007 00:00


Theman_2_4 A few have emailed me to ask my opinion on how the new prime will affect the companies that I cover and invest in (against). Well, I believe that this is basically a non-event from an economic perspective with very little effect. This is primarialy a political move, wich is unfortunate because the policy guys actually had a chance to help someone. Below is my annotated excerpt from the American Securitization Forum Outlines Procedures for Servicers to Follow in Streamlining Loan Modifications.

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