Reggie Middleton wrote:
I wouldn't go so far as to say rescued... But I know what you mean. In your opinion, can the insurer recover the ABS assets held by the CDO in the case of default, or have those assets already been pledged to the cdo itself and the insurer has only insured the tranche and not the cdo, hence have no underlying collateral to revcover?

hmmm. Some of which I agree, some of the analysis i dont think is deep enough. for instance risk factors affecting defaults for senior and super-senior tranches do not fully support your undercapitalization statement, although I agree they were probably a bit optimistic at first... Whether or not the capital funding was dilutive is not as relevant and a red herring.

Remember, the monolines only shore up senior, higly rated debt. This capital infusion was necessary and another corrective infusion will probably be necessary in the 2nd quarter of 08. However, the top monolines will get what they need from large cap hedge funds. I don't know how much I would "short" them. Amback is a different story though. look at the rating agency views.... its ALL depends on their view since they rate the CDO tranches AND the monolines.

I dont think there is "over" optimism about CDOs and structured finance recovery (not called ABS). Everyone is simply trying to ride it out and waiting in the equity market, municipal bonds, government securities and other safer areas (ie, commodities). No-one is touching the credit markets. Look at what JPMorgan Chase is doing for indicative analysis. They're the huge player in the credit markets.

I was confident in my position until you said you agree with me. Now I am concerned. :-) Dilutive effects mean the world when you are an equity investor - long or short. Would you rather share $1000 with 2 people or 4? In addition, if you apply an option pricing model to the warrants pincus purchased, they paid about $18 to $24 per share while the market price was about $10 more than that and the economically "unadjusted" book value was even more. MBIA short changed their current investors out of desperation, which aided the shorts. We all know that stated book value is nonsense since much of the structured product insurance should technically be booked at a loss at inception of the contract, but is not due to accounting ambiguities. As for shorting - MBIA fell from $66 to about $22 in two months. That is a phenomenal return on the short side - way over 100%.

MBIA is woefully undercaptialized, simply run the numbers under realistic default scenarios and you will see where they will burn through their current equity capital quite quickly, 104 basis point move in the total portfolio value will devastate corporate equity - the destructive power of excessive leverage. They have less then $7 billion in Stat capital. The $500 million they received form pincus, which was a ripoff to current shareholders, and the promise for an additional five, which is more of a ripoff, add up to $1billion, they have about $500 billion of exposure, with about $31 billion in speculative structured finance, and $8.1 billion in CDOs and CDO squared (guaranteed losses). That's why I queried the term "rescue". Pincus (unwisely, in my opinion) bought stock on the cheap at the cost of current shareholders. MBIA will not be able to get reinsurance at realistic terms for anything that they actually need reinsurance for, but their "good" risks, which will further dilute current shareholders. They are losing revenue, as now bond issuers realize that their insurance is really a scam and doesn't truly add value, and so they can't even earn their way out of this. NY, Chicago, and CA have all decided to go without insurance this past month for issuing muni debt. MBIA's chairman, director of risk management, president, and COO have all left the company in the last year and a half. What did all of these guys know??? Probably what is written in this email.

Ambac I am even more bearish on. That is because they were foolish enough to temporarily publish their rather risky profile portfolio for a while (it is no longer up there in the detail that it was), and I had my guys go through almost all of it line by line. $8 billion dollars of expected losses on $2.6 billion of market cap and $1.65 of equity with about $5 billion of stat cap. The performance of their potfolio in terms of losses is abysmal, and my guys have went through auto, consumer finance, structured finance and RMBS. They didn't go through the munis, which will take larger than normal losses since most muni govt. overextended their budgets during the RE boom, and now that there is a bust have significant capital shortfalls. I don't see a lot of large cap hedge funds trying to fund these types of losses. Most of the large funds have done awful this year except for the ones that did what I did, shorted the insurers, banks, and real estate cos. Now, there is a lot of contention on the viability of these companies. Some say buy, some say sell. You know where I stand on this. The business model of the monolines was bound to fail. They don't have the expertise, track record, or capitalization to underwrite the risk that they do. The CDO risks insurance was particularly foolhardy since no one knows what the loss tail really looks like because the stuff hasn't been around long enough.

The opinions of the rating agencies are meaningless at this point. Unless they are going to provide capital, AAA is pointless since the wiser insureds now see that the monolines can't truly back up the insurance that they are offering. You have even confirmed my point with that statement. Any company that needs a AAA rating to stay in business, by default, inherently does not deserve a AAA rating. The ratings agencies have been so wrong this time around that they have lost all credibility with any fairly astute investor. Tranches that thay have declared AAA have not only stopped paying nterest, they have lost more than 20% of the principal. AA down to mezzanine in some cases have been nearly wiped clean. They have admitted that they relied on perpetually increasing HPA. nothing goes up forever. The ponzi scheme has simply fallen apart.

TrackBack URI for this entry

Name

Email

Website

Title

Comment

smaller | bigger

Subscribe via email (Registered users only)

I have read and agree to the Terms of Usage.

Write the displayed characters

Add Comment Preview