Tuesday, 09 November 2010 02:26

Banks, Monolines, and Ratings Agencies As The Three Card Monte (Wall)Street Hustlers! Its a Sucker's Bet, Who's Going to Fall for it in QE2?

Summary: Banks, Insurers and ratings agencies conspired to move junk assets that were guaranteed to implode. They were (Wall)Street hustling, 3 Card Monte style.


Three Card Monte is a scam designed to separate a fool from his/her money. It is quite efficient, particularly when fools are involved!

The Boogie Down Bronx

The big secret to the Morgan Monte Scam is that it is 10% sleight of hand and 90% teamwork. Even if you are not deft enough to capture the sleight of hand, the key in avoiding it is to recognize the team players, whose key player is often YOU - The Mark!

The retail/typical qualified fund investor = "The Mark"

Monolines/FIRE sector= The Operator/Hustler!

Sell Side analysts = "Jess"

Rating agencies = "Paul"

How its done in the UK

Reenactment of 2009's entire year of Wall Street earnings

How its done on Wall Street, see outset...

Next, up we let the late Biggie school you on how Wall Street banks follow the Ten Crack Commandments!

Back in my teenage days, before Big Corporation America bought up most of 42nd street in NYC, you would regularly find tourists, young boys out in their first trip away from their suburban home on their own, and just plain fools getting separated from their money in a wholesale fashion by the Three Card Monte street hustlers. You see, with 1 part sleight of hand, and 9 parts deceptive teamwork (from a gang) that parlayed an individual's greed to override that part of the brain that controls common sense, these Street hustlers actually had a steady stream of suckers to rob.

Forty Deuce, as the brothers so affectionately referred to it, was a very different place back then - drugs, prostitution, and street hustling were the activities du jour. Actually, not so different from The Street today. Let me present you with a blatant example of The Old Three Card Monte hustle being played on Wall Street today, along with the team of the Fed, Washington regulators, and the ratings agencies. From Bloomberg:

Ambac Financial Group Files Bankruptcy to Restructure Bond Debt

Nov. 9 (Bloomberg) -- Ambac Financial Group Inc., a holding company for the bond insurer being restructured by state regulators in Wisconsin, filed for bankruptcy with liabilities of $1.68 billion as of June 30 on an unconsolidated basis.

Ambac Financial, which filed its petition for Chapter 11 protection yesterday in U.S. Bankruptcy Court in Manhattan, seeks to reschedule payments on more than $1 billion in bonds and other claims. Ambac Financial said this month it was trying to negotiate terms of a bankruptcy court restructuring with senior lenders.

Ambac Financial is the holding company of Ambac Assurance Corp., which has about $57.6 billion in policies insuring credit derivatives and other financial products that are being restructured by Wisconsin regulators, according to the company.

For those who have not been following me since 2007, I made very clear that Ambac was HIGHLY insolvent, and basically the walking dead - to wit: 

  1. Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billionn in Equity
  2. Follow up to the Ambac Analysis
  3. Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility

These posts were written in November of 2007 through the end of that year. I assert, with absolutely no shame nor ambiguity whatsoever, that monoline insurers such as Ambac and MBIA, as well as other financial institutions (as in many banks) that allege that they can write massive amounts (relative to their equity capital) of leveraged instruments on bubbled assets at the top of the asset bubble, yet remain solvent as that bubble bursts and asset values tumble 40% or more - are essentially scams. The losses are so great in these companies, that the three largest that were essentially taken over by the government have absorbed nearly half a trillion dollars in government aid. That's right, I said government aid, not losses! Just think about it. And the losses keep coming...

Freddie Mac Posts $4.1 Billion Loss in Quarter: Freddie Mac, pickled by way over a hundred billion in losses and still counting, literally has to borrow money from the tax payer to make the dividend payments on the money that it borrowed from the tax payer! The accountants say the losses are getting smaller, economic reality and Reggie Middleton say the larger losses lie ahead. See our Shadow Inventory worksheet for professional and institutional subscribers for proof - File Icon Shadow Inventory. Having to borrow money to pay the interest on the money that you borrowed is essentially the writing on the wall, isn't it?

I also assert that these scams cannot be pulled off in a vacuum. They need fellow scamsters, as as well as willing suckers, victims, investors on which to perpetrate said scams.  So, in this particular scenarios (and I have many, the monoline scenario is being used because it is in the news today), the monoline insurer is the (Wall) Street Hustler, who sold bogus protection (in the guise of insurance that wasn't under the reserve policy auspices of state insurance departments) to banks. Were the banks the suckers? In no way were they the mark! They were in on it. They needed these fake policies to move toxic trash off of the balance sheet, or at the very least to free up reserve capital. How did they do it? Well, they called in another member of the scamster squad, the ratings agencies, who have a very loyal following of passive, sheep, suckers, marks, investors. Here's how it went down...

Excerpted from A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007). Here’s the story in a graphical nutshell… (click to enlarge)

and then…

So, you see, the scam couldn't have went down without the major players in place. The following is a rundown of the gang and their mark...

The (Wall)Street Hustler: the monolines, ex. Ambac and MBIA, who were plainly insolvent the day I first looked into them

  1. Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billionn in Equity
  2. Follow up to the Ambac Analysis
  3. Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility
  4. A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton

The Mark: institutional and retail investors who don't subscribe to BoomBustBlog! :lol:

From the WSJ.com December 11, 2007:

Bond insurer MBIA Inc. got the capital it sorely needed for Christmas, but paid a handsome price. It also filled investors' stockings with a new lump of coal: a fourth-quarter profit warning.

Private-equity firm Warburg Pincus LLC agreed to commit as much as $1 billion to MBIA to help boost the financial guarantor's capital level and potentially head off a downgrade of its triple-A credit rating.

In addition to acquiring shares of MBIA at $31 a share, Warburg receives warrants that will allow it to buy an additional 16.1 million common shares of MBIA at $40 a share in the ...

The accomplice in disguise who urges the mark (the investor) to put his money in.

In the video above (this is how it's done in the UK), this accomplice is called "Jess". I'll call it Wall Street's sell side analysts and the ratings agencies - to wit:

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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And then you the other hustler's accomplice, detailed in the graphics above - the rating agencies:

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…

From WSJ.com:
"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."


MBIA takes nearly a billion dollars in value losses on its portfolio in one month, gets a 500 million dollar equity investment below current market price, and an offer for another $500 million through a discounted right's offering, which brings it back to where it was before it lost the $1 billion last month (which was in trouble) and it gets its AAA rating confirmed??? Ambac buys reinsurance from a company in the same business as Ambac taking very similar losses, and it gets to retain its AAA rating??? Doesn't anyone see concentration risk and an uncomfortable amount of correlation here, or is it just me?

And then you have the joke with the punchline known as Moody's rating's opinion - all too funny, LMAO :-) as long as you didn't follow their advice. See  Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility:

From Bloomberg news:

MBIA Inc. fell the most in more than 20 years in New York trading after Moody's Investors Service said the biggest bond insurer is “somewhat likely'' to face a shortage of capital that threatens its AAA credit rating.

A review of MBIA and six other AAA rated guarantors will be completed within two weeks, Moody's said in a statement today. Moody's revised its assessment from last month that MBIA was unlikely to need more capital after additional scrutiny of the Armonk, New York-based bond insurer's mortgage-backed securities portfolio.

“The guarantor is at greater risk of exhibiting a capital shortfall than previously communicated, (about a week and a half ago – my, aren't we fickle with our opinions) New York-based Moody's said. “We now consider this somewhat likely.''

SOMEWHAT LIKELY!!! This is the adviser that gave MBIA a AAA rating, the same rating that they give to the US Treasury Note! An they say the company is "somewhat likely" to experience a capital shortfall!

From Standard & Poors:

Standard & Poor's Ratings Services today lowered its ratings to 'D' on the senior swap and the class A, B-1, B-2, C, D, and E notes issued by Adams Square Funding I Ltd. The downgrades follow notice from the trustee that the portfolio collateral has been liquidated and the credit default swaps for the transaction terminated.

The issuance amount of the downgraded collateralized debt obligation (CDO) notes is $487.25 million.

According to the notice from the trustee, the sale proceeds from the liquidation of the cash assets, along with the proceeds in the collateral principal collection account, super-senior reserve account, credit default swap (CDS) reserve account, and other sources, were not adequate to cover the required termination payments to the CDS counterparty. As a result, the CDO had to draw the balance from the super-senior swap counterparty. Based on the notice we received, the trustee anticipates that proceeds will not be sufficient to cover the funded portion of the super-senior swap in full and that no proceeds will be available for distribution to the class A, B, C, D, or E notes.

Note, that the super senior stuff was supposed to be the super safe, overcollateralized stuff that allegedly justified the AAA rating for the garbage!

Today's rating actions reflect the impact of the liquidation of the collateral at depressed prices. Therefore, these rating actions are more severe than would be justified had liquidation not been ordered, in which case our rating actions would have been based on the credit deterioration of the underlying collateral.

The collateral (home prices) that backed much of the debt that was financially engineered in question, are now much, much lower in price than they were in 2007! The only prices that may have stabilized some were the prices of the assets bubbled up by the Fed using taxpayer money in an attempt to reblow the bubble. What do you think happens when the Fed stops blowing bubbles with the taxpayers' last breath? Well, we won't find out this week will we, since QE 2.1 has just commenced??!!

Across the cash flow assets sold and credit default swaps terminated, we estimate, based on the values reported by the trustee, that the collateral in Adams Square Funding I Ltd. yielded, on average, the equivalent of a market value of less than 25% of par value.

Mind you, Ambac's insured portfolio is 32% of this stuff. Are there anymore debates to be had regarding 50% or more recovery values?

Last quarter, Ambac increased its structured product loss reserve by about $75 million. Would that even be enough to cover the one loss above??? They have $29 billion of CDO exposure backed heavily by Subprime RMBS and ABS CDO Mezzanine that is more than likely to – no, let's make that, definitely result in significantly higher losses for the company. Remember, I feel that public finance will not be the cash cow it use to be and may even develop notable losses due to the bidding up of budgets on bubble revenue that is no longer available.

And what's up with S&P??? Their ratings go from AAA to D in one downgrade!!! You buy AAA rated paper, rated the same as paper with the full faith and backing of the richest government in the world, then suddenly you are told you won't get your money back! I might as well jump on Moody's ass as well. They change their tune on MBIA and the monolines (sounds like a music group akin to the Monkeys, or the Beetles) every other week. Everybody makes mistakes, especially me. But this is not a mistake. This stuff was not hard to see coming. Hell, all you had to do was read this blog. I query… Why, oh why, are investors heeding the reports of the ratings agencies? How many times must you get hit in the face before you put your hands up? I am not one for litigation (actually I hate and despise it, to put it lightly), but this stuff really, really begs the question.

The CDO story links into the article about from the good doctor and leads into my next set of concentrated shorts as well. I am looking into overpaying with stupidly low cap rates (commercial real estate gurus) and guys who have mounds of credit risk exposure to other guys who couldn't pay up if their lives depended on it. I will release the research to the free portion of the blog once I get my shorts in order – roughly a week or two.

BTW, I was referring to GGP in that statement - BoomBustBlog.com’s answer to GGP’s latest press release and Another GGP update coming…. They filed bankruptcy last year!

Oh, I think I left out one of those major rating's agencies. Oh well, just to be fair, let's cover all of the bases. Next up we have an archived article from Mish Shedlock's blog:  Fitch Discloses Its Fatally Flawed Rating Model

In a conference call regarding securitization and the sub-prime mortgage market crisis, Fitch responded to First Pacific Advisors like this:

Q: What are the key drivers of your rating model?
Fitch: FICO scores and home price appreciation (HPA) of low single digit (LSD) or mid single digit (MSD), as HPA has been for the past 50 years.

Q: What if HPA was flat for an extended period of time?
Fitch: They responded that their model would start to break down.

Q: What if HPA were to decline 1% to 2% for an extended period of time?
Fitch: They responded that their models would break down completely.

Q: With 2% depreciation, how far up the rating’s scale would it harm?
Fitch: They responded that it might go as high as the AA or AAA tranches.

Hmmmm! A 2% housing price decline could cause loses to reach the AA or AAA tranches, eh??? I wonder what these losses will do?

The Truth Goes Viral, Pt 1: Housing Prices, Economic Sales and the State of Depression

Tuesday, October 5th, 2010

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Subscribers have access to all of the data and analysis used to create these charts, in addition to a more granular application, by state in the SCAP template and by region in housing price and charge off templates – see

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I will be attempting to quantify the risks to the other parts of the bubbled up financial ecosystem borne from Ambac’s tardy, yet truly unavoidable bankruptcy filing and will report my findings, if any of substance, to my subscribers. Next up is a truly realistic look at the shadow housing inventory and why these mortgage related problems (ex. like the one above) are far, far from over. Click here to subscribe!

Related reading: Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

Friday, October 15th, 2010

Last modified on Wednesday, 24 July 2013 07:14


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  • Comment Link Reggie Middleton Thursday, 11 November 2010 03:31 posted by Reggie Middleton

    "“Money that should be invested in students, classrooms and fixing infrastructure in Pennsylvania is instead lining the pockets of Wall Street,” Jack Wagner, the state’s auditor general, said in a statement in April after calling on lawmakers to ban swaps. “State and local governments must stop gambling with public money,” he said."

    It's not even that the states are gambling with the money. They are allowing salesmen to sell them things that they do not truly understand. I would gladly have my tea vet these instruments for a nominal fee, a fee that would definitely be less than the $4billion in aggregate lost thus far.

    The key is to have an idea of what you are doing. If you don't fully understand it, then you shouldn't ever touch it.

  • Comment Link Justicia Thursday, 11 November 2010 01:38 posted by Justicia

    Fantastic analysis, Reggie. The investor "marks" of Wall Street monte scams never seem to learn, do they. From today's Bloomberg:


    Wall Street Takes $4 Billion From Taxpayers as Swaps Backfire

    Nov. 10 (Bloomberg) -- The subprime mortgage crisis isn’t the only calamity Wall Street created that’s upending the finances of U.S. states and cities.

    For more than a decade, banks and insurance companies convinced governments and nonprofits that financial engineering would lower interest rates on bonds sold for public projects such as roads, bridges and schools. That failed promise has cost more than $4 billion, according to data compiled by Bloomberg, as hundreds of borrowers from the Bay Area Toll Authority in Oakland, California, to Cornell University in Ithaca, New York, quietly paid Wall Street to end agreements since 2008.
    “It was brilliant, and it all blew up on me,” said Brian Mayhew, chief financial officer of the Bay Area Toll Authority, the state agency that gave Ambac Financial Group Inc., the New York-based bond insurer that filed for bankruptcy this week, $105 million to end $1.1 billion of interest-rate agreements. The payments equal more than two months of revenue on seven bridges the authority oversees around San Francisco.
    “Money that should be invested in students, classrooms and fixing infrastructure in Pennsylvania is instead lining the pockets of Wall Street,” Jack Wagner, the state’s auditor general, said in a statement in April after calling on lawmakers to ban swaps. “State and local governments must stop gambling with public money,” he said.

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