December 03, 2020

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Reggie Middleton

Reggie Middleton

Selfies labore, leggings cupidatat sunt taxidermy umami fanny pack typewriter hoodie art party voluptate. Listicle meditation paleo, drinking vinegar sint direct trade.

  • I've had this research on MBIA sitting on my desktop for some time now, too busy to convert it into a post for the blog. The macro situation stemming from the real estate bust is unfolding just as I have surmised, albeit a bit quicker and more far reaching than I originally thought. It is scary, for nobody wants to see bad things happen to other people, and I don't want to get caught in a financial downturn regardless of how well prepared I try to make myself. On the other hand, these situations create significant opportunity for gain, primarily from those who refuse to acknowledge the fact that the wave is not only coming, but has reached us quite a while back. I have learned unequivocally what many probably new for some time now. What is that you ask? You really just can't trust government data. Now, I don't want to get into politics and conspiracy theories, but the data as of late has been so far removed from the obvious reality for many that it is almost signaling that the government doesn't even want you to heed the data and is giving you the requisite warning signals. Examples of which are employment data and inflation. Alas, and as usual, I digress, as such is the mind of insane idiot savant that my kids call Dad.

    Now, back to the title - What so special about the number 104? It is the number that will probably scare the pants off of anyone who is in equity investors, or potentially anyone who is a customer, of MBIA's insurance and guarantee products. It is the number that when reached, will leave the equity investor with shareholder certificates worth nothing. It is the number where MBIA's equity is wiped clean. Why are you being so damn cryptic Reggie, you ask? Because, I need for you to go through this history of how we came to this point before I explain in detail, so as to get a clear and comprehensive understanding of the situation. That is part of it; the other part is just because I feel like it. Now, let me give you a little cartoon of what the number is, then a background of how we got in this mess to begin with, then an analysis that shows how I got to this number. As usual, you can click on any graph to enlarge it.

    And then...

    Some time ago I came across this report on the MBIA and ABK by Pershing Square and found it absolutely intriguing. I posted it on this blog on September 3rd, when these companies were trading in the 60's and 70's roughly, and respectively (sometimes it actually pays to read this blog:-). I was actually impressed enough to take a small short position of my own without doing my own forensic analysis. This is something that I regret. Why? Because I am willing to assume significant risk once I convince myself of the strength of a position. Using third party research, I dabble at best - and rarely do I use third party research. So, I dabbled when I should have looked harder and took a significant position. After the fact, I looked further into the industry on an anecdotal basis, then all of a sudden, Bam! The proverbial feces hit the fan blades. The stocks fell so far, so fast, I was taken aback. So, I asked part of my analytical team to take a look at these guys, for I knew that a major problem the monolines, the banks, and the builders all had was a lack of understanding and respect for the rate of decline in value and default of instruments linked to bubble real estate - combined with excessive leverage. So they took a cursory look for me, and they pretty much confirmed my suspicions, but it is not straightforward. There conflicts of interest issues that goes far and wide. So much so, that I will most assuredly not be making anymore friends with this blog. Many of the financial professionals know this, but the layman may not.

    What's wrong with the ratings agencies?

    What's wrong with the ratings agencies? All of the major rating agencies feel MBIA is in good standing to weather the storm. Coincidentally, they all receive significant fees from the monolines and their customers. Hmmm! Now, there is this song by Kanye West, the rapper. A verse goes, "I'm not saying she's a gold digger…" Well, to make a long story short, any analysis born from compensation received from the entity you are analyzing will always be suspect, at least in my eyes. Conflicts of interest and financially incestuous relationships appear rampant to the paranoid conspiracy type (like me). If you remember my analysis of Ryland, I looked at data as far back as 1993. That gave a succinct, but barely acceptable snapshot of what to expect in turbulent times from a historical perspective. You would need much more data to analyze the more complex topic of MBS. It is believed by the naysayers, that the major ratings agencies have sampled data from only the good times, thus that is why their worst case scenarios still smell like roses. Their predictive prowess over the last few years doesn't look very impressive either. Massive swath of investment grade securities (that they, themselves, labeled investment grade - and were paid by the securities' issuers to do so) are being downgraded straight to junk. I know if I invested in AAA bonds that are losing principal and downgraded to junk in a year or two by the same rating that gave it an investment grade rating in the first place, I would be pissed. But, that is what happens without the proper due diligence, I guess. At least that is what the ratings agencies are bound to say. When looking at data gathered from the real estate boom, and not the busts, you get:
    ----- EXTENDED BODY:

    Data sets limited by favorable recent year trends

     

  • Low interest rates, which improving liquidity which allows bad risks to refi out of their situations
  • Rising home prices, which allow bad risks to sell out of their situations
  • Strong economic environment, allows for better earning power
  • Product innovation (hey, I can sell anything)
  • No payment shocks in existing (boom and bubble) data because borrowers have been able to refinance
  • Performance of securitizations benefited from required and voluntary removal of troubled loans

    Rating agencies assume limited historical correlation (20%-30% for sub-prime) will hold in the future (we've heard this line before) as the credit cycle turns (it is obviously turning now), correlations could approach 100%.

    Just imagine if the ratings agencies are as accurate with their opinion of MBIA as they have been with their opinions on the securities that MBIA insures. Look out below!!!

    Smaller advisories, coincidentally those that do not receive significant fees from the monolines and their customers, have a different take on the monolines. Take Gimme Credit, for example. Gimme Credit downgraded MBIA's bonds to "deteriorating" from "stable" earlier last week, citing the potential for write downs. They also stated that the other major agencies should have done so a while back. CDS market has also moved against the big monolines. I know everyone has an opinion, but the problem starts to look like a problem when you can prognosticate the opinions based on the incestuous nature of the money trail.

    Now, let's be fair to the big agencies

    To be fair to the big ratings agencies, they dance a precarious line. If they do downgrade the monolines, they, by default, downgrade all of the bonds and entities that they insure. That is not just mortgages and CDOs, but municipals, hospitals, etc. This ripples through various investment funds, government funds, the whole nine yards. Then again, it really doesn't look good when the companies that don't get fat fees from the insurers and their clients are so much quicker to downgrade than those that do. So they are damned if they do and damned if they don't. Then again, there a fair share of boutique research houses that say that it would take an extremely fat tail and near 100% correlation amongst the insured securities to cause failure in the monolines. Well, have you ever been to Tasmania? Tasmanian devils have very fat tails, as well as a whole host of other animals such as fat tailed skinks and occurrences with a 1 in 2 million chance of happening such as the outlier that took down LTCM. You see, when everyone is leveraged up, and there is one door when someone yells fire - it is going to get awfully crowded around that exit. Call it correlation, call it common sense, call it whatever, but I think we will soon be calling it a foregone conclusion. These fat tails don't have to be as fat as the financial engineers think they have to be. As for the 100% correlation, well that was briefly mentioned in the bullet list above, but from a common sense perspective, as the subprime underwriting really takes effect (what we have seen thus far is just the start), everyone in leveraged instruments (i.e. everyone) will start running for the exits at the same time - hence 100% correlation. I figured this one out without a model, nor a Financial Engineering PhD. I know there are those who disagree with me or may think that I don't know what I am talking about. Well, a few months will reveal one of us to be wrong. Somehow, I don't think it will be me.

    Relation between MBIA and Channel Re

    Channel Re is a Bermuda-based reinsurance company established to provide 'AAA' rated reinsurance capacity to MBIA. Renaissance Re Holdings Ltd, Partner Reinsurance Co., Ltd, Koch Financial Re Ltd and MBIA Insurance Corp are the investors in Channel Re. MBIA has a 17.4% equity stake in Channel Re and seeded Channel Re with the majority of its business. Channel Re has a preferential relationship with MBIA.

    Channel Re has entered into treaty and facultative reinsurance arrangements whereby Channel Re agreed to provide committed reinsurance capacity to MBIA through June 30, 2009, and subject to renewal thereafter. Channel Re assumed an approximate of US$27 bn (par amount) portfolio of in force business from MBIA Inc and has claims paying resources of approximately US$924 mn. (source Renaissance Re 10K. Swapping Paper Losses Channel Re is insulated against huge losses because of adverse selection in terms of pricing and risk on the assumed portfolio of MBIA. The agreement between the Channel Re and MBIA protects channel Re against any major losses. This financial reinsurance scheme smells a little fishy.

    Is MBIA dumping mark to market losses on Channel Re through reinsurance contracts?

    The SEC and the NYS Insurance Dept. thought so. In addition, there is overlapping risk retained through the relationship - MBIA has an equity investment of 17.4% in Channel Re. Channel Re assumes 52.37% of the total par ceded by MBIA of US$74 bn. The total par ceded not covered through reinsurance contracts due to the equity investment of MBIA in Channel Re is US$6.7 bn. Thus, there is a little under $7 billion dollars of risk that many think MBIA is covered for that it really is not. Then there is the case of diversity of Channel Re's portfolio. I have a slight suspicion that MBIA's business makes up much too much of it to be considered well diversified. Rennaisance Re, the majority owner, has also come clean admitting that Channel Re has a very high exposure to CDO losses and mortgage backed securities. Uh oh! This admission came from the extreme losses Channel Re took last quarter due to mark to market issues for mortgage backed paper. Again, is MBIA doing the old financial reinsurance scheme that was outlawed not too long ago? My gut investor's feeling tells me...For those not familiar with the reinsurance game, here is a primer on financial reinsurance

    Haven't we learned how dangerous leverage can be?

    Particularly when you don't have a firm grasp on the underlying collateral and risks involved

    Do you remember my exclamation of the incestuous relationships? There is the moral hazard issue of everyone getting paid up front except for the ultimate risk holder.

    Keep in mind, in terms of terms of the ratings agencies:

  • They only get paid of the deal closes favorably, and banks go ratings opinion shopping for the desired results - very similar to the residential real estate boom where brokers went shopping amongst appraisers to get the blessed number that they desired. Without that number, the appraiser/ratings agency just won't get paid.

  • Fairness opinion fees are only really not that synonomous with fairness, since the grand arbiter of fairness is the guy that paid to get the deal done in the first place.

  • Structured finance (like that of MBIA's business) is 40% of the rating's agencies' revenues and pay out considerably higher margins than the plain vanilla bond business

  • Reputational risk exists when opinions are changed quickly. They do not want people like me asking why a tranche can go from AA to CCC in a year!!! I think what companies such as Fitch are figuring out is that reputational risk exists in greater part when opinions are changed too slowly and are questioned by pundits publicly in the face of failure. I have noticed that Fitch has gotten much more aggressive than the other two major agencies.

  • There are several other reasons, which I won't go into here, which are bound to lead one to believe that conflicts of interests are rampant.

    So, if I am right, and the insurers are wrong, what happens as default rates increase?

    The 7 graphics immediately above are from the Pershing Capital Report linked above.

    Monoline insurers make a very unique counterparty. Unlike guidance of traditional ISDA contracts, and unlike traditional insurers, financial guarantors don't put capital up front, they don't post additional capital in the case of contract value decline, and need not post additional capital in the case of an adverse change in their credit rating.

    MBIA is woefully undercapitalized in the event of a major mortgage security default event, despite the opinions of the large ratings agencies. Look at the graph and use common sense.

     

    Image010

     

    As of Q3 of 07, they had approximately 35 basis points of unallocated reserve to cover net (of reinsurance, see the redundant risk through Channel Re note above) par outstanding financial guaranty contracts. Put in lay terms, MBIA, after buying reinsurance to cover itself for potential losses (some of which it has actually bought from itself), has 35 pennies to pay for every $100 of risk protection that it sells to its customers. This is cutting it thin, no matter which way you look at it. Particularly considering how reliably the subprime underwriting of the recent boom has caused defaults to occur, uniformly and with increasing correlation across multiple and historically disparate underwriting classes. Now, this 35 cents of protection coverage for every $100 of risk translates to extreme leverage. If you think the hedge funds took excessive capital risk due to leverage, you ain't seen nothin' yet.

     

    Image011

     

    MBIA easily sports 100x plus leverage for the last quarter or two.

    MBIA has increased exposure to Structured Finance during period of rapid innovation and lower lending standards. It's structured finance exposure has increased along with all of the other housing sector related companies during the boom, more than doubling in the last ten years.

     

    MBIA has significant capital at risk

    Source: Pershing Capital

     

    Source: Pershing Capital

     

    Source: Pershing Capital

     

    Being so sensitive and exposed to CDOs, one would be curious as to what happens if the CDO spreads widen. Well…

    Effect of Change in spread in CDO

       

    Figures in Million of dollars

       

    As of 31/12/2006

       

    CDO Exposure

     

    130,900

    Statutory Capital Base

     

    6800

         

    Assumed Duration of the CDO bonds

    5

     

    Change in Spread that can eliminate capital

     

    In bps

    104

     

    Capital Eroded

     

    6807

         

    Remaining Equity

     

    -6.8


    So, an increase of 104 basis points in CDO spreads wipes out the equity of MBIA, TOTALLY wipes it out.

    To put this into perspective, let me show you the entire sensitivity grid. Hey, no matter which way you look at, these guys are at risk. They have $6,800 in capital. Just move your finger over any combination of CDO duration and spread in basis points, and if you come close to that 6,800 figure, bingo! The current duration average is approximately 5 years. So the question is, "Will spreads reach 104, or more?" Well, look at the charts above that I posted from Pershing. Better yet, look at the subprime underlyings performance, which can be mimicked by the ABX from markit.com. Horrendous, indeed.

     

     

    Sensitivity Analysis

           
       

    Spread in BPS

    Duration

     

    100

    102

    104

    106

    108

    3

    3,927

    4,006

    4,084

    4,163

    4,241

    4

    5,236

    5,341

    5,445

    5,550

    5,655

    5

    6,545

    6,676

    6,807

    6,938

    7,069

    6

    7,854

    8,011

    8,168

    8,325

    8,482

    7

    9,163

    9,346

    9,530

    9,713

    9,896

    MBIA Valuation

    MBIA appears to have engaged in the all so popular share repurchase method of attempting to raise share prices when they don't have anything better to do with shareholder capital. They have authorized and pursued $2.4 billion worth of share repurchases and special dividends. This is unfortunate since one would believe that they need every dime of capital they can get. Did the "program" work? Well, let's see…

         

    FY2007

     

    FY2008

    All Figures in Millions of Dollars, unless othrerwise stated

     

    Mean Multiple

    High Multiple

    Low Multiple

     

    Mean Multiple

    High Multiple

    Low Multiple

    Tangible Book Value

     

    6,684

    6,684

    6,684

     

    7,513

    7,513

    7,513

                       

    Diluted number of shares

     

    128.7

    128.7

    128.7

     

    123.71

    123.71

    123.71

                       

    BVPS

       

    51.9

    51.9

    51.9

     

    60.7

    60.7

    60.7

                       

    Equity Value Per Share

     

    $22.7

    $30.1

    $16.2

     

    $24.5

    $33.6

    $17.5

                       

    Current Stock Price

     

    $35.2

    $35.2

    $35.2

     

    $35.2

    $35.2

    $35.2

    (Discount)/Premium to FMV

     

    55%

    17%

    117%

     

    44%

    5%

    101%

                       
                       

    Peers

                     
                       

    Name

    Ticker

    Mcap

    Price

    BVPS '07

    BVPS '08

     

    P/B '07

    P/B '08

     

    Ambac Financial Group

    ABK

    4,120

    26.39

    65.44

    74.538

     

    0.40

    0.35

     

    Assured Guaranty

    AGO

    1,570

    19.8

    34.33

    35.804

     

    0.58

    0.55

     

    The PMI Group

    PMI

    1,460

    13.12

    42.05

    43.57

     

    0.31

    0.30

     

    Primus Guaranty

    PRS

    420.8

    5.83

    10.05

    11.26

     

    0.58

    0.52

     

    Security Capital Assurance Ltd

    SCA

    918.34

    7.06

    22.647

    24.44

     

    0.31

    0.29

     
                       

    Average

               

    0.44

    0.40

     

    High

               

    0.58

    0.55

     

    Low

               

    0.31

    0.29

     

    Book Value includes the effect of derivative and foreign currency loss

    So, in a nutshell, despite the significant drop in MBIA's share price, it is still trading at a 55% premium to it's mean adjusted book value comparable price.

     

    MBIA Management Issues

     

    • Resigned (5/30/06): Nicholas Ferreri, Chief Financial Officer
    • Retiring (1/11/07): Jay Brown, Chairman of Board of Directors
    • Resigned (2/16/07): Neil Budnick, President of MBIA Insurance Co.
    • Resigned (2/16/07): Mark Zucker, Head of Global Structured Finance

    Is it me, or do they have a vacuum of experienced management approaching? Worse yet, did these guys know something that we should be aware of? After all, looking at the graphs below, the industry is going to run into some rought subprime underwriting times!

     

    Image015

     

    Subprime Exposure by Vintage Among the Major Monolines

     

    Image016

     

    Remember, the Toxic Waste Vintages are '05, '06 and 1st half of '07

    Source: S&P

     

    Is Europe next?
    A third of MBIA's revenues stem from abroad, primarily in Europe. Most of the action in Europe is in the UK PFI market. These bonds finance roads, schools, rail projects, tunnels and public buildings. Italy, Spain, Portugal and France are also on the bandwagon. Niche sectors such as non-conforming mortgages in the UK (and possible Spain) are particularly susceptible, primarily for the same reasons they are here in the US. Over building, overvalued housing stock (particularly the UK, Spain and Ireland), lax (subprime) financing, and declining property values under loose regulation. It definitely will not help the European insureds if MBIA gets downgraded or CDS spreads widen considerably.

Ambac Financial Group Inc.

Ambac Financial Group Inc. (Ambac or the Company) was a financial services holding company whose principal subsidiaries, Ambac Assurance Corporation and Ambac Assurance UK Limited, were financial guarantee insurance companies. Ambac Financial Group Inc, headquartered in New York, was founded in 1971.

Realizing the impending crisis in housing and consumer finance in the US, BoomBustBlog (the financial blog primarily authored by Reggie Middleton) pointed out the trouble Ambac Financial Group Inc. had and its potential impact on stock prices in an article (Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap), in 2007. According to the article, the possibility of insolvency for Ambac Financial Group Inc. was rising as it was insuring more than it could cover and the quality of its insured products in the subprime mortgage, and consumer finance was deteriorating. The credit rating of Ambac Financial Group was downgraded by rating agency Fitch in January 2008, two months after the article was published as the company dropped its plan of issuing new equity capital after writing down repackaged consumer debt due to subprime mortgage crisis. The financial position of Ambac Financial Group continued to degrade and it eventually filed for bankruptcy in November 2010.

Media House

First article published on

List of Articles published

No. of Articles published

The time lag from BoomBustBlog

The time difference from Ambac filing for bankruptcy

Comments

BoomBustBlog

November2007

 

 

November2007

 

 

November 2007

1.   Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap

2.   Welcome to the World of Dr. FrankenFinance!

3.   A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton

3

-

Predicted about 3 years before Ambac's filing for bankruptcy

Predicted well before filing for bankruptcy

Bloomberg

January 2008

January 2008

 

November 2010

1.   Ambac's Agony Deepens

2.   Ambac Tumbles on More Subprime Fallout

3.   Ambac Financial Group Files Bankruptcy to Restructure Bond Debt

3

2 months (reporting on possible credit rating downgrade)

2 months

(reporting on possible credit rating downgrade)

About 3 years

(reporting on filing for bankruptcy)

The first report was published before downgrading of credit rating in 2008 by Fitch

The second report was published before downgrading of credit rating in 2008 by Fitch

The report was published after filing for bankruptcy in 2010

Reported before credit rating downgrading and reacted after filing for bankruptcy

The Wall Street Journal

January 2008

 

 

November 2010

 

November 2010

1.   Monoline Insurers Sink On Credit-Rating Reviews

 

 

2.   Ambac Says Chapter 11 a Possibility By Year-End

 

3.   Ambac Files for Chapter 11

3

2 months (reporting on possible credit rating downgrade)

About 3 years

(reporting before possible bankruptcy)

About 3 years

(reporting on bankruptcy)

The first report was published before downgrading of credit rating in 2008.

The second report was published some days before the bankruptcy of Ambac reporting concern of the Company on a possible bankruptcy.

Report on filing for bankruptcy

Reacted before the credit rating downgrade

  Reported before and after the bankruptcy

Financial Times

November 2007

November 2010

1.   Ambac looks to offload risk

2.   Ambac warns over prospect of bankruptcy

2

No lag (reporting on possible credit rating downgrade)

About 3 years

(reporting on possible bankruptcy)

The report was published before downgrading of credit rating in 2008.

The second report was published some days before the bankruptcy of Ambac reporting concern of the Company on the prospect of a bankruptcy

Reported before the credit rating downgrade and also before the bankruptcy filing

Forbes

January 2008

November 2010

1.   You Should Worry About Ambac

 

2.   Ambac Tumbles Into Chapter 11

 

2

2 months

(reporting on possible credit rating downgrade)

About 3 years

(reporting on filing for bankruptcy)

The first report was published before the credit rating downgrading by Fitch in January 2008

The second report was published after the filing of the bankruptcy

Reported before the credit downgrading and after the filing for bankruptcy

Reuters

January 2008

 

June

2010

November 2010

November 2010

1.   Ambac Loses Top Rating in Blow to Its Business

2.   Ambac warns of default as bondholders organize

3.   Ambac says may go bankrupt this year; shares sink

4.   Bond insurer Ambac files for bankruptcy

4

2 months

(reporting on credit rating downgrade)

About 2 years 7 months

(reporting on possible bankruptcy)

About 3 years

(reporting on possible bankruptcy)

About 3 years

(reporting on filing for bankruptcy)

The first report was published after downgrading of credit rating in 2008.

The second report was published about five months before the bankruptcy of Ambac reporting concern of the Company on a possible bankruptcy.

The third report was published some days before the bankruptcy

The fourth report was published after filing for bankruptcy

Reacted after the credit rating downgrade  

Reacted in two articles (June 2010 and November 2010) before the bankruptcy on the concern of Company on a possible bankruptcy

Also reacted after the bankruptcy

The New York Times

November

2010

1.   Ambac Files for Bankruptcy

1

About 3 years

It was published after the Company filed for bankruptcy

Reacted only after filing for bankruptcy

Fortune

-

-

-

-

-

-

Business Insider

-

-

-

-

-

-

               

 

Key Highlights:

BoomBustBlog

Reggie Middleton, through his articles, provided a comprehensive view and some of the earliest warning about a challenging operating environment for Ambac based on its financial status and business profile. His assessment pointed out that, Ambac would be insolvent due to insuring considerably more than the economic value of its equity capital and writing insurance contracts for risky bonds linked to troubled mortgages. Some of the major points highlighted in the article are,

  • Ambac has little capital to cover its insurance claims
  • In the consumer finance portion of Ambac's portfolio; it insured companies in financial distress with some of them reporting large scale write down on mortgage assets
  • In the base case scenario, it was estimated that the Company would report losses to the tune of USD8 billion in its structured finance, subprime RMBS and the consumer finance portfolio and it would need to raise an additional USD2 billion in order to function as an ongoing concern
  • Based on an assumption to spread the losses on the insurance of various vintage periods over the coming years, the Company would have to create a provision of USD6.8 billion as per the base case scenario
  • The economic book value per share in the optimistic scenario was estimated to be USD9 compared to the stock price of USD21.8 while writing the article
  • Out of its total mortgage-backed security (MBS) related insurance, residential mortgage-backed security (RMBS) related insurance represented 16.3%
  • Out of its total subprime portfolio, 36.4% belonged to years of 2006-2007 when credit writing standards were at their all-time lows

The predictive analysis done by BoomBustBlog was detailed and comprehensive. The prediction made by Reggie and the points highlighted by him were proved right, and in November 2010 the Company filed for bankruptcy.

 

Bloomberg

Bloomberg reported in January 2008 on downgrading of the credit rating of Ambac Financial Group by Moody’s. In the next article in January 2008, it reported that Ambac was trying to raise capital as it warned of a fourth-quarter loss in FY09.

In November 2010, it reported that Ambac filed for bankruptcy.

Bloomberg pointed out that Ambac faltered after it started chasing higher profits by expanding beyond municipal bond insurance and insuring riskier debt. That move backfired due to the crash in the housing market, and tightening of credit markets.

Bloomberg also reported that Ambac could not raise the needed capital and was unable to reach an agreement with senior bondholders for restructuring.

Reggie had pointed out in his article that Ambac Financial Group Inc. was insuring much more than they can handle in the case of an outlier event given its relatively lower equity capital - and he did this a full three months in advance. It would need to raise an additional USD2 billion to continue as a going concern.

The Wall Street Journal

In its first article published in January 2008, the Wall Street Journal (WSJ) reported that Moody's Investors Service and Standard & Poor's signaled fresh consideration of AAA rating bonds of Ambac Financial Group Inc.  

In November 2010, WSJ reported that Ambac might file for bankruptcy protection by the end of the year. In the same month, it reported that Ambac filed for Chapter 11 bankruptcy protection after the Internal Revenue Service questioned the accounting that allowed the bond insurer to receive more than USD700 million in tax refunds.

Reuters

Reuters reported in its article published in January 2008 about the downgrading of credit rating of Ambac by Fitch. Reuters pointed out that the credit rating was downgraded as Ambac dropped its plan to issue new equity after writing down repackaged consumer debt hit by the subprime mortgage crisis.

Reuters published an article in June 2010, stating the concern of Ambac about the prospect of a default on its loan obligations and was still considering filing for bankruptcy. In November 2010, Reuters reported that Ambac filed for bankruptcy. It pointed out insuring risky debt as the primary reason for the bankruptcy of Ambac.

Notably, Reggie Middleton, in his article in BoomBustBlog, has provided a detailed description of the subprime portfolio of Ambac. He pointed out that the subprime RMBS portfolio represented about 16% of the total MBS portfolio of Ambac Financial Group.

 

Financial Times

In an article published in November 2007, Financial Times reported that Ambac was working on deals to offload risks from parts of its portfolio to ease pressure on its capital base and avoid a downgrade of its credit rating.

In March 2010, Financial Times reported that the insurance unit of Ambac Financial Group was seized by regulators to halt pay-outs on USD35 billion worth of policies covering defaulted mortgage-backed debts. It was done in part to protect the public finance market guarantees from the fallout of the mortgage business. In November 2010, an article was published in Financial Times on the concern of Ambac over a possible bankruptcy. As per Financial Times, default on the risky mortgage due to housing market collapse led to the trouble for Ambac.

Forbes

In an article published in January 2008, Forbes reported on the prospect of credit rating downgrade of Ambac after the company forecasted significantly higher-than-expected losses from insuring credit derivatives, many of them tied to subprime mortgages.

In November 2010, Forbes reported that Ambac Financial Group filed for Chapter 11 bankruptcy, after failing to reach agreements with lenders on how to repay its debt.

The New York Times

In its article published in November 2010, The New York Times reported that Ambac filed for bankruptcy protection after seeking to negotiate a plan with its biggest creditors. In its Chapter 11 petition, Ambac listed several groups of bondholders — all represented by the Bank of New York Mellon as trustee — as its largest creditors, with a total of USD1.6 billion in claims.

 

 

The Asset Securitization Crisis of the US and much of the developed and emerging markets (2007-2009) apparently ended for many relatively quickly, despite being the worst economic downturn the country (and most likely the world) has seen since the Great Depression. How did the US pull out so fast, or more importantly, did the US actually pull out of it at all? Well, it was never my belief that the problem was over, simply papered over with some accounting changes and force fed massive amounts of liquidity coupled with a drive to privatize profits while socializing losses. Of course, the natural result of such actions was the gorging of the public sector on debt and bad assets. This sleight of hand was able to create a positive GDP print in many countries while rescuing sub par private companies that would have toppled under less generate corporate welfare, but more importantly, it succeeded in poisoning several governments whose finances could not handle the extra burden of unrestrained spending during economic boom times combined with the assumption of massive private sector losses during the "bust" times.

Thus the Asset Securitization Crisis has been morphed, through direct and explicit government and central banker intervention, into a Pan-European Sovereign Debt Crisis, Soon to be the Global Sovereign Debt Crisis. This particular environment have been custom-made for my proprietary investment style, see "The Great Global Macro Experiment, Revisited".

Understanding my proprietary investment style

My own, personal and discretionary investment style leverages long and short positions in any traditional or alternative asset class, in any instrument, in any market around the world with the goal of profiting from macroeconomic trends.

Basically, I attempt to profit off of the policy errors of governments and central bankers world wide. This has been a most profitable profession over the last 10 years or so, with said errors causing massive and obvious bubbles in real estate, equity and credit markets which paid those in the real estate markets handsomely. This "multi-asset bubble" culminated in what was "an easy to see coming"crash that allowed both me and my subscribers to score abnormal returns on the downside as well. Back when I tabulated my results publicly, 300% and 400% returns were common place (see Sample Research & Performance), not including the equally impressive levered returns garnered during the bubble. I was able to time the exit from the real estate market 6 months before the market peak, a combination of luck, intuition and spreadsheets. This 9 year performance was dampened in the last 3 quarters of 2009, where I took a 39% loss by misjudging the timing of the effect of central bankers' policy errors (yes, they are still making big mistakes and no, this is not a bull market but a bear market rally - I was simply off about 9 months in the anticipation of the European Sovereign Debt Crisis). I wrote about this in detail in my Year End Note to BoomBustBlog Readers and Subscribers in an attempt to both put things in perspective and self-flagellate.

Click any graphic to enlarge.

Needless to say, the time to ride the bear is here again, and in a fashion that many do not appreciate for I fear the Sovereign Debt Crisis may make the Asset Securitization Crisis look like a mini-bull rally in and of itself, dwarfing the capital destroying potential of the latter in both size and scope. This brings us to the analysis below.

The PIIGS at the Center of the Global Sovereign Debt Crisis

Greece, Portugal, Ireland, Spain and Italy, collectively referred as PIIGS, are a reflection of how the developed countries, the credibility of whom have been endorsed over the years by high credit ratings and low credit spreads, are turning out to be the epicenter of sovereign risk in Europe. Huge fiscal deficit and unimaginably high levels of public debt, dragged these nations to the verge of default when the markets refused to lend money at prevailing rates against their fragile fiscal situation and structurally decaying economies. Greece, the weakest of all, has effectively defaulted on its debt obligations when it approached EU/IMF for funds (see How the US Has Perfected the Use of Economic Imperialism Through the European Union!). The support extended by the European Union was primarily to contain the contagion effect (resulting from common currency as well huge inter-country claims) which would have done greater damage and would have cost more. However, the aid extended by EU and IMF is quite insufficient as it will solve only a fraction of the liquidity problem, and even then for a short term, while the major solvency and liquidity issues over the medium-to-long term remain. Thus, the only inevitable outcome which can bring sustainability to the public finances of these countries is the restructuring of their sovereign debt.

The Sovereign Debt Restructuring

Sovereign debt restructuring can be done either by taking haircuts on the principal amounts or by extending the maturity of the debt. While the latter will result in some losses to the creditors owing to resultant reduction in Net Present Value , the losses shall be significantly lower than in case of haircuts in the principal amount. However, in the case of PIIGS, this option will solve the liquidity side of the problem rather than solvency issues. In the following model, we have estimated the haircuts on the principal amounts that might be taken to bring the sovereign debt of PIIGS to a more sustainable levels.

The restructuring of the sovereign debt of PIIGS nations, especially Greece, is likely to occur owing to, either or both, of the following reasons

Government debt ratio (Government debt as % of GDP) is at unsustainably high levels

  • Government debt levels in excess of 100% of GDP are highly unsustainable owing to the the huge re-financing risk as well as the interest rate risk. Interest expense on such a high debt level is already a huge burden on the fiscal situation; an increase in interest rates can put more pressure on the public finances of the country. Further, the country runs the risk of failure to refinance or roll-over such high level of debt in the market .
  • PIIGS have been facing tough times meeting their debt obligations (interest expense and the principal repayment) owing to increasingly expanding spreads over the perceived safe haven rate of the German bund. The liquidity crunch (pre-EU/IMF bailout announcement) that they are witnessing in the market is owing to high risk perception build due to poor public finances situation (rising primary and fiscal deficits) as well as bleak economic outlook of these countries. Subscribers should reference:
  • While the IMF/EU package will be a short term liquidity relief over the next three years, after 2013 these countries will again turn to the credit markets to finance not only the scheduled bond obligations but also repay IMF and EU loans (reference What We Know About the Pan European Bailout Thus Far). Thus, restructuring of the debt might become inevitable for PIIGS countries specially those which have debt levels in excess of 100% of GDP. Out of the PIIGS countries, Greece and Italy already have government debt in excess of 100% of GDP while Ireland and Portugal are rapidly approaching those levels. Greece in particular has unsustainably high debt ratios which are estimated to spiral from 116% of GDP to 140-145% of GDP in 2013

Increase in government debt ratio (Government debt as % of GDP)  is unsustainable

  • Increases in government debt ratios stem primarily from the "snowball effect" and the primary deficit. The snowball effect is the self-reinforcing effect of debt accumulation arising from the spread between the interest rate paid on public debt and the nominal growth rate of the national economy. If the average interest rate paid on existing public debt is higher than the nominal GDP growth rate, it will result in increase in government debt ratio (Government debt as % of GDP).
  • PIIGS are recording huge primary deficits, i.e, government expenditures (excluding interest expenditure) exceeding government revenues, which are leading to additional borrowing that then adds to the government debt levels - wash, rinse, repeat... This coupled with the snowball effect, which itself increased substantially due to negative nominal GDP growth and rising interest rates, has been contributing substantially to the increase in the government debt ratios of these countries. In the case of Greece, this effect has been extremely large owing to very high government debt, rising borrowing cost and the shrinking economy.

The BoomBustBlog Haircut Model

Below is a live spreadsheet summary, currently updated by our analysts with new developments and refinements, that calculates the expected haircuts in several of the PIIGS members, followed by a much more comprehensive sheet for our professional subscribers.

Bloomberg has as a headline: Greek Quarantine Tested as Spain Vows to Combat Euro Contagion `Madness':

Investors are already testing the euro region’s efforts to contain the Greek crisis.

Greek bond yields rose yesterday above their level before the government agreed on a European Union-led bailout on May 2 as escalating protests cast doubt on its ability to drive through austerity measures. Spanish and Portuguese bonds also renewed last week’s slide as investors question their ability to cut budget deficits that are among the highest in the euro area.

The equity destroying capability of this occurrence should not be underestimated. Referencing " How Greece Killed Its Own Banks!", you can see that at just 10x leverage (about 1/3rd what most European banks are currently sporting), any holder of Greek bonds are underwater (if not insolvent) on those particular purchases at offer - and that is using last weeks numbers, which look much better than the reality today!

European governments are hoping that Greece’s 110 billion- euro bailout will stop a crisis that Nobel Prize-winning economist Joseph Stiglitz says threatens the currency’s survival. Investors are speculating that Spain and Portugal may also eventually need assistance, prompting Spanish Prime Minister Jose Luis Rodriguez Zapatero to dismiss such talk as “complete madness.”...

Well, I don't know about complete madness. An excerpted page from our  Spain public finances projections shows Mr. Zapatero's government has been most optimistic in his assumptions of growth and revenues.

What dismissal of the debate of a Spanish bailout itself skirting the perimeters of "madness" is that despite the fact that Spain's government has pretty much based their numbers using L-La Land math, the baseline numbers that we compared them to are also prone to optimistic fantasy. Reference how rosy the outlook of the IMF and the EU were in forecasting the deficit and debt to GDP ration for teh UK, Ireland, Italy and Greece throughout this entire fiasco in "Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!"

Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revised their forecasts to still end up wildly optimistic.

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad…

Revisions-R-US!

and the EU on goverment balance??? Way, way, way off.

So, Mr. Zapatero, the contents of this blog post alone, contains more than enough reason to speculate on the possibility of Spain needing a bailout. If one were to actually delve deeper into our reports, many, many more reasons to speculate will emerge, and the banks contained in the Leveraged European Entities from a Sovereign Risk Perspective are justifiably suspect, for they hold a lot of debt and exposure to the most suspect of the PIIGS group. I don't think "madness" would accurately describe the speculation of Spain's need for assistance. The options market agrees, looking at the performance of the puts on exposed and high NPA Spanish banks...

Bonds Tumble

That didn’t stop a sell-off in Spanish bonds yesterday. The extra yield that investors demand to buy its debt over German bunds rose 21 basis points to a 14-month high of 117.8 points. Spain’s benchmark IBEX Index, the euro region’s worst performer after Greece, fell 5.4 percent to the lowest since July. Portugal’s spread rose 40 basis points to 247 yesterday.

Up until last week Spanish bonds did not represent drastic losses to their investors. I fear they will soon start looking like those Greek bonds charted above very soon, though.

The euro weakened 1.4 percent to $1.3011, the lowest in more than a year. The currency retreated further in Asian trading today, to $1.2961 as of 11 a.m. in Singapore.

Greek unions plan their third general strike of the year today after workers occupied the Acropolis yesterday and shut down schools and hospitals at the start of a 48-hour walk-out. Aegean Airlines SA, a Greek carrier, has canceled all flights....

Massive’ Protest

“We will continue with action as long as these measures, which go against workers and are anti-social, continue to be demanded,” Stathis Anestis, a spokesman for the GSEE union, said in a telephone interview, predicting “massive participation.”

The yield on Greece’s 10-year bond climbed 90 basis points to 9.84 percent yesterday, compared with 9.343 percent on April 30.

Investors may turn to the relative attraction of Asia’s bonds because economic expansion in the region means sovereign balance sheets are stronger, according to Standard & Poor’s. “The growth story and sovereign-balance story in Asia looks relatively better, much better in some cases,” William Hess, director of sovereign ratings for S&P in Asia, said in an interview this week in Tashkent, Uzbekistan.

This is reminiscent of HPA (perpetual housing price appreciation) that was used in the rating agency housing models to justify AAA ratings for junk subprime bond debt. Asia (China and Japan in particular) is in the same NPA/debt boat as Europe and the US. China has simply super-stimulated their economy and we are are awaiting the results of massive bubble blowing. Reference:

  • A Summary and Related Thoughts on the IMF's "Strategies for Fiscal Consolidation in the Post-Crisis
  • What Are the Odds That China Will Follow 1920's US and 1980's Japan?
  • Signs of a China Credit and Real Asset Bubble Are Now Unmistakable!
  • Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
  • Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let's Look at the Facts
  • The Potential Effects of Remnibi Appreciation on China's Economy

More than 51 percent of Greeks said they won’t accept new austerity measures before the rescue deal, according to a poll of 1,000 people by ALCO for Proto Thema newspaper. That compared with 33 percent who would accept them. No margin of error was given for the poll conducted from April 27 to April 29.

Union Record

Unions have had some success influencing policy in the past. They forced then-Prime Minister Costas Simitis to dilute proposals such as raising the retirement age in 2001. Unions successfully opposed a government proposal in 1985 to cut spending and boost tax revenue, prompting Simitis, who was economy minister at the time, to resign two years later.

This is the reason why a simple extrapolation of foreign claims against and withing the PIIGS will fail to tell you who's next after Greece. While an examination of foreign claims reveals a lot, it fails to tell the whole story.

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical breakdown of the total exposure as well as the level of risk surrounding each component. These components include a) government default b) private sector default and c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors. Hence, the origin of our Sovereign Contagion model ( Sovereign Contagion Model – Retail and  Sovereign Contagion Model – Pro & Institutional) which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.And not, back to the article...

Some economists say the terms are too harsh for the country to bear. Greece expects its economy to shrink 4 percent this year and 2.6 percent in 2011.

“The economic pain that such belt tightening will bring suggests that it would be unwise to rule out a default further down the line,” Ben May, an economist at Capital Economics in London, said in a note.

The danger for the euro region is that failure to end the Greece crisis after three months of wrangling by EU leaders will prompt investors to shift attention to the deficits of Portugal and Spain, and dump their bonds too. Spain’s budget gap was the area’s third highest last year, at 11.2 percent of GDP. Portugal’s shortfall was fourth at 9.4 percent of output.

 

Zerohedge reports: Time To Go All-In The "Big Short 3.0"? 80% Of New York Hotels On Verge Of Default. To wit:

Now that hedge funds have finally started piling into the "Big Short 3.0" trade, which as we first explained back in June is basically shifting the CMBS short from malls to hotels (via the overexposed CMBX Series 9 index whose BBB- tranche is the fulcrum), every incremental development in the sector is closely scrutinized.

And judging by the lack of appreciation in the BBB- tranche of the CMBX Series 9 index which has the highest exposure to hotels - despite a very modest rebound earlier this week on vaccine hopes - developments continue to show accelerating deterioration with little sign of recovery on the horizon.

A recent tailwind blast for the CMBX 9 shorts came from a September report from NorthStar according to which, without aid 74% percent of US hotels said they expect to lay off more employees, with a whopping two thirds of properties warning they won't be able to last another six months at the current projected revenue and occupancy levels. Needless to say, should two-thirds of the US hotel industry fold, shorting the CMBX S9 BBB- could well be the most profitable (institutionally sized) short in recent history when the Fed has effectively made shorting impossible.

Since then it's only gotten worse for the hotel sector, which as even the FT now writes has hit New York hotel industry especially hard with four out of five properties underpinning commercial mortgage bonds now on the verge of default.

Those who follow me know that I have been ringing this alarm since the spring. Again, to wit:

With Every Hedge Fund and Their Mother Crowding Into the Big Short 3.0, Remember Who Warned You 1st, in 2007 and 2020!

A quick refresher....

Whether you have seen him featured on CNBC, The Keiser Report or are interested in the world of “smart contracts,” Reggie Middleton, the “Disruptor-In-Chief” of Veritaseum, is an expert you should know.

Based in the New York area, Middleton has gone from a successful real estate investor, capitalizing on the market’s economic downturn in 2008, to predicting the fall of Bear Sterns, Lehman Brothers, and others in the years to come. Reggie Middleton has always been a step ahead of the curve, so Bitcoin.com sat down with him on where the banking industry is going with blockchain technology.

As a former banker myself, I’ve seen many parallels with the Internet’s global propagation back in the 1990’s, and how the “banksters” are struggling with the Bitcoin concept, just like they did the Internet way back when. The rhetoric and blind attacks of today show history repeating itself if memory serves me correctly. How does Reggie see this financial industry-wide plan of blockchain integration playing out? Read on.

Bitcoin.com (BC): Haven’t we been through this before with banks trying to co-opt and centralize decentralized systems? Why will this be any different than ISDN or corporate Intranets from the 90’s?

Reggie Middleton (RM): Banks and many other private companies have tried to recreate the virtues of the internet via mini, private internet-like networks called intranets. These intranets were very useful and materially increased the utility of the banks, but they all paled, considerably paled in comparison to the value, utility, and ubiquity of the public internet. Click here for more on how this model works.

BC: You speak to the bankers fairly directly. What is their endgame with private blockchains, which leads to their altcoins? Disrupting the disruptor, Bitcoin? Is the goal to simply becoming more tech savvy and cost-efficient?

RM: Most in the evening industry don’t have an endgame in regards to Bitcoin technology – at least not yet. This is because they don’t fully understand its potential. They appear to be getting most of their education on the topic from a fairly narrow, undiversified set of sources. Hence, any potential misconceptions, biases or downright errors are easily reply ingrained, multiplied and propagated. If this continues for any meaningful amount of time, the re-education can be and likely will be quite painful if not lethal to the less light of foot.

"“Many of the bankers I’ve spoken to eschew Bitcoin and other ‘digital currencies’ […] don’t realize that the private blockchains use altcoins, the very same concept that they are eschewing in Bitcoin and cryptocurrencies.”

For instance, you mentioned altcoins. Many of the bankers I’ve spoken to eschew Bitcoin and other “digital currencies” (failing to realize that most USD and EUR are digital currencies, what they mean is crypto-currencies) don’t realize that the private blockchains use altcoins, the very same concept that they are eschewing in Bitcoin and cryptocurrencies. Worse yet, of all the cryptocurrencies in existence to date, Bitcoin is by far the most vetted. I feel many banks and bankers hear the hype and jump on the bandwagon without doing their due diligence. Time will tell if I’m correct in this assumption.

BC: Do you feel a small-medium sized banks will adopt decentralized digital currencies as a whole? And will this calculated breaking off from the establishment herd drive the industry in a new direction of Bitcoin inclusion?

RM: I think that either a relatively small or underprivileged bank will figure out how this stuff works (“Network effect” and all) and set off a chaotic chain reaction that will tear legacy business models asunder. There’s about a 30% chance of that outcome, in my opinion. The more likely outcome is a technology-oriented concern engineers this tech to disintermediate the banks to the extent that they’ll be rendered mere money pipe utilities needed for their banking charters (say a 60% chance of this outcome). The least likely outcome is the legacy banking industry gets it right, which has never happened before during any major paradigm shift, so leave a 10% chance for this. Click here for more on this.

BC: Do you think banks will make viable blockchains at all? Who says they can model Bitcoin’s success for their private gain?

RM: Banks will make private blockchains whether they will be viable or not is not only up for debate but also highly relative. If what you mean by viable is “Will it work?” Then I’d say yes. Now, if you mean by viable is “Will it be competitive with a widely accepted public blockchain?” then the answer is almost definitely no. You see, “Network effects” prevent private blockchains from ever scaling to the prospective heights of a widely accepted public blockchain such as bitcoin. Click here for more on this.

"‘Network effects’ prevent private blockchains from ever scaling to the prospective heights of a widely accepted public blockchain such as bitcoin.”

BC: Can banks have it both ways? Deriding the bitcoin digital currency while praising its technological foundation? Is this genius, or basic hypocrisy?

RM: Attempting to laud the blockchain while deriding tokens that make them work is neither genius nor hypocrisy. In my opinion, it’s ignorance. Picture me saying, “ I love this Internet thing, but want nothing to do with Internet packets. Unfortunately, only nerds will get that one. For more on this, go here.

BC: Was Jamie Dimon right? Will the government, or some higher power, prevent Bitcoin from going viral in the mainstream, at least in Western civilization?

RM: Jamie Dimon is talking “his book.” He’s talking like a bank CEO, who is expected to say pro-bank things, and slam things that will compete with bank offerings. He’s simply doing his job. Now, please remain cognizant of the fact that this does not mean that he necessarily knows what he’s talking about, nor is he necessarily speaking the truth.

"If bitcoin is outlawed, one risks driving it underground. Governments don’t want tech that they can’t control nor stop driven out of its reach.”

The fact that the US, the world’s most powerful financial concern, has not banned bitcoin should tell you something. If bitcoin is outlawed, one risks driving it underground. Governments don’t want tech that they can’t control nor stop driven out of its reach. That is exactly what will happen if it goes underground as a peer to peer system. Think of how successful the MPAA, the record industry, and the courts have been in stemming the use of peer to peer file sharing of MP3s after their massive legal assault? Hint: over 60% of download Internet traffic is thought to be P2P torrent-style downloads.

The can easily happen to the banking industry. The path of least resistance is to regulate and then attempt to co-opt Bitcoin (think IRS and NSA) then to outlaw and attack outright.

As for his opinion on virality, methinks he may be missing the point? Viral outbreaks are never, never anticipated, wanted nor prevented by those who are subject to it! That’s not a matter of choice!

BC: Please sum up banking, blockchains, and privatization for us. Is this a net-positive for the Bitcoin community just based on the publicity alone?

RM: My summation will likely be different from what you’d expect. I believe that the entire banking community and many of the entities that are serving them are headed in the wrong direction, re Bitcoin technology. Everybody is reaching for the low hanging fruit, totally disregarding why said fruit is hanging low in the first place (hint: it’s fully ripened and is about to drop off the vine). Very wide area networks (vWANs, such as the Internet) were designed to be used by as many entities as possible (not a select group).

This is where the network effect comes into play, and how a publicly accepted Bitcoin network will force banks to play ball in its arena or face extinction. You see, Bitcoin not only enables autonomous activities, but it also rewards them. The legacy banking business model, as we know it today, is predicated on a heteronomous business model. So was the music industry before the Internet. How did that work out for them?

Bloomberg reports America’s $20 Trillion Debt Pile Is Getting Cheaper as It Grows

The U.S. government is paying less as it borrows more, one reason investors appear more comfortable than

Congress about funding another leg of stimulus. Interest payments in the federal budget declined about 10% in the first 11 months of this fiscal year, when America was running up its biggest deficit since World War II. Over the next few years, servicing the national debt will be cheaper than any time in the past half-century when measured against the size of the economy, according to the Congressional Budget Office.

 The concerns that pundits have regarding the US record debt stockpile is unfounded - at least for now and the near future. Take note that although nearly every government expense category has spiked from last year, one of the biggest actually shrank - net interest expense. 

lewaegq 3b63d

The CBO forecasts this cost savings to be extrapolated into the future as well. Of course, in today's highly politicized environment, I think it is wise to take many potentially conflicted data sources with a  healthy dose of skepticism. Alas, the logic behind their forecasts holds up (chart sourced from Bloomberg LP)....

safdsf 2219d

What Bloomberg, nor any other media outlet fails to inform us of is that the US is economically defaulting on its debt at the same time that it is paying a lower interest rate. That's right, what the US is doing is actually an economic default on it obligations to is investors. It is not a technical, legal or accounting default since the US is paying its debt service on time. What it is NOT doing is paying back the economic value of what it has borrowed, plus interest. Although this scenario is not laid bare in the charts above, it is plain as pie in the chart below. 

uyguyg 18410

What does all of this mean? Well, in a nutshell, it means that rates will not be going up anytime soon. If rates do go up, then debt service risks becoming untenable. 

It also means that one should expect the US to continue printing money at this ungodly clip until true, "organic" economic activity actually recovers at a reasonable pace. That will not happen this year, and is likely not to happen in full next year either. There's a risk that the year after that or more may be moot as well.

With the USD, being devalued, and interest rates dropping closer to zero as the Federal budget looms larger among historically unprecedented unemployment and corporate earnings that are dropping (even with the accounting "massaging" that's taking place - see Forensic Review of Bank of America's 2Q2020 Earnings - It's Ugly! and Analysis of JP Morgan's Terrible, Horrible, No Good 2nd Quarter of 2020 - Why Am I the Only One?) guess where the equity markets will go relative to gold? See "Panic-Driven Monetary Inflation and It's Effect on Tokenized Gold"

This chart is the base of the entire argument of holding gold as an currency reserve. First, look at the trend of each component/line.

    • The economic world has been upended during the popping of the 2007 bubble.
    • In 2009, the Fed has doubled in balance sheet through quantitative easing, thereafter increasing it by ~700% more through today. It has added more than 30% to its balance sheet in just the last two months.
    • The broad money supply has jumped 49% in the last 6 months.Monetary inflation is at its highest level, ever, and half of the annualized inflation rate of Zimbabwe.
    • US borrowing has increased by 300% over the largest period of borrowing in the modern history of this country. There has never been a period where the US has borrowed more, or borrowed as fast.
    • Gold has tracked this monetary debasement (inflation) closely, now near an all-time high

In closing, remember there's a strong chance that Stagflation is Here Right Now! As Is A Depression. Buy your VeGold digital, fully redeemable gold here

It has been called to my attention that among the many typos in my earlier post, an important one was the reference to the funding costs of DHI. The company in question was actually DHOM - Dominion Homes, not DR Horton - DHI. The general theme still stands, though, these guys as an industry who hold significantly depreciating real assets or options on said assets, financed by debt (all of them) or those who have significant mortgage banking operations without internal financing (ex. deposit accounts, etc.) (the vast majority of them), and who are running consistent operating losses for the last quarter and foreseeable next half (all of them) are in trouble, to say the least.

TOLL will exhibit a lag in some of the effects since they deal in a slightly upscale market, but are far from immune. They say that they do not warehouse mortgages without a buyer committed for the paper. If true, that is good management, but

the problem still remains... Who will be the buyer for the non-conforming stuff in this market. If Countrywide can't do it, you can bet your buttocks that a fancy homebuilder can't do it. If you think 30% losses quarterly looked bad, at earnings time, wait until you see next quarter's earnings after the effect of the mortgage crunch which slows sales, the land impairment charges, and impairment from whole loans (not necessarily MBSs) that are stuck in warehouse credit line show up!!!! In addition, some of these warehouse lines will be pulled by the banks during this fiscal quarter. As my little baby girl says, "Uh Oh!!!"

The mortgage insurers and investment banks like bear Stearns have similar issues, of reliance upon credit during bad times. There was a post on another blog by a fellow pundit that detailed two large mortgage insurers having leverage of up to 90:1. They cannot afford a run on the bank, which is exactly what is to be expected as ARMS reset.

Bear Stearns has about $22 billion dollars of equity capital, and about $423 billion dollars of assets. It is also the MBS king of the Street. With this leverage, a 5% move does a lot of damage to Bear Stearns equity. The same with the mortgage insurers.

Can this happen? Well, if I am not mistaken, Countrywide's sub-prime portfolio is currently experiencing a 5% default rate, and we have not even experience the first deluge of the 2 year ARM resets or significantly higher interest rates.

The Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars!

  1. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All
  2. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift
  3. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
  4. Don’t Count Microsoft Out of the Ultra-Mobile Computing Wars Just Yet
  5. This article should drive the point home: An iPhone 4 Recall Will Hurt Apple More By Opening Additional Opportunity for Android Devices Than Increased Expenses
  6. A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
  7. After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
  8. RIM Smart Phone Market Share, RIP?
  9. Android is gaining preference as the long-term choice of application developers
  10. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  11. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  12. Apple on the Margin
  13. RIM Smart Phone Market Share, RIP?
  14. Motorola, the Company That INVENTED the Cellphone is Trying to Uninvent the iPad With Android
  15. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  16. There Goes Those Fancy eBook Aspirations from Apple, Barnes and Noble, and Amazon: 100,000’s of FREE eBooks from the Public Library
  17. How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue
  18. Empirical Evidence of Android Eating Apple!
  19. More of the Android Onslaught: Increasing Handset Revenues and Growth
  20. Many More Black Eyes for the Blackberry? A Complete Forensic Analysis of Research in Motion
  21. The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download
  22. The Complete, 63 pg Google Forensic Valuation is Available for Download
  23. iSuppli Continues to Validate BoomBustBlog’s Original Thesis: Android as the Viral Game Changer!
  24. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours, true blowout earnings unlike JPM
  25. As I Warned in June, DO NOT DISCOUNT Microsoft in This Mobile Computing War! Their Marketing Campaign is PURE GENIUS! and it Appears as if the Phone Ain’t Bad Either
  26. Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He?
  27. A Quick Peek Into the REAL WORLD Logic That Went Into Building the BoomBustBlog Apple Model: It’s Called Compression!!!

The Pan-European

October 21, 2020

The Asset Securitization Crisis of 2007, 2008 and 2009 led to the demise of several global banks and institutions. Central bank induced risky asset bubbles gave rise to, what was popularly considered and reported as through the popular media, a rapid recovery. The reality was that the insolvencies that marked the crisis were passed on, in part, to the sovereign nations that sponsored the Crisis, and as the chickens came home to roost the Asset Securitization Crisis has now blown into a full Sovereign debt crisis.

The Pan-European Sovereign Debt Crisis, to date (free):
  1. The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem

The Latest Pan-European Sovereign Risk Subscription Research – The Good Stuff!!!

Actionable Intelligence Note For All Paying Subscribers on European Bank Research

A Review of the Spanish Banks from a Sovereign Risk Perspective – retail.pdf

A Review of the Spanish Banks from a Sovereign Risk Perspective – professional

Ireland public finances projections

Spain public finances projections_033010
UK Public Finances March 2010

Italy public finances projection

Greece Public Finances Projections

Banks exposed to Central and Eastern Europe

Greek Banking Fundamental Tear Sheet

Italian Banking Macro-Fundamental Discussion Note
Spanish Banking Macro Discussion Note

  • Deutsche Bank vs Postbank Review & Summary Analysis - Pro & Institutional
  • Deutsche Bank vs Postbank Review & Summary Analysis - Retail
  • Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)
  • Sovereign Contagion Model - Pro & Institutional
  • Irish Bank Strategy Note
  • Euro Bank Soveregn Debt Exposure Final -Retail
  • Euro Bank Soveregn Debt Exposure Final - Pro & Institutional

Online Spreadsheets (professional and institutional subscribers only)

  • Greek Default Restructuring Scenario Analysis
  • Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
  • Portugal's Debt Ridden Finances: An Analysis of Haircuts, Restructuring and Strategy - Professional Analysis
  • The Spain Sovereign Debt Haircut Analysis for Professional/Institutional
  • Ireland Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
  • This is the professional addendum to the Sovereign Debt Exposure of European Insurers and Reinsurers 
  • Insurer and Reinsurer Sovereign Debt Exposure Worksheets - Professional localized one.
  1. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect
  2. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. – attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived “stronger” nations.
  3. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries
  4. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
  5. The Beginning of the Endgame is Coming???
  6. I Think It’s Confirmed, Greece Will Be the First Domino to Fall
  7. Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!
  8. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
  9. Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
  10. Germany Finally Comes Out and Says, “We’re Not Touching Greece” – Well, Sort of…
  11. The Greece and the Greek Banks Get the Word “First” Etched on the Side of Their Domino
  12. As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis
  13. Once You Catch a Few EU Countries “Stretching the Truth”, Why Should You Trust the Rest?
    Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
  14. Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
  15. Moody’s Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks
  16. The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!
  17. How BoomBustBlog Research Intersects with That of the IMF: Greece in the Spotlight
  18. Grecian News and its Relevance to My Analysis
  19. A Summary and Related Thoughts on the IMF’s “Strategies for Fiscal Consolidation in the Post-Crisis
  20. Euro-Gossip Debunked, Courtesy of Trichet and the IMF!
  21. Greek Soap Opera Update: Back to the Bailout That Was Never Needed?
  22. Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!
  23. As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!
  24. LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog
  25. Beware of the Potential Irish Ponzi Scheme!
  26. The Daisy Chain Effect That I Anticipated Appears To Have Commenced!
  27. How Greece Killed Its Own Banks!
  28. Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!
  29. With Europe’s First Real Test of Contagion Quarrantine Failing, BoomBustBloggers Should Doubt the Existence of a Vaccination
  30. What We Know About the Pan European Bailout Thus Far
  31. As I Warned Yesterday, It Appears the Market Is Calling the Europeans Bluff – It’s Now Put Up Or Get Put Down
  32. How the US Has Perfected the Use of Economic Imperialism Through the European Union!
  33. The Greek Bank Tear Sheet is Now Available to the Public
  34. BoomBustBlog Irish Research Becomes Reality
  35. BoomBustBlog Irish Research Becomes Reality
  36. Sovereign debt exposure of Insurers and Reinsurers
  37. As We Have Warned, the Fissures Are Widening in the Spanish Banking System
  38. “With the Euro Disintegrating, You Can Calculate Your Haircuts Here”
  39. What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates
  40. The ECB and the Potential Failure of Quantitative Easing, Euro Edition – In the Spotlight!
  41. Introducing the Not So Stylish Portuguese Haircut Analysis
  42. A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina
  43. Osborne Seems to Have Read the BoomBustBlog UK Finances Analysis, His U.K. Deficit Cuts May Rattle Coalition

Follow the UK and Eurozone topic list for our latest analysis of Pan-European issues.

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