Posted on 01/18/2008 8:50:14 PM PST by TigerLikesRooster
Bond insurers
All fall down?
Jan 18th 2008 | NEW YORK
From Economist.com
A little-known part of America’s capital markets could cause huge problems
Shutterstock AMERICA’S big bond insurers, which have underwritten some $2.4 trillion of private and public-sector bonds, usually go about their business largely unnoticed. But now they are looking distinctly wobbly they have started to attract attention. If one or more of them were to topple over, there will be a huge knock-on effect on banks and other financial institutions that rely on their guarantees. This in turn will further worsen the credit crunch and cause an even bigger headache for policymakers already grappling with a sharp slowdown in the American economy.
The threat of such a financial domino effect looms large. Moody’s, a credit-rating agency, has signalled that it might downgrade the AAA-ratings of two of the biggest bond insurers, MBIA and Ambac, in the near future. On Friday January 18th, Ambac said that it had dropped a plan to raise $1 billion of new equity capital to preserve its rating—making futher downgrades even likelier. In response, Fitch, another rating firm, cut Ambac's rating.
MBIA, which recently managed to raise $1 billion of new capital on top of another billion that it received from Warburg Pincus, a private-equity firm, will almost certainly need even more money if it is to preserve its AAA-rating. ACA Financial Guaranty Corporation, another insurer, is in even direr straits. In December its single-A credit rating was cut to junk status. The firm begged its trading partners to give it more time to sort out its problems. But by Friday it had still not come up with a rescue plan. The state insurance regulator of Maryland, where ACA is incorporated, has already assumed responsibility for some of its operations.
Bond insurers in effect “lend” their top-notch ratings to lower-quality debt, raising its value in the eyes of investors. Any cut in those ratings may make it impossible for the bond insurers to take on new business and would reduce the value of the securities they have already underwritten. Such cuts are now a distinct possibility because the insurers have underwritten billions of dollars of mortgage-backed securities, including those notorious collateralised-debt obligations (CDOs) that have now gone sour.
On Wednesday Ambac announced a $3.5 billion writedown—as well as the ousting of its chief executive—$1.1 billion of which was related to CDOs. The insurers’ exposure to these and other exotic products is a huge multiple of their flimsy capital bases—and the chances of them having to cover claims has soared as the economy has slowed. Small wonder, then, that their share prices plummeted this week—proving that the market has already decided they no longer deserve such lofty ratings and creating a vicious downwards spiral. Ambac’s falling share price has severely dented it chances of raising fresh capital.
There are already signs that the insurers’ woes are contagious. On Thursday Merrill Lynch wrote down $3.1 billion on debt securities that it had hedged with ACA and other bond insurers. Other banks have also made writedowns to reflect their lack of confidence in ACA’s ability to meet its commitments. The full extent of the “counterparty risk” banks face in dealing with bond insurers is only now becoming apparent Jamie Dimon, the boss of JP Morgan Chase, has said that the fallout from the bond-insurer crisis could be “pretty terrible” for the debt markets. If a big insurer such as Ambac or MBIA were to take a tumble, that could look like an understatement.
This happened to Ambac today.
I hate it when the sky falls, again...
Hyperinflation can fix this. These debts can be easliy repaid in Zimbabwe dollars.
It’s terrible. People are throwing USD’s away like confetti of course.
Yes, but a 70’s style “economic stimulus” plan is quite crude. And for congressional Democrats to be in favor, this would seem to portend a bad situation brewing. Surely the Democrats would like to see a marginally poor economy leading into the 2008 election, but a complete meltdown could in fact harm them, given their assumption of full congressional power in 2004. This is the only reason that I can think of whereby the Democrats woule ever be in favor of an economic stimulus plan today.
IMHO, the whole financial house of cards is about to come crashing down. Look for one of the big three auto makers to crash and burn by June. Look for more and more layoffs. Heck, even SPrint is laying off 4 thousand. Citibank is laying off some 24 thousand. It will be a major unwinding and blood letting of a magnitude none of us have ever seen or lived through. I’m not ready and I don’t think may of us here are..
Technology king AMAT (Applied Materials) is shedding thousand of jobs.
First rule of leadership: know your subject
Ben Bernanke, the Chairman of the Federal Reserve, is hardly an obscure figure - indeed, the onset of the credit crunch has made him practically a household name. But not to everyone, it would seem. A congresswoman at a House of Representatives Budget Committee hearing was seeking to pin down which Wall Street firms were responsible for the securitisation of sub-prime mortgages.
She began: “Seeing as how you were the former CEO of Goldman Sachs ...”
A bemused Bernanke interrupted: “No, no, no, you're confusing me with the Treasury Secretary [Hank Paulson, the former Goldman Sachs bigwig] ...”
She continued: “I've got the wrong firm? Paulson, Oh, OK”, before adding: “Sorry, I got you confused with the other one. I'm glad you clarified that for the record. Where were you, sir?”
Maybe it was the hair that did it.
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yitbos
With the bond insurers circling down the drain, the banks will be soon to follow. Already insitutions are forbiding large withdrawals of you own money. Ever try to put 2K in the bank lately--reports to homeland security and the IRS... Its getting really weird out there.
Regarding inflation. Have you noticed that the box of ceral you buy in the store is the same size, but two to three ounces less product for the same price? A ten pound bag of Kingsford Charcoal is now an eight pound bag...things like that.
I'm not financially ready, buy have my own well and five areas and some seed stock saved..we'll see what happens...
Calm down. It isn’t the end of the world. Just a nasty recession.
The reporting of cash transactions has been in place for awhile. It used to be $10,000 and then they dropped it. Nothing new there.
And yes, there is some inflation.
Already insitutions are forbiding large withdrawals of you own money...
I seriously doubt this...
Then go and try to withdraw ten grand of your own money out of the bank.
Aside from the reporting — required by law — that isn’t a problem.
The law, by the way, was originally put into place to thwart money laundering of drug profits.
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