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.
I routinely cash out a lot more than that. But you are right and you are wrong : ) Banks typically do not have a lot of cash sitting in the vault, that would be stupid. Ideally from the banks perspective they would loan out every single dollar that they have. They carefully calculate how much cash is going to be needed for withdrawals each day and when someone like me comes in and needs a lot of cash they simply may not have it on hand.
Now piddly little withdrawals like a couple of grand are no big deal.
It's likely true this time.
Okay, I am wrong. Furthermore the “current” financial crisis is nothing more than those bugaboo democrats trying to talk the economy down for political gain. All I will say is this. If you live within five miles of a 7-11, you are toast.
Getting close to some very lucrative buying opportunities. About one or two months, maybe.
yitbos
Not for awhile. A year, maybe 18 months...or more.
yitbos
We haven’t begun to see this thing fully play out...
At what point does the Media thank BILL CLINTON and JESSE JACKSON for creating this mess???
Remember when it was racist not to give no-doc mortgages to blacks and illegals??
Jesse Jackson made MILLIONS from this scam and the CRA changes, inner-city connected Democrats have made BILLIONS from massive mortgage fraud, and the taxpayers are going to get stuck for TRILLIONS from this nightmare...
yitbos
I’d still like to see how this plays out.
Why?
Cause the RHINO's in DC and the GOP have screwed the pooch. They know it. It's how the shell game with the smoke-n-mirrors is played on The Hill coupled with complete compliance of the MSM to shill for the NWO, socialisms and the elites.
We are headed for a serious slowdown in the economy.
The said think is this will most likely give the RATS total control after 2008.
Still neither side does anything but sleep w/respect to illegal immigration , unsecured borders, oil dependency, and fair trade.
*BUMP* !
Everyone is wrong when it comes to predicting the future : ) Predicting the future is impossible and anyone who tries is a fool. That doesn't stop me from trying to hedge my bets, but I have a lot of free time : )
You are right. It is tied to the price of oil, which will be rising to $4.5/pgal by April and debt. Our Government leaders do not understand basic economics and it will only be made worse when stimulus packages are passed due to the increase in public debt.
The only solution is to cut the size of Government by 50% and reduce taxes across the board for all Government (Fed, State, and Local property taxes). We have met the threshold of a viable economy and taxes. If not reduced by June08, we will be seeing a depression.
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