Fed rate cut triggered by fear of bond insurance collapse

Okay, stupid question from a financially challenged former scientist who is now a photographer (vanity of vanities, all is vanity).....where did all the money go? You guys seem to be up on the shell game here. Was there really no money - we were all just playing with pretend money....or did someone all of a sudden just put a bunch of cash in their vault and are waiting to buy a few NFL franchises.....why doesn’t the money just recycle and trickle down again....(I AM fully clothed in asbestos, so go ahead and make my day) My question is where is all the cash? In foreign countries? Why are they in financial trouble also.....thanks & Best regards,

So, when’s the right time to buy some US Bank Stocks?

Probably not next week, but how about in a few weeks??

These guys have reserved for the “kitchen sink” based on all of their “potential” loan losses materializing, all based on what they have to do based on GAAP/FASB/SEC principles, but not real losses, not real cash.

Who knows how many sub-prime home owners will default, but certainly it will not be to the extent that the market has shed their stock value.

Seems to me to be a huge investment potential, just need to pick the timing!

??Thoughts anyone??

the bond insurance market is not very regulated at all, and was likened to a bunch of people making side bets on fights

You're thinking of credit default swaps (CDS), which is not the same as bond insurance. MBIA-type bond insurance is used by municipalities that may not have stellar credit to obtain AAA grade financing. They buy AAA rated insurance for the bonds they issue (that's what's meant by "wrapping" the bond) and then the overall bond gets the AAA rating, lowering the interest rate.

OTOH, CDS is unregulated and can be entered into by just about anyone - hedge funds, banks, insurance companies, corporations... To enter a CDS one party "insures" a company's bond against default by paying an upfront fee and then an annual charge for the promise to be paid the face value of the bond in the event of default. But if the entity that made that promise is insolvent, the "insurance" is worthless. That's known as counterparty risk - the risk that the other side of your financial contract can't live up to the contract's terms.

In the first of many of these writeoffs to come, Merrill Lynch just wrote off about $3.2 billion of CDS that were entered into with ACA Capital Holdings. Last I had read, there were about $45 of CDS covering only $15 billion or so of corporate debt (that's the side bet aspect) and hundreds of billions of CDS covering CDOs issued by companies such as ACA. Many of these CDS will prove to be worthless.

Now to confuse matters a bit more, the bond insurers such as MBIA didn't get involved in CDS. And the municipal bonds they insure is still a good business (which is why Buffet is getting into it.) But they did get into insuring CDOs and many of those are going bad, which is impacting their capital structure. The 75bp rate cut likely won't help much here. Not when MBIA had to pay 14% interest to be able to sell a $1 billion issuance last week. BTW, that was rated AA by the bond rating agencies. 14% interest and an AA rating...

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