Posted on 02/01/2008 4:19:36 PM PST by TigerLikesRooster
Banks link to solve bond insurers crisis
By David Wighton, Aline van Duyn and Henny Sender in New York and Peter Thal Larsen in London
Published: February 1 2008 19:53 | Last updated: February 1 2008 20:05
Leading US and European banks are joining forces to find solutions to the crisis among US bond insurers, whose problems threaten to exacerbate the impact of the credit squeeze.
One group of banks, including Citigroup and Barclays, is examining options for supporting Ambac Financial, one of the leading insurers. Separate teams are working with other bond insurers, according to people close to the process.
The moves come after efforts by Eric Dinallo, New York state insurance superintendent, to persuade the banks to back an industry-wide bail-out for the beleaguered guarantors. John Thain, chief executive of Merrill Lynch, told the Financial Times that such an industry-wide solution would be “hard to get” given the banks’ different exposures to the credit insurers. However, Mr Dinallo’s initiative has spurred the banks to look at supporting the insurers on an individual basis.
Moody’s Investors Service and Standard & Poor’s, the biggest credit rating agencies, have warned that they may cut the triple-A ratings of Ambac and MBIA. This would force banks to make further writedowns or provide more capital against investments insured by the guarantors.
The group of banks looking at supporting Ambac includes Citigroup, Wachovia, Barclays, Royal Bank of Scotland, Société Générale, BNP Paribas, UBS and Dresdner. The group is being advised by Greenhill while Credit Suisse is advising Ambac.
Ambac, which has been stripped of its triple-A rating by Fitch, needs to raise $1bn, according to analysts. Uncertainty about whether Ambac and MBIA can find new capital in time to avoid losing their triple-A ratings has weighed on sentiment in the equity markets.
Time is running out for the bond insurers. Moody’s said this week it would complete a review of the bond insurance industry by late February as it tries to determine how much more capital bond insurers need to account for rising losses from subprime mortgage securities.
Shares in the bond insurers rose yesterday on the news that banks were considering injecting cash into Ambac, first reported by CNBC.
Around midday in New York, Ambac was up 15.5 per cent to $13.45, and MBIA was up 5.4 per cent to $16.35. Both companies have seen their share prices fall by nearly 80 per cent in the past 12 months.
Ping!
I like it. The banks need to act together to hold this thing together.
Sounds like a con job.
Banks are considering injecting capital into the bond insurers. I can see why you think this is a “con job.” (WTH??????)
So, let’s think about this a sec: the banks pledge their reserves to backstop the monolines.
Which means that the banks’ ability to lend continues to contract.
Which sucks yet more money out of the economy.
Yes, this is preferable to the monolines going down, but there is a downside: a recession becomes more likely.
Why did you put “bailout?” in the title?
to persuade the banks to back an industry-wide bail-out for the beleaguered guarantors
the insurers are trying to ensure 1000 times what they have on hand, and the banks think they can make a dent?
So are the banks getting anything in return for their “bailout?”
higher ratings on their bonds, because their insurers are now "solvent"?
It’s getting a little complicated now. Citibank for example just convinced somebody to buy what, five percent?, of itself for some number of billions of dollars because their own balance sheet is shaky, and some of that cash apparently is going out the back door a month later.
So the degree to which Citibank uses their own emergency cash for what might very well be a bigger emergency makes Citibank that much weaker again. Do they just go back to their sponsor next week with their hand out a second time with that story?
In that sense, this is a crisis alright.
Preventing a Panic
By Mortimer Zuckerman
Posted February 1, 2008
The fireworks of the primary season, climaxing on February 5, are like having a carnival on a beach while a tsunami gathers force offshore. "Hope" and "Change" as slogans may make people feel good, but they have the same relevance to the financial complexities threatening us as the clueless castaways on Lost, the quirky ABC melodrama.
The castaways are truly lost because they don't understand their new world. Understanding our new world should be the first requirement of all the White House hopefuls because what we are facing is a credit crisis so severe that it threatens the working of the economy. And so deep that it may take as long as two years to unwind—even assuming the top policymakers understand how the new world works. The problem is so complex that nobody can give the right answers before knowing the right questions and gathering the right information. This is a much tougher task than Congress applying band-aids of tax and investment relief. The financial community itself is bewildered, unsure of its risks and liabilities and taken by surprise almost daily. The story of the 31-year-old trader at Société Générale, one of France's largest banks, reads like the script of a movie thriller. He bet $73 billion of the bank's money that European and German stock indexes would go up. When they turned down, the bank discovered the unauthorized trades and unraveled them—at the stupefying cost of $7.2 billion.
Questions: How could one junior trader have bet so much without senior management knowing? How could the bank fail to monitor properly the sophisticated trading techniques and the computerized analyses that underscored the bets? How could it not be aware of the risks inherent in the incredible leverage by which banks borrow 80 to 90 percent of every $1 they invest?
Oversight failure. These failures are shared by many American investment and commercial banks. Merrill Lynch held subprime mortgages exceeding the net worth of the firm. Citigroup had $80 billion of sub-prime mortgages held off its balance sheet in so-called structured investment vehicles. In effect, this meant Citibank had guaranteed the financing to support a massive investment literally unknown to the financial community and much of its management. This at the same time it was holding an additional $50 billion of subprime paper on its balance sheet.
These and other banks invested heavily in all this paper because big profits come from borrowing inexpensively in the short term and reaping higher returns from longer-term securities (many of which earned AAA and AA from the rating agencies). Nice, but just as profits are magnified by leverage, the 1-to-9 ratio of cash equity to borrowing, so are the losses. If the price of the longer-term securities grew by 5 percent when the security had been financed to the tune of 90 percent credit, the result was a 50 percent return on the equity. But if the prices fell by 5 percent, there was a loss 10 times greater in the value of the equity. Your original dollar was worth 50 cents. In many cases, the equity was wiped out. The way up is also the way down.
The markets provided easy, almost unlimited financing to buy securities. But this bubble depended primarily on another bubble—the one in housing. The assumption had been that house prices would continue to rise, enabling overextended borrowers to refinance the growing equity value in their homes. But when prices began to fall in 2007, mortgagees went into default. Bad enough—it was the first time house prices had fallen year over year since the Great Depression. But worse, the defaulters, like falling dominoes, took down with them the institutions that had invested in subprime mortgages bundled into bondlike securities (collateralized debt obligations or CDOs).
The risk in these securities was supposed to be reduced and dispersed by a variety of bond insurance mechanisms (credit default swaps or CDS)—but the rising tide of defaults in CDOs and corporate bonds has imposed heavy burdens on the insurers. The insurers can get the bond they guaranteed, but it is now worth much less than its face value. If the insurer can't afford these losses or goes bust, the bond bounces back to the "original" holders of the CDOs, who bear the losses they thought were guaranteed not to happen. The result can be a fire sale of billions of dollars or securities...
[see link for full article]
Quite simply, this financial crisis is the worst since the panic that led to the Great Depression. As a result, the recession may well be deeper and/or longer than any since the end of WWII. No one knows where the bottom is. That is why the level of confidence in both consumers and producers has declined—and must be restored if the financial fiasco is not to turn into a crisis for the broader economy....
Wachovia has said it has insignificant exposure to bond insurers, yet they are on the list of banks in negotiations. I would think that the banks would get equity interests for their investments.
Still don’t know how its a con.
Where oh where are these banks to int to get the billions in spare capital to inject? Are they going to borrow it from each other? LOL.
Shell game. Follow the peanut. Now you see it, now you don’t.
Reading tomorrow’s history today. Great posting, thanks.
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