Posted on 06/21/2008 6:08:42 AM PDT by DeaconBenjamin
The threat of up to $10bn (£5bn) in further banking writedowns on the back of serious downgrades to the world's two largest bond insurers sent shares in New York tumbling to levels not seen since March.
Credit ratings agency Moody's decision to remove MBIA and Ambac's prized Aaa ratings saw the shares values of the two "monoline" insurers fall by 13pc and 6pc respectively.
The benchmark Dow Jones Industrial Average was down more than 200 points in late trading, falling well below the psychologically important 12,000 level and down 10.6 pc year-to-date. The broader S&P500 index also hit a three-month low, down 24 points at 1,318.85. advertisement
Bank shares were worse hit, with Citigroup and Merrill Lynch both falling by around 6pc - the latter also hit by unsubstantiated rumours that it is about to sound a profits warning.
The market was unsettled by the monoline downgrades, with investors fearing the bonds they insure could lose their cherished ratings too and trigger sell-off by those institutional investors only permitted to hold triple-A instruments.
Such a sell-off could hit bond values and further undermine the balance sheets of the banks and other institutional investors. Oppenheimer & Co banking analyst Meredith Whitney believes that the downgrades may limit the monoline's ability to write new policies, posing "a risk to the value of the insurance and hedges on the sub-prime-related securities provided to the banks and brokers".
Both Ambac and MBIA contested their downgrades by Moodys yesterday, stressing they believed their capital levels supported a higher rating.
(Excerpt) Read more at telegraph.co.uk ...
PING
When do I start buying shares of Citibank?....$18?...or do I wait for it to go lower?
Moody's announced its decision to cut MBIA's rating, to "A2" from "Aaa," late Thursday.
The bond insurer said it has total assets of $25 billion related to its asset/liability management business, of which $15.2 billion is available to satisfy these requirements.
In addition, MBIA also has available another $1.4 billion in cash, including the proceeds of its recent equity offering.
Shares of MBIA closed at $5.59.
MBIA comments on Moody's downgrade; sees $2.9B in potential payments
I'll take that as a rhetorical question.
“””When do I start buying shares of Citibank?....$18?”””
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Citi is going to high single digits before it’s over. I would steer clear of financials for some time. New FASB accounting rules coming on line are going to deepen the pain for bank assets whose value is based in fiction currently.
Wait, it’ll be a single digit before long. Either that or it will be sold piecemeal.
Ha, didn’t read your post before I did mine. We think alike.
You wait. There are other shoes about to drop.
time to buy.
Wait until some positive news shows up or at least negative news sort of stops.
I hate to expose my ignorance, but would someone here please explain how a writedown like this hurts us?
“””What new standard is coming on-line? FAS 157 and 159 were effective 1/1/08, and most of the big banks early adopted this in 2007. Is there something else?””””
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FAS 161, 162 and 163 are all in varying states of adoption, mandated to be in full force by November and December ‘08. The big deal is the accounting standards for asset values of derivatives such as Credit Default Swaps and the like. Current standards are pretty loose as to how financial firms can value these assets. The common way of looking at it bluntly is that some assets are currently valued at what the firm says their value is, marked to model as opposed to marked to market. Some would say that currently the term marked to model is actually marked to myth. The bottom line is, there is likely 100’s of $Billions, if not $Trillions in worthless junk that is currently rated as having value.
Unless I’m mistaken, FAS 161 only addresses disclosure, not accounting. 162 doesn’t seem to apply. I admit I’m not up on FAS 163 but I thought it only impacted insurance companies.
As to junk being incorrectly shown as having value, there may be some of that. However, just because a financial instrument wouldn’t trade at its economic value in the market today doesn’t mean it doesn’t have value. The market for anything exotic or structured has basically ground to a halt. But if an entity doesn’t need to sell, it is very likely that many such instruments will continue to return the orginal yield on the investment and the investor will be made whole at maturity. For example, a credit default swap is only worthless if the underlying entity defaults or the counterparty fails. Barring these two scenarios, there is lots of value for these instruments.
Bottom line is that the structured stuff does present the financial system with lots of risk, and on hindsight we all wish much of it wouldn’t have been done. That said, there has been over-reaction in the market place to much of this. I really doubt there is trillions of paper on the books of the world’s financial firms that is worthless. In fact, I wouldn’t be surprised if many of the write-offs being taken right now will be reversed in the coming years as the markets return to normalcy or as the instruments mature.
You can find a cliche to support whatever you decide. A bull will say, “buy when there is blood in the streets” (and there seems to be lots of financial-institution blood these days), and a bear will say, “never try to catch a falling knife” (and the financial-institution knives are clearly falling like dominoes). Pay your money and take your choice. As for me, I suspect BAC is the best choice for eventual big profits, but WFC and USB seem like much safer choices. I have no opinion about Citigroup.
I suppose that depends on who “us” is. If you own stock in the downgraded insurers, the answer can be seen in the drop in their stock prices yesterday. If you own stock in a company that holds debt insured by either of the insurers, the value of that stock also probably dropped yesterday. If the writedowns lead to runs on any of the banks that make the writedowns (or possibly even lead to the insolvency of any of those banks) and if the FDIC cannot cover all the losses it has agreed to cover, Uncle Sam will likely step in with your tax dollars. Also, even if the banks stay solvent, their abilty and willingness to make loans will likely be impaired, leaving it more expensive for you to get a loan and possibly increasing a credit contraction that lessens the ability of the economy to grow (which will hurt you if a growing economy helps you and help you if a growing economy hurts you—and which will likely help Barack Hussein Obama).
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