Posted on 07/05/2015 11:55:20 AM PDT by Lorianne
I really had not been paying much attention to the Puerto Rico debt situation. After all, $72 billion in debt that might go bad – big deal. The Fed can print up $72 billion in credit lines with the push of a button.
But a friend of mine happened to mention to me today (Monday) that MBIA’s stock was down over 23% and Assured Guaranty’s stock was down over 13%. That woke me up.
Companies like MBI and AMBAC underwrite credit “enhancement” guarantees on these massive cesspools of debt – and the associated derivatives that are “wrapped around” the debt structures – and stick them in VIEs. MBI’s 10-K has several pages of footnotes which vaguely describe the contents of its VIEs. The problem is that MBI and its ilk are thinly capitalized relative to the potential size of the liabilities they face if the credit markets become volatile to the downside.
But wait, the story gets even better. As it turns out Warburg Pincus, one of the loftiest private equity firms on Wall Street, is by far MBI’s largest shareholder. Warburg announced a little over five weeks ago that it was going to unload 60% of its stake via over the counter negotiated sales – LINK. The firm has been unloading these shares since May 18th. We won’t know how successful this effort has been until the selling is completed.
Does Warburg Pincus sound recently familiar? It’s the firm that hired “Turbo Tax” Tim Geithner shortly after he left his post as Treasury Secretary. Remember, Geithner was head of the NY Fed at the time of the 2008 financial collapse. In other words, he knows where a lot of the bodies in the financial system are buried. I have no doubt that Geithner has played a significant role in advising Warburg on the need to unload its exposure to MBIA. Anyone who takes the other side of this trade is a complete idiot.
Thanks for posting this. I’ve been trying to get a handle on what the fallout might be in a PR default. Prior to this all I’ve seen is that the bondholders ‘have insurance’.
Your posted article paints a less sanguine picture.
Well, it happened in 1998 and then again in 2008. The “Masters of the Universe” who are always the smartest guys in the room “misunderestimated” the intensity of the herd’s panic attack, and so their trading parameters, they were surprised to learn, were way to narrow, and the next thing you know a chain reaction of puts and calls is triggered and the smartest guys in the room are caught with their pants down. They don’t have enough money to cover their position so they turn to the long-suffering United States taxpayer for succor. Will we be fooled yet again?
That's my uneducated guess. The Fed will not print money to explicitly pay off any of the debt, but they will issue "guarantees" for the loans.
Then when the loans go bad, the Fed will quietly pay off over a time line long enough that few will notice.
“Warburg announced a little over five weeks ago that it was going to unload 60% of its stake via over the counter negotiated sales – LINK. The firm has been unloading these shares since May 18th.”
This sounds eerily similar to the movie ‘Margin Call’, where they had to dump all of their securities by the end of the next trading day. Because of it the company survived, but everyone else on the Street got burned.
I think the title was ‘Margin Call’...
I’m wondering who they are selling to.
The real question is will the so called “conservatives” here, and in political office, will act like tyrants and seek to further regulate derivatives. Leave the derivative traders alone. Only someone who rejects liberty would impose more Barney Frank style solutions.
Leave us alone!
The Fed will let these credit insurers handle this (or go broke doing so) and will not undertake a similar rescue analogous to the AIG debacle in 2008 which would have taken down the entire US financial system. AIG had several hundred billion of credit default swaps with shaky counterparties (Lehman, etc.). The AIG/Hank Greenberg case was adjudicated last week in favor of AIG/Greenberg against the Fed with zero dollars awarded as damages.
At this point in history, it is well known that derivatives are put together by con artists for suckers. May the suckers lose their shirts and the crooks have their loot confiscated.
Unfortunately, it is the crooks who will be confiscating our "loot", such of it as is left after 7 years of Herr Leader.
Unfortunately, many of the suckers are unknowing suckers as much of this is unloaded to retirement accounts, etc.
Investors have known about Puerto Rico for years. Since this is not a surprise, no one of any consequence should have unhedged exposure.....except maybe for hedge funds.
If you can predict it then it isn’t a Black Swan.
Somehow, all those fancy trading algorithms always seem to forget to factor in things like mass hysteria.
I wonder if Chlsea’s hubby is exposed... I think I saw reports he ad large exposure to Greece.
I’d love to leave Wall Street alone. But as we saw in 2008, Wall Street doesn’t leave us alone.
Politicians get in bed with them. The solution is for politicians to stop getting in bed with them - it is not to inititiate bailouts and it is not to create regulations.
That will never happen. Politicians will, over time, always follow the money. We need a more radical fix than forlorn hopes for better, loftier sentiments among the venal.
Regardless, leave derivatives alone.
I’ll leave Wall Street alone so long as Wall Street leaves Main Street alone. Deal?
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