Sidetalk

We all know the monolines (bond insurers) are a huge mess.  Although they insure massive amounts of debt, they themselves appear to lack the assets to honor those obligations. How best to fix this mess? 

Bill Ackman’s recent presentation is highly recommended reading.  It has an A to Z analysis of how the bond insurers do business, financial condition, and — go to page 134 of his analysis — a very cogent outline of how the scenario will play out.  Spoiler:  he says downgrades, bankruptcy, receivership.

Here it is:  howtosavethebondinsurers.pdf

Satyajit Das opines that the tools available to central banks are inadequate to address the scope of the global economic problems we face.  The black box or shadow economy may involve the unwinding of “innovative” financial products/derivatives such that monetary and fiscal policy simply will not work this time. 

http://www.boston.com/bostonglobe/ideas/articles/2008/01/27/the_black_box_economy/

From Goode Value Investing  http://www.goodevalue.com/2008/01/22/bill-ackmans-letter-to-rating-agencies-regarding-bond-insurers/:  Bill Ackman is apparently asking the ratings companies the questions we all want answered.  It’s an excellent letter with a concise explanation of the facts, and the consequences of the facts.  The letter observes it is unlikely that MBIA, Ambac and other insurers will be able to continue as going concerns. Finally, the letter asks the ultimate question:  When the rating companies look at themselves in the mirror, how can they possibly say that MBIA and others deserve their highest (Triple A) rating? 

Here is text of the letter: 
January 18, 2008

Mr. Raymond McDaniel Mr. Stephen Joynt
Executive Chairman and CEO CEO and President
Moody’s Corp. Fitch Ratings
99 Church St. One State Street Plaza
New York, NY 10007 New York, NY 10004

Mr. Deven Sharma
President
Standard & Poor’s
55 Water Street
New York, NY 10041

Re: Bond Insurer Ratings

Ladies and Gentlemen:

As a Nationally Recognized Statistical Rating Organization, Moody’s, S&P, and Fitch
have been granted a level of authority that capital market participants and Federal and
State regulators have historically relied upon in evaluating the safety and soundness of
corporations, regulated financial institutions, and structured finance securities. To state
the obvious, because of your critical role in the capital markets, it is essential that the
ratings you publish are the result of comprehensive and accurate analysis.

(more…)

It’s no secret anymore that the monolines really don’t have the wherewithal to properly “insure” credit derivatives such as CDOs.  And the first hand evidence is piling in that the monolines apparently knew all along what they were doing — and kept right on “insuring” CDOs and other junky derivatives.  Why?  Profit, of course.  Where did all that money go?  Wherever it went, it’s high time for someone to go and get it back. 

My idea:  let the ratings companies (Fitch, Standard & Poors, et al.) who bestowed AAA ratings to this mess.  Perhaps they should disgorge all the revenue they collected as a result.  Seems as if they were unjustly enriched at the expense of …. all of us?

So - who spilled the beans?  Well, for one, former ACA Capital honcho (now literally put out to pasture?) as quoted at length in Bloomberg:

“Municipal bond insurers such as MBIA Inc. and Ambac Financial Group Inc. had a good thing going.  For years, they earned some of the highest profit margins in any industry — by writing coverage for securities sold by states and cities to build roads, schools and firehouses. 

(more…)

This is the nightmare scenario:  pension funds invested in CDOs and/or other derivatives are swamped by the massive unwinding process underway.   Where then does the money come from to pay retirees? 

This great unwinding has potential consequences not only for U.S. pensioners, but certainly the U.K. and possibly beyond.  Here is a terrific and concise explanation of the relationship between CDO downgrades and U.K. pension funds by Ken Griffin and Jeff Moskowitz: (more…)

It’s bad indeed when Wall Street calls its lawyers in hopeless tears.  What is the lawyer supposed to do about it?  And from the lawyer’s point of view, who’s going to pay for the call?

From NY Post:
 
“January 20, 2008 — Pink slips began in earnest on Wall Street last week - moving grown men to tears and headhunters’ phones ringing off the hook.The worst fourth quarter in Wall Street history, which has wiped out billions of dollars in market capitalization and sent the markets into a tailspin, is now costing folks their jobs.

“In all my years in financial services, I have never seen it this bad,” one high-powered securities industry lawyer told The Post. “I have owners of small firms calling me up saying their liabilities now exceed their assets, which means by law they are required to close down.” (more…)

Update:  What About the Munis?  → good article:   http://wallstreetexaminer.com/blogs/winter/?p=1348

Is the current credit crisis and resulting loss of asset valuation having an impact on pensions and healthcare benefits?

Yes - see two preliminary reports below.

pew.pdf     ← The Pew Center on the States released a report in December 2007 highlighting the perilous footing of  the states’ funding of their long-term retiree benefits (both pension and nonpension).  Click through to full report.  

(more…)

comptroller.pdf 

The Honorable David M. Walker, Comptroller General of the United States, has been loud and clear in warning Congress, the administration, academia, and the public that the US economic situation requires urgent and radical measures.  “The status quo is not an option.”   (more…)

The risks of CDO meltdowns have been well-recognized for at least the last decade.  CDOs are necessarily dependent on the underlying collateral portfolio because CDOs necessarily separate the performance of the issuing bank from the performance of the issued notes.  The inherent risks of CDO nonperformance have long been known and discussed.  In her November, 1998 analysis, Karen Spinner gives an exceptionally cogent listing and explanation of these risks.  For example, Model Risk dictates that the investor consider the possibility that the rating agency’s models “may not bee 100% accurate.”  Liquidity Risk means that it is hard for an issuer to unwind a closed CDO structure. 

Her excellent piece is entitled “CDOs Under Fire - What will happen to CDOs if credit fears paralyze financial markets?”.  Too bad more institutional investors and other players apparently did not pay enough attention here.  Apparently the credit fears have now virtually paralyzed the financial markets and we’ll have to observe the actual consequences to these derivative instruments. 

Link to Spinner piece here:

http://www.derivativesstrategy.com/magazine/archive/1998/1198fea1.asp

Watching this testimony live, without benefit of transcript, Bernanke incredibly is saying there will NOT be a recession!  Forecasting slower growth picking up in late 2008.  Some decent questions from Congresspeople re: why would a rebate actually improve economy?  Shift from pro-savings economy to pro-debt, etc.

Comments? 

Why is Bernanke talking so optimistically (yet looking terrible)?

What will Congress do on fiscal side?

Will Bernanke lower rates on 1/30 and if so why?

Cheers!

Hat tip Liz!

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