the issue of counterparty risk will probably lead the banks to have to mark down the assets they hedged through the bond insurers. I doubt a bailout will be made, they will just take on the chin. The big banks arent about fail just yet they still got capital cushion, plus the capital coming from the rest world is still too abundant it would be hard for the fed or treasury to sell to congress a bailout when the middle east has shown willingness to be the sucker and bailouter of last resort A low interest loan from the fed to ambac or aca would be illegal(northern rock type solution) although they could do it if the financial world were about to end(they would deal with the legal issues latter) but I dont think the banks are in that bad of shape just yet, they just came from a period of record profits so they can lose some more capital
"We are very mindful of the situation and are as reasonably on top of it as we can be," Dinallo told Reuters ..." wow,doesnt sound to confident...when will the public at large be exposed to this ugliness?seems like a panic will hit the fan then...
Well lets see 2.4 trillion in bonds with possible writedowns of 250 billion with unknowable dominos falling afterwards. I'd say there is a pretty good chance we see some sort of attempt at a "managed" solution from a government entity shortly.
your probably right on the municipal bond side. on the cdos the banks will have to swallow the losses because nobody else will, it would be scandal if the treasury funded CDO losses for some wall street banks
think there is a chance of some kind of auction for the portfolios?the money would go the the bond insurers and this would delay the problems and make them happen slowly
I'd say time of the essence and they are out of time now. It will probably go the way of ACA and the banks will have to EAT IT. ACA Customers Allow More Time to Unwind Default Swaps (Update2) By Mark Pittman and Cecile Gutscher Jan. 21 (Bloomberg) -- ACA Capital Holdings Inc., the bond insurer being run by regulators after subprime-mortgage losses, won a month's grace to unwind $60 billion of credit-default swap contracts that it can't pay. ACA, under the control of the Maryland Insurance Administration, extended an agreement that waives collateral requirements, policy claims and termination rights until Feb. 19, the New York-based company said in a statement on Business Wire late yesterday. The insurer is working with its trading partners ``to develop a permanent solution to stabilize its capital position,'' according to the statement. Standard & Poor's cut ACA's rating 12 levels to CCC last month, casting doubt on the company's guarantees and triggering collateral requirements. ACA, which lost 97 percent of its market value in the past 12 months, caused Merrill Lynch & Co. to write down $1.9 billion of securities last week and Canadian Imperial Bank of Commerce to sell more than C$2.75 billion ($2.7 billion) in stock to cover writedowns. Bond insurer shares plunged last week and credit-default swaps rose to a record on concern the companies may be unable to meet their obligations as the subprime-mortgage securities and collateralized debt obligations they guarantee slump in value. Ambac Financial Group Inc., the second-largest bond insurer, had its AAA credit ranking cut to AA by Fitch Ratings. Both Ambac and its larger rival, MBIA Inc., are under threat of losing the top grades from Moody's Investors Service and S&P, a move that would throw doubt on the ratings of $2.4 trillion of securities. An after-hours call to ACA last night by Bloomberg News wasn't immediately returned. Derivative Contracts ``ACA is an important case to follow because it shows how the banks' react to fast-deteriorating counterparty creditworthiness,'' said Toby Nangle, who helps oversee $37 billion as head of global aggregate business at Baring Asset Management in London. The bond insurers, also known as monolines, guaranteed $127 billion of CDOs backed by subprime-mortgage securities as of June 30, according to S&P. CDOs are created by packaging debt or derivatives into new securities with varying ratings. Most of those guarantees are in the form of derivatives. Unlike insurance, these contracts are required to be valued at market rates. Derivatives are contracts whose value is derived from assets including stocks, bonds, currencies and commodities, or from events such as the weather or changes in interest rates. South Dakota Bonds ACA was founded in 1997 by former Fitch executive H. Russell Fraser, who left the ratings company in 2001 as it shifted focus to structured finance from municipal bonds. Fraser said his idea was to start an A rated municipal bond insurance company to guarantee a new crop of borrowers he sometimes called ``the cream of the crap.'' ACA's larger competitors such as Ambac and MBIA had enough cash to get the top AAA ratings on their insured bonds. ACA backed $51.5 million of bonds sold to finance the construction of a jail in Pinal County, Arizona, and $4.7 million of bonds for the city of Deadwood, South Dakota. CDOs were created by Wall Street by repackaging assets such as mortgage bonds and buyout loans into new obligations for sale to institutional investors. The insurers agreed to pay CDO holders, many of them banks that created the securities, in the event of a default. CDO Downgrades The tipping point came last year when the three major rating companies downgraded thousands of CDOs. Ratings on more than 2,000 CDOs were cut in November alone, according to a Dec. 13 UBS AG research report. Maryland Insurance Administration held off filing delinquency proceedings last month while ACA sought capital. ACA was required under its credit-default swap contracts to post collateral if its rating fell below A-. ACA gained 2 cents, or 4 percent, to 48 cents in over-the- counter trading on Jan. 18 in New York. ``The monolines are dead, their business model is dead,'' said David Roche, head of investment consultancy Independent Strategy in London. ``The government is going to have to recapitalize this industry or there will be communities in the U.S. where they can't even flush their toilets'' because they can't afford the services. Default Risk Prices for contracts that pay investors if Armonk, New York-based MBIA can't meet its debt obligations imply a 71 percent chance the company will default in the next five years, according to a JPMorgan Chase & Co. valuation model. Contracts on New York-based Ambac imply a 72 percent probability. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite. New York State Insurance Superintendent Eric Dinallo is examining whether to limit the types of debt that can be guaranteed by bond insurers, department spokesman David Neustadt said last week. The Federal Reserve may need to organize a bailout, Nangle at Barings said. ``More generalised monoline meltdown would be a situation that would require intervention by the New York Fed,'' said Nangle. The regulator should ``get all the banks into a room, have them open their books, and then lean on them to inject capital.'' -- With reporting by John Glover in London. Editors: Emma Moody, Gavin Serkin To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net Last Updated: January 21, 2008 06:34 EST
ambac was triple a and couldnt raise a mere billion this guys are triple ccc and insolvent and need $1.7b, I dont know what the maryland dept is waiting to take over
did anyone read the article 2nd to last page of page 1 wsj's friday paper on how long it took berkshire to unwind general re's derivatives contracts at a slow pace ? it took 4 yrs. and a loss of 400 mil. now tell me what is happening now ? bgp
"All those insurers and credit derivative sellers should be forced to work under a mark to market and margin system just like option and future traders. Market not liquid? then put up 100% portfolio margin, no leverage, sorry. Not profitable? No bailout either, sorry. Counterparty risk would essentially disappear, and this would create a lot more confidence than BS rate cuts and fiscal stimulus packages" Its been way way to easy to leverage very illiquid instruments