Economic Amrageddon - Bond Insurers About To Default

Discussion in 'Economics' started by Trendytrader, Dec 20, 2007.

  1. hey houndDog...

    what with SLM and their new flame throwing CEO???
     
    #51     Dec 21, 2007
  2. "My expectation is that the US Govt will ultimately step in to offer a gigantic bailout to the bond insurers, the current focal point of destruction. "

    And if the US government is already technically insolvent, when called on for the biggest bailout in global economic history, whom do you think will be willing to extend the Trillions needed?
     
    #52     Dec 24, 2007
  3. sjfan

    sjfan

    I'll chime in then. I trade CDS and non-mortgage-related CDOs (so I must be the devil so long as the board is concerned). Financials are at interesting place. Spreads are wide, though off of their recents highs. But AA money center banks are unlikely to default most because of the "too big to fall" rationale. Nonetheless, their bond spreads can remain fairly high and edge higher for some time.

    But more on topic, failing bond insurers isn't a good thing, obviously. But I don't think it's end-of-the-world either. Most actual default risk hedging is done via CDS these days. The interesting question is how much short CDS inventory these insurers hold and cannot pay; in this case, the investment banks face a bit of counterparty risk. On the other hand, the banks have been decently good recently in handling counterparty risk, which is more transparent than market risk.
     
    #53     Dec 24, 2007
  4. Shagi

    Shagi

    With all this gloom and doom - stock market should have crashed a long time ago with a big big boom, but no its rallying hard squeezing shorts and Bond Futures are tanking lower. Ask your self why??

    The Fed dont have to do much to prop it up and certainly its not Joe Blogs next door getting a tip to buy securities. One theory suggests that there is Asian/Mid East Govts/Syndicates awash with $US from trade surplus with the US and oil revenue who are actively investing their profits in the US securities market. Why? because in as much as they hate the US they view US markets as a safe haven and logistically its the only market in the world that can absorb the vast amounts of cash they are sitting on. Huh!

    So its not so simple.

    The only thing a professional trader need to worry about is how to make money in this market environment. No need for deep prognosis or understanding this and that. Its an impossible task, even the banks with 2gizzallion Phd's doing reasearch work 24/7 get it wrong.

    Trading both sides short and long has been extremely profitable on index futures and continues to be from mid July 07 or so. Rather than predict a bear market, get in step with the beat, go with the flow and adapt trading strategies accordingly. Wait until the fat lady sings.
     
    #54     Dec 24, 2007
  5. maxpi

    maxpi

    Unless one's account is staggeringly large prognostications are fairly useless. Nonetheless I want to see how all this excess leverage unwinds just from curiosity.. I'm a macroeconomist at heart and have been watching business cycles and real estate cycles for decades... To me they are like the weather anymore, I can go outside and sniff the air and tell where I can go on the bicycle and not get caught in the rain, the economic cycles are little different. I'm not surprised by the real estate downturn or the fraud or the huge mistakes by supposedly intelligent people, I am a little taken aback by the magnitude of the leverage however... hopefully the powers that be will be able to fix things right where the dominos are falling so as to keep all of them from knocking over....
     
    #55     Dec 24, 2007
  6. That SLM CEO isn't new, he was the CEO from 1997 to 2005.
     
    #56     Dec 24, 2007
  7. I find that highly offensive, especially coming from someone from Toronto.

    The world hyperpower is nowhere near a failed state, thanks. Zimbabwe is a failed state.
     
    #57     Dec 24, 2007
  8. maxpi

    maxpi

    If all this CDO insanity unwinds into worst case scenario I wonder how failed every state in the world will be.... I'm seeing all this hyper leverage that nobody seemed to know about as the same thing as all the secret defense pacts before WWI that caused the war to go world wide.... if that happens the ubiquitous business model will be the new paradigm because the financing that supports the bigger more concentrated business model we now have won't be there.
     
    #58     Dec 25, 2007
  9. Shagi

    Shagi

    Zimbabwe is not a failed state, its an abnormal situation caused by a crazed dictator oppressing his people to stay in power at all costs.
     
    #59     Dec 26, 2007
  10. Control of ACA turned over to regulators in a bid to avoid bankruptcy. Uh yeah, good luck with that.

    Dec. 27 (Bloomberg) -- ACA Capital Holdings Inc., the bond insurer that lost its investment-grade credit rating last week, agreed to give control to regulators to avert bankruptcy.

    ACA Financial Guaranty Corp., a unit of ACA Capital, will seek approval from the Maryland Insurance Administration before pledging or assigning assets or paying dividends, the New York- based company said in a filing with the Securities & Exchange Commission yesterday.

    S&P sliced ACA's rating 12 levels to CCC, casting doubt on more than $75 billion of debt the company guarantees, including $69 billion of securities such as collateralized debt obligations. ACA reached agreements to avoid posting collateral until Jan. 18 against credit derivatives it uses to insure the debt. The regulator held off filing delinquency proceedings while ACA seeks ways to raise capital.

    ``ACA is still in deep trouble,'' said Donald Light, senior analyst with Celent, a Boston-based financial research and consulting firm. ``Unless it gets a capital infusion quickly, these recent moves are only delaying the inevitable.''

    Canadian Imperial Bank of Commerce said last week that it may write down the value of subprime securities it holds by $2 billion because they were insured by ACA. CDOs are created by packaging debt or derivatives into new securities with varying ratings.

    Credit rating companies are reviewing MBIA Inc., Ambac Financial Group Inc. and other bond insurers on concern they don't have enough money to cover potential losses stemming from accelerating downgrades of the debt they guarantee, potentially endangering $2.4 trillion of securities.

    `Breathing Room'

    Telephone messages left for ACA's chief executive officer Alan Roseman and for Karen Barrow, a spokeswoman for the Maryland Insurance Administration, weren't immediately returned.

    ACA, down 95 percent this year, fell 11 cents to 73 cents in over-the-counter trading in New York.

    ACA has $1.1 billion to cover potential losses on $7.1 billion of bonds it's insured, according to data on claims-paying resources or capital posted on its Web site.

    ``It's given them breathing room and a month to stave off bankruptcy,'' said Nigel Sillis, director of fixed income and currency research at Baring Asset Management in London, which oversees $15 billion of fixed income. ``It still looks like bankruptcy is inevitable.''

    Lower Ratings

    ACA, founded in 1997 by former Fitch Ratings executive H. Russell Fraser, was rated A by S&P until Dec. 19, lower than the AAA of its competitors. ACA specialized in guaranteeing municipal bonds with credit ratings that were below those others were willing to guarantee.

    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. ACA shifted its focus to structured finance since 2001.

    When home sales soared this decade, bond insurers increased their guarantees of securities created from mortgages, including subprime loans to people with poor credit.

    They guaranteed almost $100 billion of CDOs backed by subprime-mortgage securities as of June 30, according to an Aug. 2 report by Fitch. Most of those guarantees are in the form of derivative contracts. Unlike insurance, those contracts are required to be valued at market rates at the end of each quarter.

    CIBC, Merrill

    CIBC, Canada's fifth-biggest bank said ACA insures about $3.5 billion of the bank's U.S. subprime investments.

    Merrill Lynch & Co. may have used contracts with ACA Capital to pass off the market risk of $5 billion in CDOs, Roger Freeman, an analyst covering the brokerage industry for Lehman Brothers Holdings Inc., wrote in a Nov. 5 report. If ACA Capital defaults on its swap contracts, Merrill Lynch could recognize unrealized losses on those securities of about $3 billion, Freeman wrote.

    Banks and securities firms already have taken more than $97 billion of credit-related writedowns.

    MBIA, the largest bond insurer, earlier this month agreed to sell as much as $1 billion of stock to New York-based Warburg Pincus LLC to prevent a potential downgrade. The Armonk, New York-based company dropped 70 percent this year.

    Ambac Financial Group Inc., the second-largest of the so- called monolines, took out insurance on $29 billion of the securities it guarantees. The New York-based company's shares slumped 67 percent this year.

    Fitch last week gave MBIA, Ambac and New York-based FGIC Corp. four to six weeks to raise at least $1 billion or lose their top ratings. Moody's Investors Service put its top grade for FGIC under review for downgrade on Dec. 14 and assigned a negative outlook to MBIA Insurance Corp.'s Aaa rating. S&P has FGIC on review for a rating cut, and has a negative outlook on MBIA and Ambac.

    To contact the reporters on this story: Cecile Gutscher in London at cgutscher@bloomberg.net ; Christine Richard in New York at crichard5@bloomberg.net

    http://www.bloomberg.com/apps/news?pid=20601087&sid=atUEmIwJ.v6U&refer=home
     
    #60     Dec 27, 2007