Monoline update: hedge funds the only people who know what they’re doing

Discussion in 'Wall St. News' started by ASusilovic, Feb 8, 2008.

  1. Perhaps a little perspective is needed, bond insurer-wise.

    Markets don’t seem to know how to react. It’s pretty clear that as far as trading monolines goes, equity investors are in hock to whatever the latest headline is. The WSJ’s Market Beat blog has a useful timeline here.

    First up, Yves Smith at Naked Capitalism points us in the direction of a new scenario, which emerged Monday this week, via Morgan Stanley’s credit analysts: Downgrades might well come, but the consequent losses for banks might be negligable - between $5bn-$7bn.‘only’-5bn-7bn/

    We don’t see how MS figures’ can be the case. Take, for example, bond insurer ACA. Unlike some other monolines, ACA was required to post collateral against its insurance contracts in the event of a downgrade. It couldn’t manage that, and is on death row consequently - awaiting a declaration of insolvency, or a massive bailout. ACA has hedging agreements on $6.6bn of CDO paper with Merrill Lynch. That’s not reported in Merrill’s headline figures - which are all net of such hedges. If ACA goes bust, the contracts will, of course, be worthless, and Merrill alone will be instantly exposed to $6.6bn more of CDOs. ACA has another $55bn of such contracts with other banks.

    Standard & Poor’s bore out that point on Tuesday, when they estimated banks had around $125bn of such CDO hedges with monolines in place. Morgan Stanley’s analysis looks optimistic then.

    And S&P’s figure doesn’t even take into account the potential price crashes on the hundreds of thousands of other vanilla bonds monolines insure. Fitch, for example, put 172,168 muni bonds on ratings watch on Tuesday in line with its deteriorating outlook for MBIA.

    Fitch indeed, leads the rating agency pack. Hat tip to Calculated Risk for pointing us in the direction of this Fitch statement - also on Tuesday:

    Fitch believes that a sharp increase in expected losses would be especially problematic for the ratings of financial guarantors — even more problematic than the previously discussed increases in ‘AAA’ capital guidelines, which has been the primary focus of recent analysis of the industry. Expected losses reflect an estimate of future claims that Fitch believes would ultimately need to be paid by a guarantor. A material increase in claim payments would be inconsistent with ‘AAA’ ratings standards for financial guarantors, and could potentially call into question the appropriateness of ‘AAA’ ratings for those affected companies, regardless of their ultimate capital levels.

    All of which makes talk of a bailout look premature. Banks are, of course, afraid of the Warburg Pincus/MBIA scenario - commiting money (at a time when they can’t afford to) to a black hole. Only the Europeans appear keen to assist. For Wall Street, better the CDOs you know, apparently. Whether that’s a wise strategy or not…

    As is fast becoming the rule, the only people who seem to know what they’re doing are the hedge funds. Our money is still with Bill Ackman.
  2. bgp


    i'm not convinced the hedgies are ahead of the game. in fact, i think they are deep in derivatives and sweating bullets right now.

  3. its all about how bad it will get. Shorts(aka hedgies) think the CDO's are going to like 10c on dollar while monolines argue that they have only insured top quality tranches and prices are going to .75 on the dollar.

    Only time will tell.

    However hedgies are pressing now as it is the point of peak subprime resets and thus the weakest for bulls.
  4. Mvic


  5. You are correct. Hedge Funds bought loads of absolute crap (Here in Australia Basis Capital is a good example). Because of their lack of regulation they are not subject to the same "stringent" accounting rules banks are. A lot of HFs lie to their own investors which in a lot of cases is truly DUMB MONEY.
  6. mokwit


    I suspect that a lot of hedge funds have been lying for so long that there is not enough cash to back up the stated fund value and thus cover fund withdrawals i.e it is a fractional reserve ponzi scheme whereby any withdrawals are paid from a smaller than declared asset pool or new investors. I think that is why so many funds halt withdrawals and why Bernanke is cutting whenever the market drops. Banks have extended leverage to hedge Funds remember.

    Time will tell, but I suspect we will see a lot of hedge fund fraud emerging.

    That said, just as some will lose big, others will make out like bandits buying CDO's whose valuations underestimate the debt servicing capablity.
  7. yep
  8. Much like daytraders, Hedge Funds are a dime a dozen and many will blow out.

    There are some solid and well run Hedgefunds who are profitable on a consistent basis, as there are traders.

    Hedge Funds as a hole are far more sophisticated than the average JOE SIX PACK, trying to trade for a living.

    Hedge Funds also hire quants from Ivy Leagues, and are in with the "Institutional Crowds", unlike your average "trader".

    Hedge funds are able to short, unlike your mutual funds.

    But, many will blow out, just like many traders will blow out.
  9. mokwit


    My guess is that 50% or more of the hedge funds started in the post 2003 easy fund raising environment will close. Trading in anything other than a bull market is just not that easy, and many mistook leverage or a bull market for brains. Markets move from phases where almost anybody can make money to phases where almost nobody can make money.
  10. mokwit


    Looks like I was right........................

    "Sol Waksman, president of Barclay Group, an alternative investment database, said that three-quarters of the 1,241 hedge funds that have reported returns for January lost money."

    Probably why the markets are so wild - longs and shorts being unwound to meet redemptions.
    #10     Feb 12, 2008