Monolines and Wall St - The Worst Is Yet To Come

Discussion in 'Wall St. News' started by THE-BEAKER, Feb 7, 2008.

  1. if only people realise the extent of the problems this is causing and will further cause you would not want to own a bank share for the rest of the year.

    mark my words.

    the bond insurers are finished.

    New danger appears on the monoline horizon
    By Paul J Davies

    As the bond insurers, or monolines, have seen their seemingly rock-solid AAA ratings begin to buckle, worries have grown about what downgrades for these companies might mean for banks.

    Now, one particular type of trade done between banks and monolines is being seen as an extra hidden danger.

    CDS market may create added risks - Feb-05Setback for monoline rescue - Feb-04These so-called negative basis trades were done in large volumes in recent years. They allowed both banks and monolines to book apparently “free money” and saw monolines writing guarantees on each other. If they have to be unwound, it will be a costly business for all involved.

    The real problem is that almost no one has any idea how significant the profits taken on these trades might be. These trades were profitable because a bond could pay out more in interest than it cost to buy the insurance available in the derivatives market to protect the holder against default. In the world of structured finance, a bank would buy a bond, get it guaranteed, or wrapped, by a monoline to support the bond’s AAA rating, but then also pay another monoline to write a default swap on the first monoline, to guard against it defaulting on its guarantee.

    The difference between what the bank paid for the insurance and what it received in yield from the bond could be pocketed as “risk-free” profit – and in many cases banks took the entire value of that income over the life of the bond upfront.

    One senior industry insider admits that billions of dollars worth of these trades were done, but insists they were mostly restricted to the arena of utility and infrastructure debt. These were attractive both because they were of long maturities and because they were often linked to inflation, which would increase the returns.

    “On a £100m deal over 25 years a bank could conservatively book £5m up front – even more if it was index linked,” says the senior industry executive.

    For the monolines, the trades were also seen as near risk-free profit when taking the position of writing protection on peers.

    The same executive insists that monoline activity in CDOs was restricted to the hedging of senior tranches that banks had retained on their books after structuring deals and had nothing to do with negative basis trades.

    However, others are less sure. Monoline analysts at some of the banks believe a large amount of negative basis trades in the US were done on super senior CDO tranches, but admit they have no idea what proportion of total CDO business for the monolines that was.

    Bob McKee, an analyst at Independent Strategy, a London research house, believes that up to $150bn worth of CDO business done by the monolines could be negative basis trades.

    Standard & Poor’s, in a note on the potential impact of monolines on banks this week, said it believed some of the CDOs hedged by bond insurers were part of a strategy of “negative basis trades”.

    The problem is that if monolines are downgraded and their protection becomes ineffective, profits booked up-front need to be reversed. Restating earnings is a very tricky area for investment banks – not least because the traders involved will have long ago pocketed their bonuses.
  2. mokwit


    Commercial roperty is the next shoe. there has not been a commercial CDO isued

    NEW YORK (Reuters) - The credit crunch could see the commercial mortgage-backed securities market passing an ominous milestone -- the first month in its two-decade history without a single issue priced.

    MS seems to have the most property exosure as percent of equity- booked as level 3.
  3. Here we go with the lvl 3 garbage again. All lvl 3 needs to be
    M2T(marked to toilet).