Credit Default Swap Domino???

[Tourette Dude]

Crunch May Hit Insurers Of Bonds
Downgrading Weighed for 8 Leading Firms

By Tomoeh Murakami Tse
Washington Post Staff Writer
Saturday, November 24, 2007; Page D01

NEW YORK -- Investors already burned by turmoil from the credit crunch are now worried about unwanted surprises in the industry that insures bonds.

In the face of mounting losses in U.S. mortgages, rating agencies are reviewing eight leading bond insurers, which could lead to downgrades. Such a move could ripple across the financial sector, because if a bond insurer is downgraded, most of the securities it has blessed as virtually risk free are likely to follow. That could spark a new round of sell-offs and write-downs.

"It would have a domino effect on all of the entities that hold these vehicles," said Ed Rombach, a senior analyst at Thomson Financial. "They would have to have more write-offs. It's a vicious cycle."

Moody's Investors Service and Fitch Ratings are examining the capital levels and structured debt these firms have insured because they are worried that the deterioration in the mortgage market may expose them to greater losses. Moody's expects to finish its review next week. Fitch said it would complete its review within three weeks. If any company is put on what's known as negative watch, it would be given a month to increase its capital and have its rating affirmed.

Bond insurers play a critical role in the capital markets because they issue insurance that boosts the credit ratings of more than $2 trillion in debt securities held in portfolios around the world, including municipal bonds, mortgage-backed securities and complicated debt instruments.

The stock prices of leading insurers have been plummeting as investors worry they may not have enough capital to cover projected losses from securities tied to delinquent mortgage loans. This has put pressure on guarantors to shore up their capital reserves to protect their coveted triple-A ratings. On Thursday, the parent company of one bond insurer, CIFG Holding, gave it a $1.5 billion capital infusion. Soon after, Fitch affirmed CIFG's triple-A rating.

"The triple-A rating is really the product that they're selling," said Thomas Abruzzo, an analyst with Fitch said in reference to bond insurers in general. "They're selling high financial strength. It's the highest rating out there, and, really, without that rating it's going to be significantly more difficult to potentially sell your services."

Just how much of a downgrade would devalue securities these companies insure is unclear, analysts say. For example, if a company was downgraded to a double-A rating from triple-A, the impact might be minimal, since the spreads, or perceived risk, of owning similar securities with those two ratings may not be that wide.

However, these are jittery times.

"The people watching this are not going to say, 'I'm so happy they're going to be downgraded only to double-A,' " said Sylvain Raynes, a founding principle of R&R Consulting, a structured-finance consultancy. "They're going to say, 'This is the beginning of the end.' And they're going to want to go before everyone else goes. This is a stampede."

Any downgrade of a financial guarantor would likely be more than just one notch, said Stanislas Rouyer, senior vice president of Moody's financial guarantors team. A downgrade, he said, would need to incorporate not only the reason for the downgrade but also the consequences of the downgrade on the business. .......

......."As the credit market continues to weaken, our confidence that the guarantors will survive the credit meltdown is waning," Ken Zerbe, an analyst at Morgan Stanley, wrote in a research note this month. "At the current stock price, we believe the market is pricing in the loss of their triple-A ratings. Previously, we would have dismissed this as nearly impossible -- now we are not so sure."

The two largest bond insurers, Ambac Financial Group and MBIA, recently were described by Fitch and Moody's as having moderate to little risk of falling below adequate capital levels. Nonetheless, their shares have fallen by at least half since the beginning of October.

Ambac spokesman Peter R. Poillon said Friday that based on where the stock is trading, investors appeared to be doubting the company's ability to hold on to its triple-A rating. He disagreed with that assessment, saying the company has capital sufficient to meet the rating agencies' requirements.

"We value our triple-A. We know it's our franchise, and we will do anything to maintain it," Poillon said. A downgrade "is a very, very significant impact in the financial markets and we recognize that, and we realize how important it is to the folks who own those bonds. And we plan on keeping our triple-A."
http://www.washingtonpost.com/wp-dyn...112301746.html

[Tourette Dude]

Slo-Mo train wreck.....................

Can they stop the unwinding?????




MBIA Shares Drop After Moody's Says Capital in Doubt (Update5)

By Christine Richard

Dec. 5 (Bloomberg) -- MBIA Inc. fell the most in more than 20 years in New York trading after Moody's Investors Service said the biggest bond insurer is ``somewhat likely'' to face a shortage of capital that threatens its AAA credit rating.

A review of MBIA and six other AAA rated guarantors will be completed within two weeks, Moody's said in a statement today. Moody's revised its assessment from last month that MBIA was unlikely to need more capital after additional scrutiny of the Armonk, New York-based bond insurer's mortgage-backed securities portfolio.

``The guarantor is at greater risk of exhibiting a capital shortfall than previously communicated,'' New York-based Moody's said. ``We now consider this somewhat likely.''

The loss of MBIA's top ranking would cast doubt over the ratings of $652 billion of state, municipal and structured finance bonds that the company guarantees. MBIA is among at least eight bond insurers seeking to ward off potential credit-rating downgrades by Moody's, Fitch Ratings and Standard & Poor's. The insurers guarantee $2.4 trillion of debt and downgrades could cause losses of $200 billion, according to Bloomberg data.
http://www.bloomberg.com/apps/news?p...efer=worldwide

[Tourette Dude]

..........MBIA, the world's biggest bond insurer, rose 13 percent in New York Stock Exchange composite trading as the capital increase offset the company's warning of ``significantly'' higher losses from the securities it guarantees. Warburg Pincus will buy $500 million of common stock and take up to $500 million in a rights offering next quarter, Armonk, New York-based MBIA said today.

The added capital may help avoid a cut in MBIA's AAA credit rating, which is under scrutiny by Moody's Investors Service, Fitch Ratings and Standard & Poor's. MBIA stands behind $652 billion of state, municipal and structured finance bonds, and losing the AAA stamp would endanger those ratings. Without the top ranking, MBIA may be unable to guarantee debt, a business that made up 90 percent of revenue last year.

`It's a positive for the company,'' said Rob Haines, an analyst at CreditSights Inc., a New York-based independent bond research firm. While not a ``magic bullet,'' the capital infusion may stave off a downgrade for now, he said.

Fitch analyst Thomas Abruzzo stopped short of affirming MBIA's credit rating in a statement today. Fitch will weigh the capital infusion against the added losses and make a decision next week, Abruzzo said. David Veno, a bond insurance analyst at S&P, and Stanislas Rouyer, at Moody's, didn't immediately return calls seeking comment.

Under Scrutiny

MBIA is among at least eight bond insurers being scrutinized by the ratings companies. The industry guarantees $2.4 trillion of debt and downgrades could cause losses of as much as $200 billion based on falling values of the debt and increased borrowing costs, according to data compiled by Bloomberg.....


http://www.bloomberg.com/apps/news?p...d=azUcUDce2Gjs

http://globaleconomicanalysis.blogsp...-it-again.html

[Brock Landers]

ACA Financial also officially shat itself yesterday- having S&P drop its credit rating to junk status-CCC. Not going to do much business in bond insurance if youre going to go under.

[Rontele]

I can say that in public finance that there are VERY few bond insurers willing to do deals at this time.

[Brock Landers]

I can say that in public finance that there are VERY few bond insurers willing to do deals at this time.

Goes the other way too- the bond insurers arent safe from all this either. People dont want to do business with a bond insurer rated "SHIT" by Moody's or Fitch. Thats why the cash infusion was so important for MBIA- kept their credit rating. ACA didnt have this cash infusion and once you hit CCC rating, youre fucked because you just lost any customers willing to do business.

[mushmouth]

"Warburg Pincus will buy $500 million of common stock and take up to $500 million in a rights offering next quarter, Armonk, New York-based MBIA said today."

Ummm...doesn't MBIA insure a few $bb in structured products to which Warburg has exposure? So do these guys basically insure themselves now? How is that now fucked up?

I'm in the boat that this is going to get A LOT worse in the next 3-4 months and little shit like this like the little dutch boy trying to stick his finger in the Titanic.

[Tourette Dude]

The Monoline/Credit Default Swap Nexus

"After bond fund giant Pimco's Bill Gross gave a back-of-the-envelope estimate of a possible $250 billion in losses resulting from the impact of deteriorating corporate credit and bond defaults on the $45 trillion (notional amount) credit default swaps market, other commentators have been making improved (but still quick and dirty) calculations.

One interesting effort appears in today's Financial Times "The fire threatens credit insurance ," by David Roche of Independent Strategy. Roche looks at a topic near and dear to our hearts, the impact of the just-about-inevitable downgrading of the monoline insurers. He focuses on them by working through the question: what happens if we start witnessing counterparty failure on top of mere required default payments? He sees the bond insurers like Ambac and MBIA as the most probable flash points, and the resulting damage in the ballpark of $400 billion"................

http://www.ft.com/cms/s/0/486fb178-c...nclick_check=1
http://www.nakedcapitalism.com/2008/...nexus-not.html



Without the sovereign wealth funds we are fucked.

I'd love to see someone defend banking/financial consolidation, offshore vehicles/corps, deregulation, golden parchutes, etc..................

Either we end up owned by the export driven economies and oil producing nations and/or the every day joe pays for corporate corruption and greed with tax supported bailouts and more debt for our children.

Good times.

[Tourette Dude]

Lets say a pension fund buys some bonds. They then buy a CDS to protect them in case those bonds default. If the party holding the other side of the CDS contract is unable to pay out on the CDS, do the originators of the CDS (MBIA AMBAC etc) have any obligation to act as a backup to the CDS.

If the bond insurers are essentially insolvent won't that effect EVERY bond deal that has been hedged with CDSs.

I'm just trying to wrap my head around the potential snowball effect.

[Rontele]

Lets say a pension fund buys some bonds. They then buy a CDS to protect them in case those bonds default. If the party holding the other side of the CDS contract is unable to pay out on the CDS, do the originators of the CDS (MBIA AMBAC etc) have any obligation to act as a backup to the CDS.

If the bond insurers are essentially insolvent won't that effect EVERY bond deal that has been hedged with CDSs.

I'm just trying to wrap my head around the potential snowball effect.

We are currently discussing this issue. I'll get back to you later with my thoughts...

[Tourette Dude]

Cool, thanks.

[Rontele]

The SEC has said that the AMBAC downgrade doesn't require notification of a material event disclosure.

[Tourette Dude]

Hey I'm an armchair finance jong. Does that mean it would NOT cause ratings triggers in bonds linked to CDS.

Or is my sarcasm meter thrashed and your actually fucking with me

[Tourette Dude]

Credit Default Swap Tsunami Approaches


.......There are countless hedge funds out there, leveraged to the hilt in garbage that has not been marked to market. The same holds true for banks and as we have seen today, insurance companies like AIG.

At some point, some company will declare bankruptcy or a debt downgrade will trigger a claim. That claim will not be paid because the hedge fund or mudhut (whichever comes first) does not have the means to do so. A cascade of defaults will occur up the line on any corporation counting on that claim as part of their hedge.

Consider GM. The market cap of GM is $15 billion or so. There are about $1 trillion in credit default swaps bet on the success or failure of GM. It is virtually impossible for this to be hedged because there is not $1 trillion in GM bonds available as collateral.

The credit swaps on MBIA, Ambac, and the homebuilders trade deep into junk, some priced outright for default. Is there any wonder Moody's, Fitch, and the S&P are reluctant to downgrade MBIA and Ambac? The ratings assigned to Ambac and MBIA are a joke........

http://globaleconomicanalysis.blogsp...pproaches.html

[Tourette Dude]

This is AFTER Buffet stepped in to try and calm the municipal end of the bond market by acting as bond insurer(CDS) since the major players are in SERIOUS trouble.

If you think your state, local and property taxes are high now, just wait. The muni market funds much of what you see driving around town(including public hospitals, fire departments, police forces and on and on and on.)


The ripples have become waves.




Turmoil In Munis: Yields Soar To 20%

Bloomberg is reporting Auction-Bond Failures Roil Munis, Pushing Rates Up.

A wave of bonds sold by U.S. municipal borrowers with rates set through periodic auctions failed to attract enough buyers in recent days as banks including Goldman Sachs Group Inc. and Citigroup Inc. that run the bidding wouldn't commit their own capital to the debt.

Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey, with bidding run by Goldman, soared to 20 percent yesterday from 4.3 percent a week ago, according to data compiled by Bloomberg.

"It's the beginning of the end for the auction-rate market," said Matt Fabian, a senior analyst with Concord, Massachusetts-based Municipal Market Advisors. "Banks have stopped supporting the market."

Auction bonds have interest rates that are determined by bidding that typically occurs every seven, 28 or 35 days. When there aren't enough buyers, the auction fails and bondholders who wanted to sell are left holding the securities. Rates at failed auctions are set at a level spelled out in official statements issued at the initial bond sale.

Local governments are obliged to pay the high rates until either the auctions start attracting more buyers or they arrange to convert the bonds to some other form of debt. The 20 percent rate for the $100 million of Port Authority auction bonds will cost it $388,889 until the next weekly auction, up from $83,611 last week.

"This market has been under a tremendous amount of stress," said Alex Roever, a JPMorgan Chase & Co. fixed income analyst. "Without the dealers providing an active secondary bid, it's very hard for these transactions to clear."

Unsuccessful auctions have hurt companies that bought those variable-rate securities as short-term investments with excess cash, and are unable to sell their holdings. Bristol-Myers Squibb Co., the New York-based maker of the anti-clotting pill Plavix, announced on Jan. 31 a $275 million writedown of its auction-rate holdings related to subprime debt, which totaled $811 million at the end of 2007.

About a third of 449 companies polled in a survey last May for the Association for Finance Professionals said they had investments in auction-rate bonds.

100 Failed Auctions Yesterday

The number and size of the auctions failing is simply stunning. Professor Sedacca is commenting on that in 100 Muni-Bond Auctions Fail.

There were over 100 failed auctions in Auction Rate Securities yesterday, notably some in the closed end space. This is a first and it is important.

Why? Imagine you had a margin account where you were forced to pay a higher margin rate and your bonds were falling in price? It is a lethal combination.

If I could borrow these funds I would short them, but they are notoriously hard to borrow. The sad part is that these funds were more financial alchemy by the folks on Wall Street. There are approximately $265 billion outstanding.

I know this: If I owned 'em, I would blow 'em out. If I could short 'em, I would, in size. This is a mess and mom-and-pop retail won't likely find out about it until it's too late.

http://globaleconomicanalysis.blogsp...oar-to-20.html

If you have time follow the links in the article.

While the major media outlets focus on the joke of a distraction about the baseball steroid shit, your tax dollars are literally evaporating.

[Spats]

If you think your state, local and property taxes are high now, just wait. The muni market funds much of what you see driving around town(including public hospitals, fire departments, police forces and on and on and on.)

Add that to the damage caused by falling house values, and it's easy to see that municipal governments are headed for an historic trainwreck. Rising property taxes will drive property values even lower...it's vicious cycle time.

You heard it here first: renting a house in a state with no income tax will be the hot tip for the next Presidential administration. Also look for a giant Congressional fight over the Internet sales tax exemption as sales taxes approach 10% in many areas.

[char]

I'm trying to wrap my head around what this means.

Long term decline in home prices? Increased municipal taxes? Inflation? Recession? Stagflation?

Is this going to be the next Great Depression where we all learn to scrape pennies together like my grandparents did?

Or, is this potentially the best time to get into a house in a long time and potentially for awhile? Spats says rent.

Ug, confused about this whole mess.

[neck beard]

I left a banking career a few months ago, but not before I became deeply involved with the first few months of this crisis. It is breathtaking just how screwed the system is. I can't state that with enough force to get the message across. The future for big banking and related financial operations looks horrible, and not just in the US. Germany is in deep trouble as well. It really is spectacular, the mess that the industry has gotten itself into. Sadly for the wider community in America and the international economy, this play is only just starting. The thunder hasn't even started yet. I couldn't think of a worse place to work right now than a bond/treasury/credit derivative dealing desk. Or risk management. In fact, speculative investment banking as a whole is starting to look like a suckers game in so far as these days the strain and sweat almost equals the pay, at last. You wait 'till many of the truly experienced and clever traders don't get paid this year or next, two of the nastiest in decades, all pain, no gain. They will leave. And that will drain the game of the very technicians that can help navigate a good course through the storm for many banks.

For too long the industry has paid massive wages on the basis of constant growth based on too little substance. Now the enormous ball of shit is falling apart and any attempts to restore it requires another financial invention no unlike the ones that lead to this problem.

Like energy, shit can not be destroyed, it can only be re-packaged, re-priced and re-sold. But the shit will remain once created. This could well reset the shit mechanism. Long overdue in both the States and Europe.

Buy Australian dollars, and invest in their money market.

[Brock Landers]

Lets say a pension fund buys some bonds. They then buy a CDS to protect them in case those bonds default. If the party holding the other side of the CDS contract is unable to pay out on the CDS, do the originators of the CDS (MBIA AMBAC etc) have any obligation to act as a backup to the CDS.

If the bond insurers are essentially insolvent won't that effect EVERY bond deal that has been hedged with CDSs.

I'm just trying to wrap my head around the potential snowball effect.

Pension fund buys bonds and pays MBIA to insure them. They use MBIA because MBIA has a AAA credit rating (and for whatever other reasons). Those bonds are worth face value. If MBIA drops to BBB status, there is a slight possibility it wont be able to pay off those pension fund bonds, in the event of a default, thereby lowering the value of the bond. Much like the tranche system (I think?) where MBIA is acting like the lower level tranches, protecting the AAA tranches. The value of those lower level tranches goes down, effectively lowering the protection capabilities of the upper level tranches. The upper level tranches lose value since theyre not as safe (on paper) and you get....write downs. Subprime defaults crushing these tranches one by one is like the bond insurers losing credibility.

Warren Buffett adding capital into a bond insurer just makes the insurer more credible that it can pay off any shitty bonds. The reason they are not-as-credible up to this point is that most of their capital has been depleted insuring these CDOs. Usually they get 1 or 2 defaults a year they have to insure. Now they have more of them and for much more money. Its cutting way past bond insurer profits and screwing with their capital.

(I hope this is correct)

[Purveyor of Slack]

http://www.bloomberg.com/apps/news?p...V38&refer=home

It's nearly unstoppable now.

[LeeLau]

The article is helpful but does not really expand on who wrote these Lehman CDS contracts and if they can pay it out. When is cash settlement of the contracts? 3 days from now? Who is exposed?

[Purveyor of Slack]

Who is exposed?

Everyone.

The interlinkages of counterparties on a global basis, along with the complete opacity, is what is causing this dislocation.

Everyone assumes everyone else is exposed.

The lack of transparency, so charished by the OTC market, is its achilles heel.


I don't think attempts at reflation can return counterparty trust.


Deflationary pressures are now dominating.


Just my uneducated .02.

[Brock Landers]

WSJ said it doesnt know yet who the writers are specifically. But apparently its spread out and wont be a huge deal to pay off.

[smitchell333]

Fucking crooks.

NOW we finally know what the fuck Paulson was obliquely referring to.

We should hang Paulson and all the investment bank cronies who profited from the creation of these largely illusory products. We all as participants in the economy will pay the price while they sit on their millions accumulated during the days when their gigantic bonuses were based on stock prices and profits derived from illusory products.

[Purveyor of Slack]

WSJ said it doesnt know yet who the writers are specifically. But apparently its spread out and wont be a huge deal to pay off.

Nouriel Roubini, Sajit Das, Doug Noland, Bill Fleckenstien may have a different take.

They have been correct on their calls up to this point.


It's more than just Lehman, it's distrust amongst ALL counterparties.

The giants are dropping like flies on a GLOBAL level.



I have a feeling we will be hearing the term SDR floated very soon.