Many more bailouts needed. This is the mark of the derivative beast.

http://www.bloomberg.com/apps/news?pid=206...mp;refer=canada
SIVs Must Refinance $70 Billion This Year, Merrill Lynch Says

By Neil Unmack

Jan. 9 (Bloomberg) -- Structured investment vehicles have $70 billion of medium-term debt maturing this year, according to Merrill Lynch & Co. analysts.

Dresdner Bank AG's K2 Corp., Bank of Montreal's Links Finance Corp. and nine other SIVs have to repay $21 billion of medium-term notes before April, Merrill analysts wrote in research dated yesterday. The figures are based on SIVs that haven't been bailed out by banks.

SIVs, companies that use short-term debt to buy higher- yielding assets, have been unable to borrow since August as the collapse of the subprime market caused investors to shun securities linked to mortgages. U.S. Treasury Secretary Henry Paulson initiated talks to set up a fund to avert a firesale of SIV assets further roiling credit markets. Banks abandoned the initiative after cutting SIV assets to about $282 billion from a peak of $400 billion last year, based on Standard & Poor's data.

Refinancing ``is likely to remain a concern for non-bank sponsored SIVs this year,'' wrote Merrill analysts led by Alexander Batchvarov in London. ``The influence of SIVs on the overall structured finance market is likely to remain negative.''

Banks led by Citigroup Inc. in New York and London-based HSBC Holdings Plc are bailing out their funds, while non-bank SIVs are selling assets, reorganizing or going out of business.

SIVs have probably repaid most of the $100 billion of short-term commercial paper outstanding at the end of September, Merrill said. The debt matures in 270 days or less.

Sigma Finance Corp., the investment company run by Gordian Knot Ltd. in London, must repay $25 billion of medium-term debt this year, Merrill analysts said. Maturities on medium-term notes range from nine months to 10 years.

Dresdner's Cayman Islands-based K2 SIV has about $15 billion of medium-term notes maturing in 2008 while two SIVs run by Bank of Montreal must raise at least $11 billion to repay debt, Bloomberg data show. Canada's fourth-largest bank said last month it is working on an ``action plan'' for its structured investment vehicles.

You know when you've been Tangoed Credit Crunched!

http://money.cnn.com/2008/01/09/news/compa...sion=2008010914
Bank of America's Countrywide trap
The financial behemoth's $2 billion investment in the mortgage lender is disappearing fast. Too bad its options are limited.

NEW YORK (Fortune) -- Late last summer, Bank of America and its deal-hungry chief Kenneth Lewis won kudos for a $2 billion investment in Countrywide Financial, the once high-flying mortgage lender hit hard by the housing slump.

...

Nobody's congratulating Bank of America these days. As Countrywide shares tank and speculation mounts that the company will be forced into bankruptcy, the bank's stake has plunged in value, to about $560 million. Now Bank of America faces a tough choice: It can buy Countrywide outright, pour even more money into the lender, or simply bide its time and hope for the best.

Countrywide CEO Angelo Mozillo tells investors that his face isn't orange and the mortgage lender isn't headed for bankruptcy.

(enhanced from the CNN article)

Financial cancer spreading beyond subprime.

http://www.forbes.com/feeds/ap/2008/01/09/ap4513571.html
Moody's Cuts Goldman Sachs Alt-A Deals
Associated Press 01.09.08, 5:46 PM ET

NEW YORK - Moody's Investors Service lowered its ratings on 47 bundles of mortgage-backed bonds issued last year by Goldman Sachs Group Inc., the investment bank that has so far weathered the recent credit crisis much better than its Wall Street peers.

The downgraded groups of bonds, or "tranches," are backed by mostly first-lien, fixed and adjustable-rate Alt-A mortgage loans, Moody's said.

Because the ratings agency saw higher-than-expected rates of delinquency and foreclosure on these loans, many of the tranches now have "speculative grade" ratings, which means that they are deemed to hold high credit risk.

Alt-A mortgages are given to people with limited documentation or minor credit problems, as opposed to subprime mortgages, which are given to borrowers with poor credit histories.

Moody's also put 20 additional tranches issued by Goldman under review for possible downgrade.

Moody's did not specify how much the tranches were worth.

Cgnao can you please reply to FreeTrader`s post.

Justice,

As I said in my comment the ratio of gross market value to notional will almost certainly have risen since June. Something like $20 trillion wouldn't surprise me, but 10% ($50 trillion+) sounds excessive.

Remember that we had one major example of notional vs net exposure on derivatives in 1998 with the bailout of LTCM. Notional there was estimated at something like $1.3 trillion, but the net loss in the end came to around $4.5 billion - just 0.3% of notional. LTCM had thousands of trades, the majority of which were swaps. The team who were brought in to unwind these trades did so very skilfully, netting off the trades in numerous deals with counterparties until only a few core trades were left.



Noel,

As I tried to clarify in the edit I made a few minutes after the original post, a protection giver on a CDS can be exposed to the full notional value of the insured security (i.e. no recovery whatsoever). Overall though the gross credit risk (market value) as measured by BIS should take such risks into account. Also, with CDS contracts you need to be aware that the aggregate notional value includes a large amount of double (and triple, and quadruple etc) counting. The CDS notionals are summed even of they are merely reinsurances passed on to another party. On this basis the credit exposure isn't anything like the aggregate notional suggests, even if every underlying security defaulted (and this is before the netting arrangements I mentioned).

The reply is in previous posts in this thread. Briefly, notional value becomes real value when the losing party in the agreement defaults on its obligation.

/nod/

Figments of the imagination gain life through central bank action.

Sonny has been telling lots of lies, and father can make the lies true to keep sonny from getting into trouble.

Sonny doesn't learn and father doesn't care and no one is happy. But sonny stays sonny and father stays in charge.....

Unspe....MUHAHAHAHAHHAHAHAHHAHAHAHA

http://business.timesonline.co.uk/tol/busi...icle3162442.ece
January 10, 2008
Bear Stearns fund shut

Bear Stearns, the investment bank, is to close its third hedge fund in less than nine months after recording a $300 million (£154 million) loss between the start of August and the end of November. The fund told investors that it would sell its remaining assets and return the proceeds over an unspecified time period.

I use to get irked with myself at not understanding some of cgnoa's posts and thought that I was missing some information until I realised that is was his assertion that what he said was "This is 100% correct, guaranteed." that was bothering me.

Now, everytime I see his posts I just think its 10.0% correct, guaranteed and I'm not so troubled.

De-leveraging. De-risking. Unwinding.

http://uk.reuters.com/article/fundsNews/id...A93288920080109

Liquidity crunch. Capital crunch. Default. Counter party risk.

Tide ebbs.

I don't want to upset cgnao, but ....

DEFLATION

How much of it leeks into the high street is anyones guess, but huge piles of speculative leverage are disappearing, and fast.

Paying back loans is deflationary yes.

http://en.wikipedia.org/wiki/Money_creation

The reverse of money creation, i.e. money destruction, can occur in 2 different ways, depending on how the money was created. The destruction of physically created money occurs when coins are scrapped to recover their precious metal content, or when the issuer redeems the securities. The destruction of money created through loans occurs as the loans are paid back.

Thought you might like this...

http://www.jubileeiraq.org/blog/2007_04.html


"and with additional money from a debt write-off who can tell where the money goes"

Aye. Written off debt is highly inflationary as it can never be paid back.

Where was the leveraging? It was in LBOs, in people speculating in ABS etc. So, yes, most stocks and asset-backed papers should perform like turds (i.e. deflate) because of deleveraging. But there is still a lot of money out there, and there will be more debt creation. And the question is where this money goes and how it will affect people.

People on the high street do not suffer so much from high prices in asset-backed paper. But they do suffer from high oil prices.

There's alot of fictitious capital I would say is closer to the truth.

Very true. This de-leveraging is hardly going to have much impact on the existing money supply explosion of the last few years.

Does anyone have a spare $10bn? Citi wants it from you to fill their black holes. Errh, no, you won't get it back. Why do you ask?

Any sovereign wealth fund or rich indvidual who wants to burn some cash, please step forward. Alternatively, please PM me, I can burn it for you as well.

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Freetrader,

But is the GCR measuring the MTM valuation (DV01 * delta between buying spread and spread if you were to hedge the trade), or is it measuring the loss given default of all existing contracts, or something else (netted notional)?
I appreciate that there is a lot of double counting, and given sufficent risk management, if a name defaults, the net loss shouldn't be that great for a given bank.
I think what Bill Gross was saying in his article was that not all banks etc have a near zero notional exposure on names, so when companies start to default, these are going to get stung.

You are not only wrong, but you are fighting the wrong war.

The following publications may help....

The first two sets out the BoE's views on Money Supply and inflation.

http://www.bankofengland.co.uk/publication...in/qb020305.pdf

And penned by Merv no less....(I've noticed he talks about 'expectations' a lot over time. Interesting graphs showing link between money supply and inflation increasing over time horizons...but not that much use near term)

http://www.bankofengland.co.uk/publication...in/qb020203.pdf

And more recently a very interesting speech from Paul Tucker BoE member of the MPC where he says some interesting things about money and credit....

http://www.bankofengland.co.uk/publication...7/speech331.pdf

"we must try to avoid a vicious circle in which tighter
liquidity conditions, lower asset values, impaired capital resources, reduced credit supply, and
slower aggregate demand feed back on each other"

(risk of deflation mind set)

"If reintermediation is significant, banks will be taking back on to their
balance sheets conduit and investment vehicle paper or just holding onto loans for longer than
usual before they can be sold onto the capital markets. It cannot be ruled out that, for a while,
the M4L growth rate may deceive as to the underlying pace of credit expansion in the economy."

(they've been deceived already and are now only finding out)

"we will need to look at total credit, and carefully
across different sectors to track the impact of the tightening. But timely and rich data are
available on just bank lending"

(oops - we don't know what we're doing - we've ditched money supply targets because they didn't seem to correlate with inflation figures, but now we're finding out we haven't been looking at the whole picture)

"we may well need richer data on
credit quantities and flows outside the banking sector, perhaps along the lines of the US Flow of
Funds statistics"

Not easy reads but worth the effort - and saves time in the long run.

On deflation (referring to Japan) Merv says...

"...monetary policy is indeed impotent
when interest rates are zero. At this point, households
and firms have an infinitely elastic demand for money
balances, and so any increase in money supply is
absorbed passively in higher balances. An increase in
money supply has no implications for spending or
output. In such circumstances, the only way to affect
the economy is by an expansionary fiscal policy."

Merv also posits another theory as an alternative to the above:

[i]"If the demand for money tended to
infinity, as the interest rate tended to zero, then an
expansion in the money supply would have no real effect
on demand and output because any additional money
created would simply be absorbed passively in money
holdings. But if the demand for money is satiated at a
finite level as interest rates tend to zero, then the
creation of money beyond that point would be translated
into a demand for other assets and higher incomes."[/i]

But I think we've already had this bit.

So there you have it.

Gordon will be happy.

And finally, the guy who wrote Mary Poppins knew more than I realised...

"In the early years of the Bank of England, there were
unexpected shifts in the demand for money and credit
resulting from uncertain arrival times in the port of
London of ships laden with commodities from all over
the world. The uncertainty derived from changes in the
direction and speed of the wind carrying ships up the
Thames to the port of London. Hence the Court Room
of the Bank of England contained a weather vane which
provided an accurate guide to these shifts in money
demand—the weather vane is there to this day, and it
still works. If only monetary policy could be as scientific
today!"

Think of the implications and protect yourselves before the domino defaults and bank runs start.

http://www.reuters.com/article/reutersEdge...dge&rpc=401

NEW YORK (Reuters) - The market prices that Wall Street's biggest banks are using to help estimate the value of potential losses on subprime mortgage investments may be as flawed as the computer models banks have used until now, making life even tougher for investors hoping to gauge credit risks.

Volumes have been very light in the subprime mortgage bond market meaning that reliance on market prices could lead the recent wave of bank write-downs to be reversed, analysts say.

A U.S. accounting rule change is forcing banks to use mark-to-market techniques when possible.

Investors are bracing for a fresh round of write downs in mortgage-related assets, after witnessing nearly $100 billion of potential losses globally since August, according to figures from brokerage Friedman Billings Ramsey.

Remember the denials and reassurances by Northern Rock before the bank run?

http://uk.reuters.com/article/bankingFinan...10?rpc=401&

B&B denies market rumours of emergency funding
Thu Jan 10, 2008 4:50pm GMT

LONDON (Reuters) - Buy-to-let mortgage bank Bradford & Bingley (BB.L: Quote, Profile, Research) on Thursday "categorically denied" market rumours that it had requested emergency funding from the Bank of England.

A spokesman for the bank said it "continued to be well funded", and declined further comment. The bank had said in November that it was "padded up for the long haul", with enough funding to see it through to the back end of 2008.

Earlier on Thursday -- shortly after the Bank's data showed weekly borrowing in a key asset category rose to 1.4 billion pounds -- several traders reported talk B&B had turned to the bank for an emergency loan.

The cheque's in the post.

This is definitely the mark of the derivative beast.

I URGE you to protect yourselves NOW, before the domino defaults and bank runs begin in earnest.

Citigroup, Merrill seek more foreign capital infusions
Moves, Foreshadowing Further Write-Downs, Raise Regulatory Issues

By David Enrich, Randall Smith, and Damian Paletta
The Wall Street Journal
Thursday, January 10, 2008

Two of the biggest names on Wall Street are going hat in hand, again, to foreign investors.

Citigroup Inc. and Merrill Lynch & Co., two companies that just named new chief executives after being burned by the troubles in the U.S. housing market, recently raised billions of dollars from outside investors. Now they are in discussions to get additional infusions of capital from investors, primarily foreign governments.

Merrill is expected to get $3 billion to $4 billion, much of it from a Middle Eastern government investment fund. Citi could get as much as $10 billion, likely all from foreign governments.

Such large investments would be the latest sign big banks are undergoing a rapid recapitalization to stabilize their shaky financial foundations. Already, foreign governments have invested about $27 billion in Merrill, Citi, UBS AG and Morgan Stanley.

....

Both Citi and Merrill are scrambling to nail down the details before they report earnings next week that are expected to include additional losses stemming from their exposure to mortgage-related investments. Together, these additional losses could reach as much as $25 billion.

....

Coming just weeks after Citigroup and Merrill first turned to foreign governments' so-called sovereign-wealth funds, the second round of capital-raising shows that the credit crisis isn't yet abating. As the write-downs mount, other financial firms may also be seeking fresh capital.

The initial infusions were expected to quench the companies' thirst for fresh capital. But mortgage-related write-downs have continued. And Citigroup last month bailed out seven affiliated investment entities, bringing onto its balance sheet $49 billion in new assets and further eroding its capital position.

More bad news for banks could be around the corner. With the economy weakening, Citigroup and its peers are bracing for a new round of problems stemming from souring loans to consumers and businesses. Banks' profit margins are getting pinched as they increase rates to lure depositors.

The risk of credit downgrades to bond insurers could further imperil banks that have hedged their exposure to billions of dollars of bonds by buying insurance. The value of that insurance diminishes if the insurers are downgraded, making the bonds they have on their books fall in value.

I think one day some SWFs and sheiks wake up and say: 'Hey, wait a minute. I gave you $200bn, and now you want another load? What do I get in return?'

They'll say: 'Shares, your Royal Highness, shares'.

He goes: 'Your shares have plunged 80%. You suck. You get no billions no more. Go, burn in hell.'

And that's when it'll be GAME OVER.

And then guess what they'll do with their billions.

Hide them under a load of camels?

Unexpected, rapidly spiralling losses. This is the mark of the derivative beast.

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Jan. 11 (Bloomberg) -- Merrill Lynch & Co., the third- largest U.S. securities firm, may write down $15 billion related to U.S. mortgage losses, almost twice its original estimate, the New York Times reported, citing people briefed on the plan.

Merrill is trying to raise $4 billion from investors in the U.S., Asia and the Middle East, the newspaper said, citing the same people. The firm is expected to disclose the loss when it reports earnings next week, according to the Times.

Merrill and Citigroup Inc. lost almost half their market value in the past year, and Federal Reserve Chairman Ben S. Bernanke said yesterday that financial-market ``turmoil'' has hurt the economy. U.S. and European banks and securities firms have turned to Asian and Middle Eastern governments for about $34 billion as subprime mortgage losses battered their balance sheets.

http://news.yahoo.com/s/nm/20080111/bs_nm/ubs_dc
UBS in shareholder plea as subprime fallout weighs

ZURICH (Reuters) - UBS AG (UBSN.VX) said it cannot predict the final impact of the subprime crisis but that a new capital injection would strengthen its position as it called on shareholders to support its emergency capital hike.

UBS's made the appeal in letter to shareholders released on Friday, and it comes after the New York Times reported Merrill Lynch (MER.N) is expected to suffer $15 billion in losses stemming from soured mortgage investments.

The Swiss bank is braced for what looks set to be a stormy shareholder meeting on February 27 when it will seek approval for a capital increase, resulting in the sale of a 9 percent stake to the Singapore government and around 1.5 percent to an unidentified Middle East investor.

Totally unexpected nasty and sudden surprises* in the banking sector.

*

Look! Countrywide isn't about to go bankrupt, because BoA has magiced up some paper to swap for it:

Bank of America to Acquire Countrywide for $4 Billion



Jim Sinclair has a view on why this has happened:

Note the purchase is in stock, not cash. It's just a share swap. They are both bankrupt.

http://www.iii.co.uk/news/?type=afxnews&am...;action=article

NEW YORK (Thomson Financial) - Bank of America Corp. Friday agreed to acquire struggling mortgage lender Countrywide Financial Corp. for roughly $4 billion in stock.

The deal calls for Bank of America to swap .1822 of a share for each share of Countrywide stock. The transaction values Countrywide shares at roughly $7.16 each, based on Thursday's close. This is roughly a 7.6% discount to the Countrywide's closing price of $7.75 on Thursday.

I wasn't aware of that.

So the deals been done to shore up sentiment then, more a pr type exercise ? making it appear as though the problems aren't that bad.

It's not about sentiment. It's about trying desperately, at any cost to prevent the derivative mountain from imploding.

It's comparable to trying to repair a fissured dam with band-aids.

Here's another one:

http://www.bloomberg.com/apps/news?pid=206...refer=worldwide
Washington Mutual Rises on Speculation of Purchase by JPMorgan

By Elizabeth Hester

Jan. 11 (Bloomberg) -- Washington Mutual Inc., the largest U.S. thrift, rose in early trading on speculation that it will be bought by JPMorgan Chase & Co., the No. 3 U.S. bank.

Stock in the Seattle-based lender rose 74 cents, or 5.2 percent, to $14.90 at 8:38 a.m. in trading before the official opening of the New York Stock Exchange. The company has lost 68 percent of its value in the last year. New York-based JPMorgan was unchanged.

EDIT typo

What are you waiting for?

http://www.ft.com/cms/s/0/203440a0-bfc8-11...00779fd2ac.html
Writedown fears return to Wall St

By Chris Bryant in New York

Published: January 11 2008 14:12 | Last updated: January 11 2008 14:24

Wall Street stocks were set to open lower on Friday amid fears of bigger-than-expected writedowns and loan-losses at financial companies and as Bank of America agreed to absorb Countrywide Financial, the troubled mortgage lender.

Quick! Quick! Call in the Plunge Protection Team!

http://money.cnn.com/2008/01/11/markets/ma...dex.htm?cnn=yes
Ugly start for stocks
U.S. markets tumble at the start on talk of Merrill writedown, disappointment in Countrywide buyout details.

January 11 2008: 9:38 AM EST

NEW YORK (CNNMoney.com) -- Concerns about financial sector earnings and the details of the Bank of America-Countrywide Financial deal helped send stocks lower at Friday's open.

...

Investors were haunted by the prospect that bank losses stemming from bad mortgage bets may be even deeper than originally thought.

The New York Times reported that Merrill Lynch is expected to take a $15 billion hit when it reports results next Wednesday, nearly twice its earlier estimate.

Merrill, Citigroup and JP Morgan Chase are all due to report quarterly results next week.

Talk of the massive writedown appeared to dim the optimism that lifted stocks on Wall Street Thursday.

The derivative beast wants more.

http://www.sfgate.com/cgi-bin/article.cgi?...p;type=business
Citi, Merrill on Hunt for More Capital

By JOE BEL BRUNO, AP Business Writer

Friday, January 11, 2008

Two of the biggest names on Wall Street are scrambling again to secure major cash infusions from foreign governments to offset billions of dollars in losses from risky subprime mortgage securities, analysts said on Thursday.

Citigroup Inc. and Merrill Lynch & Co., the No. 1 U.S. bank and largest brokerage house, are facing potentially $25 billion worth of losses when they report earnings results next week.

Both companies — led by new CEOs eager to make their mark — are expected to turn overseas for another injection of capital.

Wall Street's biggest banks and brokerages have been lining up investments from foreign governments to cushion against losses from bad investments in subprime mortgages, which are made to people with less-than-stellar credit, or in securities back by subprime mortgages.

Sovereign wealth funds, which are investment pools backed by governments, already have invested about $27 billion in Merrill, Citi, Switzerland's UBS AG and Morgan Stanley.

The fact Merrill and Citi are going back for seconds indicates that the credit crisis might be taking a bigger toll on Wall Street than initially expected.

"The bottom line is that their losses are much more sizable then first thought, and they need capital to shore up their balance sheet," said Richard X. Bove, an analyst with Punk Ziegel & Co. "It's why they're out there looking for more."

Countrywide acquisition = forced BoA move leading to financial checkmate.

http://www.bloomberg.com/apps/news?pid=206...refer=worldwide
Bank of America Credit Risk Increases on Countrywide Purchase

By Shannon D. Harrington and Hamish Risk

Jan. 11 (Bloomberg) -- The risk of Bank of America Corp. defaulting rose to the highest since at least November 2001 after the biggest U.S. bank by market value said it will rescue Countrywide Financial Corp.

Trading in credit-default swaps today reflected concerns that Charlotte, North Carolina-based Bank of America will take on too many liabilities in its $4 billion acquisition of Countrywide, the money-losing mortgage lender besieged by bankruptcy speculation.

Credit-default swaps on Bank of America rose 12 basis points to 92 basis points, according to broker Phoenix Partners Group in New York, suggesting deteriorating perceptions of credit quality.

Desperation sets in.

http://www.bloomberg.com/apps/news?pid=206...&refer=bond
MBIA Offers Yield of 14 Percent on $1 Billion of Surplus Notes

By Christine Richard

Jan. 11 (Bloomberg) -- MBIA Inc., the largest bond insurer, is offering to pay about 14 percent on its $1 billion of surplus notes to help attract investors, according to a person with knowledge of the sale.

The timing of the sale hasn't been decided, said the person, who declined to be named because the terms haven't been set.

MBIA, based in Armonk, New York, needs the money to bolster capital and stave off a reduction in its AAA credit rating. Fitch Ratings gave MBIA until the end of the month to raise at least $1 billion. A loss of the top rating would cripple MBIA's business of insuring debt.

MBIA said this week it would sell the notes and cut its dividend 62 percent to help increase its capital. In December, the company said private equity firm Warburg Pincus LLC would invest $1 billion in the company.

MBIA spokesman Jeff Lloyd didn't immediately return a call seeking comment.

Flippin' 'eck Ciggy,
I've got tummy ache on account of all this Bearfood
Keep 'em coming...its like 'count down to disaster'...

cgnao - you rock!

14%

Yep. Of course, I suppose they will try to insure their own bonds against default.

At least in Germany that's how it works: when a bank goes bankrupt, it doesn't, it gets merged. In the end only one bank is left and debt won't matter anymore and money can be created limitless.

What rating does this imply with the Fed funds rate so low?

So Who thinks this:

Merrill Lynch & Co., Inc.
(Public, NYSE:MER) - Add to Portfolio - Discuss MER Find more results for NYSE:MER

54.54
+2.51 (4.82%)

is the work of the Plunge Protection Team? I certainly suspect them.

Not necessarily. I quote Zapata George here: "Liquidity breeds stupidity."

Stop and think for a moment.

How can a company retain its AAA rating when it is troubled to the point of needing to issue debt at distressed premiums?

Further, this is no ordinary company as its failure would immediately trigger an unprecedented bond market panic, as many the institutional investors would become forced sellers of all sorts of bonds no longer covered by the collapsed insurance provider.

THIS IS IT, HERE AND NOW, 100% CORRECT, GUARANTEED.

I URGE you to take drastic defensive countermeasures NOW, without further hesitation.

http://www.bloomberg.com/apps/news?pid=206...refer=worldwide
MBIA Forced to Pay 14 Percent Yield on Surplus Bonds

By Christine Richard and Pierre Paulden

Jan. 11 (Bloomberg) -- MBIA Inc., the largest bond insurer, is offering to pay a yield of about 14 percent on its $1 billion of AA rated notes, a rate usually charged to the lowest-ranked borrowers.

The yield would be 3.125 percent higher than what Greenwood Village, Colorado-based First Data Corp. paid in October when it sold $2.2 billion of bonds to finance its leveraged buyout by Kohlberg, Kravis Roberts & Co., according to Merrill Lynch & Co. index data.

``Obviously, there are problems in wonderland,'' said Alan Kral, managing director of Trevor Stewart Burton and Jacobsen, a New York-based investment adviser with $750 million under management, including shares of MBIA.

MBIA needs the money to bolster capital and stave off a reduction in its insurance unit's top credit rating. Fitch Ratings gave MBIA until the end of the month to raise at least $1 billion. A loss of the rating would cripple MBIA's business of insuring debt.

MBIA said this week it would sell the notes and cut its dividend 62 percent to help increase its capital. In December, the company said private equity firm Warburg Pincus LLC would invest $1 billion in the Armonk, New York-based company.

The bond sale may occur as soon as today, according to a person with knowledge of the offering who declined to be identified because terms, including the final yield, haven't been set.

A spokesman for MBIA, Jeff Lloyd, didn't immediately return a call seeking comment.

JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Morgan Stanley are managing the offering.

Hybrid Bonds

The $1 billion of 25-year hybrid bonds will pay a fixed rate until 2013, when, if not called, they will begin to float. Surplus notes are bonds issued by insurance companies that state insurance regulators consider equity.

Moody's Investors Service gave the debt an Aa2 rating, two levels below MBIA's insurance company, and Standard & Poor's ranked it an equivalent AA.

Under the terms of the notes, MBIA can only make interest or principal payments with the blessing of the New York State Insurance Department, according to a preliminary prospectus.

MBIA's yield is equivalent to 956 basis points higher than U.S. Treasuries of a similar maturity. The extra yield, or spread, on investment-grade bonds is 217 basis points, according to Merrill Lynch index data. The premium to own high-yield, or junk-rated, debt is 663 basis points. A basis point is 0.01 percentage point.

Fourth-Quarter Markdowns

``That would be close to distressed levels,'' said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. Distressed bonds trade at 1,000 basis points over Treasuries of similar maturity.

MBIA, down 80 percent in the past 12 months before today, jumped $2.61, or 18 percent, to $16.72 at 1:37 p.m. in New York Stock Exchange composite trading. Marty Whitman's Third Avenue Management LLC more than doubled its stake in the company to 10.98 percent, according to a regulatory filing yesterday.

Earlier this week, MBIA said it expects to take fourth- quarter markdowns totaling $3.3 billion on its guarantees of securities based on home loans made to borrowers with poor credit.

``It's clearly a troubled company,'' said William Featherston, managing director in high yield at J. Giordano Securities LLC in Stamford, Connecticut.