Thursday, Jan 24, 2008
How financial bail-outs are destroying capitalism
MoneyWeek: Why banks can’t afford to save the bond insurers
"Arty types often like to sneer at those involved in the financial sector, dismissing them as dull grey ‘suits’. But recent events have shown that, when they put their minds to it, the ‘suits’ can be far more creative than the media studies students of this world. Just look at all the creative financing that’s been going on. “I know, let’s take 100 junk-rated subprime mortgages, bake them into a cake, keep the worst bits for ourselves, then chop the rest into 80 AAA-rated slices and sell them!” That idea took some imagination."
Posted by mary @ 09:50 AM (417 views) Add Comment
4 Comments
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1. happyrenterz said...
The FT has a post on this as well which I have pasted below. It would be a significant change and perhaps moving in the direction of what George Soros said in Davos that “The financial system needs a global sheriff,”
FT Banks pressed to bail-out bond insurers
By Ben White, Aline van Duyn and Francesco Guerrera in New York
Published: January 23 2008 20:25 | Last updated: January 24 2008 00:45
Leading US banks are under pressure from New York state’s insurance regulator to provide as much as $15bn to support struggling bond insurers, people familiar with the matter said on Wednesday night.
Eric Dinallo, New York insurance superintendent, held a two-hour meeting with bank executives on Wednesday and urged them to provide as much as $5bn in initial capital to support the insurers – the largest of which are MBIA and Ambac – and ultimately to commit up to $15bn.
There is widespread concern that rating agency downgrades of the specialist insurers known as monolines could force a fresh round of writedowns by banks, which could damage already battered investor confidence. This has led to speculation that banks would band together to prop up the insurers, which guarantee payments on thousands of billions of dollars worth of bonds issued by municipal governments and other borrowers. A spokesman for Mr Dinallo had no comment on details of the meeting.
People familiar with the matter said the specifics of a possible capital infusion had yet to be decided, but contributions would not necessarily be based on how much exposure each bank has to bond insurers.
Some participants in the meeting described the discussions as at an early stage.
Mr Dinallo’s effort has not met with uniform support among the banks, which in some cases have their own capital-raising needs following the collapse in value of mortgage-related securities on their books.
The banks also still feel stung after a failed bail-out plan backed by the US Treasury under which they would have bought assets from structured investment vehicles, known as SIVs.
Wilbur Ross, the US financier who specialises in distressed businesses, said he was seriously considering buying a stake in a monoline and would make a decision on which company to back “soon”.
He expressed scepticism that Mr Dinallo would be able to persuade banks to provide the funds.
“I think it’s good that the New York insurance superintendent is coming with proactive and creative ideas for the industry but I am not so sure that he can do much to persuade banks to provide capital [to the insurers],” Mr Ross told the Financial Times.
News of a possible bail-out sent share prices for both Ambac and MBIA soaring, making any potential investments more expensive.
Ambac shares rose 71.9 per cent to $13.70 while MBIA rose 32.6 per cent to $16.61.
Concerns about the future of MBIA and Ambac grew last week when Fitch Ratings downgraded Ambac from triple-A to double-A. The business model of both companies depends on a top-level credit rating.
Banks such as Merrill Lynch, Citigroup and others have been forced to writedown the value of insurance for mortgage-backed securities that they own.
XL Capital, the Bermuda insurer, on Wednesday night said it expects a net loss in the fourth quarter of $1.0bn-$1.2bn, blaming charges connected to its investment in Security Capital Assurance.
The Federal Reserve, the Treasury and the Securities and Exchange Commission have set up at a joint group to examine risks to the financial system that might arise from problems at the bond insurers. Federal officials were understood to be monitoring the discussions between the New York regulators and the banks. However, they were not thought to be actively involved.
Unlike banking, insurance is largely regulated in the US by the states. Mr Dinallo became well known on Wall Street this decade when he worked with Eliot Spitzer, then the New York attorney-general, on an investigation into conflicts of interest in research by investment banks. Mr Spitzer has since been elected governor of New York and appointed Mr Dinallo to his current position.
2. techieman said...
XL capital has a problem with this. If this causes them to get downgraded then thats a major problem because it means that certain people wont use them as Insurer /
Reinsurer - depnding on the level of downgrade.
3. hpwatcher said...
I'm looking forward to the time when they no longer can continue to bail out. It will be here very very soon.
4. drewster said...
Let's suppose the banks somehow do manage to find $5bn-$15bn of cash to support the bond insurers MBIA and AMBAC. What happens if the credit markets continue to tumble, and the insurers have to pay out more than that $5-15bn in insurance claims? After all, that does seem very likely. The bond insurers have guaranteed $2.4trn in credit, only a fraction of that has to default before the monolines are out of business.
There's also a risk of "give them an inch and they'll take a mile". If the banks step in to help and their $15bn promptly disappears in claims, they'll feel obliged to put more money in to save face (just like when the BoE kept lending more and more money to Northern Rock). The banks will have to keep on bailing them out until they have no money left.