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Now Im beginning to understand what structured finance really is.

It is a financial house of cards, and the main structure keeping it up are a team of smiling, expensively besuited bankers standing around it so you cant see exactly how fragile it is, but more important than that, their task is to stop any slight breeze from toppling the lot.

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Now Im beginning to understand what structured finance really is.

It is a financial house of cards, and the main structure keeping it up are a team of smiling, expensively besuited bankers standing around it so you cant see exactly how fragile it is, but more important than that, their task is to stop any slight breeze from toppling the lot.

Spot on. And once the underlying asset (CDOs, CDSs, etc) collapses - i.e. the bottom row of cards - guess what happens next?

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alabama found:

As I write this column, it's a bright, sunny day. The herons have returned to their Thames-side hunting grounds, and God is quite clearly in his heaven. But then the walls of Jericho probably looked pretty comforting just before they came tumbling down.
From the railway station in the distance came the sound of shunting trains, ringing and rumbling, softened almost into melody by the distance. My wife pointed out to me the brightness of the red, green, and yellow signal lights hanging in a framework against the sky. It seemed so safe and tranquil.
© H G Wells (expired)
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Bond Insurance Turns Toxic for Munis as Rates Soar

Just to add ... The shit is really hitting the fan!!!

Courtesy of Bloomberg

Feb. 11 (Bloomberg) -- Bond insurance sold by MBIA Inc., Ambac Financial Group Inc. and Security Capital Assurance Ltd. is backfiring on counties, universities and hospitals across the U.S., more than doubling some borrowing costs.

Park Nicollet Health Services in Minneapolis may pay an extra $5 million to $6 million this year, about a quarter of its operating profit, because interest on $375 million in floating- rate debt doubled in the last six weeks, said Chief Financial Officer David Cooke. The rate on $98 million insured by Ambac climbed to 6 percent on Jan. 30 from 3.06 percent on Jan. 2.

``We'll have to reduce our capital expenditure program, which means less equipment, less modernization of facilities,'' Cooke said in an interview. The hospital paid Ambac to ``count on that AAA insurance for 30 years. Now it's going away on us.''

Investors are shunning insured bonds after three of the biggest guarantors, owned by Ambac, Security Capital and FGIC Corp., were stripped of at least one AAA credit rating amid losses on debt tied to subprime mortgages. Interest costs on floating-rate bonds sold by more than 100 governments, hospitals and colleges rose as much as 7 percentage points since the beginning of January even as the Federal Reserve lowered its benchmark rate for U.S. borrowing by 1.25 percentage points.

`State of Turmoil'

Park Nicollet is among tax-exempt borrowers seeking to restructure their debt to supplement or strip out the insurance that was supposed to reassure investors and lower their costs. The Bay Area Toll Authority in Oakland, California, and the Billings Clinic in Billings, Montana, shelved plans to borrow.

``The market's in a state of turmoil,'' said Bryan Mayhew, chief financial officer for the toll authority, which manages the San Francisco Bay Bridge and six other state-owned toll bridges.

Tax-exempt money-market funds can't hold debt rated lower than AA-, and downgrades to insurers are enough in some instances to make the bonds it backs ineligible.

State and local government debt is tainted even though Moody's Investors Service says the default rate on municipal bonds is 0.1 percent.

Insurers are losing the top ratings because of the structured securities they began guaranteeing decades after they first offered protection against municipal defaults. The toxin is debt tied to subprime mortgage borrowers; a surge in delinquencies has triggered about $146 billion in writedowns and losses at banks and securities firms since the start of 2007.

Credit Downgrades

New York-based Ambac is the second-biggest bond insurer after Armonk, New York-based MBIA, while FGIC and Security Capital are fourth and sixth, respectively. The four guarantee about $1.1 trillion of fixed- and floating-rate municipal bonds, or 42 percent of the outstanding state and local government debt, according to data compiled by Bloomberg.

Fitch Ratings downgraded the financial strength ranking of Ambac's main insurance units two levels to AA Jan. 18, and the primary subsidiaries of New York-based FGIC were cut to AA at both Fitch and Standard & Poor's later in the month.

Units of Bermuda-based Security Capital, started by XL Capital Ltd., were dropped by Fitch five grades to A on Jan. 24 and downgraded by Moody's six levels to A3 on Feb. 7. The three rating companies have MBIA's subsidiaries under review for possible cuts and say there may be more downgrades for the others. Financial strength ratings gauge an insurer's claims- paying ability.

Exploring Alternatives

Michael Gormley, a spokesman for Security Capital's XL Capital Assurance Inc., said officials are ``sympathetic'' to the difficulties facing issuers that insured variable-rate bonds with the company. ``We are exploring different alternatives with our clients to address the issues they face due to the currently volatile market,'' Gormley said in an e-mailed statement.

Ambac spokesman Peter Poillon declined to comment. MBIA spokesman Michael Sitrick didn't return a phone call and e-mail. FGIC's Brian Moore didn't either.

Governments and nonprofits that didn't insure their variable-rate debt are benefiting from five months of Fed easing. The Securities Industry and Financial Markets Association rate, the benchmark for tax-exempt, floating-rate debt, dropped about 2 percentage points to 1.73 percent since Sept. 18 as the Fed's target rate for overnight loans between banks fell 2.25 points to 3 percent.

Lower Rates

The University of Pittsburgh Medical Center, a Pittsburgh- based network of hospitals, in March 2004 issued uninsured floating-rate bonds with a AA- rating, two grades above Park Nicollet. The rate on $80 million of its seven-day debt was reset at 1.68 percent on Feb. 6, down from 3.42 percent on Dec. 26.

Interest costs on insured variable-rate debt are rising as investors invoke their right to sell the debt back. Issuers enter into so-called standby purchase agreements with banks to ensure there are funds available to buy it.

Cooke said he may replace Park Nicollet's standby purchase agreement with a bank letter of credit, which offers more protection to investors because it guarantees the payment of principal and interest and provides an unconditional agreement to buy tendered debt.

For insured auction-rate securities, which are due in 30 years or more, the increases are even more pronounced. The rates are reset by periodic bidding, and investors are concerned that the dealers who hold the auctions may not support the market with their own offers, as they have in the past.

Auctions Fail

On Jan. 22, the first trading session after the Ambac downgrade, two auctions run by Lehman Brothers Holdings Inc. failed, triggering automatic resets at the maximum proscribed in the bond terms. Debt issued by electric utility Nevada Power reset at 6.757 percent, up from 6 percent, while Georgetown University debt went to 6.604 percent from 5.25 percent. Since then, rates on both issues fell after successful auctions.

Kerrie Cohen, a spokeswoman for New York-based Lehman, didn't return a phone call seeking comment.

Rates on $40 million of Worcester Polytechnic Institute's XL Capital Assurance-insured auction-rate securities rose to as much as 6.25 percent on Jan. 22 from 3.9 percent at the beginning of the year. The bonds are rated A+ without insurance.

Tufts University in Medford, Massachusetts, rated one step higher than Worcester at AA-, is currently paying 4.5 percent on $93 million of uninsured auction-rate debt.

``It's frustrating, there's no doubt about it,'' said Jeffrey Solomon, finance chief of the 3,800-student school in Worcester, Massachusetts. He's is in the process of converting the debt to a new variable-rate bond backed by a letter of credit from Portland, Maine-based TD Banknorth Inc.

Learning to Swim

In Jefferson County, Alabama, the rate on $221.3 million of auction-rate sewer bonds issued in 2002 and insured by XL Capital Assurance soared to 10 percent on Feb. 6 from 3.06 percent on Jan. 9.

Jay Wenger, who advises local governments for Susquehanna Group Advisors Inc., in Harrisburg, Pennsylvania, spends much of his time trying to help clients who want to restructure their variable-rate debt.

``The last few weeks have been difficult to operate in,'' Wenger said. ``There's a whole market out there that's facing a liquidity crisis, that's learning how to swim.''

Edited by REP013
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Getting closer now ...

Mortgage insurer reports big loss (BBC Website)

US mortgage insurer MGIC has reported quarterly losses of $1.47bn (£750m) after being hit by the housing slump and resulting high levels of bad debt.

The loss for the last three months of 2007 compares with a profit of $121.5m for the equivalent quarter in 2006.

MGIC said a growing number of its policy holders had either fallen behind on their mortgage payments or had their homes repossessed.

In both cases, insurers such as MGIC have to pay out to mortgage lenders.

Failed merger

MGIC's losses were more than twice as high as market expectations.

While the firm said it had "adequate" funds to make continuing penalty payments to mortgage lenders, it added it was now seeking a fresh capital injection.

MGIC said it had to pay out $870m in bad debt penalties for 2007 as a whole, and added this could increase to $2bn this year.

Last February, MGIC had agreed to a $5bn merger with its mortgage insurance rival Radian, but the deal collapsed in September after the full extend of bad US mortgage debt led to a plunge in the companies' shares.

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Trying to keep this in one place ... perhaps GF is right and we are there (oh shit)

UBS Won't Support Failing Auction-Rate Securities

Feb. 14 (Bloomberg) -- UBS AG won't buy auction-rate securities that fail to attract enough bidders, joining a growing number of dealers stepping back from the $300 billion market, said a person with direct knowledge of the situation.

The second-biggest underwriter of the securities, whose rates are reset periodically at auctions, notified its 8,200 U.S. brokers of the decision yesterday, said the person, who declined to be identified because the announcement wasn't publicly disclosed. Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Citigroup Inc. allowed failures of auctions they managed by not purchasing securities that didn't sell.

Bank of America Corp. estimated in a report that 80 percent of all auctions were unsuccessful yesterday. That may mean as much as $20 billion of bonds failed to find buyers, based on the $15 billion to $25 billion of auction bonds that are scheduled for bidding daily, said Alex Roever, a JPMorgan Chase & Co. fixed income analyst.

``We're hearing it's a general reaction to the auction market,'' said Marlene Zurack, senior vice president for New York City's Health and Hospitals Corp., whose auction yesterday of $64.9 million of bonds failed. ``The truth is our credit is good, our ratings are good, our bond insurer is unscathed, and it still happened.''

Auctions of bonds sold by cities, hospitals and student loan agencies are failing as confidence in the creditworthiness of insurers backing the securities wanes, and as loss-plagued banks seek to avoid tying up their capital. More than 129 auctions failed yesterday, said Anne Kritzmire, a managing director for closed-end funds at Nuveen Investments in Chicago.

Four-Fifths Fail

Rohini Pragasam, a spokeswoman for UBS, the second-biggest underwriter of municipal auction-rate debt after Citigroup in 2006 according to Thomson Financial, declined to comment. UBS, the dealer on the hospital corporation's auction, today posted the biggest-ever loss by a bank for the fourth quarter. The stock declined 2.38 francs ($2.15), or 5.8 percent, to 38.48 francs at 11 a.m. in Zurich.

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.

Won't Bid

Until recently, UBS and other banks that collect fees for running auctions have stepped in with their capital to prevent failures when bidding falters. These firms have grown unwilling to commit their money to auction-rate securities after suffering at least $133 billion in credit losses and mortgage writedowns stemming from the subprime mortgage collapse.

``If you talk to the dealers, their balance sheets are getting flooded with these auction-rate certificates right now,'' said Doug Dachille, who oversees $7 billion in fixed- income securities as chief executive officer of First Principles Capital Management LLC in New York. ``Right now, the way they're dealing with the issue is they won't bid. That's why we're seeing failed auctions.''

Auctions began stumbling three weeks ago when banks failed to drum up enough demand for auction rate bonds sold by borrowers including Georgetown University and Nevada Power. Since then, auctions have failed for frequent and well-known borrowers, such as Port Authority of New York and New Jersey and New York state's Metropolitan Transportation Authority.

Insurance at Issue

The failures show the widening impact of the bursting of the U.S. housing bubble, which has caused rising defaults on home loans and threatened the credit ratings of the insurance companies that guaranteed structured securities -- such as collateralized debt obligations tied to mortgages -- against default.

The waning strength of some bond insurers has caused investors to trim their exposure to debt backed by companies such as Ambac Financial Group Inc.'s Ambac Assurance Corp., concerned that it may be difficult to sell such debt should insurers' problems grow worse. That has hurt borrowers such as the Port Authority, whose auction debt soared to 20 percent on Feb. 12 from 4.3 percent a week ago even though there is little risk it will default on its debt.

Local governments are obliged to pay the high rates until either the auctions start attracting more buyers or they modify the bonds to some other kind of variable-rate debt or a fixed interest rate. Bankers and borrowers have been working on conversion plans for several weeks.

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The German psyche is still scarred by the horror of the hyper-inflation that followed World War I. It lingers on in Frankfurt and Bonn. So when Mr Ackerman hinted at a colossal wave of collapsing bond values, the consequent closing out of stop-loss positions, and the free-fall into implosion that would follow, then maybe – just maybe – he was indulging a Teutonic penchant for market melancholy.

Ackerman is Swiss and a former army officer. And I don't think it fair to suggest that Deutsche like to play it safe. Their write-downs will come in time I suspect.

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...

The government approved a credit of 5 billion marks for war materials. Then came a further departure from the rules. Treasury bills of three-month maturities were issued by the government in the amount of 5 billion marks, and were substituted for the commercial paper previously used as backing for the currrency. Unlike commercial paper, Treasury bills did not represent the underlying security of the issuer of that commercial paper. They were nothing more than promissory notes, sold by the gvernment to the Reichsbank, which permitted the Reichsbank to print more money at will. Germany had not only quit the Gold Standard, she had also quit the commercial paper standard, leaving the currency with no backing at all. In other words, it was worth no more than the paper it was written on.

...

This sounds all too familiar.

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We don't need a bail-out - MBIA Says It Can Weather Slump, Doesn't Need Bailout

This maybe true but what about all those using their ratings by proxy?

The story ...

Feb. 14 (Bloomberg) -- MBIA Inc., the world's biggest bond insurer, said it is equipped to survive the slump in prices of mortgage securities and dismissed suggestions that the industry needs a rescue or stronger federal oversight.

``A bailout of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced,'' MBIA Chief Financial Officer Charles Chaplin said in prepared remarks to be delivered today at a hearing of the House Financial Services subcommittee on capital markets in Washington.

Chaplin and Ambac Financial Group Inc. Chief Executive Officer Michael Callen will make their presentations on Capitol Hill as they try to fend off credit rating downgrades and critics who say the companies may be headed for bankruptcy. One of the most vocal skeptics, hedge fund manager William Ackman, will also deliver remarks today alongside the MBIA and Ambac executives.

MBIA, based in Armonk, New York, and Ambac are among five companies struggling to maintain their top bond insurance credit ratings after a slump in the value of mortgage-linked securities the companies guaranteed. Standard & Poor's, Moody's Investors Service and Fitch Ratings are reviewing MBIA's top rating for a possible downgrade. Fitch already cut its AAA ratings on New York-based Ambac's insurance unit to AA. Ambac is also being scrutinized by Moody's and S&P.

``MBIA is more than adequately capitalized to meet obligations to policyholders,'' Chaplin, 51, said in his testimony.

Rescue Plans

Ambac said in a statement last night that Callen will tell the committee the company's main challenge is to achieve ``ratings stability.''

MBIA rose 14 cents to $11.64 yesterday in New York Stock Exchange composite trading. Ambac climbed 47 cents to $9.37.

MBIA and Ambac tumbled more than 80 percent in the past year in New York trading as they posted record losses of more than $5 billion and concern grew the companies may not get enough capital to sustain their ratings, casting doubt on $2.4 trillion of municipal and structured finance debt.

New York Insurance Department Superintendent Eric Dinallo last month organized banks to begin plans for a rescue of the insurers and said he may consider strengthening his oversight. Dinallo will also appear before the committee today, as will New York Governor Eliot Spitzer, U.S. Securities and Exchange Commission director Erik Sirri and Keith M. Buckley, a group managing director at Fitch.

Buffett's Offer

Billionaire investor Warren Buffett yesterday offered to take over $800 billion of the municipal debt guaranteed by MBIA, Ambac and FGIC Corp., the fourth-largest bond insurer. Ambac yesterday said it rejected the offer. Two other insurers haven't responded, Buffett told CNBC television.

``We doubt any of the financial guarantors agree to it,'' Bank of America Corp. analysts Michael Barry and Seth Levine wrote in a research note published yesterday.

Buffett's plan won't save the companies or the municipal bond market because losses on securities linked to subprime mortgages will continue to ``eat away capital'' at the insurers, Bank of America's report said.

`Rigorous Oversight'

MBIA said an industrywide bailout may perpetuate existing problems.

``Similarly, MBIA does not believe there is a need for federal oversight of the industry,'' Chaplin said. MBIA ``is confident that the rigorous oversight it has always been subject to from state regulators and the rating agencies will continue to be more than adequate going forward.''

Chaplin asked Congress to rein in the practices of Ackman and other so-called short sellers that are seeking to profit from the company's demise. Callen will talk about the ``undue fear'' created by inflated estimates of losses at the companies, the statement said.

Ackman has persisted in challenging MBIA's AAA credit rating for more than five years, saying MBIA hasn't been forthcoming about backing risky financial instruments such as those based on loans to the least creditworthy homebuyers. Ackman's Pershing Square Capital Management has been making bets that the stocks and bonds of MBIA and Ambac would fall, a strategy that helped Pershing Square to return 22 percent net to investors last year.

Risky Business

Short sellers sell borrowed stock with the purpose of profiting by repurchasing the securities later at a lower price and returning them to the holder. The short interest in MBIA has more than tripled to 56 million shares as of Jan. 31 from 18 million a year earlier. MBIA had 223 million shares outstanding on Feb. 11.

Ackman last week wrote to U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke, urging them to put an end to a bank-led bailout because it would ``prolong the term and severity of the recent credit contraction.''

Paulson yesterday said he was watching the bond insurers ``closely.''

``Just like everything else, it comes down to the theme of capital,'' Paulson said in an interview with Bloomberg television. ``Are they able to raise enough capital?''

Losses Climb

Ambac, which was the first to insure a bond in 1971, and MBIA, which started as the Municipal Bond Insurance Association in 1974, are reeling from an expansion into guaranteeing collateralized debt obligations. CDOs repackage assets such as mortgage bonds and buyout loans into new securities with varying risk. As the value of some CDOs plummet, ratings companies are pressing the insurers to add more capital.

MBIA last month reported a fourth-quarter net loss of $2.3 billion, or $18.61 a share, its biggest ever. The results led to a full-year net loss, snapping a streak of annual profitability dating back to at least 1991 that had been buoyed by the regular premiums from insuring municipal debt.

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What planet are these people from???

Mr Dinallo also said that the insurance regulator would allow bond insurers to split into two companies, separating the healthy municipal insurance business from the problem, structured finance portfolio.

What holder of structured finance insurance is going to agree to this? They're going to say sod off, my contract is with the company that holds a proportion of good assets, not with a trashcan that only holds junk and is in danger of going bust.

Mr Dinallo's cunning plan is like saying to a bank that has given you and your wife a joint unsecured loan and credit cards: "Now that I've lost my job, we are going to separate our finances and assets. I will get the clapped out car and the DVD collection and my wife who still has a job will get the house and the shares. I will remain liable to you for the debts. She will now not be liable to pay anything back to you and bank with someone else. Ok? Please..."

FT Link

Edited by newbie
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What planet are these people from???

What holder of structured finance insurance is going to agree to this? They're going to say sod off, my contract is with the company that holds a proportion of good assets, not with a trashcan that only holds junk and is in danger of going bust.

Mr Dinallo's cunning plan is like saying to a bank that has given you and your wife a joint unsecured loan and credit cards: "Now that I've lost my job, we are going to separate our finances and assets. I will get the clapped out car and the DVD collection and my wife who still has a job will get the house and the shares. I will remain liable to you for the debts. She will now not be liable to pay anything back to you and bank with someone else. Ok? Please..."

http://www.ft.com/cms/s/0/3b313712-db09-11...00779fd2ac.html

Beneficiaries of these structured finance guarantees won't get a say. Contracts are written to allow monolines an unfettered right to assign the contract to an equally rated entity.

Beneficiaries could of course sue, and I'm sure they will.

Best,

Monty

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Beneficiaries of these structured finance guarantees won't get a say. Contracts are written to allow monolines an unfettered right to assign the contract to an equally rated entity.

Beneficiaries could of course sue, and I'm sure they will.

Best,

Monty

If insurers can transfer them in this way, then provided they can get the rating companies to the party, it will be fascinating to watch the action from the sidelines... But I doubt the ratings companies will play along in the face of angry counterparties threatening to sue them.

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If insurers can transfer them in this way, then provided they can get the rating companies to the party, it will be fascinating to watch the action from the sidelines... But I doubt the ratings companies will play along in the face of angry counterparties threatening to sue them.

Fun and games indeed! I think the rating agencies are as keen as anybody to draw a line under this debacle. They will also be leaned on heavily by monoline regulators, central banks, the Fed and the Treasury to gain closure. If this is the least bad way of doing it, then it will be done (with 20 years of litigation to follow).

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``A bailout of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced,'' MBIA Chief Financial Officer Charles Chaplin said in prepared remarks to be delivered today at a hearing of the House Financial Services subcommittee on capital markets in Washington.

Sounds about right, I wonder where Laurel and Hardy fit in ??

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

New York's Dinallo Considers Splitting Bond Insurers (Update7)

By Christine Richard and James Tyson

Feb. 14 (Bloomberg) -- Bond insurers may be split into two businesses in what would be the biggest overhaul of the industry since it was created almost four decades ago.

New York Insurance Department Superintendent Eric Dinallo said such a separation is one of the proposals regulators have been discussing with bond insurers, including MBIA Inc. and Ambac Financial Group Inc.

``One would have the municipal bond policies and any other healthy parts of the business,'' Dinallo said in prepared testimony for a hearing today of the House Financial Services subcommittee on capital markets in Washington. ``The other would have the structured finance and problem parts of the business.''

New York Governor Eliot Spitzer told the committee that the step, while ``not optimal,'' may be necessary if the companies can't raise the capital needed to stave off credit-rating downgrades. The world's largest bond insurers may lose the AAA ratings they use to guarantee $2.4 trillion of municipal and mortgage-backed debt, casting doubt on the rankings of thousands of schools, hospitals and local governments around the country

Is this going to work? Are we saved? Bags I the munis you can have the sivs.

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