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An Attempt At A New Monoline Thread


Captain Coma
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Market getting excited about a bond insurer bailout.

Banks, New York Regulators Meet on Rescue for Bond Insurers

Jan. 23 (Bloomberg) -- New York State's insurance regulators met today with U.S. banks to discuss raising new capital for bond insurers, said a department spokesman.

Talks in New York with the unnamed banks are part of Insurance Superintendent Eric Dinallo's effort to stabilize the bond guarantors and bolster the market's financial condition, said agency spokesman Andrew Mais in an interview.

New capital may help preserve the top credit ratings for the bond guarantors such as MBIA Inc., the industry's largest, and halt any erosion of investor confidence in the $2 trillion of assets they guarantee. Ambac Financial Group Inc., MBIA's biggest rival, lost its AAA grade from Fitch Ratings this month on concern about rising defaults tied to subprime mortgages.

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Financial Times:

Banks pressured to bail out bond insurers

The largest US banks are under pressure from New York State insurance regulators to provide as much as $15bn in fresh capital to support struggling bond insurers, people familiar with the matter said.

Eric Dinallo, New York insurance superintendent, has met executives at the banks and has strongly urged them to provide $5bn in immediate capital to support the bond insurers, the largest of which are MBIA and Ambac, and to ultimately commit up to $15bn. A spokesman for Mr Dinallo had no immediate comment.

Concerns about the future of MBIA and Ambac grew last week when Fitch Ratings downgraded Ambac from triple-A status. The business model of both companies depends on them keeping their top level credit rating.

Share prices for both Ambac and MBIA rose on Wednesday by more than 10 per cent amid rising hopes for a capital injection.

People familiar with the matter said details had yet to be worked out but that contributions to the bail-out fund would not necessarily be based on how much exposure each individual bank has to the insurers, known as monolines.

It was unclear to what extent federal officials were involved in the discussions but the health of the monolines has been a top priority of regulators at the US Treasury and Federal Reserve.

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Okay, so the banks who are (probably) counterparty to the monolines will be putting up capital so that the insurers can meet default payments to the banks who are counterparty to the monolines.

so they have sufficient capitalisation to maintain their credit ratings given their huge potential liabilities; I don't think this is about paying claims as such.

(edit: remember that no insurer could, or would expect to, pay out on every policy. But previous mis-pricing of risk means that the old worst-case scenario is now a lot worse, meaning that more capital is required. They can still live in hope that the worst-case scenario of widespread default will not come to pass).

Edited by huw
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Guest grumpy-old-man
Okay, so the banks who are (probably) counterparty to the monolines will be putting up capital so that the insurers can meet default payments to the banks who are counterparty to the monolines.

This is making my head hurt.

I think that's something we can ALL agree on.

I feel like I have a full time job just reading this stuff day after day......it's been fun & I have learnt so much it's unbelievable.

Restructured my career & life & my family, almost entirely based on what I have been involved with on this site & a bit from anecdotal & my own experience.

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I think that's something we can ALL agree on.

I feel like I have a full time job just reading this stuff day after day......it's been fun & I have learnt so much it's unbelievable.

Restructured my career & life & my family, almost entirely based on what I have been involved with on this site & a bit from anecdotal & my own experience.

Same here.

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http://www.marketwatch.com/news/story/amba...2B1E68F55505%7D

Ambac "is in desperate need of $5 billion or more of capital or a guarantee from a very strong credit to preserve market confidence," said Egan-Jones Ratings, a rating agency that's paid by investors rather than issuers. "Some sophisticated investors claim that Ambac and MBIA must be saved or the write-downs and margin postings will be debilitating to most investment and commercial banks."

DJI

Index Value: 12,270.17

Change: 298.98 (2.50%)

Day's Range: 11,644.81 - 12,276.67

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I gather the monolines were put in place to add value to the CDOs and MBS slice ups, by making the whole thing even more secure than the sum of the tranches.

They were seriously underfunded to maintain this task, so were merely a vehicle to A: help fool investors, B: cream off even more money.

This is the biggest Scam in history.

100% guaranteed

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Guest grumpy-old-man
Same here.

I used to read a lot of your posts when I first joined this site you know, & still do now although you don't post as much.

you may also be right with your footnote, it just depends on how long that period of inflation lasts, but we don't want to go there again do we, that's partly why our heads hurt so much. :rolleyes:

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DOW surged nearly 700 points on the news!

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

Banks, New York Regulator Meet on Bond Insurer Rescue (Update1)

By Erik Holm

Jan. 23 (Bloomberg) -- New York State's insurance regulators met today with U.S. banks to discuss raising new capital for bond insurers, said a department spokesman.

Talks in New York with the unnamed banks are part of Insurance Superintendent Eric Dinallo's effort to stabilize the bond guarantors and bolster the market's financial condition, said agency spokesman Andrew Mais in an interview.

New capital may help preserve the top credit ratings for the bond guarantors such as MBIA Inc., the industry's largest, and halt any erosion of investor confidence in the $2 trillion of assets they guarantee. Ambac Financial Group Inc., MBIA's biggest rival, lost its AAA grade from Fitch Ratings this month on concern about rising defaults tied to subprime mortgages.

MBIA rose $4.27, or 34 percent, to $16.80 in 3:31 p.m. New York Stock Exchange composite trading, while Ambac added $4.55, or 57 percent to $12.52. MBIA and Ambac shares have declined more than 80 percent in the past year before today.

Moody's Investors Service and Standard & Poor's are reviewing Ambac and MBIA, both based in New York, for possible downgrades. Insured municipal bonds usually carry the debt rating of the insurer rather than the underlying debt.

Downgrades may force sales by investors who are required to hold only the highest-rated bonds and cut profit for banks that have already posted more than $130 billion of writedowns and credit losses tied to the falling value of mortgage securities.

Mortgage Values

Ambac and MBIA have suffered losses because of guarantees they sold for structured investments such as collateralized debt obligations backed by mortgages. The industry collectively guaranteed $127 billion of CDOs linked to mortgages that were given to borrowers with poor credit.

The securities have plunged in value as defaults by borrowers soared to a record in the third quarter of last year, according to the Mortgage Bankers Association.

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so they have sufficient capitalisation to maintain their credit ratings given their huge potential liabilities; I don't think this is about paying claims as such.

(edit: remember that no insurer could, or would expect to, pay out on every policy. But previous mis-pricing of risk means that the old worst-case scenario is now a lot worse, meaning that more capital is required. They can still live in hope that the worst-case scenario of widespread default will not come to pass).

In the short term you're absolutely right huw, but losses are still losses (and a conservative estimate of those losses is $250 billion). Are the auditors going to ultimately sign off on this charade? Or is it just going to be Japan II with what are effectively NPLs sitting on the books for years.

Any manager of a sovereign wealth fund who's thinking of infusing capital into one of these shipwrecks so that the capital can be fed into a counterparty insurer to pay for it's own claims wants his head looking at.

We need to see the small print. Until then I'm highly sceptical.

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Guest grumpy-old-man
hotairmail,

Great link.

This is linked from that link, highly recommended reading.

http://ftalphaville.ft.com/blog/2008/01/23...specially-hbos/

29929BlackTuesday, GOM - Ditto, big time.

yeah, but the difference is you understand most of it, I understand some of it!

I will take a look at the link, just to finish frying my brain............

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In the short term you're absolutely right huw, but losses are still losses (and a conservative estimate of those losses is $250 billion). Are the auditors going to ultimately sign off on this charade? Or is it just going to be Japan II with what are effectively NPLs sitting on the books for years.

Any manager of a sovereign wealth fund who's thinking of infusing capital into one of these shipwrecks so that the capital can be fed into a counterparty insurer to pay for it's own claims wants his head looking at.

We need to see the small print. Until then I'm highly sceptical.

Apparently the monolines are exposed to a potential $100 trillion (minimum) of junk CDS risk worldwide and have (or had) just 0.1% reserve cover for it! It's a wonder they could get any rating at all, never mind AAA. :lol:

If even 10% of that junk goes bad it will require a worldwide whip-round to cover it, not just the US federal budget.

I would guess each goverment will be 'asked' to bail out any national financial entity that feels it has no choice but to make a major monoline call - to share the pain and thereby help avoid pushing the big red reset-to-zero button.

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DOW surged nearly 700 points on the news!

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

Banks, New York Regulator Meet on Bond Insurer Rescue (Update1)

If the DOW ended up almost 300 points today because of this news - which I think is the reason - then I will bet it won't stay there for long.

There is not enough money in America to bail out the monolines if the defaults accellerate, which they will, and asking the gov or the FED to step in to cover the debts (claimed against defaulting commercial bonds written by the banks themselves) amounts to an NR-style bailout for the entire US banking system.

The fact that Wall Street was so overjoyed and relieved simply to hear that a meeting was taking place merely points to the dawning realisation of this desperate and perhaps incurable situation.

Once they do their sums and realise that shareholders are going to be crucified to the last cent (apparently Soros has basically said "save the banks and hang the shareholders" - see CGNAO's thread), I think the markets will puke and it'll go the other way.

These ups and downs are getting wilder and wilder and faster and faster by the day now. If the DOW was a person you'd be looking at somebody crying and laughing and talking gibberish - meaning an imminent psychotic break and the strait-jacket for the patient's own protection.

Poor kitty: they just strapped the dead cat to a rocket and lit the blue touch paper.

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Just as you think you start to understand this whole mess, you uncover another layer which leads to more inter links that generate more questions and confusion.

At some point down the line we need to see the impact of

. Credit card and unsecured credit defaults

. Car Finance

. The effect of all that has gone before on pension funds

I am going to watch the C4 documentary on the collapse of Enron again, as it seems Enron was the Pilot scheme for the way the world’s entire financial system would come to be run. Coincidence the same large American banks and the same players are involved again? :ph34r:

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The fact that Wall Street was so overjoyed and relieved simply to hear that a meeting was taking place merely points to the dawning realisation of this desperate and perhaps incurable situation.

Spot on.

How many of the banks are in a fit state to recapitalise the monolines?

This is a link to the current, aggregate, reserves of US banks (depository institutions). This is the amount the banks have on deposit with the Federal Reserve banks or as cash in vaults.

http://www.federalreserve.gov/releases/h3/Current/

The nonborrowed reserve amount that I am looking at is the amount of deposits held with the Federal Reserve banks plus cash in vaults less money that has been borrowed via the Federal Reserves discount window ( I assume this also includes via auction, which will be backed by collateral). The figure is for the banking system as a whole. The amount of nonborrowed reserves has dropped dramatically in the last month from $42 billion at the end of November to $27 billion at the end of December, $11 billion on January 2nd to a negative $1.3 billion (Seasonally adjusted a positive $200 million) on January 16th. I'm not sure what the negative nonborrowed amount implies, on the face of it, it seems that the banking system as a whole isn't meeting its (regulatory?) reserve requirements.

Banks that are borrowing to fulfill their reserve requirements are not going to be bailing anyone out.

One bit of good news; some banks are still running a cash surplus (approx. $19 billion in total)

Again this is only my interpretation of this, if anyone knows better please put me straight.

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How many of the banks are in a fit state to recapitalise the monolines?

At a rough guess, none.

For your entertainment and edification, here is a sample of the chatter on Market Ticker forum from some folks who are nearer to what's going on. I've edited it together a bit so that you can get a more fluid sense of where the conversation is going. Great stuff, and it sounds as if they are saying the same things we are here on this thread - but in American, which always sounds good to my ear:

"Insurance cos don't go into bankruptcy they go into receivership. In that case regulators step in and take charge of unwinding. So, is this just a pre-emptive bankruptcy under a different name? I don't know but sounds like it. Mono bonds rallying hard up 10 points. Monoline common stocks rallying too but they will get screwed in the end most likely through dilution. Or holding company tied to common goes bankrupt."
"So when we get a few trillion of CDO exposure, is the State of New York going to foot the bill?"
"The reason NY and Wis insurance commissioners are involved is that they are the lead regulators for MBIA and Ambac respectively. There's no Federal regulation of these companies, and each state has their own agencies. It's based on where the company was headquartered when it was started. Ambac originally was a part of MGIC in Wisconsin before it was sold off to Citi back in the 80's. Any bailout or capital infusion needs to be approved by the lead insurance commissioner. That doesn't mean any state taxpayer money would be involved in the recapitalization."
"You know who else is scared right now? Wisc and NY regulators. If the markets rally hard on the idea that they will somehow backstop the monolines, who gets to take the PR hit when we find out - oops - that they can't ACTUALLY do that, since they don't have the cash. Oh, and by the way, the swaps the monolines insured are still defaulting with no coverage. All I'm hearing so far is jawboning. The sheeple are buying on hope and reading between the lines to find things that haven't actually been stated. I'll believe this when I see it."
"OK, so the infusions need to be approved.. but where did the money that they're infusing come from?Perhaps this is the increase of liquidity that Bernanke talks about but hasn't actually done.. yet.."
"Well, at least now we can be almost certain that the "potential" big selloff and panic was predicated primarily on the monoline issue (the monster monoline thread here at this forum was no fluke). These folks better deliver on this rescue plan or as Karl says, the Gates of Hell will be opened wide."
"Banks don't have the capital, insurer's don't have the capital, BUT the banks are trying to RAISE the capital for the insurer's so that the banks themselves can last a little longer. Can u say "Domino" Effect?"
"If anyone buying equities right now stopped long enough to THINK about this - they might figure out that this is HUMUNGOUSLY BAD!"
"Ha, ha, ha, ha. The open tomorrow should be interesting as the retail investor realize they've given the money makers another chance to get out. Good grief."
"Seriously, when you get the .gov involved, it's not just as simple as saying, 'Yep, let's do this.' This is not private equity peeps. There's a tough row to hoe to get this to actually do anything, let alone save the day. God help anyone long if this 600-point swing ends up being built on speculation. How far down do you think it comes if this plan doesn't happen?"
"WTF, is the rest of the world gov going to bail out their markets. I call ******** on this!!"
"Pump and dump is right..."
"I'll repeat myself. I don't think that the CB's give a shit about the stock market... all they care about is the solvency of the major banks..especially but not exclusively GS. every move is geared to this."
"You know how you can tell that it is getting bad? They can't even make things up anymore that are halfway believable. This shit sounds like a three year old made it up."

(The full thing on http://www.tickerforum.org/cgi-ticker/akcs...496&page=1)

Some of the posters elsewhere are also hinting that the really big, mysterious, "smart" money has already left town, so when the DOW inevitably tanks in tears and snotters, it will be ordinary investors, pension funds etc., on the hook for all this.

The biggest sucker's rally ever?

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