Jump to content
House Price Crash Forum

An Attempt At A New Monoline Thread


Recommended Posts

They don't and haven't. The reason PFI exists at all is to get the cost of the projects funded that way out of the public sector borrowing requirement so that GB can claim he's not breached his 'don't borrow more than 40% of GDP rule'. By having the money raised privately, it doesn't show up in the statistics although the interest on it turns up in annual government expenditure in the form of annual fees paid by the NHS et al to PFI suppliers. MBIA and other bond insurers were happy to insure these issues since it's clear, in reality, they are government backed. We should be thankful for small mercies I guess since it did at least reduce the costs for us taxpayers a bit (not by as much as if the government had issued the debt directly of course).

It's all a horrible con-trick and one of the reasons NuLabour may well go down in history as the most financially incompetent governments of all time.

spot on, cheaper today, more expensive over 30 years with the expert government negotiators cutting excellent deals for repayment- NOT

Link to post
Share on other sites
  • Replies 355
  • Created
  • Last Reply

Top Posters In This Topic

They don't and haven't. The reason PFI exists at all is to get the cost of the projects funded that way out of the public sector borrowing requirement so that GB can claim he's not breached his 'don't borrow more than 40% of GDP rule'. By having the money raised privately, it doesn't show up in the statistics although the interest on it turns up in annual government expenditure in the form of annual fees paid by the NHS et al to PFI suppliers. MBIA and other bond insurers were happy to insure these issues since it's clear, in reality, they are government backed. We should be thankful for small mercies I guess since it did at least reduce the costs for us taxpayers a bit (not by as much as if the government had issued the debt directly of course).

It's all a horrible con-trick and one of the reasons NuLabour may well go down in history as the most financially incompetent governments of all time.

maybe it is just me but I am beginning to see that we have been subject to a series of elaborate financial con-tricks by our political and financial elite over the past several years and most people still haven't noticed yet.

The is like Rome just before it is about to be sacked by the barbarians. We have been overcome by Hubris and become hedonists. Next comes the fall...

Edited by JimmyMac
Link to post
Share on other sites
They don't and haven't. The reason PFI exists at all is to get the cost of the projects funded that way out of the public sector borrowing requirement so that GB can claim he's not breached his 'don't borrow more than 40% of GDP rule'. By having the money raised privately, it doesn't show up in the statistics although the interest on it turns up in annual government expenditure in the form of annual fees paid by the NHS et al to PFI suppliers. MBIA and other bond insurers were happy to insure these issues since it's clear, in reality, they are government backed. We should be thankful for small mercies I guess since it did at least reduce the costs for us taxpayers a bit (not by as much as if the government had issued the debt directly of course).

It's all a horrible con-trick and one of the reasons NuLabour may well go down in history as the most financially incompetent governments of all time.

Thanks, I think I understand now: the PFI supplier is standing behind the bond and relying on the income stream from the government in order to finance the payments. Presumably any future government that repudiates these deals will (technically) be in breach of contract rather than in default on a debt, then.

Link to post
Share on other sites
spot on, cheaper today, more expensive over 30 years with the expert government negotiators cutting excellent deals for repayment- NOT

Plus they have undertaken work that would not otherwise have been done, eg building new hospitals instead of refurbishing old ones -- because small/modest projects won't yield enough profit to entice private finance. We're ending up with finance-driven, rather than needs-driven, solutions.

Link to post
Share on other sites
Thanks, I think I understand now: the PFI supplier is standing behind the bond and relying on the income stream from the government in order to finance the payments. Presumably any future government that repudiates these deals will (technically) be in breach of contract rather than in default on a debt, then.

Yes, from what I understand of the contractual details (which are always secret due to 'commercial sensitivity') that's exactly it.

Link to post
Share on other sites
Plus they have undertaken work that would not otherwise have been done, eg building new hospitals instead of refurbishing old ones -- because small/modest projects won't yield enough profit to entice private finance. We're ending up with finance-driven, rather than needs-driven, solutions.

That certainly seems to be the case - I can't think of any other reason for some of the new building that's gone on in the NHS (even allowing for the fact that a lot of the existing building were probably genuinely not salvageable). It's not much different to people buying houses or cars I suspect - the people signing the deals look at the annual payments rather than the actual full cost over the lifetime of the project.

Link to post
Share on other sites

Great piece on bond insurance and the monoline scam from Elaine Meinel Supkis today over at Money Matters. It's long, and this ain't all of it. But it's good:

http://elainemeinelsupkis.typepad.com/mone...e-meine-13.html

From MSNBC: Banks left exposed
That instrument is the credit default swap, or CDS. It was developed as a way for bondholders to buy insurance against the possibility that companies might fail to pay their debts, and later it morphed into a way for big traders to actively bet on the likelihood of the default of bonds and other credit instruments. But what is only now becoming clear is that major U.S. and European banks and hedge funds bought up to $20 trillion worth of that insurance to offset their exposure to mortgage-related securities they owned. And those banks and hedge funds are discovering the sellers of the swaps may not pay up.
*snip*
The problem surfaced to an important degree in a footnote to the news last week that Merrill Lynch (MER, news, msgs) would take an $11.5 billion write-down of bad debts for the fourth quarter. Of that amount, $3.1 billion was a write-down of credit default swaps that Merrill had purchased from bond insurer ACA Capital to hedge the risk of owning a lot of collateralized debt obligations, or CDOs, which are leveraged bundles of asset-backed securities. (In a typical CDS transaction, a debt holder or speculator agrees to pays 1.5% or more per year for $10 million worth of insurance on a specific slice of a debt security.)
This means that not only is Merrill unprotected against a default in the CDOs, but it has lost all the money it has paid for that insurance. It's as if you had paid $200,000 in premiums over the years in a $1 million life insurance policy for your spouse, and when a death occurs not only does the insurer tell you it's broke and can't pay -- but your premiums are down the drain, too.

It is very notable that the stream of stories last year of ever-bigger purchases of corporations, $10 billion then $20 billion and then up to over $50 each, are now replaced with identical stories of losses in these same amounts. Only out of the darkness comes uglier stories. Just as the story of the French trader has now suggested he actually made up numbers in the multi-tens of billions, not merely $7 billion, so it is here. The obligations that are collaping are a spectacular $20 TRILLION. This is more than the entire planet's GNP worth for the last year! Far more! How on earth can an insurance fund's liabilities be greater than all the wealth generated this year on earth?

Call me hyper-suspicious but I know from real estate, many a person, when the economy goes bad, will over-insure a property and then voila! It is destroyed! This can be so bad, whole sectors of cities can burn down pretty rapidly and the insurance companies either go bankrupt or they have to charge ever-higher rates to make up for losses and this kills the real estate market even more and the fires rage out of control. I have seen more than one family have a fire and then rebuild a much bigger, fancier house than pre-fire. This way of spinning old housing straw into new housing gold happens in auto insurance, too.

When times are good, insurance claims in this area are not high. When there is a bad recession, it shoots up. I used to see people drive out to the slum I was rebuilding in NYC and within minutes of parking their cars, the darn things would be on fire! I got so annoyed by this, aside from the rooftop-arson watch as well as the anti-arson patrol, we also tracked auto arsonists. We would alert insurance companies that we would testify in court if they took the arsonists to trial. This scared them off from our community at least!

The point here is simple: the people buying insurance for deals have the same temptations as anyone else. Just like my rich neighbor who went bankrupt instantly started committing crimes, so it is here. The temptation to over-subscribe with the insurance and then to use this to build up more 'hedges' that do the same has caused this particular sector to balloon grossly. This is the problem with derivatives which are pure numbers inside of computers. The savage mess created by the young trader in Societe Generale is classic. The shadow world of these numbers are like a slumlord building up a pile of multiple insurance policies against a property in financial trouble. Then he moves in some rough people who are very careless with trash and matches. Oops. It burns down, he collects and throws them the chump change.

There is no way a bunch of sliced and diced SIVs and CDOs rang up $20 trillion in value. Indeed, this is much worse. They not only were never worth $20 trillion, as they lose 'value' when the truth comes out, they are losing value faster than the banks are admitting they are losing value. And this is a feed back loop typical of all bubbles: the collapse feeds on itself. The slum buildings that had high mortgages put on them and which had to be insured at every level where they passed through hands, the insurance piled on top of these already-overpriced babies became many times greater than the buildings or businesses were worth in the middle of the bubble and now, as they fall, the insurance is kicking in and kicking the bucket. Because there isn't enough money in the world to pay off these stupid things! And if the central banks even drop interest rates to 0%, the creation of $20 trillion in order to satisfy these future claims we know will happen, is purely impossible.

The push right now is to steal money from savings around the world and use it to patch over this mess that should never have happened. Bond insurance is silly in the first place. Like any system, we have to PRICE RISK. If these slum buildings or cars are over-insured, they will be torched! And to price risk, the bond holder doesn't get 'insurance'---THIS IS WHAT INTEREST RATES ARE FOR! Gads! Since banking was invented, the people lending things like money or gold or cows or houses would ask for a good sized return in case the people receiving can't pay in full. The insurance is on the THING BEING LENT not on the loan itself. This is so the debtor can repay if it goes up in flames. The lender doesn't care who pays, they just want payment. Modern banks make home owners take out fire insurance so the property which the bank owns until it is paid off, is intact. Otherwise, if there is a fire, the person owing money will walk.

All the properties in the CDOs peddled by the brokers should be INSURED. By the buyers of the properties. But the CDOs are NOT insurable. They are gambles that the mortgages and the insurance on the properties will be good! When the brokers selling these stupid CDOs claimed they would return 7% or more per year, the 7% was the bait, the lure, to buyers. Obviously, the brokers would hold these themselves IF THERE WAS NO RISK.

But while selling these things, they had to hold them. And having no good faith in their bonds, they decided to put insurance on the rigged mess so they would not have to pay ANYTHING if fecal matter hits the metaphoric fans. This meant they didn't have to 'price in risk' because they thought there was no risk at all, for themselves! HAHAHA. They thought all this would be pure profit up or down. They called this 'hedging'. I call this 'insurance fraud.'

Edit: spelling

Edited by Captain Coma
Link to post
Share on other sites
Great piece on bond insurance and the monoline scam from Elaine Meinel Supkis today over at Money Matters. It's long, and this ain't all of it. But it's good:

Excellent article - thanks for the link. She expresses much better than I have been able to do the sheer idiocy of insuring the loan instead of pricing the risk of default into the initial terms. If I take out a loan, I can get insurance against unemployment, but I can't insure the loan itself! There's a world of difference and it's one that I have found very hard to articulate. This is the best explanation I have read to date.

Bond insurance is silly in the first place. Like any system, we have to PRICE RISK. If these slum buildings or cars are over-insured, they will be torched! And to price risk, the bond holder doesn't get 'insurance'---THIS IS WHAT INTEREST RATES ARE FOR! Gads! Since banking was invented, the people lending things like money or gold or cows or houses would ask for a good sized return in case the people receiving can't pay in full. The insurance is on the THING BEING LENT not on the loan itself. This is so the debtor can repay if it goes up in flames. The lender doesn't care who pays, they just want payment. Modern banks make home owners take out fire insurance so the property which the bank owns until it is paid off, is intact. Otherwise, if there is a fire, the person owing money will walk.
Link to post
Share on other sites
Excellent article - thanks for the link. She expresses much better than I have been able to do the sheer idiocy of insuring the loan instead of pricing the risk of default into the initial terms. If I take out a loan, I can get insurance against unemployment, but I can't insure the loan itself! There's a world of difference and it's one that I have found very hard to articulate. This is the best explanation I have read to date.

well, it was the ONLY way they could ADD value to the CDO, ie reducing the risk of returns through insurance, so making deal SAFE for investors like pension funds.

Otherwise, with risk already priced in at source, with commissions paid, there would BE NO CDOS, because, where would the extra value come from?

Link to post
Share on other sites

Bond insurance is silly in the first place. Like any system, we have to PRICE RISK. If these slum buildings or cars are over-insured, they will be torched! And to price risk, the bond holder doesn't get 'insurance'---THIS IS WHAT INTEREST RATES ARE FOR! Gads! Since banking was invented, the people lending things like money or gold or cows or houses would ask for a good sized return in case the people receiving can't pay in full. The insurance is on the THING BEING LENT not on the loan itself. This is so the debtor can repay if it goes up in flames. The lender doesn't care who pays, they just want payment. Modern banks make home owners take out fire insurance so the property which the bank owns until it is paid off, is intact. Otherwise, if there is a fire, the person owing money will walk.

Once the fools accept that the current system doesn't work, the banks will have to encourage savers once again and only lend at sensible multiples.This of course will ruin the current Western economic model, but something has got to give.

Link to post
Share on other sites
well, it was the ONLY way they could ADD value to the CDO, ie reducing the risk of returns through insurance, so making deal SAFE for investors like pension funds.

Otherwise, with risk already priced in at source, with commissions paid, there would BE NO CDOS, because, where would the extra value come from?

Surely you could have a CDO without an external insurer, simply by bundling the debt and slicing it into tranches with varying exposure to default?

Link to post
Share on other sites
Bond insurance is silly in the first place. Like any system, we have to PRICE RISK. If these slum buildings or cars are over-insured, they will be torched! And to price risk, the bond holder doesn't get 'insurance'---THIS IS WHAT INTEREST RATES ARE FOR! Gads! Since banking was invented, the people lending things like money or gold or cows or houses would ask for a good sized return in case the people receiving can't pay in full. The insurance is on the THING BEING LENT not on the loan itself. This is so the debtor can repay if it goes up in flames. The lender doesn't care who pays, they just want payment. Modern banks make home owners take out fire insurance so the property which the bank owns until it is paid off, is intact. Otherwise, if there is a fire, the person owing money will walk.

Once the fools accept that the current system doesn't work, the banks will have to encourage savers once again and only lend at sensible multiples.This of course will ruin the current Western economic model, but something has got to give.

thats right, but pension funds would want minimum hassle and are looking for yeild in many cases. Here, was a guaranteed, AAA rated RETURN on their investment, made safe because the risky parts were insured. Its a scam.

Proven by the trouble the monolines are in. They are in trouble because their models for the CDOS were only based on a rising market.

and for 7 years, they were right.

Link to post
Share on other sites
thats right, but pension funds would want minimum hassle and are looking for yeild in many cases. Here, was a guaranteed, AAA rated RETURN on their investment, made safe because the risky parts were insured. Its a scam.

Proven by the trouble the monolines are in. They are in trouble because their models for the CDOS were only based on a rising market.

and for 7 years, they were right.

The interesting thing that's come out of this for me is that the model could not work, which is something I had not grasped until just now. If the bond yield correctly prices risk, then the yield (or something close to it) is what the monoline insurers should have been charging. It's not surprising that the bonds are now effectively under-insured.

Link to post
Share on other sites
The interesting thing that's come out of this for me is that the model could not work, which is something I had not grasped until just now. If the bond yield correctly prices risk, then the yield (or something close to it) is what the monoline insurers should have been charging. It's not surprising that the bonds are now effectively under-insured.

Thats right, they were making a margin when there was none- then again, as we have seen, the monolines were not set up to actually payout on ANYTHING- they dont have the money!.

CLEARLY a SCAM.

Link to post
Share on other sites
Thats right, they were making a margin when there was none- then again, as we have seen, the monolines were not set up to actually payout on ANYTHING- they dont have the money!.

CLEARLY a SCAM.

In other words, they were making a margin by selling bits of paper of their own creation which effectively offered zilch. The clever thing was to get a AAA rating for their bits of worthless paper. Now how did they do that? More to the point, how did they do it in the FIRST INSTANCE?

Link to post
Share on other sites
In other words, they were making a margin by selling bits of paper of their own creation which effectively offered zilch. The clever thing was to get a AAA rating for their bits of worthless paper. Now how did they do that? More to the point, how did they do it in the FIRST INSTANCE?

It was the Insurance Guarantee that made it "safe" hence the AAA. Without the insurance, no top rating and therefore no added value.

Link to post
Share on other sites
It was the Insurance Guarantee that made it "safe" hence the AAA. Without the insurance, no top rating and therefore no added value.

But the insurance itself (the CDS) was worthless. Or am I getting muddled? These layers on layers on layers are really getting my brain in a spin. How can a worthless insurance (i.e offered by an under-capitalised company in terms of the risks it was covering) elevate an intrinsically dodgy bond to AAA? I feel like a dog chasing its tail trying to pin down this scam in my mind.

Link to post
Share on other sites
But the insurance itself (the CDS) was worthless. Or am I getting muddled? These layers on layers on layers are really getting my brain in a spin. How can a worthless insurance (i.e offered by an under-capitalised company in terms of the risks it was covering) elevate an intrinsically dodgy bond to AAA? I feel like a dog chasing its tail trying to pin down this scam in my mind.

As moosetea said above, the system was designed for boom. The belief that prices only ever go up must surely affect the perception (and thus pricing) of risk.

Link to post
Share on other sites
But the insurance itself (the CDS) was worthless. Or am I getting muddled? These layers on layers on layers are really getting my brain in a spin. How can a worthless insurance (i.e offered by an under-capitalised company in terms of the risks it was covering) elevate an intrinsically dodgy bond to AAA? I feel like a dog chasing its tail trying to pin down this scam in my mind.

well the insurance was not KNOWN to be worthless. The mathematical models shown to show the insurance was good did not take into account a falling, or even a flat housing market. ( This I saw in this website some months ago, a transcript of a part of a conversation)

You see, in a rising market, the repo of the defaulting mortgage would cover the losses ( mostly) so the insurance would pay out little or nothing. The model breaks down at the moment of real stress, ie when the market on which the securities are based is falling.

Close questioning of the schemes by an alert invester wold have revealed this, but it looks like abother case of most people accepting the word of the model makers.

To me, this whole thing was designed, not a system that evolved, hence my beleive it was a scam, but as more and more institutions got involved, along with the AAA rating obtained for the insurers, investors got sloppy.

Now its time for a few payouts, tears are a flowing.

Link to post
Share on other sites
But the insurance itself (the CDS) was worthless. Or am I getting muddled? These layers on layers on layers are really getting my brain in a spin. How can a worthless insurance (i.e offered by an under-capitalised company in terms of the risks it was covering) elevate an intrinsically dodgy bond to AAA? I feel like a dog chasing its tail trying to pin down this scam in my mind.

The insurance was rated against historical risk; the insurer had been able to cover any default losses that arose because these were small in a rising market; most of the defaults were recoverable by liquidating securuity. So the bond issuers were able to consistently fullfill all obligations and acheive AAA rating

It's the colapse of the housing market that has changed the risk profile; because the security no longer covers the rising tide of defaults

Edit:

Beat me to it BL!

Edited by Sonic the Hedge Fund
Link to post
Share on other sites

Thanks BL and Sonic.

I still find it difficult to understand why the potential for house price deflation was not built into the insurance risk. I mean, as consumers, we are bombarded with warnings that the value of houses can go down as well as up when secured loans are advertised. Surely the possibility that house prices could go down should have been factored into their models even if the historical data did not include such a scenario because the instruments were new and did not encompass the last housing bust? It certainly was within the bounds of possibility and as such surely should have been written in.

Link to post
Share on other sites
Thanks BL and Sonic.

I still find it difficult to understand why the potential for house price deflation was not built into the insurance risk. I mean, as consumers, we are bombarded with warnings that the value of houses can go down as well as up when secured loans are advertised. Surely the possibility that house prices could go down should have been factored into their models even if the historical data did not include such a scenario because the instruments were new and did not encompass the last housing bust? It certainly was within the bounds of possibility and as such surely should have been written in.

you would think so,but the whole reason for the recent boom in loans is because they said RISK was a thing of the past.

The Herd did the rest.

Link to post
Share on other sites
you would think so,but the whole reason for the recent boom in loans is because they said RISK was a thing of the past.

The Herd did the rest.

So they had begun to believe in a form of perpetual motion.....now I understand. Silly me. Write 100 times:

House prices only ever go up

House prices only ever go up

One two, miss a few...

House prices only ever go up

....ninety-nine

House prices only ever go up

...a hundred!

Link to post
Share on other sites
So they had begun to believe in a form of perpetual motion.....now I understand. Silly me. Write 100 times:

House prices only ever go up

House prices only ever go up

One two, miss a few...

House prices only ever go up

....ninety-nine

House prices only ever go up

...a hundred!

HA, you can see the attitude really well displayed in the US right now: they have had NO recession, they are still growing, yet when the equity market falls for a day or so, they DEMAND something is done, cut .75% now, further cuts next week? yet nothing is really happening except a drop in a day, they cant even HANDLE the prospect of losers in the US Financial markets, there is always a way to prop it up.

Unless, the Fed knows something the rest dont know- all except here, at hpc, where we think we know whats going to happen.

Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    No registered users viewing this page.



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.