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An Attempt At A New Monoline Thread


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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)

What particularly puzzles me about that is that there have been actuaries working in mortgage indemnity assurance for decades who have some very good mathematical models that could have been plagiarised from extensively. Detailed stochastic models that would consider all kinds of scenarios, with intrictately modelled parameter interdependencies. I can see how it'd be easy to have a duff model if such models don't exist or if you were a small company, but for companies speculating billions to use duff models when there's bloody good models out there already seems like madness.

Especially since they could pick up a few top quality actuaries for the cost of a single coked up merchant banker.

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What particularly puzzles me about that is that there have been actuaries working in mortgage indemnity assurance for decades who have some very good mathematical models that could have been plagiarised from extensively. Detailed stochastic models that would consider all kinds of scenarios, with intrictately modelled parameter interdependencies. I can see how it'd be easy to have a duff model if such models don't exist or if you were a small company, but for companies speculating billions to use duff models when there's bloody good models out there already seems like madness.

Especially since they could pick up a few top quality actuaries for the cost of a single coked up merchant banker.

Thats the point, the monolines are not insurance companies like lloyds.

It looks to me like they were created just for this purpose, enhancing the value of CDOS. They are another Financial"vehicle".

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Thats the point, the monolines are not insurance companies like lloyds.

It looks to me like they were created just for this purpose, enhancing the value of CDOS. They are another Financial"vehicle".

No, they've been around for a long time and were originally created for insuring municipal bonds (MBIA = municipal bond insurance association). Until they got greedy and strayed into insuring mortgage backed CDOs, they were pretty much like Lloyds although with a less diverse business. This underlying issue that seems to have caught them out, hubris and greed aside, is that their models of baskets of mortgages vastly underestimated the correlation between the probabilities of default of each item in the basket (whether that was an individual mortgage at the MBS level or a single MBS at the CDO level). To be fair, it's not obvious how you account for wide scale fraud when modelling such things.

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No, they've been around for a long time and were originally created for insuring municipal bonds (MBIA = municipal bond insurance association). Until they got greedy and strayed into insuring mortgage backed CDOs, they were pretty much like Lloyds although with a less diverse business. This underlying issue that seems to have caught them out, hubris and greed aside, is that their models of baskets of mortgages vastly underestimated the correlation between the probabilities of default of each item in the basket (whether that was an individual mortgage at the MBS level or a single MBS at the CDO level). To be fair, it's not obvious how you account for wide scale fraud when modelling such things.

Thanks for that information.

from their website :

Capital Strength. Triple-A Performance.

For issuers:

• Lowers borrowing costs by reducing interest rates

• Broadens range of investors

• Simplifies credit structure for complex bond issues

• Provides greater access to the capital markets

For investors:

• Provides “AAA” protection against issuer default and downgrade risk

• Enhances liquidity for secondary market trading

• Simplifies risk assessment

• Offers price protection

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Thanks for that information.

from their website :

Capital Strength. Triple-A Performance.

For issuers:

• Lowers borrowing costs by reducing interest rates

• Broadens range of investors

• Simplifies credit structure for complex bond issues

• Provides greater access to the capital markets

For investors:

• Provides “AAA” protection against issuer default and downgrade risk

• Enhances liquidity for secondary market trading

• Simplifies risk assessment

• Offers price protection

They forgot to add "only if we don't get downgraded" of course. It's a real shame I think, a business that was run well for 40 years and made a steady, if not stellar, profit, blown away in a couple of years leaving many entirely innocent people in the sh1t (I'm thinking all the various municipalities who are about to have their debt downgraded here, not the investment banks who could, or should at least, have known better).

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A simple bookmaker would have avoided all these mistakes. He understands related contingencies* and doesn't allow betting on them without carefully calculating the odds. But then he is risking his own money! ;)

*if the bookies offer evens on Liverpool to win a match and they also offer 9/1 on the score 3-1 to Liverpool, try doing the two bets as a double. They wont let you because obviously if the score is 3-1 to Liverpool then Liverpool have won. The two bets are related.

Edited by insidetrack
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Here's an interesting take on what's happened... although you can't believe everything you read on the internet.

I tend towards believing it, though.

http://www.financialsense.com/editorials/d.../2008/0128.html

This bit rings especially true to me:

"According to the note, the only pools of money around the world with enough capital to buy up the seemingly never ending supply of U.S. paper were "mainland Chinese banks, the Chinese government, Taiwanese banks, Korean banks, German banks, French banks, (and) UK banks."

I think our UK banks may have some explaining to do in the coming months.

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Thats the point, the monolines are not insurance companies like lloyds.

I don't get this. Surely a business that intends to offer insurance falls under some kind of regulation that means it must demonstrate its ability to actually pay out on that insurance irrespective of how much of a AAA/safe-bet the target is? I may be missing the point but I am getting the impression from what is written here that anybody can offer insurance and, hey, they will be just fine until there is a claim. I mean, can I have some schoolkid write insurance on my car? We both would know it would not pay out - but the premiums would be low!

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I don't get this. Surely a business that intends to offer insurance falls under some kind of regulation that means it must demonstrate its ability to actually pay out on that insurance irrespective of how much of a AAA/safe-bet the target is? I may be missing the point but I am getting the impression from what is written here that anybody can offer insurance and, hey, they will be just fine until there is a claim. I mean, can I have some schoolkid write insurance on my car? We both would know it would not pay out - but the premiums would be low!

Quite the opposite, the premium would have to be extraordinarily high for the schoolkids to be able to write insurance for you (your premium would become their capital ;))

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FT Alphaville

Maybe it’s just because there are lots of little French bon mots floating around at the moment, but does anyone feel a strange sense of déjà vu?

Not for SocGen though, but the monolines.

The FT broke news of a monoline bailout plan from the New York Insurance superintendent, Eric Dinallo, last week. A plan in which federal officials are trying to corral banks into supporting ailing SIVs bond insurers.

M-LEC, anyone?

Tuesday’s FT has an update on the progression of the bailout:

Efforts to shore up US bond insurers gathered pace yesterday as New York state regulators appointed investment bankers to advise on a rescue plan that could provide back-up credit lines for the troubled guarantors. The efforts are being spearheaded by Eric Dinallo, the New York state insurance superintendent, who is being privately supported by the New York Federal Reserve Bank and other regulators, people familiar with the regulators said. Perella Weinberg, an advisory firm based in New York, has been hired as a financial adviser by Mr Dinallo’s department, according to people briefed on the plans. The company is led by Joseph Perella, a former Morgan Stanley mergers and acquisitions executive, and Peter Weinberg, who previously ran Goldman Sachs’s European business. The executives were not immediately available for comment. Mr Dinallo, who had said he is in contact with federal regulators, met about a dozen banks last week, asking them to provide $5bn to $15bn of funds for the bond insurance sector.

The question remains, have the banks actually stumped anything up? Or more to the point, will they? Reuters are pessimistic: Wall Street banks and the New York State Insurance Department are more likely to look for individual fixes for ailing bond insurers than an industry-wide bailout, a person briefed on the matter said on Monday.

Not a surprise when the wilder estimates of cash-sums involved in a bond-insurer bailout are beginning to gain traction. Egan-Jones analyst Sean Egan mooted $200bn. Certainly headline grabbing.

But Barclays analysts too have slapped a massive capital requirement on the bond insurers:

Jan. 25 (Bloomberg) - Banks may need to raise as much as $143 billion to meet regulators’ requirements should rating firms downgrade bond insurers, Barclays Capital analysts said.

Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Financial Group Inc. are cut one level from AAA, and six times more for downgrades by four steps to A, Paul Fenner-Leitao wrote in a report published today. Banks own $820 billion of structured securities guaranteed by bond insurers, the report said.

So monolines could well turn into a black hole. If banks are going to bail them out, they’ll want cast iron assurances from the rating agencies that downgrades won’t follow in the future - a guarantee they’re unlikely to get. Without it, what would an industry-wide bailout be but a blank cheque?

Add to that scepticism from some analysts - like Geraud Charpin at UBS - about the actual significance a monoline downgrade would have on banks’ balance sheets, and the Dinallo plan looks even less saleable to Wall Street.

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http://uk.reuters.com/article/hotStocksNew...30?rpc=401&

NEW YORK, Jan 30 (Reuters) - Fitch Ratings on Wednesday cut its top "AAA" ratings on FGIC Corp's bond insurance arm, saying the insurer does not have the capital required for a top rating.

Fitch cut FGIC's "AAA" insurer financial strength rating by two notches to "AA." It also cut parent company FGIC Corp's long-term rating by three notches to "A" from "AA," the third-highest investment grade.

FGIC is owned by a group including mortgage insurer PMI Group Inc (PMI.N: Quote, Profile, Research) and private equity firms Blackstone Group (BX.N: Quote, Profile, Research), Cypress Group, and CIVC Partners LP. The group acquired FGIC from General Electric Co (GE.N: Quote, Profile, Research) in 2003 for about $2.18 billion. (Reporting by Dena Aubin; editing by Gary Crosse)

http://uk.reuters.com/article/marketsNewsU...30?rpc=401&

NEW YORK (Reuters) - Bill Ackman, founder of hedge fund group Pershing Square Capital Management, told regulators on Wednesday the two biggest U.S. bond insurers face combined losses of over $22 billion from from bonds they've insured, and should be forced to stop paying dividends.

Ambac Financial Group Inc (ABK.N: Quote, Profile, Research) faces losses of $11.61 billion from asset-backed securities and collateralized debt obligations it insured, Ackman said in a letter to regulators.

MBIA (MBI.N: Quote, Profile, Research) faces at least $11.63 billion of losses from these obligations, plus additional losses from reinsurance that may no longer be valid, Ackman said.

The two companies should be forced to stop shifting money from their operating subsidiaries to their holding companies to preserve capital, Ackman said. Money moved to the holding company can be used to pay dividends, and pay holding company debts and expenses. Pershing Square is short MBIA and Ambac.

(Reporting by Dan Wilchins; Editing by Brian Moss)

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

Ambac said Jan. 22 it expects to pay claims on CDOs of $1.1 billion. MBIA said Jan. 9 it will likely report a $737 million expense for the fourth quarter to cover losses related to deteriorating subprime-mortgage securities it guarantees. MBIA is scheduled today to report its fourth-quarter results after the close of regular U.S. equity trading.

One to watch out for? You reckon the Fed had prior knowledge?

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Yep, looks like that's torn it:

William Ackman, a hedge fund manager and short-seller of MBIA, is submitting data to the Securities and Exchange Commission and insurance regulators in New York State alleging that bond insurers MBIA and Ambac Financial Group are understating their losses.
In his report, Ackman, of Pershing Square Capital, will contend that both bond insurers have said their mark-to-market losses are less than $1.5 billion, but according to his analysis, the losses for each firm will be around $12 billion.
Ackman has come up with this number through an analysis of the vast majority of the CDOs that have been insured by the company.
He will claim that his analysis is conservative, meaning that if there is a question about a particular CDO, he doesn’t assume a worst case scenario.
CNBC has confirmed that Ackman has recently met with investor Wilbur Ross to discuss Ross’ examination of Ambac. Ross is interested in buying one of the troubled insurers rather than starting one of his own.
Sources say Ross is hesitant to put more than $1 billion into Ambac, so if Ackman is right, it might end Ross' interest in the bond insurer.
Wilbur Ross has declined to comment.
Ackman is a short seller and has a short position on MBIA. He would like to drive the bond insurer stocks down to zero, where he thinks they belong.
Wall Street bond rating agencies were already poised to downgrade Ambac and MBIA, even though New York state insurance regulators wanted to get a postponement until the state could develop a bailout package.
Losing a Triple A rating could be devastating for the bond insurers, preventing them from drumming up new clients -- and possibly forcing them out of business.
However, if MBIA and Ambac’s losses are as large as Ackman suggests, the rating agencies will have no choice but to downgrade them. That could then scare potential investors away from a private market bailout of the bond insurers, as well as make the New York State bailout plan much more difficult.
Ambac has already received a downgrade from rating agency Fitch but has so far been spared by Standard & Poor’s and Moody’s. MBIA hasn't yet been downgraded.

http://www.cnbc.com/id/22916460

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This bloke seems right on the button.

Bill Ackman on MBIA & bond insurers

Some great quotes in there.

At the end he mentions re-insurers for the bond insureers.

WTF, there's another layer !!!

Troubled Bond Insurer Puts on Its Defense

A big issue facing MBIA is the fate of a Bermuda-based company, Channel Reinsurance, in which it owns a 17 percent stake. MBIA is counting on Channel Re to cover losses on $43 billion of securities. MBIA has written down its stake in Channel to zero to account for the declining value of its insurance contracts, and Moody’s Investors Service is considering downgrading the reinsurer’s triple-A rating.

The reinsurer is partly owned by the insurer. Channel Re's only customer is MBIA.

Channel Re has only $300m capital. to cover these $43bn losses.

The whole system is a disgrace.

I'll check to see how much change has fallen down the back of the sofa. I may have enough to start a re-re-insurer company. Problem solved.

Edited by barry
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