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An Attempt At A New Monoline Thread


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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

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.

Here's the details............................http://ftalphaville.ft.com/blog/2008/01/31/10612/monoline-flatline-bill-ackmans-letter-to-the-insurance-regulators-in-full-and-his-models/

Scary! :blink:

Monty

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Here's the details............................http://ftalphaville.ft.com/blog/2008/01/31/10612/monoline-flatline-bill-ackmans-letter-to-the-insurance-regulators-in-full-and-his-models/

Scary! :blink:

Monty

http://ftalphaville.ft.com/blog/2008/01/31...and-his-models/

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Breaking News: CNBC are reporting on a bail out of the monolines, with a good dose of European banks in the consortium. Alphaville has a short piece.

This may explain the 'stability' meeting that the European leaders had at Number 10 earlier in the week. Time to help the Americans prop up their banking system to keep it 'contained'?

Edited by Gebbeth
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£127 profit. I went bear on a very bull start and won. Was £800 down trying to double or quits my way out of the microsoft/yahoo acquisition at one point and lost my nerve at £72 up and closed. I was at £22 a point at one point. Do you think it is better to short specifics like bond insurers or go for the whole index?

E*TRADE Spreadbetting is pleased to confirm that the following trade was successfully executed:

Ticket # : 2317365

Market Name : Wall Street Rolling Daily

Stake : 11 £

Action : Buy

Price : 12608

Market Expiry : 16 Feb 2015 21:00

Trade Executed : 1 Feb 2008 09:50

The above trade has closed/part closed the following positions:

This position was closed

Trade no : 2315915

Created : 1 Feb 2008 07:01

Amount : 2 £

Action : Sell

Price : 12568

P&L : -80.00 £

This position was closed

Trade no : 2316562

Created : 1 Feb 2008 08:26

Amount : 3 £

Action : Sell

Price : 12613

P&L : 15.00 £

This position was closed

Trade no : 2317061

Created : 1 Feb 2008 09:21

Amount : 6 £

Action : Sell

Price : 12628

P&L : 120.00 £

Total Profit/Loss : 55.00 £

Ticket # : 2319518

Market Name : Wall Street Rolling Daily

Stake : 22 £

Action : Buy

Price : 12704

Market Expiry : 16 Feb 2015 21:00

Trade Executed : 1 Feb 2008 13:18

The above trade has closed/part closed the following positions:

This position was closed

Trade no : 2318000

Created : 1 Feb 2008 11:10

Amount : 2 £

Action : Sell

Price : 12630

P&L : -148.00 £

This position was closed

Trade no : 2318199

Created : 1 Feb 2008 11:33

Amount : 5 £

Action : Sell

Price : 12688

P&L : -80.00 £

This position was closed

Trade no : 2319121

Created : 1 Feb 2008 12:43

Amount : 15 £

Action : Sell

Price : 12724

P&L : 300.00 £

Total Profit/Loss : 72.00 £

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If the european banks want to save the monolines, they must be up to their necks in potential [email protected]@.

Oh how dissapointibg I thought it was a done deal that central bankers would be piling in to bail out these monolines so kick starting their hyperinflationary holocaust.

Thought it was 100% guaranteed.

Now all this does is reduce the lending ability of these banks - shame. Still think someone should post a rocket.

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Oh how dissapointibg I thought it was a done deal that central bankers would be piling in to bail out these monolines so kick starting their hyperinflationary holocaust.

Thought it was 100% guaranteed.

Now all this does is reduce the lending ability of these banks - shame. Still think someone should post a rocket.

My guess is if that bail out goes ahead, the banks involved will need to replenish their capital with CB loans, but just add the amounts to the refreshed loans they already need, so yes the CBs are bailing.

After all, all they are doing is covering losses and payouts that they would need to make themsleves if the insurers couldnt.

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Interesting that RBS are the only UK bank mentioned, they have denied any US sub-prime exposure.

Perhaps it's their UK mortgages that are the problem?

No, Barclays are in there too. The list includes all the usual suspects from Europe, re subprime. Apparently the Euros are only interested in Ambac - MBIA may have more of a US based book so I guess the US banks will have to sort that one. I suspect the whole operation is designed to shore up Ambac long enough to keep Moodys and S&P at bay. Long term something more serious will be required.

On a slightly different topic, apparently there's around $1trillion of commercial paper (short-term loans) in the US and Europe that needs to roll over in the next few weeks and a lot of it is in toxic stuff that nobody wants to touch anymore. Throw in a massive spike in mortgage fixes coming to an end, and Feb should be an interesting month :ph34r:

Edited by whoami
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Here's away to make the monline problem go away - change the rating system!

FT.com 05/02/08

Moody's proposes new rating system

Moody’s on Monday attempted to respond to its critics by proposing a new rating system for complex debt securities that would rely on numbers rather than letters. However, the new system would involve the same number of grades – 21 – that spurred some industry executives to ask whether it would confuse investors.

Moody’s published five proposals for investor comment on Monday and will collect and assess opinion until Feb 29, after which an analysis of the responses will be provided within two to three months.

Investors and regulators in the US and Europe have criticised the methods of ratings agencies such as Moody’s, S&P and Fitch, following the downgrade of large swatches of highly rated mortgage bonds and related structures, notably CDOs. Some say the ratings process must become more transparent while others point out the model is fundamentally flawed, because issuers of debt and structured products pay an agency for a rating.

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http://www.bloomberg.com/avp/avp.htm?clipS...6A3ROrCPZNk.asf

http://www.bloomberg.com/avp/avp.asxx?clip...6A3ROrCPZNk.asf

"You take Enron, Worldcom, you take the Internet Bubble, you take LTCM, you take the Junk Bond Crisis, you take the S&L crisis you take the Housing Crisis of 1990, roll them all into one, and that's what we're looking at."

B e a u t i f u l

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New danger appears on the monoline horizon

New danger appears on the monoline horizon

By Paul J Davies

Published: February 6 2008 23:31 | Last updated: February 6 2008 23:31

As the bond insurers, or monolines, have seen their seemingly rock-solid AAA ratings begin to buckle, worries have grown about what downgrades for these companies might mean for banks.

Now, one particular type of trade done between banks and monolines is being seen as an extra hidden danger.

These so-called negative basis trades were done in large volumes in recent years. They allowed both banks and monolines to book apparently “free money” and saw monolines writing guarantees on each other. If they have to be unwound, it will be a costly business for all involved.

The real problem is that almost no one has any idea how significant the profits taken on these trades might be. These trades were profitable because a bond could pay out more in interest than it cost to buy the insurance available in the derivatives market to protect the holder against default. In the world of structured finance, a bank would buy a bond, get it guaranteed, or wrapped, by a monoline to support the bond’s AAA rating, but then also pay another monoline to write a default swap on the first monoline, to guard against it defaulting on its guarantee.

The difference between what the bank paid for the insurance and what it received in yield from the bond could be pocketed as “risk-free” profit – and in many cases banks took the entire value of that income over the life of the bond upfront.

One senior industry insider admits that billions of dollars worth of these trades were done, but insists they were mostly restricted to the arena of utility and infrastructure debt. These were attractive both because they were of long maturities and because they were often linked to inflation, which would increase the returns.

“On a £100m deal over 25 years a bank could conservatively book £5m up front – even more if it was index linked,” says the senior industry executive.

For the monolines, the trades were also seen as near risk-free profit when taking the position of writing protection on peers.

The same executive insists that monoline activity in CDOs was restricted to the hedging of senior tranches that banks had retained on their books after structuring deals and had nothing to do with negative basis trades.

However, others are less sure. Monoline analysts at some of the banks believe a large amount of negative basis trades in the US were done on super senior CDO tranches, but admit they have no idea what proportion of total CDO business for the monolines that was.

Bob McKee, an analyst at Independent Strategy, a London research house, believes that up to $150bn worth of CDO business done by the monolines could be negative basis trades.

Standard & Poor’s, in a note on the potential impact of monolines on banks this week, said it believed some of the CDOs hedged by bond insurers were part of a strategy of “negative basis trades”.

The problem is that if monolines are downgraded and their protection becomes ineffective, profits booked up-front need to be reversed. Restating earnings is a very tricky area for investment banks – not least because the traders involved will have long ago pocketed their bonuses.

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New danger appears on the monoline horizon

These so-called negative basis trades were done in large volumes in recent years. They allowed both banks and monolines to book apparently “free money” and saw monolines writing guarantees on each other. If they have to be unwound, it will be a costly business for all involved.

The real problem is that almost no one has any idea how significant the profits taken on these trades might be. These trades were profitable because a bond could pay out more in interest than it cost to buy the insurance available in the derivatives market to protect the holder against default. In the world of structured finance, a bank would buy a bond, get it guaranteed, or wrapped, by a monoline to support the bond’s AAA rating, but then also pay another monoline to write a default swap on the first monoline, to guard against it defaulting on its guarantee.

The difference between what the bank paid for the insurance and what it received in yield from the bond could be pocketed as “risk-free” profit – and in many cases banks took the entire value of that income over the life of the bond upfront.

One senior industry insider admits that billions of dollars worth of these trades were done, but insists they were mostly restricted to the arena of utility and infrastructure debt. These were attractive both because they were of long maturities and because they were often linked to inflation, which would increase the returns.

“On a £100m deal over 25 years a bank could conservatively book £5m up front – even more if it was index linked,” says the senior industry executive.

For the monolines, the trades were also seen as near risk-free profit when taking the position of writing protection on peers.

... Monoline analysts at some of the banks believe a large amount of negative basis trades in the US were done on super senior CDO tranches, but admit they have no idea what proportion of total CDO business for the monolines that was.

Bob McKee, an analyst at Independent Strategy, a London research house, believes that up to $150bn worth of CDO business done by the monolines could be negative basis trades.

The problem is that if monolines are downgraded and their protection becomes ineffective, profits booked up-front need to be reversed. Restating earnings is a very tricky area for investment banks – not least because the traders involved will have long ago pocketed their bonuses.[/i]

Great find. I never cease to be amazed at the extent of financial chicanery which has gone on in recent years. All this money had to come from somewhere - it seems it will come from you and I (in consumer price inflation and taxpayer-funded bailouts). I really hope there will be some prosecutions.

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Great find. I never cease to be amazed at the extent of financial chicanery which has gone on in recent years. All this money had to come from somewhere - it seems it will come from you and I (in consumer price inflation and taxpayer-funded bailouts). I really hope there will be some prosecutions.

I can't take the credit for finding this - I picked up the link from Market Ticker - those guys are really on the ball.

Interesting comment from one of their members, Sushihorn:

"I heard a great description of this type of structure:

The cards are on the table and the hand has yet to be played out. But the accountants for every player have already booked a profit on the whole pot for their guy."

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Great find. I never cease to be amazed at the extent of financial chicanery which has gone on in recent years. All this money had to come from somewhere - it seems it will come from you and I (in consumer price inflation and taxpayer-funded bailouts). I really hope there will be some prosecutions.

I commented on basis trades just under a year ago on my blog

http://www.noelwatson.com/blog/PermaLink,g...f9684804b9.aspx

and even mentioned counterparty risk. It seemed a lot of people haven't been taking counterparty risk into account when entering into basis trades.

A good book, for those that are interested

http://www.amazon.co.uk/Credit-Default-Swa...7415&sr=8-1

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And after a brief pause, it restarted today (08 Feb):

Moodys has downgraded monline insurer XLCA.

OK, XLCA is one of the smaller insurers (covering $150bn of debt), but the big news was that XLCA was not downgraded by one notch, but by a whopping 6 notches, from AAA all the way down to A3.

If AMBAC and MBIA (which are on watch for downgrade) move down the ranks by that much, it will be "absolutely disastrous" according to the FT.

Edited by Little Professor
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Oh, and listen to this guy in the FT:

Rescuing monolines is not a long-term solution

...That the monolines could shoulder this modern-day burden like a classical Greek Atlas was dubious from the start. How could Ambac, through the magic of its triple-A rating, with equity capital of less than $5bn, insure the debt of the state of California, the world’s sixth-largest economy?

Apply the same logic to the gargantuan size of the asset-backed market it has insured in recent years – subprimes and CDOs in the trillions of dollars – and you must come to the same logical conclusion: this is absurd.

http://www.ft.com/cms/s/0/bb7e80c8-d58c-11...00779fd2ac.html

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Rescuing monolines is not a long-term solution

...That the monolines could shoulder this modern-day burden like a classical Greek Atlas was dubious from the start. How could Ambac, through the magic of its triple-A rating, with equity capital of less than $5bn, insure the debt of the state of California, the world’s sixth-largest economy?

That is a mind numbing statement and scares the sh!t out of me.

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http://www.bloomberg.com/avp/avp.htm?clipS...6A3ROrCPZNk.asf

http://www.bloomberg.com/avp/avp.asxx?clip...6A3ROrCPZNk.asf

"You take Enron, Worldcom, you take the Internet Bubble, you take LTCM, you take the Junk Bond Crisis, you take the S&L crisis you take the Housing Crisis of 1990, roll them all into one, and that's what we're looking at."

B e a u t i f u l

That T.J. Marta, Fixed Income Strategist at RBC Capital Markets, didn't pull any punches did he.

Clearly an intelligent man with a deep understanding of all the variables and the possible knock-on effects on. Refreshing honesty too.

Maybe I've been mind-blocking the seriousness of these very possible future outcomes, it's scary stuff. If he's worried some banks will suffer great stress, even failures, and questions on how to deal with the whole situation without blowing apart the whole financial system.... it leaves you wondering how best to protect your wealth if you're totally liquid.

First of all I, would want to caution because everyone's focused on these monolines at this point - there is a whole lot of pain to come before we even get to the monolines.. and I liken it to Dante's Levels of Hell. If the monolines blow up we're talking the next level of hell, we still have to deal with the current level...
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http://www.independent.co.uk/news/business...oly-780368.html

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.

For once, the ominous news doesn't come from the US, nor yet from the rightly criticised too-little, too-late banking policy of UK commercial and private bankers. On the latter subject, I'm surprised at all the tut-tutting from commentators over brutal foreclosures and new, scorched-earth lending policies. Our banks are big, lumbering entities that make money simply because they are big and leverage that fact.

Talk of creativity and dynamism is dissimulation of Orwellian proportions: banks make money from muscle, and if they take a hit, they make sure that their customers do too. Otherwise, the balance of power might change and they would have to abandon bullying and brutalising – two of their core competences. In the long run, it makes good commercial sense to withdraw credit lines. It keeps customers in order. The late comedian Bob Hope once said a banker is someone who'll lend you money provided you can prove you don't need it. Quite.

What is alarming is the news futher east. I refer to monoline insurers and the pronouncement of Josef Ackerman, the chief executive of Deutsche Bank, that a potential "tsunami" awaits us if these firms have their creditworthiness downgraded. Monoline insurers provide cover for bonds around the world, and the knock-on effect of any downgrade would be a fall in the value of these bonds. Estimates vary as to the size of the problem, but investors having to swallow a $180bn (£93bn) loss is a conservative figure. Some analysts put the number as high as $220bn.

The nastier consequence is the potential secondary effect. Monoline insurers are the financial world's equivalent of Atlas. They guarantee some $2.4 trillion of bond debt. So quis custodies custodiet? Or rather, who guarantees the guarantee-ers?

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.

It is to be fervently hoped so. Because the Northern Rock crisis will be as nothing compared to the problems that would follow a collapse in confidence in the security of the insurers. Bear in mind it's the high-street names we know and love – the Avivas, Standard Lifes, Prudentials – which invest so heavily in the solid, safe debt that the monolines guarantee.

The ultimate meltdown would trigger a total lack of confidence in paper. There's a famous story of two women taking their savings to a bank in Weimar-Republic Germany. They had two washing baskets full of 10-billion Mark notes – about enough to buy a week's groceries. But the baskets were so heavy, they left one at the door of the bank and took the other to the cashier. Realising what they had done once their transaction was complete, they rushed outside to find that they had indeed been the victims of theft. Someone had stolen the washing basket. At least that wasn't a depreciating asset.

As yet, it's not time to sell every share or bond you have and buy physical commodities: wine, cigarettes (a major currency in Berlin in 1945) and tins of baked beans. But do watch out for the insurance meltdown.

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http://www.independent.co.uk/news/business...oly-780368.html

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.

For once, the ominous news doesn't come from the US, nor yet from the rightly criticised too-little, too-late banking policy of UK commercial and private bankers. On the latter subject, I'm surprised at all the tut-tutting from commentators over brutal foreclosures and new, scorched-earth lending policies. Our banks are big, lumbering entities that make money simply because they are big and leverage that fact.

Talk of creativity and dynamism is dissimulation of Orwellian proportions: banks make money from muscle, and if they take a hit, they make sure that their customers do too. Otherwise, the balance of power might change and they would have to abandon bullying and brutalising – two of their core competences. In the long run, it makes good commercial sense to withdraw credit lines. It keeps customers in order. The late comedian Bob Hope once said a banker is someone who'll lend you money provided you can prove you don't need it. Quite.

What is alarming is the news futher east. I refer to monoline insurers and the pronouncement of Josef Ackerman, the chief executive of Deutsche Bank, that a potential "tsunami" awaits us if these firms have their creditworthiness downgraded. Monoline insurers provide cover for bonds around the world, and the knock-on effect of any downgrade would be a fall in the value of these bonds. Estimates vary as to the size of the problem, but investors having to swallow a $180bn (£93bn) loss is a conservative figure. Some analysts put the number as high as $220bn.

The nastier consequence is the potential secondary effect. Monoline insurers are the financial world's equivalent of Atlas. They guarantee some $2.4 trillion of bond debt. So quis custodies custodiet? Or rather, who guarantees the guarantee-ers?

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.

It is to be fervently hoped so. Because the Northern Rock crisis will be as nothing compared to the problems that would follow a collapse in confidence in the security of the insurers. Bear in mind it's the high-street names we know and love – the Avivas, Standard Lifes, Prudentials – which invest so heavily in the solid, safe debt that the monolines guarantee.

The ultimate meltdown would trigger a total lack of confidence in paper. There's a famous story of two women taking their savings to a bank in Weimar-Republic Germany. They had two washing baskets full of 10-billion Mark notes – about enough to buy a week's groceries. But the baskets were so heavy, they left one at the door of the bank and took the other to the cashier. Realising what they had done once their transaction was complete, they rushed outside to find that they had indeed been the victims of theft. Someone had stolen the washing basket. At least that wasn't a depreciating asset.

As yet, it's not time to sell every share or bond you have and buy physical commodities: wine, cigarettes (a major currency in Berlin in 1945) and tins of baked beans. But do watch out for the insurance meltdown.

Glad to hear from a commentator who's considering the possibility of hyperinflation. As I mentioned in another post, I'm just re-reading "The Crash of the German Mark" from Robert Beckman's book Crashes. There are disturbing similaritioes. I quote:

"World War 1 lasted far longer than Germany had anticipated, and in its cost was far greater than could ever have been conceived. At the same time, the plunge in economic activity meant that government revenues had declined sharply. The old Imperial government did not wish to remind its people of the true burden of war by the imposition of heavy taxes to finance it. So in order to acquire the funds needed to manufacture guns and weaponry, Germany began to borrow....and borrow....and borrow.

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.

As I mentioned (before) the value of money is based on the same laws of supply and demand as anything else you care to name. When the supply of clap-traps is more than people want, the price will fall. The only way the clap-trap holder can get rid of them is to reduce the price until it reaches a level at which people will be tempted to go for clap-traps once more. The same principle holds true for currency. The more of a currency there is, the less valuable it becomes if there is no guarantee - such as gold backing - of goods and services for which that currency could be exchanged.

The German currency began to lose value as fast as the amount of paper marks in circulation grew. In just two weeks alone, during 1914, the amount of money in circulation was increased by 2 billion marks. The debt of the Reichsbank soared that year from 0.3 billion marks to 55 billion marks. Between 1914 and 1918 prices in Germany doubled. This may have caused discomfort - even distress - but halving the purchasing power of German money was not yet a catastrophe. After all, during one decade, spanning the mid-1960s to the mid-1970s, US prices doubled. In britain at about the same time, it took even less than a decade for prices to double."

This was just the groundwork that paved the way for the hyperinflation that took hold in 1923.

Does anyone else see similarities between printing money to fund a war machine and printing money to bail out Northern Rock? Whatever the government says, the propsed NR bonds, because they are backed by government guarantee and NOT by NR assets, are government paper and not commercial paper.

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