The Monolines Are F#@%ed!
If you had any doubts that the Monolines (Ambac, MBIA, FGIC) were f$%#ed before, well, they should be totally eliminated from your mind now. Consider the 3 body blows they have taken over the past week:
First, the non-offer offer from Buffett. It is astounding that some people thought of this as a bail out for these firms from Warren. It was nothing of the sort -- indeed, this was merely a sales pitch from an insurance man: "We'll reinsure your Municipal Bonds a 4X the rate you originally did."
The response: "No, thanks."
My opinion: Buffett never expected these guys to accept his terms. This was a clever, showboating tactic to show the state insurance regulators that Berkshire Hathaway (BRK) stood ready to step into the role of guaranteeing Muni bonds across the country. Call it a ploy, declare it a hollow gesture -- but recognize that it is a brilliant strategic move designed to checkmate the Monolines into giving up the high return, low risk business Buffett covets (and would do a much better job running anyway).
Second, the NYS Commissioner of Insurance has suggested splitting the Muni bond business off from the rest of the firm. What's left is can best be described as a poorly run, derivative hedge fund led by people who have no business running a hedge fund of any sort, much less one of the poorly run derivative variety. But the fact that the NYS insurance commissioner is suggesting this should tell you that this has reached a level of government involvement that cannot bode well for our friends at ABK, MBIA and FGIC
(Its almost an irrelevant afterthought that Moody's downgraded FGIC, pulling their triple-A credit rating today).
Now, the coup de grâce: The FT reported that Eliot Spitzer, former NYS Attorney General, now New York governor, gave the bond insurers three to five business days to find fresh capital, or face a potential break-up by state regulators who want to safeguard the municipal bond markets. Oh, and that was BEFORE Moody’s cut FGIC from to double AA -- effectively ending their ability to write muni bond business.
~~~
As I noted on CNBC Tuesday, these firms have become financial terrorists, holding the muni bond business as their hostage. They know what happens to bank robbers and bad guys once they let the hostages go -- they get riddled with bullets. If it wasn't for this end of their business, no one care on whit about these guys -- they are just another hedgie that blew up.
Gee, anyone still think Wilbur Ross will be riding to the rescue anytime soon . . . ?
>
UPDATE: February 15, 2008 6:27am
In response to several questions raised in comments, let's delve a bit deeper into the "Why."
Understand that this is not just any business; This is an extremely regulated insurance business that exists solely to facilitate capital raises by States and Municipalities to build State facilities for the public good.
They operate by the good graces of the State. No State approval, no business.
If the larger, more influential States -- NY, California, and especially The Port Authority of NY/NJ -- say, WE NO LONGER TRUST YOU, your recklessness has endangered our ability to raise funds thru bond issues to build schools and hospitals and bridges etc., then it is game over.
That is what is happening now; NY State wants to cleave off the all important muni bond business -- and leave the reckless, irresponsible portion to live or die on its own.
>
Previously:
Counter-Party Risk
http://bigpicture.typepad.com/comments/2008/01/counter-party-r.html
Monoline Insurance: There's a New Sheriff in Town... http://bigpicture.typepad.com/comments/2008/01/monoline-insura.html
Sources:
Monolines given five days to find funds
Aline Van Duyn in Washington and Michael Mackenzie in New York
FT, February 14 2008 14:54 |
http://www.ft.com/cms/s/0/3b313712-db09-11dc-9fdd-0000779fd2ac.html
NY regulator: Bond insurers may be split up
Dan Wilchins and Patrick Rucker
Reuters, Thursday February 14, 2:56 am ET
http://biz.yahoo.com/rb/080214/bondinsurers_dinallo.html?.v=1
Friday, February 15, 2008 | 12:41 AM | Permalink
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Comments
I hope y'all caught this already, but this is pretty crazy...
About the super high rates for debt borrowers including Port Authority...
http://www.nytimes.com/2008/02/15/business/15muni.html?ref=business
Posted by: SINGER | Feb 15, 2008 12:10:56 AM
Barry,
I am stretching to see how the State of New York could mandate a split off. There are preexisting contracts in place, maybe prevent future insurance? The fed would have a lot more power to toke global action, but where does New York get its power? Think like a lawyer here.
Thanks.
Posted by: Rich Shinnick | Feb 15, 2008 12:18:27 AM
Just a thought, but in the convoluted credit default swap area with it's presently skyrocketing premiums, has anyone of these government regulators looked at premiums for captive insurance in Vermont? If the profit laundering raquet 44 of 100 fortune 100 corporations are running through Vermont turns out to be using under capitalized wholly owned shell corporations, the rule changes that since 1999 allowed employee pension and medical insurance scams (I mean plans) to collect the premiums may turn out to be a huge capital loss for the employees. Wells Fargo comes to mind. This is not chump change.
The whole point of Vermont captive insurance procedures is to give corporation large state tax breaks in return for 2% added income for the state from all these outside corporations. The catch for workers is that the premiums are jacked up with no regulatory oversight because the reinsuring captive insurance corporations are technically "offshore" for tax purposes. While the corporations claim this lowers their cost of reinsurance, it actually does the reverse by increasing expenses for employees and shareholders while fabulously enriching the executives or board members who own the shell corporations.
It all worked great most of the time because the captives weren't required to cover hardly any losses since they don't kick in until a significant hit comes along. Well, Wells Fargo, Aetna, Blue Cross, large oil corporations and many many other of the S&P 500 are in on this and the reinsurers (captives) are now supposed to come up with the money being lost in the billions. Do they have it? Ask the Governor of New York. I don't think so. This may be the next blow up among S&P 500 corporations. It could get really ugly.
Posted by: AGG | Feb 15, 2008 12:23:44 AM
I never thought Wilbur Ross would come into the rescue, nor did I think anyone else would. Personally I hope the government doesn't spend our tax dollars to bail out the non-muni part of the business.
I've felt that the monolines were F@$!K#D for a while now, but it'll take a while longer to figure hot how F@$!K#D they are :)
Posted by: Dave | Feb 15, 2008 12:27:30 AM
I second rick's question. Now, I am quite ready to these these asshats axed, but, I don't understand New York's authority here.
Posted by: Red Pill | Feb 15, 2008 12:35:27 AM
Premier Spitzer is delusional, he'll have the biggest target painted on his back if he even tries to do anything of that sort.
Posted by: Gary | Feb 15, 2008 12:55:12 AM
>>he'll have the biggest target painted on his back
Anyone who makes waves in Posh Pond will suffer. But it must be done. Hopefully there will be a sincere and honest effort to punish some of the most accomplished predatory sociopaths on the planet.
Insurance is second only to central banking in confidence scams. It's a rich mans con. I say execute them all, worry about justice later.
Posted by: 1694 | Feb 15, 2008 1:10:57 AM
"these firms have become financial terrorists, holding the muni bond business as their hostage."
I have a question: What prevents the municipalities to walk out of AMBAC and MBIA and seek other insurers, like Berkshire Hathaway for instance?
Posted by: Francois | Feb 15, 2008 1:58:01 AM
Get ready for the personal attacks on Spitzer to increase. When you hear about it from friends, tell them what's driving it.
Posted by: wunsacon | Feb 15, 2008 4:05:38 AM
Ladies/Gentlemen, thanks for another episode of "Who's Really F%*king Who." Once the public gets knowledge of what is really going on, there is going to be so much social unrest. Better find that cave out in the Hinterland somewhere before it is too late.
Posted by: JustinTheSkeptic | Feb 15, 2008 6:58:16 AM
Barry,
What are you talking about, the latest Bensteinery(when the Google spelling servers accept this, that is when you know it has arived.) is that it's all the short sellers.
Ya, it's Brinkmanship..... with the muni bonds. I'm wondering if spitzer/donalo deadline is in concert with S&P and moodies.
This also reminds me of the Mortgage lenders, and them denying a problem all the way to the end.
My prediction is that MBIA raises some cash, and holds out for 6 more months.. similar to CFC and the BofA deal.
and as the Disheveled look of the Ambac CEO, yesterday... it blows up next week.
Only rescue will be if they submit to the Vultures. Which they don't seem likely to do.
The downgrade of their CDOs seems almost guaranteed at this point.
Posted by: Eric Davis | Feb 15, 2008 7:04:13 AM
Barry, that's *exactly* why Buffet made his offer, and it was beautiful! Why the brainless media didn't pick up on the simple logic is beyond me....beyond incompetence. You had the monos getting *very* close with the government, and talk about possible public funds bailouts, etc.. Buffet's move was to 1) screw that little dance because now how can the govt suggest a public bailout of the monos when there are private funds available, and 2) screw the monos themselves by only offering to buy their decent risks. It's classic and obvious. Even the NYS CI is now resorting to splitting the monos in half--the good and the garbage--to salvage his role. Pathetic! (Buffet's move had me laughing....awesome!)
Posted by: dukeb | Feb 15, 2008 7:21:29 AM
What Ambac and MBIA did was pure incompetence, but I don't understand why everyone is ok with Buffett taking over the muni business. Why is a federal insurer not created just to insure munis? It seems wrong to allow a corporation to receive massive profits with no(tiny) risk simply because they are the only ones big enough to cover that tiny tiny risk.
Besides, this whole circus has made it very clear that the insurers have more insurance from the municipalities than the other way around, so why does this business even exist?
Posted by: RichardN | Feb 15, 2008 7:40:01 AM
What prevents the municipalities to walk out of AMBAC and MBIA and seek other insurers, like Berkshire Hathaway for instance?
For future business they can. But as I understand it, premiums for existing insurance contracts were paid up front in full. This is why Buffett asked for a good deal of money to take on the risk of the monolines' existing muni portfolios -- he wants the premiums already paid to the monolines, plus more.
Posted by: eh | Feb 15, 2008 7:43:11 AM
Why is a federal insurer not created just to insure munis?
A better question is how did we get to the point where munis, which have a very low default rate, are generally assumed to need insurance? When you buy an electronic gadget at the store, do you bite on the usual offer to pay more for an extended/enhanced warranty? Probably not. But there is probably a better chance of your gadget crapping out than a muni defaulting. I think this is, in part, the 'hostage' situation Barry is referring to: somehow muni issuers have become hostages of the monolines, dependent on their insurance to get the highest rating, which reduces their costs (interest expense).
Posted by: eh | Feb 15, 2008 7:49:42 AM
Can anyone expand on what AGG was talking about above?? Also where are the accounting firms in this mess? I mean these are publicly traded companies. Enron part 2?
Posted by: Mark D | Feb 15, 2008 8:03:35 AM
Is it legally possible to cleave off part of the business like that? You'd figure that people/creditors with a claim against the company would object. Why doesn't Buffet just let the AIG and the rest crash to the ground and start a new bond insurance company that has a clean slate?
Posted by: MrWoohoo | Feb 15, 2008 8:12:03 AM
I must say that a shiver went up my spine when you wrote "They operate by the good graces of the state." I'm so glad to be part of a controlled economy!
That being said, let's say Spitzer somehow figures out a way to force the muni bond part to be split off from the rest of the business of these insurers. I guess then that all ratings on securitized products insured by these guys will decline further, leading potentially to greater turmoil in the financial markets.
I guess that doesn't really affect the Insurance Commissioner though.
(I know, maybe this is exactly what the markets need - I just hope Spitzer has the guts to say that when the Dow is down 1,000 points in a single day).
Posted by: anon4life | Feb 15, 2008 8:17:24 AM
But the all important question is what happens to the bank's balance sheets once their CDO is left to die and can no longer coat tailer on a "mirage like" triple A status. Sure the muni bond business may be segregated and somewhat protected, but the toxic CDO cancer will be free to metastasize. So in terms of the stock market, the banks will be facing tens of billions further in losses.
Posted by: Stuart | Feb 15, 2008 8:20:38 AM
They are the walking dead. The guy from Ambac who was on CNBC yesterday is more full of shite' than a Christmas Turkey.
Not content with a license to steal with the Muni business, they ventured into the exotic acronym world where they had no business. You are scroomed boys and girls!
Posted by: SPECTRE of Deflation | Feb 15, 2008 8:25:33 AM
Barry no worries because we have a new financial instrument. The Super Duper Senior Note. You can't make this stuff up. From Calculated Risk:
Super Duper Senior Bonds
I will have you know I did not make that up.
Aside from the small trickle of deals, UBS highlighted a new structuring technique for Alt-A hybrid deals, which involves carving out ultra high-quality bonds out of the super senior triple-A classes and calling them super duper senior bonds.
"Many investors are reluctant to buy MBS backed by Alt-A collateral including super senior paper, as they fear credit losses," UBS analysts wrote.
In a hypothetical super duper triple-A deal, the bonds have twice the credit enhancement of the super senior triple-A bond and four times the credit support of the straight triple-A bond. After running the structure through hypothetical scenarios, UBS determined that the super duper senior Alt-A hybrids offer great value relative to prime jumbo super senior hybrids and agency hybrids, and virtually eliminate the credit component.
Some market participants, however, were not as delighted with the prospect of the new structure. "I don't think it will be anything big," one trader said. "I don't think anyone is overwhelmed by it."
I'd think not. "Super Duper" sounds like the kind of thing you hear at a Junior League luncheon (not that I've ever been invited to one, you know, but you hear stories). I think they need a better name for this.
Belt and Suspenders Bonds? Belt and Suspenders and Duct Tape Bonds? Belt and Suspenders and Duct Tape and Airbag Bonds? Belt and Suspenders and Duct Tape and Airbag and Flame-Retardant Jammies Bonds? If we're going to act like we found the recipe for a quintuple-A rating, we might as well be vivid.
Posted by: SPECTRE of Deflation | Feb 15, 2008 8:36:04 AM
“...is more full of shite' than a Christmas Turkey.”
Posted by: SPECTRE of Deflation | Feb 15, 2008 8:25:33 AM
SPECTRE: I don't know what they've been feeding you on Christmas, but you should check out sage stuffing.
Posted by: Marcus Aurelius | Feb 15, 2008 8:48:03 AM
I've read that NY State has capital requirements for the bond insurers. Why would they be less than whatever is needed to maintain a AAA rating, esp if they're writing AAA business?
Posted by: bidask | Feb 15, 2008 8:54:26 AM
I drew the same conclusions as you did, Barry.
When municipal debt doesn't trade, we're perilously close to Road Warrior time.
So what did some people hear in all this that drove up ABK and MBI double digit percentages yesterday?
I put out a lowball bid on some August puts in MBI that actually got hit yesterday.
Posted by: zackattack | Feb 15, 2008 8:55:04 AM
The new high rating for bonds:
Double-dog, mega-ultimo, super duper, cross my heart and hope to die, A-1, VSOP, Acme, Forever.
Everything else will be known as 'Maypops'.
Simple.
Posted by: Marcus Aurelius | Feb 15, 2008 8:57:50 AM
