Three Thoughts on Financials

1) One year ago, I opined that there would be legal difficulties splitting the financial guarantee insurers into municipal and non-municipal businesses. Two articles, though I think I wrote more:

• Let the Lawsuits Begin
• Split the Financial Guarantors in Two? You Can’t Do That.

The powers that be tried to conspire, because it favored municipalities (them!). Now a hedge fund with an economic interest sues to stop the split. No surprise. Why should debtholders allow themselves to be disadvantaged from the split? Now, will the structured finance buyers step forward?

2) Will bondholders of “too big to fail institutions” take a hit? I have thought so, but here is another article indicating an increase in political pressure there.

3) Should life insurers be bailed out? No. Will the big life insurers be bailed out? I think so. The state guarantee funds rely on the solvent insurance industry to pay up, and if a lot of the big insurers fail, those guarantee funds will severely tax the surviving life insurance industry. A sad situation, would that we would force life insurers to be more conservative in their leverage posture.

Comments

[Larry House:]

Thanks, David. There is just no end to the messy financial tangles that have to be sorted out. It is very hard to have any confidence in any financial right now.

Mar 12 10:49 AM

[Tom Armistead:]

On MBI, Aurelius and the 15 major firms reportedly meeting with Dinallo about the split have some interesting choices - they could fight the split tooth and nail, while the insured assets plumb new depths, or they could contribute about 3 billion of capital on economically realistic terms and the insured assets would eventually trade at triple A rate again.

It may be too much to ask that many Wall Street denizens to use common sense and mutual co-operation.

Mar 12 11:48 AM

[Moon Kil Woong:]

Personally if I owned and lost on bank stocks I'd sue for not having the legitimate right as a shareholder to see decent accounting about the company I own. People forget, the shareholders are the owners. When you pass laws letting execs hide their losses off balance sheet and not mark assets to market you are not defrauding investors, you are letting company execs defraud company owners.

Fortunately i down't own bank stocks, insurance companies, or financials.

As for insuring everyone, the Fed is essentially doing that with their backstops now. Like the banking sector, the taxpayer will only know they got caught holding the bag when the whole scheme fails. In the end, what the Fed guarantees, if it looses the taxpayer is the guarantor. The good news I guess is that there is plenty of moral hazard for everyone.

Let the mad hatter's tea party begin.


Constructe now known as Moon Kil Woong

Mar 12 10:42 PM