Re-insurers May Offer Subprime Hope

The bad news may not be over just yet for the subprime crisis. Citibank, Merrill Lynch and other big U.S. investment banks have so far written off about $30 billion (U.S.) in mortgage-related assets but another$30 billion (U.S.) is to come according to projections by Citigroup and JP Morgan analysts. And E-Trade’s announcement yesterday of write-offs is likely to be the front-end of a parade of write-downs to come from other financial institutions. All in all, the total potential, estimated by “marking to market” the universe of mortgage-backed securities with the ABX indexes, would be in the $200- to $250-billion (U.S.) range.

Also worrisome is the collapse in the stock prices of firms that insure debt obligations. Shares in MBIA (MBI) and Ambac Financial (ABK) are down approximately 60% and 80%, respectively, year to date -- with most of the plunge coming since September. If their guarantees of mortgage-backed securities were to be devalued by deterioration in their financial capacity and creditworthiness, further pressure could ensue.

There are a few rays of light. The Bank of America, Citigroup and JP Morgan, agreed on Nov. 9 a $75-billion (U.S.) fund to stabilize credit markets. Also the panic seems tailor-made for Warren Buffett to capitalize on, as a Wall Street Journal article discussed, by providing, for example, re-insurance (at handsome fees, of course) to debt insurers like MBIA and Ambac.

Another glimmer of hope is recent buying of MBIA shares by insiders, to the tune of about $1 million dollars. And Old Republic International, which offers mortgage insurance along with other services, recently disclosed it had acquired big stakes in PMI Group (15%) and MGIC Investment (11%), two mortgage insurers. If industry insiders are buying, perhaps there is hope after all?

Comments

[deanfv]

It is irresponsible to repeat the bogus WSJ article re: Warren Buffett's interest in these 2 companies. Pure specualation on the author's part.

2007 Nov 14 06:37 PM

[deanfv]

It is irresponsible to repeat the bogus WSJ article re: Warren Buffett's interest in these 2 companies. Pure specualation on the author's part.

2007 Nov 14 06:37 PM