The AMBAC Bailout Plan is Really About Banks Saving Their Own AAAsses 10 comments
-
Font Size:
-
Print
- TweetThis
"A group of eight banks that are major counterparties to Ambac Financial Group (ABK) may recapitalize the struggling bond insurer in a bid to save its crucial AAA rating, two people familiar with the situation said Friday." So went the Marketwatch Headline. This story, nothing new really, other than the "progress" in negotiations was "broken" on CNBC by Charlie Gasparino during the last hour of trading on Friday. It was good for a quick 200 point, broad based rally. Why does a company like Costco gain $500 million in market cap because AMBAC is getting bailed out? Well, it has to do with market risk and the pervasiveness of this credit crunch. Does this somehow help consumers buy more products at Costco, who knows? But, it sure made the stock feel good.
My feeling, however, is that other than some shorts getting crushed and some longs getting a brief respite, nothing really changed. Kicking the can down the road is something that we seem to excel at as a nation. So, what does this mean practically speaking? I would love to see some genuine comments and discussion. Here is my forty cents, which was really 2 cents but I have leveraged it up 20 times.
First, these banks are so worried about how a downgrade would impact them that they are willing to commit their own scarce capital to prevent it. How leveraged are they to these insurers? Who knows, but this deal is a meaningful anecdote. Besides a direct impact on directly held securities insured by AMBAC, these banks are protecting their hedge fund loan clients and preserving the marketability of billions of dollars in securities which serve as loan guarantees. What is it now, $500 trillion in notional value for all the various financial engineering products? Hate to see that come toppling down, at least in a "disorderly" fashion.
Second, it is obvious that the entire opaque system of financial "products" needs to unwind. As it turns out, we are finding out that consumers no longer need a bunch of clever gadgets (sorry Sharper Image). Maybe the financial system really doesn't need so many clever "products" which were probably always doomed to failure. Seriously, when you get to a point that you have sliced and diced Joe Six's mortgage so many ways that 17 people have a job based on his ability to pay over time, there is a problem, right?
Third, as this all unwinds, real losses are going to continue to be felt. This action is just a temporary fix, right? Nobody really thinks that things all of a sudden things are all better. We are all adults here. Does anybody remember when, during the dot bomb era, companies like Lucent had to lend their clients billions to buy their products and keep the party going? It worked for a while and judging by the stock prices back then, we all "believed" that those loans would get repaid, right? Lucent had it's "counterparties" in 1998, and how did that work out? I know it is not a perfect analogy, but does anybody see any similarity?
Fourth, what about the counterparties' counterparties? As I understand it, AMBAC and its ilk have set up or hold major stakes in reinsurers that reinsure their insurance. Say that three times fast. For some reason, these reinsurers seem to favor the Bahamas to house their "offices." Well, who is going to backstop them? I know, I know, these reinsurance companies are nothing similar to the "off balance sheet entities" that Enron created to hold their own dirty secrets. How could you even think that!
Finally, the more I think about it, the better I feel. I can't believe that we only rallied 200 points!
Disclosure: Long SKF
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 10 comments:
Gasparino was doing some serious back peddling on Fast Monday Friday night. I think he got a little ahead of himself, saw the markets reaction and soiled himself. I really do not think he meant to infer what he did with that report. For us financial bears, this is a super opportunity to add to short positions.
That aside, I am confident a 'deal' will get done, but only a save the munis but the financials. Hey, they are saying there is only $70-$90 Billion more in CDO write downs in the monolines fail...that is nothing compared to everything else coming down the pike. It almost makes all of this 'monoline' anxiety seem trivial.
This is all about the munis.
One of the best articles I've read recently on this topic. Great, well-articulated article with a sharp sense of humor. My compliments.
As for the actual subject at hand, the banks' supposed "bailout" of Ambac that seems to be coming, here's my thought: If banks were not willing to commit precious capital to buy auction rate securities issued by museums, NYC Port Authority, etc., which are by all accounts pretty safe, but instead intend to deploy their capital to prop up monolines such as Ambac, a seemingly much riskier investment, what does this indicate? The only reason I can come up with is that banks must be holding way more monoline-insured bonds than they are acknowledging. This cannot be good, and for me adds fuel to the idea that banks have not fully disclosed all their problems . I smell a lot more write-downs coming. . .
On a different note,
The dividends have not been suspended because that would amount to an admission of sorts. Remember, these companies live in two worlds: perception and reality and both contribute to the "faith" that the market needs right now. You know what, I have absolutely no idea how these guys will eventually do, but the sad truth is that I don't think they do either. Too much clevernesss coming back to bite everyone in the... But, your point on the dividend is well taken.
Also, as soon problem of confidence is over, and I have no doubts that 4 billions will save us all and the Wall Street and even whales, I see Fed raising rates to curb inflation and THAN what?
We disagree with your premise that ABK can't survive no matter what. The munis is a solid money making business. The problem is how to split the company in two and how the CDO losses (referred to as toxic waste in other articles) will be divvied up.
Once this is resolved, ABK can get back to basics. Also, we haven't seen anyone write about the banks not wanting Buffett to get a strong foothold in this business. For the time being the banks will not state so openly, but they definitely prefer working with ABK and current competitors.
CrossProfit
The bank just start working like nothing happened.
Well the dividends will not be what the have been.
The money C and the other Banks got was not free.
The will be paying their new partners or paying off their loans.
It might be in their best interest to help ABK to lessen the pain
but there still more pain to come.