Ambac, MBIA Are Still Shorts Amidst This Wink-and-Nod 22 comments
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So MBIA and Ambac both raise $2.5-$3.0 billion (assuming the Ambac deal happens), the big two ratings agencies reaffirm their AAA ratings (though it'll be very interesting to see what Fitch does), the stocks soar and the shorts discover (yet again) what a crappy business shorting is -- so it's time to cover and move on, right?
NOT!!!!
Here's what happened: everybody -- the ratings agencies, regulators, big banks, etc. -- are petrified (probably with good reason) about the consequences if MBIA and Ambac lose their AAA ratings, so there's a big wink-and-nod going on here. The companies raise enough money to give the ratings agencies some cover to reaffirm the AAA rating, the ratings agencies do so, and this buys some time (not much though -- in 60 days or so, they have to report Q1 earnings and if you thought Q4 was bad, wait until you see Q1!).
Though a bit more time is valuable -- you never know when Congress might bail out millions of mortgages -- this kabuki dance is likely to be meaningless in the end because these companies are unlikely to be able to write much new business and, more importantly, are likely to incur tens of billions of losses.
Re. the former, I've heard from people in the market that bonds insured by MBIA trade at a 15 bp discount to bonds insured by nondistressed bond insurers (like Berkshire). To compensate for that (and because premiums are front-end loaded), MBIA would have to charge a 50 bp lower premium, which is enormous given that the total premium for munis typically ranges from 30-80 bps. No banks or other institutions will tell you this, however, because they're loaded to the gills with MBIA-wrapped bonds and want to prop them up...
To get an idea of how utterly corrupt the ratings agencies are, consider that a year ago, S&P said MBIA would have zero losses from its subprime exposure. Then in July, it upped this to $64 million. Then in December, it said $5.5 billion. And earlier this week, as part of its report reaffirming MBIA, it now says $9.5 billion (the media hasn't picked up on this number yet) -- but it still maintains the AAA rating!!! But the market isn't fooled one bit -- here's TheStreet.com's Doug Kass yesterday morning:
Here is an even better comparison of Pfizer (PFE)/MBIA (MBI). Pfizer's credit default swap spread is only 38 basis points. MBIA's credit default swap spread is 603 basis points.
Yet they are both AAA.
For comparison, Pakistan's credit default swap spreads stand at 534.
As I wrote in today's opening missive: If you want AAA, buy batteries, not MBIA stock.
And here's an excerpt from Kass's article:
I was struck by the genuine and remarkably talented performance of David Archuleta and how that contrasted with the insincere AAA rating given by Moody's and Standard & Poor's to MBIA (MBI) and the equally disingenuous commentary of MBIA's new CEO, Jay "Our Ratings Are Stable" Brown.
The good news is that David Archuleta's rendition of John Lennon's "Imagine" will undoubtedly catapult him into the favored position to become 2008's American Idol -- and years of well-deserved fame into the future.
"You may say that I am a dreamer," but my ludicrous forecast is that, over time, David will become more popular than Kelly Clarkson.
In "American Idol" terms, MBIA is the William Hung of finance. If MBIA was a performance on "American Idol," Simon Cowell would have laughed the company off of the stage.
"He lies like a finance minister on the eve of devaluation." -- Warren Buffett
The bad news is that the ratings agencies should be tarred, feathered and litigated against after maintaining AAA ratings on MBIA recently. There was little reality in what Jay Brown said in his CNBC interview with Michelle Caruso-Cabrera on Tuesday afternoon, but investors and the media (with the exception of CNBC's Charlie Gasparino) seem content to accept his views as gospel despite the fact that Mr. Brown had previously guided MBIA into its derivative insurance disaster years ago.
Importantly, AAA long-term debt ratings are intended to be reserved for only gilt-edged companies. (For a full explanation, click here.) AAA is the highest rating extant given to investment grade companies, so giving MBIA a AAA rating underscores the hoax being perpetrated by the ratings agencies. Some might call it conspiratorial.
Remember that, in only the last few days, MBIA has posted a $1.9 billion loss in its latest fiscal year, has eliminated its dividend, has temporarily stopped writing guarantees on asset-backed securities, its CEO "has questions" regarding the company's preliminary results reported in January and has refused to sign off on the company's 2007 financial statements, and the company was forced to raise $2.6 billion in capital.
More from S&P on what's happening to the underlying loans:
S&P examined how dependably people are repaying their debt for five types of loans: home-equity lines of credit, subprime loans, Alt-A loans, closed-end second-lien loans and prime jumbo loans.
For nearly all these categories, delinquencies have accelerated in the past year.
The delinquency rate was the worst for pooled subprime loans, or loans to people with bad credit. For pooled subprime loans issued in 2005, the delinquency rate is 34.4 percent, S&P said. Delinquencies have soared as much as 15 percent for some subprime loan pools.
Every day, Ambac leaks out a little bit more information (to try to prop up the stock while it tries to get a deal done, I assume). Here was yesterday's news:
Cerberus to participate in Ambac's bailout plan: report
By Sue Chang Last update: 3:57 p.m. EST Feb. 27, 2008 SAN FRANCISCO (MarketWatch) - Private equity firm Cerberus Capital Management is expected to participate in a plan by several banks to bailout Ambac Financial Group, CNBC reported Wednesday. The exact details of Cerberus' contribution is not known but it is expected to be a "substantial" amount, according to CNBC. The bailout plan is aimed at bolstering the company's capital to save its AAA rating.
Here was the "news" from the day before:
The group of banks working to bail out Ambac Financial Group includes private equity and other financial firms that have no exposure to the troubled bond insurer, signaling optimism that Ambac will be able to make money in the future, CNBC has learned.
These contortions/rationalizations are comical:
Following the review's completion, Moody's is keeping the negative outlook on its ratings because of uncertainty whether MBIA's plans will come to fruition.
Moody's estimated that MBIA's stress-case losses would be about $13.7 billion and the company has about $16.1 billion available to pay them. That capital ratio of 1.2 is "significantly in excess of the "minimum" AAA level but short of the 1.3x AAA "target" level by about $1.7 billion."
Nevertheless, MBIA's position "was determined to be consistent with a AAA rating," Moody's said, citing the insurer's plans to raise more capital.
Yeah, right! They're done until they see Q1 losses...
MBIA Inc Chief Executive Jay Brown on Wednesday said he does not expect rating agencies Moody's Investors Service and Standard & Poor's to take any action on the company's ratings for up to 18 months. "I think what you heard from Moody's and S&P this week is a very clear picture that they are done for 12 and 18 months with us," he told Reuters in a telephone interview. Both of the rating agencies earlier this week affirmed the top triple "A" ratings for MBIA's insurance unit, easing market concerns.
Disclosure: Author is short MBIA and Ambac
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This article has 22 comments:
9 Billion in losses? Where did you get that number? How about a source? Even Moody's estimates only 4 Billion and S&P had estimated 5.5 Billion.
Oh, I get it....you're adding the two estimates. Very clever.
And you never did answer my question, mr_xx_reddy....whose ass tastes better? Ackman's or Buffet's??
money.cnn.com/2008/02/...
You seem to have repeated problems with disclosure....or is this another mistake my Seeking Alpha (doubtful).....
However, one interesting aspect of this puzzle is that the ratings agencies are privy to inside information. This makes all external evaluations that don't have the inside information speculative.
Let's take an extreme example: Lets say the Fed has said it will backstop any losses that MBIA doesn't pay. Would you then agree that AAA is acceptable ? Probably (ignore the stupidity of the action). Or let's say Buffet has said that he would buy MBIA net of all the toxic garbage for a specific figure......and that figure leaves ample assets remaining to pay off the toxic structured debt.
Anyway, I am not trying to convince anyone that the ratings agencies are not corrupt - they are. However, it is possible they know something important that we don't.
My personal view is that MBIA should sell everything except the structured contracts to Buffet. This would entail providing enough cash for reinsurance of the muni book, which would be offset by whatever Buffet would pay for MBIA less the toxic structured book......
Now I don't know what figure that would be, but presuming it left sufficient assets to cover the structured book liabilities and working capital to run a firm which only insures structured products.....everybody wins:
Buffet gets his muni business and gets the MBIA name
The toxic business is split off and Jay Brown can create a start-up called Brown's Toxic Product Insurance
Regulators are happy
The muni's remain AAA
And the toxic product policy holders can't complain about fraudulent conveyance as long as the Buffet bid less reinsurance payment is fair.
Voila.....
jbd.
Its totally expected that the rating agencies will give the AAA ratings to ambac and mbia. Remember that the rating agencies are compensated by the banks. If the ratings agencies downgrade these 2 companies then the banks will loose hundreds of billions in write-downs.
Its like this, give the ratings , and stick with them till this crisis is solved. I dont believe that even after Q1 results these ratings will be downgraded, however bad these Q1 results may be.
The rating agencies , regulators , GSE's , govt will move any possible
number of goal posts to stop the banks from taking more losses.
If losses can be prevented by assurances from rating agencies, GSE's , govt etc , all sort of assurances will be given.
However as usually happens , its the actual market that decides the losses for these banks , GSE's. Investors are already behaving as though the ratings for these companies is junk , investors will behave that the bonds insured by them also are below par value.
This is a good sign , since the credibility of the ratings agencies will be diminished , along with credibility goes blind trust o them.
So investors will do their own due dilligence instead of relying on these agencies
I guess you are right that the structured product only split-off company would most likely not carry a AAA rating, so that problem would not be solved.
But if it were extremely well capitalized, it could be AAA. And obviously that depends on what the rest of MBIA is worth to someone like Buffet.
It seems to me that if MBIA management bla-bla-bla is at all close in estimating the eventual cash losses on the structured product side, then there is room for a deal and MBIA will not be run into insolvency.
If they are wrong or lying on the structured stuff, then there are major problems because it seems like a no brainer that the .5% muni default rate is going to rise dramatically in this recession (1% minimum) and that leaves less of a cushion for the bad book.
Anyway, between poor and limited disclosure from MBIA and the fact that the raters have access to inside information, we are all flying blind.
My read of the tea leaves is that there are probably legitimate solutions that get MBIA out of this mess, most likely by transferring risk by reinsurance, but possibly by more creative ways to split this thing a whole lot sooner than 5 years. Seems a good bet that Brown's 5 years statement was just part of negotiating strategy.
jbd.
The author slightly disingenuous in spewing the 9.5 billion loss figure, though. Without an honest attempt to understand the timing of the theoretical claims payouts, it is of little value in determining whether MBIA has sufficient assets to pay it out......also I am not certain that the number comes from S&P but I'll give him the benefit of the doubt.
jbd.
and the best way to play this?
either get in early, as some bad-ass traders did last year, or with an options strategy. Alas h/s= 20.20, but a straddle works wonders with these stocks because you just never know which way the news is gonna go! All you know is that the volatility will be incessant. My may put is in the dumps right now but, had I bought a call instead of buying back my short put (I had a vertical which I turned into a long ) my losses would have been covered and I'd still have time for a move to the downside.
Shorting is really an expert's game. A better way to play these is with options. However, it's not child's game either, but the potential for profits, in a short-term frame, is still there.
We're dealing with a whole lot of bonds here and with an explosive situation that could lead to a lot of troubles in a lot of municipalities in a lot of states, so SP and Mood need to be extremely cautious when issuing their ratings. It is plausible, however, that given enough publicity and downward pressure and earnings/loss reports they might get around to finally doing it. When that day comes, it won't come as an isolated incident in the market; it will likely be within a framework of other negative news that will see the market lower.
Credit ratings are simply an informed opinion as to the likelihood of getting paid in full on time in a very stressed environment with triple A's the most likely survivors. Read the rating agency credit rating definitions, and then read the raters' rating methodologies for financial guarantee insurers. Default assumptions for categories of risk can change but the fundamental approach has remained the same for more than 30 years.
The unprecedented speed and magnitude of home price declines in certain housing markets is a natural result of the unprecedented speed and magnitude of the immediately preceding price appreciation that was fueled in large part by the collapse of mortgage under writing standards beginning in 2004. Those depreciating markets are well on there way to reaching price levels consistent with current personal income levels which is and always has been the fundamental driver of residential real estate values. There will be blood but the patient will recover faster than many think unless we have a depression in which case I would rather be holding Ambac or MBIA insured debt than uninsured A rated debt. Is that not the fundamental reason why investors have been giving up a little yield in exchange for insurance protection during the last 34 years?
Moodys, S&P should be hung.
no one can feel as helpless as the owner of a sick goldfish
---Kin Hubbard