Why We're Still in the Early Innings of the Bursting of the Housing and Credit Bubbles - And Implications for MBIA and Ambac
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We’ve been working on nonstop for the past two weeks on a presentation entitled: “Why We Are Still in the Early Innings of the Bursting of the Housing and Credit Bubbles – And the Implications for MBIA and Ambac.” Amherst Securities provided us with some incredible – and very sobering – data that leads us to the following conclusion (see page 19):
In summary, today we are only seeing the tip of the iceberg: an enormous wave of defaults, foreclosures and auctions is just beginning to hit the United States. We believe it will get so bad that large-scale federal government intervention is likely.
Another implication, covered starting on page 57, is that MBIA and Ambac (which remain among our biggest short positions) are in big trouble.
To see the presentation, click here and, once on the web page, click the box on the right that says “Read Whitney Tilson’s Presentation on the Mortgage Crisis & the Implications for Bond Insurers”.
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This article has 25 comments:
Yikes! It's easy to become inured to the steady drone of bad news in the financials, until one is presented with such a salient example quantifying how much force is left in this storm.
Interesting would be your thoughts on the potential form and consequence of the massive Federal intervention you portend.
Great
r
Ditto on Citibank as GreenInvestor above. It's missing from page 50 - it probably belongs in the top spot.
This would be a great cycle of wealth destruction, followed by a supercycle of wealth creation.
It is clear MBIA and Ambac will take losses. However, it is unfair to not calculate the NPV of the losses. MBIA and Ambac will only have to pay out losses over time (in the case of these mortgages, 30 years or less), not all at once. In the meantime, they will be able to use their "losses incurred but not paid" as float for investment just like any other P&C company. Not to mention, they still are due defferred premium revenue. This again will reduce their "net-net losses." Only by calculating the NPV of the return on float, the actual payment of losses, and deferred premium revenue will you come up with an accurate representation. This value is markedly LESS than your and Ackman's gross and net losses in your presentations.
A $500K home purchase price with 10% down on a 30 yr 6.5% fixed rate with debt to income at 45% requires $69,500 at closing financing a balance of $450K with a monthly income of $11,389 or $137,000 annually. The P3 chart shows 1/1/06- 6/1/07 $40 K annual income and pushing debt to income to 55% + provided borrowing power for a $340K + home. Without all of the detail in the P3 calculation that says $60K annual income could push the borrowing power to $500K.
Does anyone else see the disconnect? Where would a $60K earner get $69,500 for closing? and how long could the charade last when pretax income needs to be over $137K. Let's just forget about the incremental escalating cost of taxes, insurance and utilities that are paid with after tax dollars and become additional burdens within 2-3 years after move-in.
Demaray
Fast forward to today's market the number is 5 times the starting wage.
Therefore, a house is only worth about 150k. Smart people should rent.
There are many, many small businesses in the US that never go public. These businesses provide us with goods and services that we need. It's called CAPITALISM. We do not need short sellers. Short sellers do not produce anything except heartbreak for the poor souls who own stocks in companies that are in trouble.
The embattled Armonk, N.Y.-based bond insurance outfit, which has raised some $2.6 billion in capital from private and public investors to appease Standard & Poor's and Moody's Investors Service, believes that it can snatch up new insurance and reinsurance policies from smaller firms that might be facing runoff -- a process in which they collect fees on policies they already insure, but pursue no new business -- or are otherwise hampered, CEO Jay Brown tells TheStreet.com.
"We have a clear opportunity. A number of companies look like they are going to go into runoff," Brown notes.
For his part, Brown has been scrambling since returning to MBIA as CEO last month to breathe new life into the world's largest bond insurance company. MBIA, the largest financial guarantor, and its next largest rival Ambac Financial(ABK - Cramer's Take - Stockpickr) have been swept up in perhaps the most harrowing financial turmoil the debt insurance sector has experienced in three decades. The guarantors have also been the target of short-selling hedge fund manager Bill Ackman, who has lobbed frequent verbal grenades at the companies through the press and his writings.
"Look at all the companies affected the most and you look at how much capacity the firms that have underwritten insurance. They don't have enough capacity," Brown says. Without being explicit, Brown said a number of the smaller guarantors may be susceptible to falling into runoff.
Still, restoring confidence among shareholders continues to be an uphill battle.
MBIA has so far underwritten "very little new business," according to a recent filing with the Securities and Exchange Commission. But Brown is optimistic that the pall surrounding the company will dissipate in the wake of S&P and Moody's affirming MBIA's pristine triple-A rating last month. The CEO also noted that MBIA wrapped up a public finance insurance deal for a $377 million toll road project. But the insurer will likely face further writedowns next quarter in areas tied to mortgage-tainted securities, including home equity mortgages that have dropped recently.
As a part of its restructuring efforts, MBIA announced late Thursday that it was cutting 48 positions, as it retools its structured finance insurance business. Brown's larger restructuring plan involves splitting up MBIA's more risky structured finance business from its safer, more conservative job of insuring debt for municipalities. The CEO has said the split may take up to five years to complete.
Some of the new staffers MBIA plans to hire in the near term will be part of a strategic financial group that will help the firm achieve its goal of underwriting conservative insurance policies. MBIA plans to steer clear of funky structured debt and staffers in its strategy group will help it figure out ways separate out its structured book of business.
Brown has said publicly that splitting up the structured book from the municipal business should help it secure future funding at attractive rates and help restore the guarantor's image to potential clients. At this point, MBIA is trading at a more than 80% discount to its share price a year ago.
MBIA has been adamant about its view that it has sufficient capital -- about $17 billion -- to pay claims should a deteriorating economy result in debt defaults.
Tilson , I hope you're taking notes...
The embattled Armonk, N.Y.-based bond insurance outfit, which has raised some $2.6 billion in capital from private and public investors to appease Standard & Poor's and Moody's Investors Service, believes that it can snatch up new insurance and reinsurance policies from smaller firms that might be facing runoff -- a process in which they collect fees on policies they already insure, but pursue no new business -- or are otherwise hampered, CEO Jay Brown tells TheStreet.com.
"We have a clear opportunity. A number of companies look like they are going to go into runoff," Brown notes.
For his part, Brown has been scrambling since returning to MBIA as CEO last month to breathe new life into the world's largest bond insurance company. MBIA, the largest financial guarantor, and its next largest rival Ambac Financial(ABK - Cramer's Take - Stockpickr) have been swept up in perhaps the most harrowing financial turmoil the debt insurance sector has experienced in three decades. The guarantors have also been the target of short-selling hedge fund manager Bill Ackman, who has lobbed frequent verbal grenades at the companies through the press and his writings.
"Look at all the companies affected the most and you look at how much capacity the firms that have underwritten insurance. They don't have enough capacity," Brown says. Without being explicit, Brown said a number of the smaller guarantors may be susceptible to falling into runoff.
Still, restoring confidence among shareholders continues to be an uphill battle.
MBIA has so far underwritten "very little new business," according to a recent filing with the Securities and Exchange Commission. But Brown is optimistic that the pall surrounding the company will dissipate in the wake of S&P and Moody's affirming MBIA's pristine triple-A rating last month. The CEO also noted that MBIA wrapped up a public finance insurance deal for a $377 million toll road project. But the insurer will likely face further writedowns next quarter in areas tied to mortgage-tainted securities, including home equity mortgages that have dropped recently.
As a part of its restructuring efforts, MBIA announced late Thursday that it was cutting 48 positions, as it retools its structured finance insurance business. Brown's larger restructuring plan involves splitting up MBIA's more risky structured finance business from its safer, more conservative job of insuring debt for municipalities. The CEO has said the split may take up to five years to complete.
Some of the new staffers MBIA plans to hire in the near term will be part of a strategic financial group that will help the firm achieve its goal of underwriting conservative insurance policies. MBIA plans to steer clear of funky structured debt and staffers in its strategy group will help it figure out ways separate out its structured book of business.
Brown has said publicly that splitting up the structured book from the municipal business should help it secure future funding at attractive rates and help restore the guarantor's image to potential clients. At this point, MBIA is trading at a more than 80% discount to its share price a year ago.
MBIA has been adamant about its view that it has sufficient capital -- about $17 billion -- to pay claims should a deteriorating economy result in debt defaults.
NEW YORK, March 11 (Reuters) - U.S. bond insurers' losses are likely much lower than what the troubled firms have reported when marking their holdings to market prices, Moody's Investors Service said on Tuesday.
Shares of bond insurers like MBIA Inc (MBI.N: Quote, Profile, Research) and Ambac Financial Group (ABK.N: Quote, Profile, Research), which guarantee payments on roughly $2.4 trillion of debt securities, have fallen precipitously on worries about billions of dollars of claims on mortgage-related bonds they may have to pay out.
In the last six months, Ambac shares have fallen 79.4 percent and MBIA shares have slid 81 percent.
But Moody's approach to rating the guarantors involves trying to determine the "real economic loss" the firms will sustain, as opposed to mark-to-market losses, Moody's analyst Ted Collins said in response to a question on a conference call.
Such loss estimates are "lower than the mark to market that's being recorded," Collins said.
Accounting firms are putting increasing pressure on financial firms to mark their holdings to observable market prices. That has frustrated some firms, which argue that volatile short-term prices can exaggerate actual losses.
If the losses the bond insurers face turn out to be less than expected, that could provide some relief for investors.
Insurers like Ambac have had to write down the value of billions of dollars of credit derivatives, but these write-downs may not necessarily translate into actual losses.
As a result, some players are still confident the firms have enough capital and available funds to pay expected claims.
Tillson, Once again please try to write both sides of stories not just your own...make things interesting at least....
Again