Tom Armistead

One Easy CDS Fix

At one time state "bucket shop" laws, in particular NY State's General Business Law Section 351, prohibited gambling transactions in the equity markets. Your Congress saw fit to specically exempt CDS from these types of legislation, with the results we have seen. Write your congressman.




On Mar 30 03:40 PM Poor Dude wrote:

> Maybe we just need to outlaw all derivatives period? And most certainly,
> all naked ones or third-party ones where anyone other than a party
> with direct exposure is allowed to participate (and where anyone
> WITH direct exposure is allowed to participate only to their limit
> of exposure). Buying insurance on an asset or hedging a future liability
> is one thing. But placing bets on the future value of something you
> don't own is just gambling anyways, and really has nothing to do
> with investing.
>
> And I'm no lawyer, but I thought gambling was already illegal in
> most places and that any contract based on (or requiring) illegal
> conduct was automatically null and void by operation of law. Am I
> wrong?

One Easy CDS Fix

You're missing the point on the monolines: the provided credit insurance in two froms, traditional insurance policies and CDS.

Unfortunately the effects of mark to market accounting, which was not in place when the CDS were written, creates grotesque distortions on their financial statements, which have been further twisted by the negative hype from the short and distort crew.

Both Liddy and the OTS testified earlier this month that the assets insured by AIG's CDS on super senior CDOs were performing 100% through that date.

Translating their CDS into synthetic bonds is exactly the solution that was imposed on AIG - the insured bonds were bought and placed in the Maiden Lane facility.

The only fix for the CDS problem is to regulate them as insurance, with a requirement of insurable interest on the part of the buyer and adequate capitaql on the part of the seller.

The fix for the synthetic bond problem is to outlaw the practice because it puts the investor into the insurance business. Amazingly, there were synthetic bonds registered with the Irish Financial Regulatroy Authority, linked to the credit of the Icelandic banks, weeks before they failed. That is the klind of cynical fraudulent behavior created by the synthetic bond business.

The Emperor (Mr. Ackman) Has No Clothes

Just a note on adjusted book value: MBIA in their last earnings release is now adding back mark to market losses to the extent they exceed impairments. So the adjusted book value adding back mark to market is 39.63. Over time, and in a best case scenario, the share price should tend back up toward that level.

It is a testament to the strength of these businesses that they could make serious underwriting mistakes and then be subjected to merciless attack by short-sellers and rumour mongers, and when the smoke clears there is still this fabulous amount of value remaining.

Steve, you identify the importance of present value - their contracts obligate them to pay pricipal and interest when due, and they cannot be accelerated against. This is one of the features of the business model that makes it so strong.

I am long both ABK and MBI. I had the good fortune to be able to buy some options on ABK, Jan10 2.50 calls for .50. If this ever goes to zero, which I doubt, I lose .50. If it goes up to the adjusted book value, or beyond if mark to market reverses, I will get paid 30 X my investment.

Interpreting the Mark-to-Market Losses of Monolines

It is significant that Moody's agrees with MBI and ABK that actual losses will probably not be as large as mark to marke implies. If and when these losses start reverting, the companies will post profits and the stock prices could go up as fast as they went down.