crashof2008

MBIA's GIC Exposure Could Trigger a Liquidity Crisis

Tim, I really must give you some credit, you have tried valiantly to defend a losing position. I respect that and your ability to change the subject is excellent.

In closing however, I must take final exception to this astonishing excerpt from your most recent post:

"...there are quite a few insurers who function quite well with ratings below AAA like AIG for instance."

Are you aware that the CEO of AIG, Mr. Sullivan, was forced out of office a little over a week ago after an emergency meeting of the Board of Directors?

This occurred after they lost 30 billion in 2 quarters based on precisely this reliance on bell-shaped distribution of pricing and behavioral outcomes, coupled with massive overleveraging that is forcing MBIA into bankruptcy before our eyes.

How you could describe such an outcome as "functioning quite well" is beyond me.

That historic debacle is outlined in the Financial Times at:

tinyurl.com/4d8s9u

A couple points to offer you:

1. You might enjoy and benefit from a subscription to the Financial Times of London, the world's finest newspaper.

2. You might also enjoy and benefit from my website listed with this post. I've reviewed hundreds of working papers of the Federal Reserve and have tried to concisely put forth some of these key issues in that venue.

Till our next debate.

Matt

MBIA's GIC Exposure Could Trigger a Liquidity Crisis

Tim Travis-

Let's be clear. What will unfold over the next few years during The Great Deleveraging is a Chernobyl that will adversely affect billions of innocents worldwide. They did nothing to deserve this.

This catastrophe is largely caused by two critical factors: 1) faulty models that claim stock and derivative prices will be distributed along a bell-shaped curve, rather than having fatter tails associated with a Cauchy distribution of prices and outcomes, coupled with 2) a reckless use of hyperleveraging that amplifies the effect of this deeply flawed price distribution assumption.

MBIA is a prime example of how profoundly bankrupt this lethal combination of false derivative modeling coupled with hyperleveraging can be.

You state that:

"The CDS positions that MBIA holds are not tradable securities and they often have significant protection on the actual portions that they insure. THEY ARE INSURANCE CONTRACTS WHICH THEY WILL HOLD AND PAY INTEREST AND PRINCIPAL ON WHEN THEY COME DUE ON DEFAULTED CONTRACTS." (emphasis added).

This is demonstrably false. If MBI were planning to hold this deeply toxic and radioactive waste to maturity, and pay any and all necessary claims as you so blandly assert, why are they (together with Ambac) so desperate to CANCEL 125 billion dollars worth of them as described just last week in the Financial Times at:

tinyurl.com/5ogde4

MBIA IS placing these on the market, in direct contradiction to your false assertion above. They are NOT holding them to maturity and they are proposing to NOT pay any interest and principal on defaults. And yet you oppose all rational market based accounting, hiding behind methods that conceal the objective reality on the ground.

You either believe in free markets or you don't.

Any attempt to avoid marking these securities to market by pretending that they will never be marketed in any stress scenario, smacks of a socialist lack of faith in the purgative powers of free market pricing.

MBIA's GIC Exposure Could Trigger a Liquidity Crisis

Here is a link to Paul Volcker's speech where he decries the folly of using past historical data to value derivatives (as Mr. Travis above is suggesting) as having "UTTERLY failed the test of the market.

www.youtube.com/watch?...

www.youtube.com/watch?...

No one has the credibility of Volcker on these issues, save perhaps Janet Tavakoli who has contracted out as a special consultant to the Fed on structured finance issues.

These videos of Mr. Volcker's are a must see and present the scandal of these weapon of mass destruction of the financial world (and their false valuations based on "historical" precedent that go with them) in easy to understand layperson language.

MBIA's GIC Exposure Could Trigger a Liquidity Crisis

Tim Travis makes a classic mistake above when he insists on continuing to rely on historical precedent to value these derivatives.

Tim does this when he says:

"Why don't you write a column on the assumptions being made in the Asset Backed Securities Market to validate the current pricing? Let's asses how realistic these prices are in relation to various historical precedents."

Tim, historical volatilities being used to input pricing in these derivatives was a major cause of what got us into this mess in the first place!

These are NOT normal times and asset prices are NOT distributed along a bell curve. Check out Volcker's recent speech before the New York Banker's Club that touches on this subject. We are continuing to have MAJOR sigma 4 and sigma 5 events (4 and 5 standard deviations from the norm) every 10 years and each one is worse than the previous one!

Those methods have FAILED the test of the market, as Volcker says.

Stock and derivative price distributions now have MUCH fatter tails, in Cauchy (not Gaussian) distributions and we need to use implied volatilies much more in assessing what these weapons of mass destruction of the financial system are really worth.

And they aren't worth much.

750 TRILLION dollars in derivatives crashing is not a pretty sight.

And to assume that this crash will follow historical price distribution precedents is irresponsible in the extreme, especially in judging how one of the most irrresponsible set of valuations in the monolines will ultimately be valued in the marketplace.

Jingle mail was not in your models. But it is the reality.

MBIA's GIC Exposure Could Trigger a Liquidity Crisis

Consider MBI's curious phrasing that they have "$10.2 billion of other unpledged diversified securities with an AVERAGE rating of Double-A"

There are different ways to calculate "average rating" here. That is MBIA's wiggle and weasel word of choice.

As I understand most of these contracts, they demand a minimum of AA collateral to meet a margin call.

Given MBI's history of deceptive practices, I note the following about that rather odd phrase "average rating":

If i had:

100 bonds with a $1000 coupon rated one notch ABOVE AA
AND
100 bonds with a $1,000,000 coupon rated one notch BELOW AA

I would have over one hundred million dollars in securities that "averaged" a AA rating.

Because I had 100 bonds ABOVE AA and 100 bonds below AA.

Of course that would be terribly misleading.

And I would only have 100,000 dollars in bonds that could be used as collateral. But I could proclaim I had over 100 million dollars of bonds with an "average" rating of AA.

The words "average rating" are highly suspicious here. I smell a rat.

Matt

Help for the Guarantors - From an Unexpected Source

Er, this is a little cute, but it is WAY off the mark. Obviously you haven't taken any math beyond college algebra. Oh well.

Did it ever occur to you that one of the key reasons MBI is tanking today is because of their 8-K they filed with the SEC yesterday?

It's a felony to lie to the SEC, so they are usually more accurate in their filings with them than with what they tell their bloggers acting in their behalf.

READ THE 8-K FILED WITH THE SEC yesterday.

Looks like the fallout from the initial stages of implementation of FASB 163 is REALLY starting to bite!

Monolines Trying CDO Buyouts

Don't EVER assume that MBI's estimate of how much collateral will be required is gospel. That is a hopelessly naive position. It is up to the counterparties to decide whether to demand extra margin. That figure is simply an exceptionally optimistic estimate of MBI.

In terms of MBI and ABK attempting to cancel 125 billion in credit default swaps in intense negotiations with Citibank, Merrill and UBS. Most accounts put MBI's share at 80 billion of this.

Any negotiations to cancel the 80 billion in insurance contracts that MBI wrote will be extraordinarily problematic, especially in this environment of collapsing bank profits.

To understand why, you need to master the difference between a CDO and a CDS. The difference between these two is an absolutely VITAL distinction that so many overlook.

I'll keep it short and sweet. But you need to master this distinction. Read carefully for just 30 seconds and it will serve you well.

Think of a CDS (credit default swap) as an insurance policy. MBI insured 80 billion of largely worthless paper to various banks. They are, after all, an insurance company and thought this would be a logical extension of their insurance business.

Now MBI wants the banks such as Merrill and Citi and UBS to cancel the insurance policies. MBI is basically offering to simply refund the premiums paid.

This would leave the banks holding 80 billion dollars of collateralized debt obligations (CDOs) that had been insured and guaranteed by MBI.

It's like if your house is destroyed in a fire. The insurance company, instead of reimbursing you for the value of the home (say $400,000) offers instead to rebate you the $1200 you have paid in premiums.

Would you take it?

This is what MBI is offering.

The End of the Monoline Bond Insurance Business

Some of you have heard about MBI and ABK attempting to cancel 125 billion in credit default swaps in intense negotiations with Citibank, Merrill and UBS. Most accounts put MBI's share at 80 billion of this.

Any negotiations to cancel the 80 billion in insurance contracts that MBI wrote will be extraordinarily problematic, especially in this environment of collapsing bank profits.

To understand why, you need to master the difference between a CDO and a CDS. The difference between these two is an absolutely VITAL distinction that so many overlook.

I'll keep it short and sweet. But you need to master this distinction. Read carefully for just 30 seconds and it will serve you well.

Think of a CDS (credit default swap) as an insurance policy. MBI insured 80 billion of largely worthless paper to various banks. They are, after all, an insurance company and thought this would be a logical extension of their insurance business.

Now MBI wants the banks such as Merrill and Citi and UBS to cancel the insurance policies. MBI is basically offering to simply refund the premiums paid.

This would leave the banks holding 80 billion dollars of collateralized debt obligations (CDOs) that had been insured and guaranteed by MBI.

It's like if your house is destroyed in a fire. The insurance company, instead of reimbursing you for the value of the home (say $400,000) offers instead to rebate you the $1200 you have paid in premiums.

Would you take it?

This is what MBI is offering.

Insurer-Cut 'Hurricane' Hits

Enter your comment hereSome of you have heard about MBI and ABK attempting to cancel 125 billion in credit default swaps in intense negotiations with Citibank, Merrill and UBS. Most accounts put MBI's share at 80 billion of this.

Any negotiations to cancel the 80 billion in insurance contracts that MBI wrote will be extraordinarily problematic, especially in this environment of collapsing bank profits.

To understand why, you need to master the difference between a CDO and a CDS. The difference between these two is an absolutely VITAL distinction that so many overlook.

I'll keep it short and sweet. But you need to master this distinction. Read carefully for just 30 seconds and it will serve you well.

Think of a CDS (credit default swap) as an insurance policy. MBI insured 80 billion of largely worthless paper to various banks. They are, after all, an insurance company and thought this would be a logical extension of their insurance business.

Now MBI wants the banks such as Merrill and Citi and UBS to cancel the insurance policies. MBI is basically offering to simply refund the premiums paid.

This would leave the banks holding 80 billion dollars of collateralized debt obligations (CDOs) that had been insured and guaranteed by MBI.

It's like if your house is destroyed in a fire. The insurance company, instead of reimbursing you for the value of the home (say $400,000) offers instead to rebate you the $1200 you have paid in premiums.

Would you take it?

This is what MBI is offering.

Ambac, MBIA: The Rating Shoes Drop

Enter your comment hereSome of you have heard about MBI and ABK attempting to cancel 125 billion in credit default swaps in intense negotiations with Citibank, Merrill and UBS. Most accounts put MBI's share at 80 billion of this.

Any negotiations to cancel the 80 billion in insurance contracts that MBI wrote will be extraordinarily problematic, especially in this environment of collapsing bank profits.

To understand why, you need to master the difference between a CDO and a CDS. The difference between these two is an absolutely VITAL distinction that so many overlook.

I'll keep it short and sweet. But you need to master this distinction. Read carefully for just 30 seconds and it will serve you well.

Think of a CDS (credit default swap) as an insurance policy. MBI insured 80 billion of largely worthless paper to various banks. They are, after all, an insurance company and thought this would be a logical extension of their insurance business.

Now MBI wants the banks such as Merrill and Citi and UBS to cancel the insurance policies. MBI is basically offering to simply refund the premiums paid.

This would leave the banks holding 80 billion dollars of collateralized debt obligations (CDOs) that had been insured and guaranteed by MBI.

It's like if your house is destroyed in a fire. The insurance company, instead of reimbursing you for the value of the home (say $400,000) offers instead to rebate you the $1200 you have paid in premiums.

Would you take it?

This is what MBI is offering.

Whitman's Q2 Letter and Disclosure Requirements

Enter your comment hereSome of you have heard about MBI and ABK attempting to cancel 125 billion in credit default swaps in intense negotiations with Citibank, Merrill and UBS. Most accounts put MBI's share at 80 billion of this.

Any negotiations to cancel the 80 billion in insurance contracts that MBI wrote will be extraordinarily problematic, especially in this environment of collapsing bank profits.

To understand why, you need to master the difference between a CDO and a CDS. The difference between these two is an absolutely VITAL distinction that so many overlook.

I'll keep it short and sweet. But you need to master this distinction. Read carefully for just 30 seconds and it will serve you well.

Think of a CDS (credit default swap) as an insurance policy. MBI insured 80 billion of largely worthless paper to various banks. They are, after all, an insurance company and thought this would be a logical extension of their insurance business.

Now MBI wants the banks such as Merrill and Citi and UBS to cancel the insurance policies. MBI is basically offering to simply refund the premiums paid.

This would leave the banks holding 80 billion dollars of collateralized debt obligations (CDOs) that had been insured and guaranteed by MBI.

It's like if your house is destroyed in a fire. The insurance company, instead of reimbursing you for the value of the home (say $400,000) offers instead to rebate you the $1200 you have paid in premiums.

Would you take it?

This is what MBI is offering.

Rating Agencies Target Guarantors to Deflect Subprime Blame

Some of you have heard about MBI and ABK attempting to cancel 125 billion in credit default swaps in intense negotiations with Citibank, Merrill and UBS. Most accounts put MBI's share at 80 billion of this.

Any negotiations to cancel the 80 billion in insurance contracts that MBI wrote will be extraordinarily problematic, especially in this environment of collapsing bank profits.

To understand why, you need to master the difference between a CDO and a CDS. The difference between these two is an absolutely VITAL distinction that so many overlook.

I'll keep it short and sweet. But you need to master this distinction. Read carefully for just 30 seconds and it will serve you well.

Think of a CDS (credit default swap) as an insurance policy. MBI insured 80 billion of largely worthless paper to various banks. They are, after all, an insurance company and thought this would be a logical extension of their insurance business.

Now MBI wants the banks such as Merrill and Citi and UBS to cancel the insurance policies. MBI is basically offering to simply refund the premiums paid.

This would leave the banks holding 80 billion dollars of collateralized debt obligations (CDOs) that had been insured and guaranteed by MBI.

It's like if your house is destroyed in a fire. The insurance company, instead of reimbursing you for the value of the home (say $400,000) offers instead to rebate you the $1200 you have paid in premiums.

Would you take it?

This is what MBI is offering.

Ambac, MBIA: The Rating Shoes Drop

This is absurd. Did it ever occur to you that the historical volatility assumptions used in modeling the "value" of MBI's CDOs are completely irrational? Do you even know anything about the whole historical vs. implied volatility valuation debates for derivatives?

Duh.

Maybe if you had taken more than elementary algebra you would understand that MBI is truly, irrevocably bankrupt.

See you in January, when FASB 163 takes full force.

Whitman's Q2 Letter and Disclosure Requirements

This is absurd. Did it ever occur to you that the historical volatility assumptions used in modeling the "value" of MBI's CDOs are completely irrational?

Duh.

Maybe if you had beyond college algebra you would understand that MBI is truly, irrevocably bankrupt.

See you in January, when FASB 163 takes full force.

The End of the Monoline Bond Insurance Business

One phrase in MBI's recent bland assurances that they have sufficient capital to meet the acceleration clauses on these swaps is that they have "10.2 billion in securities with an AVERAGE AA rating".

What does that hedge word "average" mean here? There are many ways to compute an "average".

For example, 10 bonds worth only 10,000 dollars each that are rated just one notch above AA "averaged" with 10 bonds worth 100 MILLION dollars rated just one notch BELOW AA would constitute such an "average" under this statement, even though the practical result would be that the vast majority of the alleged "collateral" is rated below AA.

Given MBI's record of dissembling, it seems highly likely that a large part of that 10.2 billion figure they cite is BELOW AA and will therefore be insufficient as collateral.

The key weasel fudge word MBI uses here is "average". Precisely HOW are they doing this "averaging"?