crashof2008

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.

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"?

Research Zeitgeist: Bank Capitalization Concerns Heat Up

Keep in mind however that these Fed facilities, unlike their BOE and European counterparts are only 30-day loans.

A loan is not a gift.

It must be repaid.

Will Lehman Follow Bear into the Woods?

This isn't going to be easy.

I am filming a documentary entitled "The Crash of 2008". Portions of
what will be used in parts of the film are now available at:

www.youtube.com/user/C...

I was a market maker in derivative securities and have read hundreds of
research papers published by individual Federal Reserve branches. I
found the most informative ones to be from Kansas City and Atlanta.

Additionally, I have reviewed scores of research papers by various
Federal Reserve branches prior to publication.

Matt Dubuque
The Crash of 2008

Fed's Strategy to Halt Debt Meltdown is Not Working

I am filming a documentary entitled "The Crash of 2008". Portions of
what will be used in parts of the film are now available at:

www.youtube.com/user/C...

I was a market maker in derivative securities and have read hundreds of
research papers published by individual Federal Reserve branches. I
found the most informative ones to be from Kansas City and Atlanta.

Additionally, I have reviewed scores of research papers by various
Federal Reserve branches prior to publication.

Matt Dubuque
The Crash of 2008