CT Programmer

More on TARP and the Insurance Industry

Remember how California was saying they didn't need bond insurance and how they were going to start their own line? That was before their Gubernator went begging for cash from the Treasury. By almost all estimates I've seen put out there (except for the shorts), MBIA is highly capitalized. And they've got a CEO who has proven that he's actually WORTH the money they pay him. He is savvy and quick on his feet. Sure they've been downgraded and that triggered some losses, but they've calculated all that in. They have been very conservative. I don't want to take any blame away from their increase in riskier practices, or from the rating agencies for not properly analyzing their (or anyone's) risk, but people started acting like these bond insurers were worthless business models and needed to go under, and that their struggling was indicative of that, yet we now know that they were the first red flag of a systemic financial crisis. Yet, given all that, I don't think MBIA should take any money from the Feds. I don't think they really need to. Sure, it would boost them to AAA overnight, but I think damage has been done to the credibility of bond insurance as a whole, and what it will take to cure that is time, not a quick cash infusion. If MBIA surfaces from all this without Fed money, they gain back more credibility than if they take the money. I agree with appro that an FDR approach of an increase in government spending (especially at the state or local level) could help us dig out of a recession, but I also doubt that will happen. Towns and municipalities are now starting to tighten their belts as their tax bases erode. That means less projects, not more. I don't think lowering the costs of bond insurance (and thus the cost of projects) will cause more projects to come about. I think the projects are being shelved at any cost. You would have to have targeted Federal injections at the local or state level to change that, and I haven't heard any kind of talk along those lines.

MBIA Sues Countrywide: Part of the Solution to Clean Up the Lies

The real problem is that you had an industry that, in an effort to chase profits, encouraged mortgage brokers to crank out as much business for as big of a mortgage as possible, and the underwriters were looking the other way because they were just wrapping them up as securities then passing them along. And although I am long MBI, I believe that they too were looking the other way as far as properly analyzing the risk on this stuff. If they priced their wraps too high, no one would buy them. No one planned for a worst case scenario where default rates doubled or tripled. Its not just one slice of the pie that's to blame --- it was the whole thing. Now, if MBI can chase this stuff down in court and recover a little from it, more power to them. But it will drag out for years. I think Ambac including this stuff in its income statement is just scrambling for any reason to pad it in the positive.

Ambac, MBIA: Moody's strikes again

If we're pointing fingers here, I think this entire financial crisis can be laid in the lap of the rating agencies. They have an entire generation of actuaries that didn't learn about risk. Just because an asset class is going up (real estate) doesn't mean it doesn't have risk, and everyone racing to pile more and more money into that asset class doesn't reduce the risk. It's only been 25 years since our last housing depression. This is the kind of big picture thinking that actuaries are supposed to earn their paycheck from, not the day to day stuff of traders or returns-chasing. Also, these ratings agencies failed to see that the derivatives market was mushrooming to huge proportions. If they had said "wait a minute guys, you're taking on too much risk and leveraging to uncomfortable levels", then maybe those companies that were just chasing profits for their shareholders would have pulled in the reigns more to retain their ratings and not stretched themselves so far. That applies to MBIA, Ambac, AIG, Lehman, anyone in the financial arena.

Also, Adam Smith's "invisible hand" sometimes doesn't work so well, and you do need regulators. We have a derivatives market of mind-blowing proportions. Jim Jubak has a good article this week specifically on the derivatives market melt-down:

articles.moneycentral....

He estimates that the entire market is $455 trillion. TRILLION. And this is an unregulated market, where the companies doing business don't necessarily follow reporting standards (I'm not sure if there really are any for these confusing contracts), and the rating agencies have largely ignored.

I don't really follow Ambac, but I am long on MBIA. It would have been nice to sell them after the last rally like you did and then bought back in lower (I was up 70% at one point but now up only half of that), but I'm long. I try not to time too much, but just sit and wait and ignore the day to day fluctuations. I believe Jay Brown when he says they don't need to go to the capital markets. They haven't in over 6 months. They have a ton of cash, and frankly, their ratings don't really mean much anymore. However, as bullish on them as I am (I see $30+ within 2 years), I don't think that Moody's projecting a "worst case scenario" beyond what is currently market conditions is too unreasonable. No matter what the current conditions, it can ALWAYS get worse. Have we hit bottom? Will things now improve? That is supposition, not certainty, and Moody's is factoring that things COULD get worse into their equations. That doesn't mean they will, but they could. I am still worried about the commercial real estate market collapsing. It has been struggling for a while, and all kinds of other news has taken the spotlight away. I think that could be the next financial shoe to fall.

The Emperor (Mr. Ackman) Has No Clothes

I'm no fan of Ackman, and I'm also long MBIA. But let's really put the blame where it belongs. Ackman didn't make ABK and MBI start investing in a riskier type of business in order to make a better return. They chose to do so, and just like everyone else wrapped up in all this mortgage mess didn't realize the true risk of those investments. There must have been an entire generation of actuaries that weren't doing their jobs, or caving to pressure to make more money. Did Ackman contribute to the knee-jerk reaction to all this and cause their shares to plummet more than they would have? Yes. But my guess is that without Ackman MBI's share still would have gone below $10, just maybe not all the way down to $4.

More Alarmism Over MBIA

Brown's letter mentioned that they had an existing, although shuttered, re-insurance company already under MBIA, and that it could be re-opened pretty much with or without Dinallo's input because it already is registered. I think a year from now no one will really be talking about this stuff anymore, and MBIA and potentially Ambac will be chugging along with business as usual, albeit not at the levels that they were before thanks to Warren Buffett. What gets me is everyone running around saying how bond insurance itself is a waste, when the reality is that if it did not serve a useful purpose to begin with, then it wouldn't have existed. Thank you, Felix, for your insightful and BALANCED reporting.

Bernanke's Statements: Blatant Lies or Wishful Thinking?

Remember the old commercials "When E.F. Hutton talks, people listen"? Greenspan was the successor to E.F. Hutton. For years, the market hinged on every innuendo and pause in between phrases of each and every public speech that Greenspan gave. They scrutinized and second-guesses everything he said. I think Bernanke is very aware of that, and the fact that everyone is throwing around doom and gloom --- if he joins the chorus (even if just by sighing in the wrong spot), it can move the market and usher in the bears. He's being a cheerleader. "It's not too bad". "The worst is over". He knows what's going on. He just knows that if he SAYS it, it will cause panic in the streets.