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Johnny Bitchdog
216 Comments
Federal Reserve: Household Equity at All Time Lows
If the govt. is going to subsidize your mortgage it makes perfect sense to have your house as leveraged as possible at all times to maximize the tax deduction. For those with alot of equity it will pay to releverage every so often and place the proceeds in a money market account.
The only real complication occurs when interest rate differentials are large from existing loan to refi loan, but presumably this is partly offset by keeping your equity in an interest bearing account instead of a house.
jbd.
Ambac's Announcement is a Joke; Disagreeing with Whitman on Monolines
Whitman's letter is full of self-serving delusions, but if you read between the lines, he does offer up a clue as to where this will really blow up:
20 billion in Second Mortgages and HELOCs......these deals don't have the seniority protection that much of the rest of the book does......not too difficult to see a few billion in losses there alone....and Whitman does at least make a glossing over of the risk there.
With respect to the Riesenberg comment about too important to fail, I have to strongly disagree. The only way something is too big to fail is if they have an important role going forward after the crisis is over. To me, it's clear there is no need for MBIA after the crisis is over and it may well be better for the system if they weren't there.....others, including Buffet, have been fast-tracked to the winners circle.......
Any rescue at this point would simply be based on moving losses around, not avoiding them........and the banks simply can't afford to be the receivers of any more losses. A government bailout might work in the short run, but that would rightly scare the hell out of the entire investing world.
Ergo - let them runoff. if it's not deadly after the crisis has stabilized for a year or so, and there is sufficient capital to cover future claims and run a risk taking business....fine.
But there is no reason to think keeping MBIA alive benefits the system at this point.
jbd.
Ambac, MBIA Are Still Shorts Amidst This Wink-and-Nod
The author slightly disingenuous in spewing the 9.5 billion loss figure, though. Without an honest attempt to understand the timing of the theoretical claims payouts, it is of little value in determining whether MBIA has sufficient assets to pay it out......also I am not certain that the number comes from S&P but I'll give him the benefit of the doubt.
jbd.
Housing Prices Are Still Headed Down
I agree with your sentiment, but instead of affordability I would substitute "long term affordability". As you know, loose lending made these McMansions affordable in the immediate sense of being able to get financing.......but as you point out unaffordable by conservative, best practices.
Can you expect the guys with power tools to be economists ?
Or is it better we blame the financial operators for much of the problem ?
Seems like the financial operators deserve more blame than the homebuilders.....
jbd.
Ambac, MBIA Are Still Shorts Amidst This Wink-and-Nod
I guess you are right that the structured product only split-off company would most likely not carry a AAA rating, so that problem would not be solved.
But if it were extremely well capitalized, it could be AAA. And obviously that depends on what the rest of MBIA is worth to someone like Buffet.
It seems to me that if MBIA management bla-bla-bla is at all close in estimating the eventual cash losses on the structured product side, then there is room for a deal and MBIA will not be run into insolvency.
If they are wrong or lying on the structured stuff, then there are major problems because it seems like a no brainer that the .5% muni default rate is going to rise dramatically in this recession (1% minimum) and that leaves less of a cushion for the bad book.
Anyway, between poor and limited disclosure from MBIA and the fact that the raters have access to inside information, we are all flying blind.
My read of the tea leaves is that there are probably legitimate solutions that get MBIA out of this mess, most likely by transferring risk by reinsurance, but possibly by more creative ways to split this thing a whole lot sooner than 5 years. Seems a good bet that Brown's 5 years statement was just part of negotiating strategy.
jbd.
Ambac, MBIA Are Still Shorts Amidst This Wink-and-Nod
However, one interesting aspect of this puzzle is that the ratings agencies are privy to inside information. This makes all external evaluations that don't have the inside information speculative.
Let's take an extreme example: Lets say the Fed has said it will backstop any losses that MBIA doesn't pay. Would you then agree that AAA is acceptable ? Probably (ignore the stupidity of the action). Or let's say Buffet has said that he would buy MBIA net of all the toxic garbage for a specific figure......and that figure leaves ample assets remaining to pay off the toxic structured debt.
Anyway, I am not trying to convince anyone that the ratings agencies are not corrupt - they are. However, it is possible they know something important that we don't.
My personal view is that MBIA should sell everything except the structured contracts to Buffet. This would entail providing enough cash for reinsurance of the muni book, which would be offset by whatever Buffet would pay for MBIA less the toxic structured book......
Now I don't know what figure that would be, but presuming it left sufficient assets to cover the structured book liabilities and working capital to run a firm which only insures structured products.....everybody wins:
Buffet gets his muni business and gets the MBIA name
The toxic business is split off and Jay Brown can create a start-up called Brown's Toxic Product Insurance
Regulators are happy
The muni's remain AAA
And the toxic product policy holders can't complain about fraudulent conveyance as long as the Buffet bid less reinsurance payment is fair.
Voila.....
jbd.
Latest Case-Schiller Report Shows the Sky is Falling
I haven't explored the precise methodology but the changing sales mix isn't the only problem with the NAR trumpeted statistics. There is no adjustment for capital improvements and its quite obvious that people have poured massive amounts of money into improvements over the last few years.....Even the foolish flippers probably put alot more money into the flip houses than was required to simply maintain its livability......
Does anybody know if Shiller has a way for adjusting for capital improvements ?
jbd.
Monoline Duoline Rescue Plan: 5th Time the Charm?
My personal view is that it would take an enormous injection, greater than 3 billion to prevent Ambac from being downgraded at some point in this slowdown.......
jbd.
Thoughts on Ambac Bailout, MBIA, Berkshire's Muni Bond Backing
As corrupt as they probably are, it always pays to pay attention to the trend in the rating, but the actual rating itself seems arbitrary (or corrupt).....
jbd.
TIPS: Great or Terrible?
1. TIPS returns are positively correlated with inflation and therefore are considered to be an inflation hedge.
2. However, TIPS prices are set based on supply and demand, and when there is heavy demand for an inflation hedge their price can surge. Of course this surge in price can actually reduce your overall returns to the point that standard treasuries would have performed better even if expected inflation occurs.
Obviously the issue centers around expectations. Generally speaking you will only get compensated for inflation in excess of expectations at the time of purchase. So you really only win with TIPs when you are a better forecaster of future inflation than the entire market which sets TIPs prices.
jbd.
A Common Sense Look at MBIA
Ackman has been largely accurate, and has played some role in forcing these companies to obtain more capital. If there are no defaults, he may be considered as part of the reason this did not occur, rather than your foolishly hypothesized conman argument.
Nobody knows what future default rates will look like but suffice to say that the leverage which MBIA operated with while still able to maintain AAA was and is simply absurd.
The ratings agencies have been horrendously fraudulent, and while it might be frustrating that they keep raising the bar, there is a very good reason: they are running scared and unable to keep the fraud going.......game over.
jbd.
For Some Economists, The Maestro Can Do No Wrong
Yun has to pander to the idiots he works for.
All this money stuff is hard enough for the bonehead real estate agents to understand, so they need to simplify things: rate cuts good, rate increases bad.
Alan Greenspan was their hero because he never met a problem that he didn't think he could solve with a rate cut. What an arrogant banker he turned out to be.....
Anyway, back to the point.....real estate agents also believe all problems can be solved with rate cuts.....
Therefore Yun has his hands tied.....
You also have to figure an economist that chooses such a position for a spin group does not have much drive to practice his profession with integrity or ethics.
jbd.
Did FASB Scupper the Auction-Rate Market?
You should have just quit when you identified the true cause of the failures......the idea that the increased accuracy in the cash account description somehow forced corporations out of this market is ridiculous.
jbd.
How to Help Both Homeowners and Lenders, at No Public Cost
Also, clearly the value of any such warrant would be based on estimating when it might be converted to cash. The present value of this future cash flow would be much less than the theoretical warrant value based on the writedown amount.
So even if there were a market for the warrants that's a big problem
Then there will not only be low incentive for the seller to get full price in order to maximize the warrant holders value in a theoretical future sale, but there will be all sorts of side deals to make sure that the value is captured locally by the owner and the buyer.............
But the most ridiculous and horrible thing about this plan is the simple act of rewarding people that failed to buy a home they could afford or participated in fraud. This would further instill a sense that in America crime and stupidity does pay, and would cause honest thrifty and deliberate Americans to be disadvantaged at the expense of greedy fools.
jbd.
A Common Sense Look at MBIA
The systemic risk is with policy holders and holders of insured debt. It's really amazing how many fools out there think the government would bailout stockholders given the risks already on the government balance sheet.
jbd.