8 Banks Join to Rescue Bond Insurers

by: TraderMark

And yet another bailout. This one seems legit. The irony of it is the parallel of you, I, our neighbors, and our every person insured say for example, under Blue Cross, having to pitch in and send money to Blue Cross so they can continue to insure us. That's how bad the situation has become.

  • Eight large banks have joined forces to seek a rescue plan for MBIA Inc (NYSE:MBI), Ambac Financial Group Inc (NYSE:ABK) and other troubled bond insurers battered by the global credit c
  • The $2.5 trillion bond insurance industry is struggling with mounting losses and capital shortfalls, jeopardizing the "triple-A" credit ratings that insurers such as MBIA and Ambac depend on to function normally.
  • CNBC said the eight banks are Barclays Plc (LSE:BARC.L), BNP Paribas (Paris:BNPP.PA), Citigroup Inc (NYSE:C), Allianz's (XETRA:ALVG.DE) Dresdner Bank, Royal Bank of Scotland Group Plc (LSE:RBS.L), Societe Generale (Paris:SOGN.PA), UBS AG (VTX:UBSN.VX) and Wachovia Corp
  • Unless the market or the insurers stabilize, investors may unload hundreds of billions of dollars of bonds, raising borrowing costs and ultimately burdening taxpayers. It could also result in hundreds of billions of dollars of additional write-downs at banks worldwide, analysts have said. Standard & Poor's on Wednesday estimated total banking industry losses tied to mortgage problems will exceed $265 billion.

But as I stated, these bond insurers have been a Sword of Damocles hanging over the market for a long time [Bond Insurers Becoming More Troublesome]. This has been an ongoing issue, but what has changed in recent weeks is regulators and those in government finally realize the issue, and behind the scenes arm twisting is happening. And "solutions" are found.

Remember, this was exactly the same solution proposes to keep hiding SIVs... the government (Treasury) in fact proposed that... Mr Paulson wanted the other banks to come to the rescue of the Citigroup's and Merrill Lynch's and contribute their own money to set up a fake third party customer to eat up the off balance sheet SIV's so that people would not have to fess up to it. [Oct 15 - the Super Bailout Fund]

Keep in mind off balance sheet accounting is part of what took Enron down. Yet now we have a government who is encouraging the creation of fake third parties to keep things hidden off balance sheet. This is how far we have fallen, and why no one calls this an outrage is beyond me. My belief is the systematic risks are so high of global financial failure that no one dare raise a beef.

You think I exaggerate? We've already seen this mortgage asset based contagion hit cities, states, other countries, and now it's hitting individual companies. We talked about Ciena (NASDAQ:CIEN), and Thursday it hit Bristol Myers. Even Potash!

  • Bristol-Myers Squibb Co.'s $275 million writedown on subprime investments shows the mortgage crisis is spreading from Wall Street to the drug, technology and mining industries, where companies are posting losses on assets once rated AAA.
  • The widening collapse threatens U.S. earnings and stock values. Computer-related companies led by Ciena Corp. already reported writedowns similar to those at New York-based Bristol- Myers. Smaller technology companies including Lawson Software Inc., a maker of human-resources software, may be at risk based on their investments, according to Merrill Lynch & Co.
  • ``Many of the securities that the corporate treasurers thought were perfectly safe in fact are not,'' said Anthony J. Carfang, a partner at Treasury Strategies, a Chicago-based financial consultant. ``No one knows where the bad paper is.''
  • Bristol-Myers and Ciena said they picked AAA-rated investments considered safe by rating companies Moody's Investors Service and Standard & Poor's. In its most recent quarterly regulatory filing on Oct. 25, Bristol-Myers said it had ``floating-rate instruments with an `AAA/aaa' credit rating'' that could ``be liquidated for cash at short notice.''
  • ``They are rated Triple A today, in two months they could be Double A and in six months they could be Single A,'' said Michael Shinnick, who helps manage $3 billion at 1st Source Bank in South Bend, Indiana. He owns technology companies such as Microsoft Corp. in part because of their cash. ``The situation in some of these mortgage-backed securities is likely to deteriorate.''
  • Not everyone is as fortunate. Apex Silver Mines Ltd., a silver producer in Bolivia, Peru and Mexico, said in November it recorded a $21.1 million charge against the value of $71.7 million of auction-rate securities. Potash Corp. of Saskatchewan Inc., the largest maker of crop nutrients, had a $26.5 million charge for auction-rate securities in the fourth quarter. Spokeswoman Rhonda Speiss declined to comment.

So again, another blow to free market capitalism. Is it good for the system? Yes. But this just kills people who bet against these stocks for valid reasons. A healthy market allows shorting. A healthy market allows people who bet against dying companies to feel safe in those bets. The American Government has now made it unsafe to bet against the financial system through multiple steps (this is just the latest). I suppose this deserves a Bronx cheer.

I am sure many billions were placed on bets against these bond insurers but the "invisible hand" has come in and says, whatever your homework was that made you predict this - it doesn't matter. You will not reap the benefits. And this is US free market capitalism. Again. Obviously we have found a new oxymoron for the lexicon. US free market capitalism.