Imminent and severe market correction

[Kauri]

may be orf topic but..
despite continued rumours of a looming large writedown.. and Merrills downgrading fred and fannie... apparently thhe market downturn is due to a snow storm in NY...
enough already...
Cheers
..........Kauri

 

[Kauri]

sorry to be orf subject again.... but...

Spanish real estate company Habitat may have to declare bankruptcy if it cannot get at least six bank lenders signed up by Wednesday. Equity traders have taken the news as a sign that the economic sickness is spreading, an omen of more pressure on global equity markets.

Cheers
...........Kauri

 

[sassa]

A spirited turnaround in the American markets overnight in the last hour due to a favourable report about the bond insurer Ambac!!

http://www.ridingthedax.com/2008/02/22/cnbc-saves-the-weekend-smells-like-manipulation/

 

[dhukka]

A spirited turnaround in the American markets overnight in the last hour due to a favourable report about the bond insurer Ambac!!

http://www.ridingthedax.com/2008/02/22/cnbc-saves-the-weekend-smells-like-manipulation/

I find it hard to believe the sources claim that CNBC deliberately manipulated the market on Friday afternnon by releasing this story. I think the FT has a better article on the story.

Banks to aid Ambac with up to $3bn

A group of banks is preparing to inject $2bn to $3bn into the troubled bond insurer Ambac, which is racing against time to come up with fresh capital to avoid a sharp cut in its triple-A credit rating that could trigger wider financial market turmoil.

The money from banks would be part of a plan to split Ambac’s operations, people involved in the discussions said.

Ambac is also considering raising equity from shareholders and it is not yet clear how much capital it will need, or what credit ratings the split businesses will have. Talks between Ambac and the banks will continue this weekend, with a view to finalising a deal by early next week.

The banks looking at supporting Ambac include Citigroup, Wachovia, Barclays, Royal Bank of Scotland, Société Générale, BNP Paribas, UBS and Dresdner. They have the most exposure to guarantees supplied by Ambac on structured bonds and derivatives, the value of which could fall sharply, resulting in billions of dollars of writedowns if the insurer’s credit ratings drop far below the triple-A level.

Bond insurers have for decades guaranteed debt issued by municipal borrowers, lending them, in effect, triple-A credit ratings in exchange for a fee. Bond insurers, or monolines, have ventured into structured finance guarantees, including guarantees on complex debt instruments such as collateralised debt obligations. The subprime mortgage crisis has led to a jump in losses in this sector, threatening the triple-A credit ratings of Ambac and MBIA, the biggest monolines.

Municipal borrowers are being hit by the crisis of confidence in the insurers, whose guarantees back $2,400bn of bonds. With interest rates for some municipals rising sharply, regulators have called for a solution that will ensure the municipal business retains its triple-A rating.

Last month, banks were called in to meet Eric Dinallo, the New York insurance superintendent, who urged them to discuss possible action to prevent downgrades. Federal policymakers did not arm-twist banks to take part in a rescue. But a senior Treasury official said it had to “blow some smoke away” so market participants understood their “indirect interest”.

It's hard to understand why this didn't happen sooner. At the risk of oversimplifying, why not put up $2 -$3 billion in capital now, to save $50 billion in writedowns in the future?

Are the banks that capital impaired they can't afford to stump up the money? At the end of the day it's throwing good money after bad, but if they can prevent a downgrade in the insurers credit rating by stumping up a few billion, surely that is preferable than tens of billions in writedowns.

Also of interest in a story which may affect the other major Bond Insurer MBIA

The ratings agency also stripped Channel Reinsurance, which provides reinsurance of policies written by bond insurer MBIA, of its triple-A rating yesterday.

The three-notch downgrade to “Aa3” may negatively impact the value of the reinsurance policies it has written for MBIA, its only customer, Moody’s said.

Moody’s expects Channel Re’s insurance policies to incur losses of $230m compared with its current claims-paying ability of about $930m

This story seems to have gotten lost amidst the euphoria of the AMBAC rescue.

 

[reece55]

The biggest problem with the Bond insurers is that it is impossible to tell (at least at this stage) if the capital provided will be sufficient to maintain a liquid operation for them...

Imagine how many different tranche's of mortgages, with varying quality (albeit a lot of them poor), they have exposure to and then trying to mathematically work out, based on current delinquencies, what the insurers have to pay out in the future. Then add into the equation that there may be the ability for the manager to actually to foreclose on the houses in the pool and varying legalities based on the way that the notes were assigned the underlying cash flow, trigger clauses etc. Then multiply that by the number of different instruments they insured.......... There is just no way of being able to tell if this will be enough. Makes you wonder why in the hell they did it in the first place, surely any sane risk manager would have said "this is just impossible for us to be able to tell how we can ensure we have enough reserves to cover worst case scenario"....

America is just living in the fallacy that the financials wizards will be able to maintain their (the insurers) going concern status - the reality is that neither the bear or bull camp for the insurers truly know, because it could take years to find out the truth!!!!

Cheers

 

[ithatheekret]

The line up in the bank bail out list tells it all .

The storyline would have us believe that there will be no rerating .

Wouldn't that be just dandy for those banks caught out holding the dunny paper ?


More Goldilocks stuff , or is it Cinderella this time .......... ?

 

[dhukka]

The biggest problem with the Bond insurers is that it is impossible to tell (at least at this stage) if the capital provided will be sufficient to maintain a liquid operation for them...

Imagine how many different tranche's of mortgages, with varying quality (albeit a lot of them poor), they have exposure to and then trying to mathematically work out, based on current delinquencies, what the insurers have to pay out in the future. Then add into the equation that there may be the ability for the manager to actually to foreclose on the houses in the pool and varying legalities based on the way that the notes were assigned the underlying cash flow, trigger clauses etc. Then multiply that by the number of different instruments they insured.......... There is just no way of being able to tell if this will be enough. Makes you wonder why in the hell they did it in the first place, surely any sane risk manager would have said "this is just impossible for us to be able to tell how we can ensure we have enough reserves to cover worst case scenario"....

America is just living in the fallacy that the financials wizards will be able to maintain their (the insurers) going concern status - the reality is that neither the bear or bull camp for the insurers truly know, because it could take years to find out the truth!!!!

Cheers

Exactly, and this is why I started off the previous post by asking why this didn't happen sooner. If it is just as simple as stumping up $2-3 billion to prevent $50 billion in writedowns why didn't they do this a month ago?

Precisely because as you say, how can the banks be sure that it will be enough? If this gets done there will not only have to be a cash injection but lines of credit to back up further potential losses. The banks don't want to do it because it ties up capital at a time when they are severely capital constrained.

However the banks seem to have decided that propping up AMBAC is preferable to letting it lose it's AAA rating.

 

[chops_a_must]

Exactly, and this is why I started off the previous post by asking why this didn't happen sooner. If it is just as simple as stumping up $2-3 billion to prevent $50 billion in writedowns why didn't they do this a month ago?

Precisely because as you say, how can the banks be sure that it will be enough? If this gets done there will not only have to be a cash injection but lines of credit to back up further potential losses. The banks don't want to do it because it ties up capital at a time when they are severely capital constrained.

However the banks seem to have decided that propping up AMBAC is preferable to letting it lose it's AAA rating.

There are a couple of issues I see. Like you guys have stated, how do they know anything will be enough to cover the trillions of dollars of crap out there? 2 billion is a piss in a river when it comes to that surely.

Secondly, how can banks that own the securities backed by the insurer and the rater of that security, then become the major stakeholder in the business doing the insuring and rating? It's a gigantic conflict of interest, that a retarded chicken could see through.

I don't think they can stop the whole thing coming down eventually, without splitting them up. Because these insurers for want of a better term, are cluster fukced. But even with splitting the insurers up, they are stuffed anyway, perhaps just slightly less so.

All that the bail out parties provide is a very handy watchlist for stocks to short when the whole thing comes down. It's not hard to see who is bound to lose most, by the actions of some...

 

[ithatheekret]

There has to be a twist here , the wads of paper the banks hold will still have to be rerated . If that's the case , how are they going to acheive investment standard cash reserve ratios and bail the bond insurers out .

If they bail them out , how do they know the likes of AMBAC won't get rerated anyway ? The capiltization is only one of the problem . What about legals from all that will eventually sue ?

There has to be a side issue on all the structured financing and municipal bonds , other than a bail out .

Unless they don't want to look that far forward ......... again .

The issues are global not just on Wall and State Street , there will be comeback for those rated instruments ticked off and rubber stamped , but of course then it was certain banks that traded these heavily , exporting them .

Look around , where didn't they find suckers ?


Some of those suckers will be able to afford mega legal teams to swipe back with .

 

[sassa]

A slight change of theme.This article is from Stephanie Pomboy of MacroMavens.

"The occasion is the sixth anniversary of MacroMavens. Stephanie is unorthodoxy personified, wonderfully adept at puncturing myths and popping bubbles with pointed fact, whether originating in Wall Street, Washington or other louche locales. The credit crisis has provided a great stomping ground for her from its incipiency through the seizing up of the SWAPS market; invariably, she's a step or two ahead of the actual disaster.

All the grandiose plans to prop up the sinking homeowner appear absurd to her in the face of the obvious question: With $6 trillion of the $8 trillion in residential mortgage debt securitized, how do you get a lender to renegotiate a mortgage when you don't know who the lender is?

Most interesting in her latest screed, we thought, were her candidates for the next serious casualties of the credit collapse, credit cards and commercial real estate. For a spell now, Stephanie has been predicting that to make up the void in home-equity lending, consumers will shift to plastic, foreshadowing a bumper crop of credit-card delinquencies. And she observes that "while smiley-faced pundits laud 'still low' delinquency rates," such figures conceal the fact that explosive growth in credit-card borrowing has been accompanied by a "massive increase" in dollar amount of delinquencies.

The other terrible accident waiting to happen, Stephanie cautions, is commercial real estate. Eager to make up for lost residential mortgage volume, banks have been pouring dough hand over first into the commercial real-estate market, creating, naturally, a huge and swiftly inflating bubble. Such profligate lending has swollen commercial real-estate loans to 14% of all bank loans, the largest slice since data first was collected 13 years ago.

Inevitably, delinquencies are starting to rise apace with the burgeoning loans and have reached their highest level in a decade. The problem is a dead certainty to get worse, as troubles in Wall Street spill over into the commercial real estate market. Stephanie cites a report by CB Richard Ellis that 42% of commercial real estate in lower Manhattan and 28% in midtown is tied to the financial sector.

Ruminating on the frantic scurrying about in Washington to come up with some palliatives for distressed homeowners (especially those who vote) and stretched-to-the-limit lenders (especially those who chip into campaign coffers) Stephanie views the efforts with something between wonder and mild incredulity.

Contrary to the conventional wisdom and the traditional lack of any kind of wisdom in Washington, she avers, "The current credit bust is not simply a function of reckless real-estate lending -- residential and commercial. It is a function of interest rate 'resets' across the entire U.S. economy."
Consumers aren't the "only ones who haplessly heeded Greenspan's call to ARMS." Everyone, she explains, switched to borrowing short. Municipalities, for example, as we've just had unhappy reason to discover.

And so did Corporate America with a vengeance: Floating-rate paper now accounts for 54% of its overall issuance, up from 26% in 2002, and a tidy $565 billion in corporate bonds have to be rolled over this year, 34% greater than last year.

Hey smiley face, what's so funny?"

 

[dhukka]

Nothing really new there sassa, could you provide links when you quote articles?

 

[sassa]

Nothing really new there sassa, could you provide links when you quote articles?

My apologies.Certainly.

http://www.itulip.com/forums/showthread.php?p=28291#poststop

 

[dhukka]

My apologies.Certainly.

http://www.itulip.com/forums/showthread.php?p=28291#poststop

Thanks,

A good summary of the situation with AMBAC was posted on Naked Capitalism yesterday. It seems that the banks are not stumping up cash but rather providing a back stop to a rights issue.

Will Ambac Have a Deal Next Week?

We aren't in a position to answer the question posed in the headline, but following a leak that lead to a 250 point rally in the Dow, the noises coming from the team trying to rescue the troubled number two bond insurer have suddenly taken an optimistic tone. While the initial reports were vague, the Wall Street Journal, the Financial Times and the New York Times carry broadly similar reports.

Ambac and the rating agencies received a proposal from eight banks (Citigroup, UBS, Royal Bank of Scotland, Wachovia, Barclays. Societe Generale, BNP Paribas, and Dresdner) on Friday afternoon. As the Times reports, the proposal involves both providing an equity infusion and splitting the company:

Under Ambac’s plan, one part of the company would guarantee relatively safe municipal bonds, while the other would insure more complex securities backed by mortgages and other debt. In all, Ambac guarantees about $556.2 billion of securities.

The company also hopes to raise $2.5 billion through a rights offering to its existing shareholders; the sale will be backed by banks. Ambac also plans to raise roughly $500 million in new debt, according to the person who has seen the plan, who was not authorized to talk about it.

The banks, which include Citigroup and UBS, delivered a draft of the plan to Ambac and credit ratings agencies on Friday, and the company is expected to give its formal consent soon. Officials involved in drafting the plan hope the two new subsidiaries will both receive triple-A ratings, though the firm backing mortgage-related bonds could be rated slightly lower.​

Note the artful phrasing: this is Ambac's plan, but the document came from the eight banks, as stated in the Wall Street Journal, "committing to the equity and debt participation."

Note: the banks aren't making an equity infusion. As I read this, they are merely backstopping a public offering by Ambac. This is the most lukewarm form of support they could provide.

Why haven't the banks stepped forth more wholeheartedly? Analyst James Bianco of Bianco Research, in an e-mail this evening, goes through the history and is mystified as to why a deal hasn't been wrapped up long ago:

The Monoline bailout hysteria started January 23.
The New York Times - (January 24) Next on the Worry List: Shaky Insurers of Bonds​

Regulators fear a possible chain of events in which the troubled bond insurers, MBIA and Ambac, might be unable to keep their promise to pay investors if borrowers default on their debt.....the talks focused on raising as much as $15 billion for the companies … Eric R. Dinallo, the New York insurance superintendent who regulates MBIA..... suggested that the group move in as little as 48 hours to get a deal done ahead of any downgrading of the bond guarantors by credit ratings firms.​

So the bailout was suppose to be done by Janaury 26 and total $15 billion. We have been told that a monoline downgrade is critical to the entire financial system. UBS estimates it will cost the banking system $203 billion in additional writedowns. Barclays estimates it will cost $143 billion in writedowns. Oppenheimer estimates that it will cost Merrill, Citi and UBS $40 to $70 billion alone.

Today we learn that a bailout is again very close.​

The Financial Times - (February 22) Banks to aid Ambac with up to $3bn
A group of banks is preparing to inject $2bn to $3bn into the troubled bond insurer Ambac.... The money from banks would be part of a plan to split Ambac’s operations, people involved in the discussions said. Ambac is also considering raising equity from shareholders and it is not yet clear how much capital it will need, or what credit ratings the split businesses will have.

Let me get this straight.

If the monolines get downgraded, the banking system is at risk for $143 billion to $203 billion of losses. This is why they were 48 hours from a $15 billion deal on January 23. Now on February 22, they are again 48 hours away from a $3 billion deal for just Ambac spread among eight banks. So the longer they talked the smaller the number got.....

My questions - If the fate of the financial system only needs $3 billion to get “fixed,” why did it take eight banks a month to negotiate coughing up $300 million each? Don’t they pay Robert Rubin more each year? B of A took less much less time to bailout Countrywide with a $4 billion deal all by itself.

Something just doesn’t make sense here. If they are staring at hundred of hundreds of billion in losses, and $300 million each stops all this, why was their even a negotiation? Just write the check and move on to the next issue.

What am I missing?​

I think Citi paid Rubin only $15.2 million, but point well taken.

Personally, I am surprised too that he banks are stepping up now as opposed to a month ago, since as we discussed earlier, the idea of a split makes it vastly less attractive for the banks to provide support. Any break-up plan is likely to be biased in favor of shoring up the muni operations. Dinallo's head would be on a pike if after all these machinations, a newly established muni operation didn't get a triple A rating. If the banks faced a free rider problem a month ago (which was presumably one reason not to stump up cash) when it was merely the structured finance businesses that appeared to be in trouble, that issue got magnified by now that the muni business is looking like the higher priority.

And FT Alphaville pointed out, as we have, that multiple businesses will require more equity than a single one:

So MBIA is paying lip service to the idea that they can’t favour one class of claimant over the other. But how they’ll do that remains unclear. For a start, as its chief executive hinted at above, two (or three or four) separate businesses will require greater capital underpinning than in one combined entity. And what has always been rather unclear in the bond insurer split plan is where the reserves go.​

So reason 1. for not doing a deal may have been a free rider problem. To continue the list:

2. Writing a check may not make the problem go away. Remember, the worst outcome for the banks is not that the monolines are downgraded; it's that they throw scarce cash at the problem and the downgrade threat resurfaces in six months to a year. That means they have wasted money and will still face the damage inflicted by a downgrade, or face an ongoing sinkhole of having to put funds in every time the monolines look shaky.

3. Not all the banks may be that badly exposed. One thing that is nasty about these deals is that everyone at the table is assumed to stump up the same amount. Some may not regard their exposure as that bad. They have their numbers; the analysts don't. Remember, even though Citi and Merrll have large CDO positions, they also have taken large writeoffs. They may not think they have further downside. And one big name not participating, or demanding a lesser role, could poison the negotiating dynamic.

4. They may have believed the monolines' prior statements. Ambac and MBIA have both been maintaining that Bill Ackman is all wet, that his mark to market analysis is wrong. Apparently the CDS contracts the insurers wrote do not have to be paid out until the CDOs liquidate, and for some contracts, apparently, a liquidation does not trigger a payout on the principal portion of the deal; they aren't required to pay until the underling assets reach final maturity, which can take as long as 30 to 45 years. That means the payouts are spread out over a longer time period than Ackman assumed.

Note I'm not entirely sure I buy this argument, simply because the insurers have never been very forthcoming when pressed. If the bulk of their agreements worked this way, the downgrade worries should have gone away. The fact that they didn't suggests matters aren't quite that simple. Yet the S&P and Moody's downgrade threats would seem to make this moot. It doesn't matter who is right; what matters is what it takes to placate the ratings agencies.

5. The banks are in vastly worse shape than they dare admit. Maybe contributing $300 million is a big deal for them, and they have been pressing behind the scenes for a government bailout or (more likely) that official pressure be applied quietly to get the rating agencies to back down. Remember, as we said before, the rating agencies are the part of the equation that is the most malleable. Maybe the banks took a month to play that strategy out.

So I may very well be proven wrong and Ambac will be rescued and split up, which seemed a particularly implausible outcome. If the press has this right, the banks and Ambac are largely on the same page. The wild card in theory is the rating agencies, but in fact, they are desperate not to downgrade the monolines. They've moved back their deadline any time an excuse cropped up. So I'd expect them to fall in line unless there is something deficient in the plan, such as inadequate detail as to how the split will be put into effect. But that may lead to further negotiation rather than a flat-out rejection.

 

[chops_a_must]

Thought this might give people a bit of a laugh. A couple of videos relating to the sub-prime mess. Posted them on the blog as well.

The first is John Fortune & John Bird, which is very very funny, and great if you are having trouble following how this fiasco happened.

The second is a little easier to follow.

 

[Kauri]

There has to be a twist here , the wads of paper the banks hold will still have to be rerated . If that's the case , how are they going to acheive investment standard cash reserve ratios and bail the bond insurers out .

If they bail them out , how do they know the likes of AMBAC won't get rerated anyway ? The capiltization is only one of the problem . What about legals from all that will eventually sue ?

There has to be a side issue on all the structured financing and municipal bonds , other than a bail out .

Unless they don't want to look that far forward ......... again .

The issues are global not just on Wall and State Street , there will be comeback for those rated instruments ticked off and rubber stamped , but of course then it was certain banks that traded these heavily , exporting them .

Look around , where didn't they find suckers ?


Some of those suckers will be able to afford mega legal teams to swipe back with .

The Sunday Times reports that HSH Nordbank, one of Germany"s biggest financial institutions is to sue UBS, the Swiss banking giant, claiming it was mis-sold hundreds of millions of dollars worth of subprime securities. The action is expected to trigger a wave of similar lawsuits across world financial centres as institutions seek recompense for losses incurred from buying complex financial instruments that are now worth a fraction of their original price.legal experts say action against investment banks that sold these products will drag on for years, and up to 500 BLN USD will have to be written off against the value of sub-prime mortgages.

 

[GreatPig]

The action is expected to trigger a wave of similar lawsuits across world financial centres

Great, so all the losses are going to be magnified by massive legal costs.

How to profit from a credit crunch: become a lawyer.

GP

 

[Aussiejeff]

Great, so all the losses are going to be magnified by massive legal costs.

How to profit from a credit crunch: become a lawyer.

GP

Too specific.

How to profit FROM ANY SITUATION IMAGINABLE: become a lawyer.

Now, that's more like it.....


AJ

 

[Kauri]

Too specific.

How to profit FROM ANY SITUATION IMAGINABLE: become a lawyer.

Now, that's more like it.....


AJ

it seems a lot of them have found ways to profit from the current problems.. investment banks are "secretly" profiting from emergency ECB funding by acting as brokers to funnel billions of euros to Britain"s banks and building societies re: "much needed liquidity". On Friday, Lloyds TSB chief executive Eric Daniels confirmed that the bank had used the ECB to "fund at the best rate we can".
Cheers
..........Kauri

 

[Kauri]

Rumours that a Goldman analyst in a report has said that large additional write downs are still possible going forrard. The report purportedly says that Citi will have $12 bln in additional write downs, Merrill $4 bln, Lehman $3.5 bln, JPM $3.4 bln, MS $3.1 bln, and BSC $1.4 bln. Good to see that they haven't mentioned themselves..

Cheers
...........Kauri

 

[wayneL]

Rumours that a Goldman analyst in a report has said that large additional write downs are still possible going forrard. The report purportedly says that Citi will have $12 bln in additional write downs, Merrill $4 bln, Lehman $3.5 bln, JPM $3.4 bln, MS $3.1 bln, and BSC $1.4 bln. Good to see that they haven't mentioned themselves..

Cheers
...........Kauri

Maybe Merrills will fill in the blanks about Goldman Sucks.