December 21, 2007

And then we found the rabbit hole of creative finance: The Bond Insurers go Belly Up

When the companies who insured the cards go bankrupt, the whole house of cards falls apart.

And that's where we are today.

You're going to need to do your own reading and research on this one, and if you take the time and effort, you'll be amazed what you find. Get ready to go down the rabbit hole of "creative finance". But be warned - you'll be frightened at what you find. Banks and the government bailing out bond insurers so that the banks and government themselves don't fail. Amazing.

Here's a good start. Good luck. Report back.

Ambac, MBIA Outlook Lowered by S&P, ACA Cut to CCC
``The hits keep coming,'' said Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``It's been our view that these guys are in a much more difficult predicament than investors or the companies themselves believed.''

``Everyone got greedy and thought they were smart enough to write structured product insurance like it was the same as insuring municipal bonds,'' said Rob Haines, an analyst with CreditSights Inc. in New York.

Analyst warns Merrill's write-downs may mount
"We believe Merrill, like its peers, has entered hedging contracts with ACA [Capital Holdings]," Trone said. "Should ACA falter, Merrill would end up with more subprime exposures as those hedging contracts terminate. This will in turn lead to more write-downs."

US$ & Monoline Bond Insurers
The main theme of the banking debacle in 2008 will be the extension far beyond subprimes into PRIME mortgages, as fully detailed in the article last week. The impact fallout from the bond insurers might hit home soon, as Wall Street will be forced to bring countless more wrecked billion$ in mortgage bonds onto balance sheets.

27 comments:

Whhite Swan Event said...

You are over reacting, Keith. Our good friends in the China government will help.
After all, they have some skin in the game.

Anonymous said...

Yeah dude, you are overreacting as usual. You make it sound like no insurance company has ever lost money before. Plenty have and plenty more will.

Anonymous said...

Let the fighting begin...

Blood in the gutters and only the strong and smart will survive.

Laugh. Doesn't that blade feel cold placed against your throat?

It will be over in a second... Baaah Baah Baaah.

Rambo

Brian said...

Today's posts are great-

I'm having more fun than a man should be allowed to have.

Are you sure the schadenfreude isn't reaching illegal concentrations around here?

Brian

Anonymous said...


Yeah dude, you are overreacting as usual. You make it sound like no insurance company has ever lost money before. Plenty have and plenty more will.


Hey moron, these guys have insured trillions worth of bonds. They used the money from those contracts to invest in junk CDOs and CLOs and lost more money. ACA Capital is a pennystock now.

westwest888 said...

http://tinyurl.com/2yrxxv

Dec. 21 (Bloomberg) -- State and local borrowers are discovering that buying municipal bond insurance from MBIA Inc. and Ambac Financial Group Inc. is a waste of money.

GT said...

man, is there some kind of graph or chart to visualize how everything is connected in this mess? i still can barely wrap my head around what write downs and cdo's are

Der Metzger said...

"man, is there some kind of graph or chart to visualize how everything is connected in this mess? i still can barely wrap my head around what write downs and cdo's are"

No graph but sometimes a recipe helps (better cooks than I, please change the ingredients or cooking steps. let's see who "makes" the best sausages shall we?)

1. Take one million pieces of rotten meat and mix with 80,000 pieces of filet and entrecot.
2. Grind in meat grinder on the finest setting
3. Mix with exotic spices
4. Stuff into rinsed pig intestines
5. Wrap it up in colorful packaging and give it a foreign sounding name.
6. Take out of package and cook on BBQ
7. Slice up sausages again.
8. Insert toothpicks.
9 Serve to your international party guests.


*Serving suggestions:

This also goes well with cold vodka shots.

TickTickBOOM! said...

THIS IS HUGE!!!

MBIA and ABK have insured TRILLIONS worth of CDOs. Their market cap and cash are but a tiny fraction of their obligations. They will not be able to cover even a fraction of the defaults they promised to cover. This is because they were allowed to promise as much as they wanted with no oversight. These losses are going to be REAL very soon and they're coming to a pension fund near you.

This is your final warning...GET OUT NOW!

Anonymous said...

This is because they were allowed to promise as much as they wanted with no oversight. These losses are going to be REAL very soon and they're coming to a pension fund near you.

This is your final warning...GET OUT NOW!

December 21, 2007 7:29 PM

This is the "free market" at work. How do you like it?

Frank@Scottsdale-Sucks.com said...

I can't wait for the hedge funds to go belly-up. Talk about people making easy money on no fundamentals and while providing zero value in return for it.

Anonymous said...

A large part of what is happening in the finanical markets folks was already foretold by Newtons' definition of motion. Let us begin our explanation of how Newton changed our understanding of the Universe by enumerating his Three Laws of Motion.

Newton's First Law of Motion:
I. Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it.

This we recognize as essentially Galileo's concept of inertia, and this is often termed simply the "Law of Inertia".

Newton's Second Law of Motion:
II. The relationship between an object's mass m, its acceleration a, and the applied force F is F = ma. Acceleration and force are vectors (as indicated by their symbols being displayed in slant bold font); in this law the direction of the force vector is the same as the direction of the acceleration vector.

This is the most powerful of Newton's three Laws, because it allows quantitative calculations of dynamics: how do velocities change when forces are applied. Notice the fundamental difference between Newton's 2nd Law and the dynamics of Aristotle: according to Newton, a force causes only a change in velocity (an acceleration); it does not maintain the velocity as Aristotle held.

This is sometimes summarized by saying that under Newton, F = ma, but under Aristotle F = mv, where v is the velocity. Thus, according to Aristotle there is only a velocity if there is a force, but according to Newton an object with a certain velocity maintains that velocity unless a force acts on it to cause an acceleration (that is, a change in the velocity). As we have noted earlier in conjunction with the discussion of Galileo, Aristotle's view seems to be more in accord with common sense, but that is because of a failure to appreciate the role played by frictional forces. Once account is taken of all forces acting in a given situation it is the dynamics of Galileo and Newton, not of Aristotle, that are found to be in accord with the observations.

Newton's Third Law of Motion:
III. For every action there is an equal and opposite reaction.

This law is exemplified by what happens if we step off a boat onto the bank of a lake: as we move in the direction of the shore, the boat tends to move in the opposite direction (leaving us facedown in the water, if we aren't careful!).

Now that you know the motion and direction of this cascade of present financial events, how are you going to print your way out? As long as the Government keeps tring to make something, i.e. money, out of nothing, you have to see an equal and opposite effect. God help us all.

Anonymous said...

Golden rule of the bond market: When interest rates go down, bond prices go up. Interest rates have went down 1% since August. I defy you to find one bond market fund (except all treasury notes) thats up in the last month.

Princess Mononoke said...

HPer's it's almost time to get those goggles out of the closet... Because the $h*t is about to hit the fan!

All those cards Keith keeps referring to will start to collapse in February!

Right now everybody in the financial district are enjoying their holidays. However, come January you'll see them all scrambling like chickens without heads.

No matter how much money the Fed prints moolah... JUNK is still JUNK! and that HPer's is what will be revealed finally!

More Transparency PLEASE!!!

Princess Mononoke said...

December 22, 2007 2:00 AM

Regarding the Bond market:

When interest rates decline, the price of the Bond does go up... BUT that is NOT a good thing, because it is now sold above par ($100) at a premium.

This is an old saying on Wall St.: The Dog always wags its tail...

(The Dog being the Bond Market and the tail being the Stock Market).

Yes, there appears to be a significant disconnect in all markets from the norm. However, the markets will soon find their equilibrium, just like any natural force does. Watch and see...

Anonymous said...

MBIA and ABK have insured TRILLIONS worth of CDOs. Their market cap and cash are but a tiny fraction of their obligations. They will not be able to cover even a fraction of the defaults they promised to cover.

The CDO/CDS market is completely unregulated. Any fly-by-night hedge fund could sell bond insurance.

Anonymous said...


I can't wait for the hedge funds to go belly-up. Talk about people making easy money on no fundamentals and while providing zero value in return for it.


I was talking to some hedge fund analysts last summer and you wouldn't believe how clueless these MFers are. One guy was telling me to buy Bear Stearns stock.

Anonymous said...

The CDO/CDS market is completely unregulated. Any fly-by-night hedge fund could sell bond insurance.

December 22, 2007 6:24 AM

So lets just make sure Government keeps their stinking nose out of this business too. I have to laugh. People complain that they've been robbed and cheated and in the next breath they scream for more free trade and less interference from government.

They are also Ron Paul supporters. God knows how Ron would solve this crisis seeing as he doesnt understand the proper function of government.

Personally were I President I would shut the hedge funds down and confiscate their assets. They are a threat to the well being of the US population.

LauraVella said...

This is getting more complicated all the time.

The fed can print as much money into oblivion. This situation is more a matter of regulation and trust.

Are there any muni bonds or government bonds carrying any subprime? Sounds like this could possibly bankrupt our government-Or is that not a possibility?

Princess Mononoke said...

LauraVella said...
>>>Sounds like this could possibly bankrupt our government-Or is that not a possibility?
December 22, 2007 3:33 PM

I know for a fact that corruption, greed & mis-management of funds were the cause of a small county not being able to meet its debt obligations (ie; municipal bonds).

I would never have known about it if my aunt didn't live there. She came to visit, I filled her in on all the latest economic gossip. She then told me, really disturbed that the taxpayer's of her town were going to have to foot the bill on TOP of what they already pay in taxes; for snow plowing, trash pick-up, maintenance, etc.

She said the County was broke!

Pagosa Springs, Colorado is going bankrupt. I'm waiting to see how that works out...?

Princess Mononoke said...

I wanted to share that story about Pagosa Springs, Co.

However, regarding our Federal Gov't going bankrupt... I personally don't see that happening.

A municipal bond is an I-O-U from a specific county. That is where I see future problems (ie; California, etc. not being able to meet their debt obligations due to a MASSIVE decrease in revenue and property taxes causing the problem).

A T-Bond is at best the most secure investment you can make at this moment, but for very little ROI. Because all Ben at the Fed has to do is print more $$$ to pay its I-O-U........

the other trader said...

Keith'
You are correct.
I cannot believe there are only 19 coments on this one.

This was the other shoe to drop, it just has not hit the floor yet.

Goes to prove, even the people here are not aware of their surroundings.
If they were, you would have 100's of responses to this post.

Anonymous said...

Game over. Even Cramer wrote about this. This is the accelerating event that will send Cuntrywide and Wamu down the toilet + who else?? BOOYAHH

FDIC is getting a standardize system together to expedite handling claims in future bank failures. I wonder why that is being done now?

Got guns?

Anonymous said...

LauraVella said...
This is getting more complicated all the time.

The fed can print as much money into oblivion. This situation is more a matter of regulation and trust.

Are there any muni bonds or government bonds carrying any subprime? Sounds like this could possibly bankrupt our government-Or is that not a possibility?

December 22, 2007 3:33 PM


A government bond is government debt obligation (local or national) backed by the credit and taxing power of a country with very little risk of default.

This includes short-term Treasury bills, medium-term Treasury notes, and long-term Treasury bonds.

Pension funds like the one Florida lost several billions due to investments in mortgage backed securities.

the other trader said...

Princess Mononoke,
You are correct concerning the downgrading of bonds, and the massive losses that are occuring, but this goes MUCH deeper than that.

According to some laws, any public/private pension fund that holds bonds must insure them by companies rated A+ or better. (I am not sure of the exact wording of the laws, I have yet to look closely), but because of these downgrades the funds will BE FORCED to sell billion and billions of their bond holding, by law.
Unless some quick (law) changes are made, selling will accelerate, losses will widen, and the system will begin to unwind.
It still goes deeper than this, I am researching this after the holidays to find the deeper facts. I will keep you informed.

Princess Mononoke said...

the other trader said...
December 23, 2007 5:30 PM

Gosh, I hadn't even considered that Fed & State Pension funds... that is not going to be pretty and the shareholders will certainly not be happy with the end result.

The JUNK I keep referring to are the exotic investment vehicles ie; SIVs, CDOs, MBSs etc. these are what other companies have heavily invested in and took HIGH risk in.

EVERY corporation has a treasury dept., an investment portfolio if you will, that it invests part of its revenue stream. This shoe is dropping very soon...

Here is an article written back in early November regarding this issue:

http://www.moneyandmarkets.com/Issues.aspx?NewsletterEntryId=1178

LauraVella said...

Thanks for responding to my question Princess M. and that story on Pagosa Springs. This kind of news isnt even in the headlines yet.

I remember back in the early 90's when Orange County was in threat of going bankrupt. I don't know exactly how they avoided it.

We'er going to start seeing more counties going bankrupt in the future.

I wonder what these "assesments" will be called, and the excuse they use when trying to force feed it onto homeowners and commercial property owners?