January 18, 2008

I can't stress how important the failure of MBIA and Ambac will be. You'll see soon enough.


Think about it this way. Most of you have insurance - for health, your car, your possessions or your home. Assume something bad happened and you needed your insurance company to pay up, and when you went to them for your settlement, they wouldn't answer the phone, and you were on your own.

Welcome to Ambac and MBIA. They insured the debt of the cities of the United States. And now they're going belly up, and the cities will have a tough time funding new projects and issuing new debt. And $700 billion of insured debt is now walking across the grand canyon without a net.

And now a whole new round of "mark-to-market" will need to happen at the financial institutions that are already on the brink of failure. I just heard Cramer on MSNBC say that when these two fail, "they won't be able to open the market" and a 2,000 point drop in the Dow was likely. Wow.


The whole leveraged house of cards is collapsing HP'ers, piece by piece. Believe it or not, we're still just getting started.

Ambac Downgraded, Cities Seen at Risk

A downgrade of bond insurer Ambac Financial Group Inc. is likely to have far-reaching effects, making it more difficult for cities to issue new bonds and forcing further write-downs at financial services companies, analysts said Friday.

Since late last year, when the agencies first raised the prospect, analysts have suggested any move to cut Ambac or MBIA below "AAA" could be disastrous. The concern is that downgrades will lead to a reduction in the value of portfolios at dozens of financial institutions, said Donald Light, a senior analyst at Celent LLC.

"Bond insurers are the lynchpin holding together valuations of portfolios of all kinds of financial institutions," Light said.

Warren Buffett's Berkshire Hathaway could be one company that gets a boost. Buffett launched a new bond insurance business in December that has a "AAA" credit rating and a solid balance sheet. Buffett's new company also has the benefit of having no questionable loans on its books.

48 comments:

buttmunch said...

asd

Anonymous said...

Not too big to fail but
too IMPORTANT to fail...

gov will step in one way or another - maybe a behind the scenes guarantee to a private outfit - or a direct takeover...

and then ( like the Countrywide/FHLB thing ) this becomes another backdoor into the US treasury, as it picks up the losses, and keeps the game going for a little while longer...

buttmunch said...

Amen Keith!!!!!!!!!!!!!!

Long ago when the media was chasing after the NAR for comments as if they were on to something the people who had clue were watching these two pigs Ambac & MBIA with a microscope. FORGET THE BANKS, these two companies represent the duck tape holding all the bullshit together.

And now they're all out of ducktape and the shit is squirting everywhere!!!!

Here it comes!

eric in vegas said...

New York already looking to bailout Ambac.

http://tinyurl.com/26dohl

Anonymous said...

2000 point drop? That's Cramer being Cramer, ie a clown making loud noises to get attention.

This is not really news. Everyone knew this was coming for months.

Anonymous said...

kweefer,

You are sooo right on this one. You have to wonder when watching Ben's upper lip quiver the entire time he was testifying yesterday that this wasn't what was really occupying his mind. These two go and its light out. Find it curious that the fed is sitting back and watching on this one...

Mark in San Diego said...

1929 is here all over again. . .a bit slow motion, but none the less. . .I agree with Anon, that the government will try to patch together some "bailout" of MBIA and Ambac - maybe let the Chinese buy them . . .who knows. . .we are now seeing the slow train wreck pick up speed - I swear, I heard three people today talking about the economy, housing, and "making payments.". . .it has finally hit the streets!

Anonymous said...

To all those who are writing about compassion, feel sorry for them, too bad, God Bless You, etc.

Rest Assured, you will be amongst the First... Start making your Peace now. There will not be time later.

You are Doomed. Now, we don't even WANT your house keys back, we are waaay beyond THAT point...

Dead and Shamed America

Anonymous said...

Thats right McCain, Gulligirl you keep talking about Iraq and and the war on terror. Hucklejoke, you just keep waving the bible and play your Guitar. Rome burns and the wanna be emperors (Clinton and Obama are not worth mentioning) fiddle and talk about motor cycles having sliding glass doors and how great things will be when they hold the septer. Meanwhile our glorious leader king George(the devil) kicks the fence down allowing thundering hords of Barbarions (illiterate illegals) to sack the shining city on the hill slaughter rape and pillage at will (got to have that north american union). I am in the bunker, heavily armed, armegeton is apon us. Good luck hp guys and girls. PS I wish I my spell checker working here, maybe in the next life.

Frank@Scottsdale-Sucks.com said...

Just another step closer to ending the madness of living on debt and imaginary money. And the shysters who get rich by producing nothing of value and serving no one.

Now local governments will actually be forced to have a balanced budget and can't raise free money with bonds anymore. Nice.

Pavlov's House said...

Odds have now increased.

60/40 shot that election is postponed "due to unforeseen economic circumstances that the Decider has decided could inhibitate people from rightly deciding who to vote for and/or unduly influencing the outcome of said postponed election."

No elections in Sprawlingrad. Welcome to the Kessel, hope you enjoy the stay.

Malcolm said...

I saw Cramer.

Monday could be a difficult day in the market.

It could also become a self-feeding panic. A bunch of people try to pull cash out of the banks “just in case”, which makes things worse and exasperates the situation.

I can only assume that the candidates running for president haven’t realized that they’re also running for the job of chief bag-holder. If the system holds on until January 09, whoever wins will be the one blamed when it finally does fall apart.

I have a question for non-American readers: What is the rest of the world saying about all of this?

hold the onion rings said...

NEWS FLASH ** Nobody will ever be able to sell a house again in his lifetime!!???**

Check it out!:

Financial Report: "The bond market has already priced in that nobody will ever be able to sell a house again in his lifetime," said Michael Davis, an independent trader in the Chicago Board of Trade's bond-futures pits, which heavily influence the price of everyday mortgages.

"It's not as if there's more bad news that we could factor in fundamentally; it's just that the market is taking its cue entirely from stocks."

Anonymous said...

Welcome to Ambac and MBIA. They insured the debt of the cities of the United States. And now they're going belly up, and the cities will have a tough time funding new projects and issuing new debt. And $700 billion of insured debt is now walking across the grand canyon without a net.

Municipalities won't be affected much - they'll just go out without the insurance wrapper, or they'll go to Berkshire or FSA.

The bigger question is what happens to all the existing wrapped munis in the hands of individual investors and in bond funds. Once the AAA ratings fail investors will be exposed to the underlying rating, or to whatever rating MBIA and Ambac have been granted (most likely AA or A). Fortunately for individual holders, most munis are an underlying AA or A anyway. (I know this to be true of my own portfolio, 'cause I checked.) As long as they don't plan to trade the bonds, they can just hold to maturity. Bond funds are another matter - they may have credit quality rules that require them to buy AAA, and they'll be forced to dump downgraded bonds. That may create a temporary buying opportunity for others, at least for bonds with good underlying ratings.

MBIA and Ambac most likely will not go bankrupt but will go into "runoff". In runoff, they close their doors and stop writing new business, then just sit on their wrapped paper and pay claims as necessary out of their small income stream and cash reserves. In that situation, it won't matter if they have theoretical losses on paper that has no market and for which they were forced to take write-downs, because such write-downs don't require them to burn cash. In other words, the write-downs may cost them their credit ratings but won't immediately put them out of business. Over time, the marked-down assets will converge to their real value, which may be higher than the current illiquid market thinks. (Indeed, vulture capital firms are already circling a lot of this paper being sold by banks with guns to their heads.)

The insurers may ultimately fail if they run out of cash, but it will take a while because during run-off they only need to pony up cash for shortfalls in incremental payouts. Anyone holding near-term munis (by near-term I mean maturing in under 5 years) will likely remain covered by these companies until their bond matures, while the holders of CDOs have to hope the companies survive another 25+ years or whatever the length of the mortgages is.

Companies can emerge from runoff. FSA was once in runoff and now, perversely, is the strongest of the original players because they stuck with munis after they reopened their doors.

This is not to suggest there is no reason for concern - there is. I liquidated fully 2/3s of my munis a few months ago because of these concerns, and today I trimmed a few more to reduce my exposure to FGIC (the weakest insurer) and Ambac, and to ensure that no single bond represented more than 10% of my holdings.

Anonymous said...

well piss on it , keith, all these cities are going to have to quit spending money on their good buddy projects and tighten their belts just like everyone else. if they can't get financing then that is too damn bad. as far as i am concerned it would not be a bad thing to hang some of the criminals we have in office in some of these towns who have stolen money from the people and used it to feather their own nests and pay off their buddies who get the good old boy contracts by greasing palms. frankly i am sick of them and i am sick of the status quo of how business is done at the local levels.....

1939 said...

Hey keith:

I know you've posted the great Hindenburg crash online over the past several years each time a major part of the housing crash comes down, but, I have a feeling that its time again for that awesome disasterious footage! It represents a complete 100% failure of our US government officials and their network of multi-media and war-profiteering criminals, but now that the greatest bust HAS indeed arrived befor our eyes(the massive bank, stocks and financial failues), what other tragic event on video could out perform the hindenburg in all of its glory?

Anything??

Not much! I think its time to watch her crash again!!!!! Let'er rip keith! (I love your classic B&W version with the TV announcer) OH MY!!!!!....

Anonymous said...

The government would surely bail them out. They are more important than the GSE's. The sotckholders will be toast, but the G will back up those bonds, especially the munis

Anonymous said...

Warren B is starting a new bond insurer to back muni and state bonds. The trouble will be with the existing bonds that are no longer insured

Anonymous said...

The problem with the Hindenberg crash analogy is that most people survived that crash ... look it up.

Anonymous said...

Now local governments will actually be forced to have a balanced budget and can't raise free money with bonds anymore. Nice.

Right on the money Frank, it's a beautiful thing.

Anonymous said...

Cramer is a tool. No way would he be allowed to make these types of statements if the powers that be didn't want him to.
They want this market to crash. They want our country to dissolve, its that simple. They are not stupid, they just have a GW Bush as the perfect front man. They pumped the housing bubble then pricked it knowing full well what would happen.

Cheney in 1990 said "If we took Saddam out you would having parts of Iraq flying off, the Kurds, Suni's & Shites. Wow, Dick knew back then.

Its all a plan, its all a massive conspiracy to get their one world government through and killing the US economy and military was a hard job.

Seneca said...

Malcom asked...

"I have a question for non-American readers: What is the rest of the world saying about all of this?"

Malcolm, I can tell you that in Australia at least this stuff is being reported but largely at no more than a 'sub prime' level problem. The interest is purely in the housing market problems and there's no real (apparent) awareness of the systemic nature of what is going on nor the potential severity of it. Our media are still too busy working out what Wells Fargo or Citigroup is, let alone MBIA and Ambac...

There is a certain sense in the more intelligent media commentary that the US has made an awesomely big f**k-up somewhere along the line but only very recently (last few days) has the true realisation of what this might mean for us started to be openly considered.

Of course we have our own housing bubble (worse than yours) and our share market is plunging even worse than yours. Our financial system is even more precarious than yours (massive debt, negative savings) but everyone here seems to think the China boom will underwrite Australia's escape from all of this. It's a nice story but of dubious accuracy. I guess we'll see how Chinese demand for our resources holds up when the US stops buying all of their cheap Chinese products.

About the only thing we do have going for us is that our government debt is zero and our Federal budget is well in surplus and has been for years - but then again, Australia doesn't have the world's reserve currency so I guess we don't have the luxury of inflating away $50tr+ in forward obligations and letting others pick up the tab...

happy homeowner in the stix said...

Assume something bad happened and you needed your insurance company to pay up, and when you went to them for your settlement, they wouldn't answer the phone, and you were on your own.

You obviously don't live in a hurricane zone, or have ever had a serious accident or illness. Insurance companies have been pulling that shit for years. They always find some way to weasel out of paying any money out, but don't worry.....they'll only jack up your premiums by a very reasonable 75%. (That is their way of cutting you a break, since you weren't responsible, you know. If you were responsible, then they drop you ASAP.)

They'll just shift any profitable assets to some offshore entity, keep the dogs, and scream that they are going broke until the guvmint gives them some money. Count on it.

Insurance companies almost make realtors look honorable.

burnt toast watch dog said...

NEWS ALERT: Countrywide Financial Corp. shares dropped nearly 10% Friday amid growing investor fears that Bank of America Corp. could walk away from its agreement to acquire the struggling home-mortgage lender.

Translation: BILLIONS MORE TOAST.

*********

Can you see Angelo's face when he heard about BofA changing their minds today on the pending deal now gone bad. "NOOOOOOO!!!!"......

He never recieved a dime from BofA, but it was a good news fake anyway.

He's probably packing his bags right now! Off to his private island with boxes of American home owner's cash! LMAO

Anonymous said...

I have a question for non-American readers: What is the rest of the world saying about all of this?
-----------------------

In Europe they're saying that America is country of greedy, self indulgent losers that have delusions of grandeur.

Anonymous said...

The G will step in them give them your money. Do not fear, the PPT is here!

Anonymous said...

Wasn't Warren Buffet starting his own bond ins co to rival MBIA and Ambac? Maybe he's pulling some strings.......

Toby said...

Notice the BI-Partisan efforts to get a spending stimulus passed. I mean old school, lets play nice, bi-partisanship. These guys are scared to death. Democrats would normally like to see a slow economy going into a presidential election, but are so scared at what they see that they are all cooperating.

Anonymous said...

Anonymous said...
well piss on it , keith, all these cities are going to have to quit spending money on their good buddy projects and tighten their belts just like everyone else. if they can't get financing then that is too damn bad. as far as i am concerned it would not be a bad thing to hang some of the criminals we have in office in some of these towns who have stolen money from the people and used it to feather their own nests and pay off their buddies who get the good old boy contracts by greasing palms. frankly i am sick of them and i am sick of the status quo of how business is done at the local levels.....

January 19, 2008 12:36 AM
---------------

Jezzz, you don't live in Chicago do you??

Stanley said...

might be an econ-noob question, but i don't see why, in the absence of bond insurance, default risk can't just be priced into bonds via a higher yield, and bond investors can't just diversify across more funds? The concept of deciding on the default risk years ahead of time seems like a scam (or huge potential for) in this case.

Anonymous said...

Now local governments will actually be forced to have a balanced budget and can't raise free money with bonds anymore. Nice.

Right on the money Frank, it's a beautiful thing.


But buh buh how are the cities going to support all those Republican Cubans who wash ashore and the Mexicans? Let the riots, robberies, and looting begin.

chris g said...

Once again, Buffett proves that he's a bottom-feeding genius by setting up his own bond insurance fund. He's going to be at the table when MBIA and Ambac begin the implosion process.

I subscribe to Moody's so I received an e-mail where Moody's set up a portal specifically for MBIA. On that portal, you can look at all of the mortgage- and asset-backed securities that MBIA has insured, most of which are susceptible to a downgrade if MBIA is downgraded. Those securities number in the thousands -- it is mind-boggling.

lazy dude said...

"Once again, Buffett proves that he's a bottom-feeding genius by setting up his own bond insurance fund"

And why not? Look at the history of his climb to wealth. His typical ploy during the '80s and '90s was to "rescue" a privately held company facing a huge inheritance tax bill due after the owner's death. Buffett would swoop in and buy these companies at a fraction of their true value. His latest scheme to bail out Uncle Sam is probably the culmination of years of careful planning. Buffett saw this tradgedy coming seven years ago.

Despite his enormous wealth, the man seems determined not to let others keep any of theirs. Buffett lobbied hard against elimination of the "death" tax. He won't shed a tear when Congress allows the Bush tax cuts to expire next year. When that happens the gravy train will be back on the tracks for Berkshire Hathaway.

stillsavinginseattle said...

Need advice HPers.

I'm trying to determine where to go with my 401K. Currently, in S&P 500 Index - which I believe long term (over 20+ years) is a good place. However, short term I believe it will be a loser.

I was thinking bonds.

Here are 2 I was looking at:

1. American Funds® Capital World Bond Fund® Class R5 - RCWFX

2. Vanguard Long-Term Bond Index Inv CL - VBLTX

What do you think? Any other suggestions?

Anonymous said...

In Europe they're saying that America is country of greedy, self indulgent losers that have delusions of grandeur.

THE EUROPEANS, what a f*cking joke. These whores have always been a bunch of weak, currupt pussies. The Euro-trash should be shitting all over themselves right now. The American people let their guard down and a bunch of one worlders got control and wrecked the shining city on the hill. These one worders were led by euro-trash bankers. Well we Americans will rebuild we will hang the traitors and rebuild. It will be a monumental task. But hey, can f*cking do. Who is going to defend the Euro-trash pussies from Chinna, Russia,the Muslems, while we rebuild our shinning city, The girlscouts! europe is truely screwed with the US done defending them. Maybe England will. I doubt it, we bailed your currupt lazy cowardly asses out twice in the last 100 years. There won't be a third time. Its time for Americans to deal with the results of their political lazyness. Euro-trash, save your money for guns your going to need them. The US will no longer buy them for you. Delusions of granduer, coming from Euro-trash, it truely is Armegeton.

Anonymous said...

just another way the neo al queda plan to screw the saVERS OUT OF THEIR PURCHACE POWER AND MONEY

Anonymous said...

BOUGHT A "CHEAP" MADE IN cHINA TOASTER THAT LASTED 6 WEEKS COMPARED TO THE PRIOR ONE THAT LASTED GENERATIONS, DITTO TO ELECTRIC SHAVER AND SUN UMBRELLA, WONDER WHERE THE SABOTAGE MAY BE COMING FROM, AS IT WOULD SEEM THAT THERE WOULD BE BILLIONS OF WAITING CUSTOMERS WITHOUT A NEED OF HAVING OR BEING FORCED TO REBUY..............

Anonymous said...

SEEMS EVERY TIME I GO TO THE DOCTOR OR GET PILLS THEY RAISE MY HEALTH INSURANCE COSTS, GUESS THEY FIGURE I WILL JUST LET IT GO, AS I GET SICKER?????????????????????????//

Anonymous said...

"I was thinking bonds.

[...]

What do you think? Any other suggestions?"


Bonds get killed when interest rates go up. Do you honestly think interest rates can stay at the current 4%-6% levels when inflation in running at 10%-15%?

If you want security with some protection (they use the "official" inflation numbers - LOL), consider Treasury Inflation Protected Securities (TIPS). Pimco has a fund that's done pretty well over the years, PRRDX, and there are probably others.

Anonymous said...

OR SET ME UP TO GET HACKED TO DEATH FOR ONE BIG PAYDAY TO SPLIT AMONGST THEMSELVES??????????????/

Anonymous said...

Yeah, Europeans and Mexicans lecturing Americans about financial responsibility, that is just too funny!

Anonymous said...

Without credit they were nothing. They built a house of straw. The thundering machines sputtered and stopped. Their leaders talked and talked and talked. But nothing could stem the avalanche. Their world crumbled. The cities exploded. A whirlwind of looting, a firestorm of fear. Men began to feed on men.

On the roads it was a white line nightmare. Only those mobile enough to scavenge, brutal enough to pillage would survive. The gangs took over the highways, ready to wage war for a tank of juice. And in this maelstrom of decay, ordinary men were battered and smashed.

Except for one man armed with an AK-47, and a Honda full of silver.

Anonymous said...

The government would surely bail them out. They are more important than the GSE's. The sotckholders will be toast, but the G will back up those bonds, especially the munis

The drooling morons in DC don't understand this, unfortunately. For once I actually agree with Cramer - regulators need to step in and take MBIA and Ambac into receivership ASAP before this gets out of control.

Warren B is starting a new bond insurer to back muni and state bonds. The trouble will be with the existing bonds that are no longer insured

Yep. For high-quality munis it won't have much effect, they've been trading as if the insurance was worthless for months now. Low-quality munis will be hammered. But muni investors accepted these risks. The bigger problem is the "insured" CDOs. Once the bandages come off, the horrific toxicicity of this paper will be marked back onto the balance sheets of insured counterparties. Another round of write-downs is in the offing, and it's not clear if all the players will still have chairs when the music stops. For the first time since the crisis started, I am getting really, really worried about a cascade failure of the banking system, because if one bank goes down, then all banks holding its debt will be forced to mark down, triggering more failures in a nuclear chain-reaction. Most brokerage accounts are insured by the SIPC, another undercapitalised private insurer - if it can't handle the failure of a large institution like Citi or Merrill, then it would fail, leaving all brokerage accounts uninsured. Bank deposits are insured by the FDIC or NCUA - while these are backed by the taxing and money-printing power of the gov, they too are woefully undercapitalised. You may relish the thought of greedy bankers getting their just deserts, but millions of innocent savers, investors, and ultimately taxpayers would be thrown under the bus first. This is why, IMO, Cramer's right - the government needs to bail this out while it's comparatively cheap to do so, if for no other reason than to avoid the need to pay collossal FDIC claims later.

Wasn't Warren Buffet starting his own bond ins co to rival MBIA and Ambac?

Yep, so municipalities' ability to borrow in the future won't be affected much. At some level the loss of insurance on existing doesn't matter to them, only to the holders of those bonds. Buffett's move effectively threw an anchor to the drowning MBIA and Ambac - the game was up for them weeks ago. City, county, and state managers will all be putting Warren's number on speed-dial and won't be returning MBIA or Ambac's phone calls. The only "surprise" here is how quickly they appear to be losing their credit ratings.

stillsavinginseattle said...

Anon Thanks!!!!!

I will see if they offer PRRDX. I have a somewhat limited selection.

Any other thoughts/suggestions are very much appreciated.

Just trying to protect my savings.

Thanks again.

Anonymous said...

The government may step in but believe it or not, what it can do,
is finite...and we are leveraged to
the moon. For instance there is more
money at risk in derivatives than
actually exists totally in the world,
and if the timing is wrong, it won't all balance out..

The government has also been weakened
in many aspects over the last couple
of decades...so don't expect miracles, it's not going to happen.

And the business model isn't going to cover everything either, they've been emphasizing looking good not
prudence...

grandma

Paul E. Math said...

The article contains the seeds of the solution too though. If the government will just stay out of it then prudent business leaders, like Warren Buffett, will step in to fill the gap. This is how it works.

Yes, there will be pain. But if the government stays out then the system will emerge stronger. This goes for the bond insurance industry, housing, mortgages, banking, everything.

Government needs to stay the fahq out.

smoking gun said...

"what other tragic event on video could out perform the hindenburg in all of its glory?"

I doubt Keith has access to the video, but somewhere there has to be security camera footage of Donald Rumsfeld in his Pentagon office on the morning of 9/11/2001, nervously looking at his watch and saying: "Are any of the planes in New York airspace, yet?"

Priceless...

Anonymous said...

But if the government stays out then the system will emerge stronger.

The experience of the 1930s suggests otherwise. The system would never have emerged without new regulations, the FDIC, etc. to restore confidence. We would even now be using a cash-only or barter system and our per-capita GDP would be 1/10 what it is now.