It’s All Unravelling – Bond Insurers Beg Banks for $125 Billion “Forgiveness”

Posted on June 23rd, 2008 in Daily Stock Market / Economic News - The Real Story

Tonight, FT’s Aline van Duyn broke a story that the bond insurers are begging banks to tear up $125 billion in credit default swaps in order to save their lives. You never know, this could be a blackmail situation…”hey, you rip up these Credit Default Swaps or you will take big losses when we fail”.

Yes, I ride these guys hard and always assume the worst first. Why shouldn’t I? Since New Century failed in March of 2007 we have been lied to at least in 99% of the cases regarding potential serious problems with companies claiming ‘there is nothing to see here’ and by officials, analysts and famous investors when talking about the mortgage, housing or credit crisis in general.

My standard operating procedure it to assume they are lying and let them prove they are not. What generally happens is a story like this breaks and the company says ‘there is nothing to see here’. The other companies involved and some sort of official, regulator or large scale investor backs up their story. Then, they find someone on which to blame the story as being ‘misconstued’. Two months later it comes full circle where the worst case scenario was true all along. I believe that this story could be big.

“Bond insurers such as Ambac, MBIA and FGIC are talking to banks about wiping out $125bn of insurance on risky debt securities in what could be the only way to limit the financial damage surrounding the bond insurers.

Discussions about “commuting” these insurance contracts, which were sold by bond insurers to banks in the form of credit default swaps, have taken on a renewed sense of urgency amid a rash of ratings downgrades in the bond insurance, or monoline, sector last week.

If agreements are struck about the value of these CDS contacts – and the discussions could take months – it could be significant for the entire financial system, which is clogged up by the uncertainty around the value of derivatives and complex bonds linked to mortgage-backed securities.”

By even asking this, it is obvious that the insurers do not have the capital to cover these bets and probably never did. It may also be a sign that the “great derivatives unwind” is underway.

“If firms and their counterparties can get across the finishing line in their commutation negotiations, a shadow of uncertainty would be lifted from the monoline sector, with the prospect of better rating stability,” said Matthew Elderfield, chief executive of the Bermuda Monetary Authority, which regulates a number of bond insurers.

Bond insurers are in different stages of financial trouble, with smaller ones such as FGIC already rated in the junk category. Last week, Ambac and MBIA lost their last triple A credit ratings after Moody’s downgraded them to double A and single A respectively. Both ratings have a negative outlook.”

Hey, maybe they are jumping too quickly! I am sure if they waited long enough or if the situation worsens enough to cause trouble with another investment bank that the Fed will think of something such as a new borrowing facility for Credit Default Swaps. I am sure Bernanke and Paulsen will be the first to say how profitable they will be in 5 to 10 years. Scratch that…I forgot the Fed doesn’t have enough capacity left for a CDS bailout, of which this is probably only the tip of the iceberg.

“The talks centre on CDS contracts issued by bond insurers to guarantee payments on collateralised debt obligations, complex debt securities often backed by mortgages which have plunged in value amid a wave of foreclosures on mortgages issued in recent years.

The nominal value of these CDSs on CDOs is about $125bn, according to estimates by Standard & Poor’s, and banks with the most exposure, such as Citibank, Merrill Lynch and UBS, have already taken writedowns related to the hedges as the credit quality of the bond insurers has deteriorated in recent months.

To commute an insurance contract, the policyholder usually receives an upfront payment in exchange for agreeing to tear up the policy.

There is little certainty about whether or not these CDSs will ever have to be paid out. In theory, bond insurers could be on the hook for billions of dollars, but it is possible that if market conditions stabilise and improve, their actual pay-outs might be low.”

This reminds me of when I make my typical $50 bets with friends on a sporting events and half way into it I am getting killed. I always ask, “how about I pay you $5 now and we call it even” before the game is over knowing my odds of losing $50 are near a sure thing. Hey, you never get anything in life unless you ask for it, right?

This desperate act comes as reports are surfacing that the public mutual fund universe has not been truthful about their structured mortgage debt marks. Sources say that most mutual fund managers have their MBS holdings mis-priced, which puts the public at significant risk. The job that structured mortgage debt did on hedge funds and banks has been bad, but a mark-to-market across the public mutual fund universe could be worse because it larger and directly effects Ma and Pa America. -Best Mr Mortgage


May CA Housing Sales Report – Conditions Worsening

CA Housing Stats, the Real Story – 4.25-years Supply?!?

29 Responses to “It’s All Unravelling – Bond Insurers Beg Banks for $125 Billion “Forgiveness””

  1. NOT ONE WORD on the downgrades this morning on bubble TV. These people are close to what you call fascists. NO ONE LITTLE WORLD. Rah ! Rah ! Rah ! It’s time to buy buy buy. These people from Bloomberg are scumbags.

  2. Hey! You see how the proceed.
    Next big downgrades coming on the 4th of July.
    Like the Bear Stearns help package. You screw the taxpayers and the investors on sunday and the stupid morons don’t even notice. Lesson the blow. That way the media coverage is minimal.

  3. OMG!!

    As they say, this would all be comical, if it weren’t so SERIOUS and downright CRIMINAL!!

    Can’t play by the rules anymore?? Metrics not workin’ for ya’?? Change the rules, or heck- Just throw them out entirely!!

    Like the DODD bailout, written by BofA, this thing is going to blow sky high!!

  4. It’s evident that they are trying to control the crash by desinformation, propaganda and market manipulation. They know the bubble has imploded. The trick as always, buy time, cushon the blow by systematically low balling the losses and hiding them from one quater to another one. Hide and seek. It’s not working. Not today anyways.

  5. So I’ve put a lot of my money into supposedly ‘safe’ money market investments to ride out this market volatility. Only earning 2-3%, but it is better than negative, right? Anyway, some of it is tax-free money market funds, which I’m presuming is public sector.

    Is that money in any danger from this writedown? Or from reduced tax receipts of local governments? I’ve already gotten out of my muni bond funds, but I’ve been presuming the money markets were safer…

  6. money markets are not safe. ETFs either. That is of course a major meltdown came. There are a couple of Treasury funds that are and also physical gold. That is about it.

  7. Kis Said:
    June 23rd, 2008 11:17 am

    So I’ve put a lot of my money into supposedly ’safe’ money market investments to ride out this market volatility. Only earning 2-3%, but it is better than negative, right? Anyway, some of it is tax-free money market funds, which I’m presuming is public sector.

    The painful reality is at 2-3% you are loosing money as inflation is far higher than the government’s CPI reality closer to 8-10% so your loosing 6-7%

  8. admin, does Gold mine stock and gold mine funds will be ok
    in such meltdown game? I am in the process of moving into
    these gold mine funds now, good idea?
    Or more physical gold?

  9. When are they going to delist Ambac?

  10. Gold has been a little too volatile for me to want to stick several hundred $k, with all that bouncing around between $840 and $900. I do have some in treasury funds – even those are subject to declining NAV. This is equity money from the sale of my house, that I’d like to utilize again for same in the next 1-2 years. Since I’m already effectively earning a return on it (in the form of declining house prices), perhaps cash is the only real safe place to maintain nominal value.

  11. When are they going to delist GM and Ford too ?

  12. […] It’s All Unravelling – Bond Insurers Beg Banks for $125 Billion “Forgiveness” […]

  13. If inflation keeps going, cash won’t be safe either. Silver might be the best place to put it. It’s not as easy to corner the silver market as it is the gold (ala IMF). There will be fluctuations, but I’m not sure there is anywhere to put the “value” of your paper that isn’t subject to fluctuations.

    As well, think about diversifying your cash to keep the fluctuations to a minimum. No sense in keeping all your eggs in one basket and someone stealing your basket.

    Just some food for thought.

  14. Mr. Mortgage — I think you misunderstand how the swaps in question work here. The banks pay a fee to the insurer, who is the policyholder; the policyholder agrees to pay in the event of a triggering event.

    So it is the banks who would pay a nominal fee to the MBIAs of the world to have the monolines commute the CDS contracts — and not the other way around, as you suggested.

  15. PJackson, the banks paid a fee but now to be released from their obligation, the insurers will pay the banks a little bit back. In other words, they’re giving them a partial refund.

  16. Linda, thats because they are insolvent and are in no posisition to raise cap.

  17. “We the people” will be paying the banks for the insurance. Want a bet ? 🙂 Boy. It’s so evident that the 125 billion will come from the taxpayer’s pocket. As for foreign investors, they will again have their US dollar reserves raped again by devaluation. Want a bet ? 🙂
    Ya uvérin.

  18. the banks can cummune book the payment and then hide the ‘assets’ which could be likely. But this story is so big potentialy. The notional CDS market value is about 80% of the global stock market value.

  19. Marc, it can’t come from the tax payers pockets or there would be revolts in the street. This one is going to come on the back of the politicians and their cronies over the years. The rich will get whacked with taxes, and a huge number of pork barrel spending will dry up over night. Big changes coming in our tax codes and the way they is structured. It has to happen that way, because they simply cannot raise taxes right now… it would be devastating. So they will hide it in a tax system overhaul full of hidden aendas that we won’t find out about until years from now…

    Problem is I think it will reach the polls this time. Lots of folks going to get voted out of office this time around. People are pissed and motivated to get up and vote for change before they see everything around them vanish. You tend to pay attention when stuff like that happens!

  20. The L3 numbers on these lenders and banks books are ridiculous to say the least. They cannot continue to hide their crap any longer. People are not only watching now, but becoming quite demanding as well. It’s funny how when your pocket book starts to dry up of its wealth… you finally start to see people start asking questions.

  21. Linda – whoops. CDS always trips me up…..thanks.

  22. perhaps, I am paranoid, but it is this kind of thing that makes me believe that an attack upon Iran is becoming inevitable

    oil and food going through the roof . . a failed invasion and occupation . . the collapse of the housing market . . . leading to the insolvency of the financial system . . . what to do?

    when there is no plausible way of dealing with the problem, war is the only remaining alternative, the only way to create an after the fact justification for the economic hardship spreading throughout the country

    “Dick, text General Turgidson . . tell him to come over as soon as the Nationals game is over . . “

  23. There is NO MONEY folks… no wars with no money, no bailouts with no money, no money hurts people! We have no choice now because our choices are going to be made for us as a result of the position our goverment has allowed us to get into.

    Nothing more and nothing less…

  24. So why don’t MBIA, Ambac, etc. just admit they are bankrupt and dissolve the company? Sheesh, they can always start up a new company under a different name and start over.

  25. Bankruptcy would be admitting that the system has imploded. It’s the famous principle “Too big to fail.” or “Too important to fail”. What is funny is that the “too big to fail” list of corporations in the US is getting soo big that I wouldn’t be surprised seing the USA going bankrupt during my short existence. Another 10 years like that, and the USA will be exactly like Argentina.

  26. Printing money is easy. Taxes cost politicians jobs, but most voters don’t understand inflation.

  27. Says who ? Just make believe, kill the shorts and steal them, kill the market mecanisms. Last week your stupid and dangerous politicians were denoucing the big bad commodity speculators. Today it’s the turn of the british bums. I really seet it. Shorting banks will soon be a criminal act liable of death penalty. UK and US political jerks.

  28. I think it is interesting that in a video posted on the mortage implode-o-meter website they talked to a financial analyst about the SEC’s plans to toss out ratings altogether and the analyst said it was foolish and was very quick to point out that the ratings agencies should do more due diligence and publicize their reasons for their ratings. When she was asked who is to blame, she didn’t answer, but pretended a different question was asked. When she was asked if ratings agencies being paid for their ratings by the companies was a conflict of interest, she agreed, but then she pointed out there are conflicts of interest all over the system, such as SEC employees then going to work for financial institutions.

    Now, why do I think this is interesting? Because it reminds me of a speeder, who, when they are pulled over, says, “But everyone else is speeding too!” as if it makes what was done any less wrong, as if the need for reform and change should not begin there just because it is needed many other places too.

    I know this post is getting a little off-topic so I’ll try to yank it back on. It seems that if there is going to be any improvement, reform has to start SOMEWHERE and take us back to basics. Let it begin with us.

    I’m sure none of us understand what entitles bond insurers with such risky operational methods to be bailed out. As some smart person mentioned elsewhere, too big to fail may also be too big to rescue. The Titanic was called “unsinkable”, but what if it had been called “too big to fail?” How many other ships might it have taken to the bottom if they were close enough? Of course, that may turn into the argument of the bond insurers–“If you don’t save us, we’ll take you down with us.” But who can really say until it happens? Is the parent strong enough to let his naughty teen go to jail? Is the nation strong enough to let badly run companies fail? Are we motivated enough to let our lawmakers know where we stand?

  29. talk about blackmailing i thinking forgiveness is out of the question
    gin davis

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