Markets are all over the place this week. The rate cut hasn’t worked to restore solvency, and because of that it hasn’t restored confidence.
The markets are pushing higher today because of the widely accepted reasoning behind the Fed’s coming rate cut tomorrow. The question is “How big will it be?”
But like last week, the rate cut will not solve any of the underlying problems in the economy. The underlying problem is insolvency, specifically of the companies that insure the three-card Monty game of debt leveraging: the monoline bond insurers.
MBIA Inc. and Ambac Financial Group Inc. fell in New York trading as the state’s insurance regulator said a rescue for bond guarantors will “take some time” and analysts cast doubt on the agency’s ability to manage the task.
“Clearly it is important to resolve issues related to the bond insurers as soon as possible,” Insurance Superintendent Eric Dinallo said in an e-mailed statement. “However, it must be understood that these are complicated issues involving a number of parties.” MBIA and Ambac, the industry’s two largest firms, are both based in the state.
Dinallo met with executives of banks and securities firms yesterday to ask them to extend capital to bond insurers and stave off credit rating reductions. A rescue would need to be arranged before Moody’s Investors Service and Standard & Poor’s complete their reviews in the next few weeks. A downgrade may reduce the value of $2.4 trillion of debt the insurers guarantee, spawning losses on top of the $133 billion already posted by the world’s biggest financial firms.
Security Capital Assurance Ltd., hobbled by deterioration in its financial guarantee portfolio, lost its AAA bond insurer grade at Fitch Ratings today, throwing the rankings of at least $154.2 billion of securities in doubt. Fitch downgraded Ambac from AAA earlier this month.
Armonk, New York-based MBIA fell $2.21, or 13 percent, to $14.40 in New York Stock Exchange composite trading. New York- based Ambac dropped $2.37, or 17 percent, to $11.33, leaving both down more than 80 percent in 12 months. Security Capital, based in Bermuda, declined $1.16, or 31 percent, to $2.63, a 90 percent loss for the past year.
It took an unprecedented rate cut, the promise of a second rate cut, and most importantly the promise of a bailout of the monolines in order to stave off a market meltdown last week.
And now that bailout is increasingly in doubt. Without the monoline insurers, the securitization game in the markets is over. It’s becoming less a question of “Will the bailout work” and more of a question of “When will the monolines fail?”
When the monolines fail, the stock market will crash. It’s that simple.
In fact it’s so simple, even CNBC’s Jim Cramer understands.
CRAMER: But, Chris, there is something I would urge all the candidates to think about and our Treasury Secretary, which is that there are a group of insurance companies which insure all these bad mortgages and, Cris, I think they are all about to go belly-up, and that will cause the Dow Jones to decline 2,000 points. They’ve got to be shut down and the insurance given to a New Resolution Trust. This is going to happen in maybe two or three weeks, Chris, it going to on the front of every newspaper and no one in Washington is even willing to admit it.
MATTHEWS: So who are you including in these mortgage companies that are going to go belly-up; give me a description?
CRAMER: These are MBIA and Ambac remember the companies that Merrill Lynch and Citigroup wrote down a lot of stuff the other day? All these companies are relying on insurance to save them. The insurers don’t have the money. There’s also personal mortgage insurance; that’s PMI, is one company; MGIC is another. Chris, I am telling you that these companies do not have the capital to “make good.” And when they do fall, and I believe it is when – if the government does not have a plan in action; you will not be able to open the stock market when they collapse. No one is even talking about the fact that these major insurers, who insure $450 billion of mortgages are all about to go under.
And frankly Cramer’s 2,000 point crash scenario is a bit optimistic. Without the monoline insurers, the game’s up. There’s no stock market to crash because it can’t function. The derivatives market worth hundreds of trillions of dollars will come unraveled, and the keystone to the whole rotten bridge is the monoline insurers making good on the defaults.
If the people insuring the defaults themselves default, the confidence game ends overnight. The US economy will collapse. We don’t have the manufacturing base anymore. We don’t have the other means anymore. The entire economy depends on the shell game of debt trading. If that game can no longer take place, then there’s nothing.
The US will spiral into a depression and take the global derivative game with it. Endgame. Checkmate. Trillions in paper wealth vanish.
And considering that paper wealth was created by taking real wealth from millions of working Americans, the rest of us are in serious trouble when this game comes to a screeching halt.
Not only will the bailout not work, the firms providing the bailout won’t be able to do it much longer and just shooting themselves in the foot by doing it in the first place. Because the firms the monolines are counting on for emergency solvency capital are themselves becoming increasingly insolvent.
Capital squeeze. Insuring mortgage-backed securities proved disastrous when the insurers found they could not afford to cover all the claims filed by the troubled banks, which have endured billions of dollars in writedowns on toxic mortgage securities.
Those bets sunk the credit rating of ACA Financial Guaranty Corp. in December, and now threaten the rating of MBIA and Ambac, which stand to lose $3.5 billion and $2.25 billion, respectively, if they get downgraded, according to Standard & Poor’s.
Calls to Ambac were not immediately returned. A spokesperson for MBIA said that the company was confident in its capital position and its underlying health.
Those fears prompted a reported meeting between a number of Wall Street banks and New York Insurance Superintendent Eric Dinallo who implored them to provide capital for these troubled insurers in an effort to prevent that from happening.
Big banks, which have a vested interest in keeping these companies afloat since it could mean further writedowns, however, are suffering through their own capital crisis.
“I don’t think banks in any way, shape, form or fashion could really come to the rescue,” said Nancy Bush, managing member at NAB Research in Aiken, S.C.
2008 is going to get ugly when the monolines go down. It’s most likely a question of when. Nobody’s really talking about it. It would be a disaster in confidence and it would expose the whole game to the world as front page news.
So it’s being ignored. Nobody can afford to bail out the monolines. If the government tries, the bailout becomes front page news. It exposes the game as well. Disaster in confidence again. Endgame.
The people who should know can see the disaster about to unfold. They aren’t going to do anything about it because they largely can’t and largely don’t want to. They’re getting out now because trillions will evaporate and along with it America’s status as a global power.
They rest believe that we’re somehow going to get magically saved. We may even get saved for a while. It will only delay the inevitable.
No confidence, indeed.