Earlier today I talked about the “monoline nuke”, how like the focused detonation charge of a nuclear bomb, the subprime collapse was going to send the monoline insurers into critical mass. Result: a massive market meltdown.
At its heart, the stock market of 2008 is a confidence game. It’s largely a sucker bet. The collapse is coming, but nobody wants to admit it.
Here’s the truth of the last eight trading days in the US: the rate cuts didn’t help at all. In fact, they made things worse. Short term interest rates went down, but long term interest rates actually went up. Mortgages are long term investments. Mortgage rates are actually going to rise because of those rate cuts due to the inflation these cuts are going to spark. The price of long-term credit will rise even as the cost to banks to borrow short-term is lowered. Why?
Banks need the money now. It’s all about solvency. And the hyper-leveraged derivatives market and the collapse of home prices and subprime defaults has sapped banks of the money they need to stay operational. They cut it too close to the bone, made bad investments, and now they are going to pay.
Or should I say we are going to pay. The banks want handouts. They expect in an election year to get them. The market is expecting bailouts, starting with the monolines. The notion of a bailout of the monolines is the only thing keeping the market standing right now.
Major rating agencies are holding off downgrading bond insurers MBIA and Ambac Financial Group while they attempt to work out a bailout plan, bankers working on the bailout told CNBC.
As reported, the ratings agencies Moody’s and Standard & Poor’s are poised to downgrade the coveted Triple A rating of the bond insurers, whose main business is guaranteeing municipal bonds but which recently entered the risky subprime debt market and lost billions of dollars. Just today, MBIA, the world’s largest bond insurer, posted a quarterly loss after writing down $3.5 billion in risky debt.
Losing their Triple A rating could be devastating for the bond insurers because it could prevent them from drumming up new clients and possibly force them out of business.
States and cities that issue municipal bonds, meanwhile, could see their own bonds downgraded because of questions about the insurers’ ability to back up those bonds.
Banks could also be hit. According to Meredith Whitney, banking analyst at Oppenheimer, U.S. financial institutions could face fresh write-downs of as much as $70 billion if the bond insurers lose their top rating.
For that reason, the issue of downgrading bond insurers has become politically sensitive.
Now the game is different. The article is basically saying here that the monolines fully expect to be bailed out and to keep their credit ratings. Too many big players in Wall Street will tumble and fall if these companies lose their ratings and can no longer insure bonds…bonds that Wall Street knows full well aren’t going to be paid back. The fat cats know the defaults are coming and they expect to get paid off when they do default, that’s why they bought the insurance.
It’s as close to a sure thing as it came on Wall Street.
Except a funny thing happened…everyone bought insurance for the market to fall apart. So much so that if the market ever did fall apart, there’s no way they would ever be able to be paid back. Everyone wanted in on the sure thing…and now everybody stands to lose.
“Politically sensitive” is Bushspeak for “We will not allow this to happen.” The billionaires who put Bush in office and kept him there expect payback now that they are in trouble. They expect the government to bail them out.
Only one problem. The government is even more insolvent than the monolines. A lot of state and municipal bonds are at stake here, and if those start to default, there will be a catastrophe. Even worse, the biggest tax revenue for many state and municipal governments is…go on, guess…taxes!
Taxes Bush wants to cut. Taxes that are going down as home prices (property tax) and business revenues (corporate tax) and consumer spending (sales tax) all continue to fall.
Fewer taxes mean less government revenue, which means more defaults, which means more monolines in trouble because they have to come up with the money to pay them back. Devious. The Devil himself couldn’t have designed a better trap.
And that trap has been sprung.
The bond insurers haven’t completely escaped downgrades. Late Thursday, S&P cut its “AAA” ratings on FGIC’s bond insurance arm, and placed its top ratings on the bond insurance arm of MBIA on review for downgrade. The rating agency also said it may cut the “AAA” rating of XL Capital Assurance, the bond insurance arm of Security Capital Assurance.
On Wednesday, Fitch Ratings downgraded FGIC after earlier downgrading Ambac.
Even the stock market has become worried about a potential meltdown among bond insurers. On Wednesday, a strong rally sparked by the Fed’s latest cut in interest rates quickly collapsed after CNBC reported that the bond insurers could be downgraded soon and that a prominent short-seller believed their losses were bigger than reported.
During a Thursday conference call, MBIA Chief Executive Gary Dunton said the troubled bond insurer has been the target of “fear mongering” by self-interested parties. He said the company will have real and significant losses, but nothing to justify the sharp decline in MBIA’s shares. He also said MBIA is in the best position to maintain Triple-A ratings among public bond insurers.
Despite the massive rate cuts, the monolines are still borderline comatose. It’s like putting defibrillation voltage into a dead corpse. After a while it just starts to smell like dead meat, and our gooses are cooked.
The rumors of the fate of MBIA’s credit rating is enough to cause a 400 point swing in the Dow. How’s that for proof the game’s over?
New York state insurance regulators, meanwhile, are trying to work out a bailout plan for the bond insurers and have urged the rating agencies to hold off on any downgrades. Bankers who are working on a bailout plan have given themselves an unofficial timetable of about two weeks to work something out. But people involved in the discussions say progress is slow and it’s unclear if any bailout involving the banks will get done.
Late Wednesday evening, MBIA announced that private-equity firm Warburg Pincus completed a $500 million investment in the bond insurer, paying $31 a share for stock that has fallen to $13.96 a share since the deal was announced last month.
The company on Wednesday also said Warburg managing directors David Coulter and Kewsong Lee were named to the MBIA board. MBIA said a director Richard Walker, general counsel of Deutsche Bank, resigned to avoid any appearance of potential conflicts of interest in light of ongoing bail-out talks among bond insurers, investment banks and New York state’s insurance department.
One wrinkle in working out a bailout is that William Ackman, a hedge fund manager and short-seller of MBIA, has submitted data to the Securities and Exchange Commission and insurance regulators in New York State alleging that MBIA and Ambac are understating their losses.
In his report, Ackman, of Pershing Square Capital, contends that both bond insurers have said their mark-to-market losses are less than $1.5 billion, but according to his analysis, the losses for each firm will be around $12 billion.
If the the losses are as large as Ackman claims, Wall Street firms may be hesitant to help bail out the bond insurers.
CNBC has confirmed that Ackman has recently met with investor Wilbur Ross to discuss Ross’ examination of Ambac. Ross is interested in buying one of the troubled insurers rather than starting one of his own.
Sources say Ross may be hesitant to put more than $1 billion into Ambac, so if Ackman is right, it might end Ross’ interest in the bond insurer.
Wilbur Ross has declined to comment.
One possible scenario is that New York State commissioner Eric Dinallo could force a prepackaged bankruptcy of the bond insurers and split the municipal bond insurance from that of the risky subprime debt. The municipal bond insurance business could be sold off, while the risky debt insurance would likley be written off.
Both Moody’s and S&P declined comment.
Write it off! Pretend it doesn’t matter! A huge government bailout of the monolines is coming. It has to come, or the markets will not see March in five figures.
Wall Street is waiting for the government to act. But the thing is this, the government can’t afford to act. It’s long past insolvent. The only answer is going to be massive hyper-inflation to try to stop a massive market collapse.
And in the end it’ll only make things worse. At this rate the bottom may fall out before the elections, while Bush is still President.
But then again, maybe that was the plan all along. Maybe this is the event that Bush needs to take and hold power for a while. The other mechanisms are in place. He just needs a weapon of mass destruction to drive the public into panic so he can step in and use his powers.
That WMD may be the Monoline Nuke. It’ll leave a pretty ugly crater in New York, that’s for sure.
Talk about “Disaster Capitalism”.
Boom.
