The Wall Street Wizards seem ready to engage in any action, no matter how stupid and unreasonable it may appear to be to rational investors, to protect their own MBS (mortgage Backed Securities) and CDO (Collateralized Debt Obligations) portfolios and avoid disclosing how reckless they have been with their investor's funds. Recklessness to the point of being legally liable for all losses.
Bailing out the insurers to prop up the perception of value in toxic portfolios...
Perhaps I do not fully understand the situation and cannot rationalize the actions of the derivative gurus in terms of street-speak, but something seems wrong about the need to bailout insurers who have provided guarantees to those who thought that they were mitigating their risk by paying premiums to avert catastrophic occurrences. Guarantees of insurance and buy-back agreements that the ratings agencies evaluated as conferring "investment grade" status on something which could turn malevolently toxic in a real estate downturn.
If the risk was based on fraudulent representations by those seeking insurance for their toxic financial products, nullify their coverage and let the selling institution suffer the consequences. Even if it means the insolvency of a financial institution. Force the institution into liquidation and throw their well-heeled executives out into the street. Or better yet, investigate whether or not these executives actually deserved their bonuses (based on funny numbers) and seek full restitution.
For the paying borrowers, and even those who face foreclosure, divorce the underlying asset from the securitization and place their value in a "recovery" pool to be shared proportionately with those exerting claims.
As for the insurers... liquidate their assets. It's not like this has never been done. My life insurance company, General American Life Insurance, could not meet their capital requirements on a single day and the Missouri Insurance Commissioner stepped in and arranged for their sale to another well-capitalized firm. Since I was one of the insured/stockholders, I received at least some value from the billion dollar transaction.
Where are the regulators?
Correct me if I am wrong, but isn't insurance a tightly regulated industry with an explicit demand that any offered insurance be backed with an actuarially sound program? Where insurance coverage over and above the prudent coverage limits imposed by the regulatory authorities and sound business practice must be "re-insured" with other carriers or a consortium of carriers to cover the associated risk?
So why am I reading Mark DeCambre's article " Bond Insurer Bailout Faces Hurdles" in the Financial Services section of TheStreet.com with a queasy feeling?
"A bank-sponsored bailout of the troubled bond insurance sector seems more like wishful thinking than market savior."
Does this mean that the banks who have been the recipient of billions of Federal Reserve funds plan to transfer some of this money to prop up their own toxic mess?
"Rumors leaked Wednesday of a massive rescue plan led by New York Insurance Superintendent Eric Dinallo drove the tattered shares of financial guarantors MBIA (MBI) and Ambac Financial (ABK) through the roof, but the cold, harsh reality of the complexities of such a move is now starting to smack the stocks again.
"'Clearly it is important to resolve issues related to the bond insurers as soon as possible,' Dinallo wrote in an emailed statement. 'However, it must be understood that these are complicated issues involving a number of parties and any effective plan will take some time to finalize.'"
"Dinallo declined to comment further through a spokesman. 'Complicated,' however, is perhaps understating the fact that some of this insurance provided by these once obscure firms, now at the eye of the credit storm gripping Wall Street, is meant to backstop losses on now-shaky debt structured -- in some cases literally -- by rocket scientist cum bankers."
"Scuttlebutt on the Street yesterday implied that the subprime-battered wonder twins Citigroup (C) and Merrill Lynch (MER) , among others, might pony up billions to help out the guarantors, also known as monoline insurers."
"Citi and Merrill and a host of financial institutions should indeed have an incentive to try and prop up the troubled firms, considering that they act as counterparties, providing additional protection for investors in the form of derivative securities known as credit default swaps that could amount to big losses for them should the guarantors go under."
Mark's salient point...
"But involving firms already swooning from their own misadventures in finance would be a laughable notion, given that both Citi and Merrill have racked up tens of billions in losses tied to mortgage-tainted securities, forcing them to turn to foreign and domestic investors to raise cash to shore up their own balance sheets."
I must be crazy... why would insurance by any entity that can't assume the full financial risk of what they insure add any value to an already toxic transaction?
"At stake for monolines is some $2.4 trillion to $2.6 trillion of municipal bonds and structured debt, such as collateralized debt obligations or CDOs, that have plummeted in value as credit markets have dried up. By many accounts, there could be a ripple effect for the financial markets if monolines suffer further downgrades to their credit ratings, as such debt would become riskier to own."
Playing the ratings game...
In many ways A.C. Nielsen is more honest about their television ratings than the so-called "Ratings Agencies" are about the amount of actual due diligence they perform before issuing a rating to their paying clients.
"As a group, the rating agencies have been accused of being late to the game in properly assessing the risk inherent in underwriting insurance linked to opaque debt. The rising concern about the monoline insurers from the agencies is that these firms do not have sufficient funds to cover claims, should defaults in the mortgage market result in defaults and losses in mortgage-linked securities."
The shell game continues...
"Still, monolines have engaged in a mad dash of capital-raising in an attempt to shore up their coveted ratings. "
"MBIA has already raised about a $1 billion via a cash injection by private equity firm Warburg Pincus, which also agreed to backstop a preferred share offering that has, since it was first offered, fallen in value to about 70 cents on the dollar in the secondary market. And Moody's still is trying to determine if MBIA needs more."
The acid test...
In accounting, their are two accepted ratios used for liquidity analysis. The first one is named the current ratio and is simply computed by dividing the firm's current assets by the current liabilities. Any value over 1.00 tends to indicate that the firm can meet their day-to-day payments. However, the second one, the acid test ratio, subtracts the value of any fluctuating or illiquid stock from the current assets before the division by current liabilities.
Considering that there is an unknown value in the assets underlying these toxic securities, why not simply assume, for the purposes of institutional analysis, that there will be a 100% call on the insurance to make the investors whole. If the company has neither the capital or the re-insurance position to cover these losses, somebody, including the firm's oversight regulatory agency, is at fault and the regulator should initiate conservator proceedings against the insurance firm.
What might the insurers be hiding?
Three scenarios come to mind. One is a daisy chain of indirectly-controlled subsidiaries who siphoned off premium dollars while not actually insuring the risk. Or that some of these re-insurance agencies are registered as "off-shore" entities which sucked up the easy money and have no real assets backing their re-insurance play. Or that the entire industry is a giant daisy-chain of re-insuring each other's risk, knowing that a cataclysmic event that resulted in widespread devastation -- would simply trigger a government bailout. For most, they probably believed that the devastating event would be a natural disaster and not a man-made debacle caused by leveraging sliced-and-diced debt.
"Bill Ackman of Pershing Square Capital, a man who is betting a fortune that some monoline's might fail, estimates that MBIA may need to raise as much as $10 billion to shore up its balance sheet."
"Dinallo says the bailout plan effort might take 'some time,' but time appears to be what many of the monolines don't have as their precious market share has been considerably eroded."
"Even should a Dinallo-led bailout get off the ground, the larger, more pressing issue for these firms is the damage that has been wrought on their reputations."
What happens over the next few weeks and months is anyone's guess. And money isn't the only problem.
Reputation? Market share? Excuse me, but shouldn't someone be looking at their fundamental business model before allowing them to continue their somewhat "risky business?"
What is Buffett doing?
"To be sure, the sage of Omaha Warren Buffett's Berkshire Hathaway (BRKA) has launched his own initiative in attempt to underwrite municipal debt -- a move that would put further pressure on financial guarantors."
Again, how can these firms continue to serve as "financial guarantors" if their real, verifiable assets remain unknown or are hidden off-shore? Buffet appears to be smart "like a fox" by siphoning off the low-risk, high premium municipal business from those who are carrying coverage of un-priced, illiquid financial instruments.
Instead of a hairy ball ... why not a ginormous hairy ball?
"Observers have suggested that creating a massive consolidation of the most troubled monolines might serve to stave off competition and prevent future failures. In the past, larger monoline insurers have purchased smaller ones. But how such a move would work is unclear in this environment."
Paulson's name surfaces...
In any event, many of these notions seem eerily similar to U.S. Treasury Secretary Henry Paulson's failed plan to bailout structured investment vehicles, or SIVs.
There was a reason that the plan failed. The structured investment vehicles not only lacked true transparency from investors and regulators, but they would have artificially created value where none truly existed. The purpose being to shore up the offering price of these toxic pieces of paper until they could be offloaded to foreign investors or to the financial unsophisticated as part of a "wink-wink" pension or other long-term investment scenario. That in addition to allowing the financial institutions to transfer the re-valued securities off their balance sheets (per FASB Rule 140) into footnote history.
What value is it to the American taxpayer to bail out a corrupt, inefficient system that will not restore fiscal confidence using the old, broken model.
"Egan notes that a government bailout, while farfetched at this point, might be the only viable solution left for the troubled guarantors."
For those who are long-term observers of government and financial institutions, you might note that the trial balloon is always flying the "far-fetched" banner.
What can YOU do?
Avoid supporting any government bailout of insurance companies and financial institutions which have created today's economic catastrophe.
While you cannot stop the Federal Reserve printing presses from pumping billions of dollars into our economy as they shore-up failing financial institutions, you can vote for someone who might, just might, restore fiscal prudence to the economic scene.
Do not vote for any candidate or current politician who is willing to subvert the safety, security, sovereignty and economic strength of the United States or limit an individual's right of self-defense for their personal philosophy, power, prestige or profits.
Quote of the day:
No good deed goes unpunished. - Clare Booth Luce
A reminder from OneCitizenSpeaking.com: a large improvement can result from a small change…
The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius
Bond Insurer Bailout Faces Hurdles - News & Analysis - Financial Services - SCA - ABK