The email, sent in July 2007, sought authorization form senior management for the structured products desk to buy put options on a slew of competitors including Merrill Lynch, Bear Stearns and Lehman Brothers. The email also revealed that Birnbaum had bought put options on MBIA, Ambac and Countrywide. Read more »
Ambac may have just suffered the ultimate humiliation- being told by a rating agency that their business model is completely broken and they have no real prospects going forward. The bond insurer’s shame spiral began last week when it couldn’t raise enough capital to launch a new muni unit and has now graduated to a eulogy from S&P.
“Loss reserving increases have depleted surplus, boosting the likelihood of regulatory intervention, and we believe Ambac’s prospects for writing new business are negligible,”
With tax receipts down and unemployment up. the brave souls at Ambac tried to pick now as an opportunistic time to launch Everspan Financial Guarantee Corp,, a bond insurer focused on wrapping municipal and public purpose debt. While Ambac thought feel good fiscal stories like the ones playing out in California would entice investors to fund their well timed venture, the lack of people willing to burn money at this stage has put the project on hold.
Ambac Delays Launch of Muni Unit [WSJ]
Barron’s has an article today about how even though no one knows anything about credit-default swaps, few people can resist speculating, the analysts in Charlie Gasparino’s lower abdomen included. Around 3 pm on January 30th the CNBC on-air editor said he “felt in his gut” that Ambac or MBIA or both would be downgraded. Nothing happened, but shares of both companies plummeted on the news. That’s right people—the gastrointestinal discomforts of Charlie Gasparino, who we’re told was seen wolfing down an Italian sub with rapidity that would distress even the steeliest of bellies, are now causing turmoil in the markets. So ridiculous we wish we could take credit for making it up. Damn you, Charlie Gasparino, for subconsciously ginning things up in response to our obsessive chronicling of your every Dago-esque utterance. It’s almost as though you want to make it impossible for us to parody you. Attributing insider information to the sources in your stomach is something WE do, not you.
Anyway. We can’t be too hard on Gasparino’s prognostication skills because, truth be told, who cares about being right or wrong when you’ve got that kind of power? Though we could never hope to match his market moving ability, we have decided to perform a small experiment of our own, just to see how we match up. Here’s the rub: we had some bad Chinese last night and are starting to feel violently ill. That’s got to mean something, no? At random points throughout the day, we’re going to pin the feelings of nausea waving over us to a little piece of news that we know isn’t true, and see what happens. Starting now: We feel in the pit in our stomach that Bear Stearns is going to pre-announce record earnings on the strength of its subprime mortgage funds. Make of that what you will.
Credit-Default Swaps: Weapons of Mass Speculation [Barron's]
If it’s a day that ends in the letter y, it’s probably time to learn about problems in another dark corner of the credit markets. On the lesson plan for today are financial creatures known as variable interest rate entities. These were known as special purpose vehicles, or SPVs, until Enron tarnished that designation for off balance-sheet assets and liabilities. Rather than quitting the SPV business altogether, Wall Street simply adopted a less familiar name and kept right on keeping on.
Now bond research firm CreditSights tells us that VIEs may contribute as much as $88 billion in losses for financial firms. Goldman Sachs, which has done so well in avoiding the worst of the self-harming habits of Wall Street, has warned that it may incur as much as $11.1 billion of losses from VIEs. That’s just a few hundred million short of Goldman’s earnings for all of last year.
So what went wrong with the VIEs? Stop us if you’ve already heard this one. They are loaded up with assets such as subprime mortgages, and financed with commercial paper. As their assets get downgraded, investors shy away. The banks have agreed to back the VIEs with line of credit, meaning they wind up buying the commercial paper and notes from the VIEs when no one else will. The troubles of the bond insurers, of course, play a role. If Ambac gets downgraded or split, the assets of the the VIEs will likely have to be written-down. So, yes, once again the off-balance sheet liabilities find their way back onto the balance sheets of the banks.
“The disclosure on VIEs is hopeless,” S&P’s Tanya Azarchs tells Bloomberg. “You have no idea of the structure or how that structure works. Until you know that you don’t know anything. It’s like every day you come into the office and another alphabet soup has run off the rails.”
Update: A reader asks a fair question: what’s the difference between a SIV and a VIE? Well, we used to actually do some work structuring these things back in the days before DealBreaker. The way we remember it is that SIVs are actually a subcategory of VIEs. What we think is being discussed here is another type of VIE, the asset back commercial paper conduit or ABC paper conduit. Although officially off balance sheet, the ABCP conduits are usually backed by credit lines from the banks (whereas SIVs weren’t usually officially backed by the banks). When they can’t roll over their short-term commercial paper financing, they can turn to the banks to refi. This means they are less risky for outside investors but more risky for the bank parents. Got it?
Goldman, Lehman May Not Have Dodged Credit Crisis [Bloomberg]
Although it looks like MBIA is now out of the woods, rival bond insurer Ambac’s fate is still murky. Reports indicate that the ratings agencies are now considering the rescue plan worked out by banks and state insurance regulators. The plan may be revealed as early as this week, and will probably involve splitting Ambac in two to segregate the municipal bond insurance business from the less healthy business of insuring riskier credit products.
Last week Holman Jenkins pointed out that segregation is unfair to customers who bought insurance on CDOs because it would “retroactively award municipal clients privileged status at the expense of other clients with equal claim on the insurers.” Bill Ackman, who has been shorting the bond insurers for years, raised a similar point. Indeed, Jenkins expects that the policy holders left with guarantees from the suddenly even more precarious side of the business will launch lawsuits to prevent the break-up.
There’s also a much stranger objection to the segregation plan, one stemming from an objection to the very existence of municipal bond insurance. We first heard about it in Portfolio, of all places. In the latest issue Jesse Eisinger argues that municipal bond insurance is a scam, and it’s victims are municipal governments. This will no doubt come as a surprise to state regulators and treasuries who have been on knife’s edge fearing that the collapse of the bond insurers would make raising money costlier or, in some cases, perhaps impossible. If the governments are the victims here, why exactly are they working to keep the victimization going?
Eric Dinallo, the former Spitzer aide who is now New York State’s insurance regulator, insists that the bond insurers are not on the verge of insolvency. But his plan to split the municipal bond business from the rest of their business only makes economic sense if it were necessary to save the companies and preserve value for the safest policy holders. So why is Dinallo so aggressively inconsistent?
What really seems to be going on is an attempt to strong-arm the banks by threatening them with the worst possible outcome of being left holding insurance that probably isn’t worth the paper its written on. If they won’t inject capital, Dinallo seems to be saying, he’ll make them pay through write-downs arising from the downgraded remnants of the broken-up insurance companies. Ugly.
When he first approached Wall Street to explore plans to rescue bond insurers, New York state’s top insurance regulator Eric Dinallo warned top bankers that they had helped create the mess and that they were facing serious losses if something weren’t done. After weeks of negotiations with an assortment of senior Wall Street bankers failed to produce a consensus on a bailout, it now seems as if Dinallo might push ahead with a plan that could trigger another round of record breaking losses for Wall Street firms.
Dinallo has proposed splitting the companies municipal insurance businesses from the businesses guaranteeing collateralized debt instruments that have suffered under the subprime meltdown. Credit ratings on more than $580 billion of asset-backed securities may be cut, according to Bloomberg. There are estimates that that could trigger write-downs of up to $35 billion. Citigroup and Merrill Lynch are often cited as having the largest exposure to the risk of an insurer downgrade.
“This is one of the worst possible outcomes for the market,” Gregory Peters, head of credit strategy at Morgan Stanley in New York, tells Bloomberg. And by “the market” he means Wall Street.
FGIC has already asked regulators for permission. MBIA has ousted its chief and replaced him with former chief executive Joseph Brown. He’s indicated that he will also seek to split the muni business from the CDO business.
Bond Insurer Split Threatens $580 Billion of Notes [Bloomberg]