MonkeyBusinessBlog

I Got Your Fat Fingers Right Here

So now are you in agreement that on May 6, when the Dow dropped a kazillion points (technical term) in about 20 seconds that there was no "error"? Usually when these "errors" occur, someone either fesses up or gets found out in about a day. Well its been 2+ weeks and it seems no one still has an explanation. And guess what? Now we are LOWER than the May 6 close. Anyone talking about "fat fingers" now? The Dow Jones has been briefly going back and forth below the magical 10,000 today. It's also down on the day which shows there is continued selling off of a pretty nasty downturn this week. Not good.

Like I've been saying, I have a few ideas on how this might be fixed. Here's one. Has this administration made ANY statement of ANY kind at ANY time of ever lowering taxes? How about this DC gang who are all going to be voted out of office soon? Pick a few sectors you would like to see grow. That means "job growth" or "creating jobs" where people work to get things. I know its a hard concept to grasp but it worked for awhile in this country. Take these sectors and give tax incentives out the wazoo (technical term), if they HIRE folks. Let the guys and gals who are entrepreneurs, invent stuff that will lead to future growth. Now for all you naysayers out there who think taxing the rich is the only way, I say this. Why don't we just TRY it. And not some garbage about building roads that we don't need. Technology, energy, even finance sectors can use some help. And oh, hey politicians, when you talk about building a plant or factory in your home area, and you will be creating jobs, BUT you have to CUT some other program to make it happen, people will listen and vote for you. Or you can try what you are doing now, bashing the rich and giving out freebies that will send us into the dark ages. And LOSE your elections anyway. Your call.

MBIA: "The Hustle Never Ends!"

There's a great scene in Season 1 of "The Soprano's".  Tony drives his young daughter Meadow up to New England to check out all the nice little liberal arts schools. On the way he recognizes one of his old crew who turned state's evidence and entered the witness protection program.  Tony stalks his pray and finally catches him from behind with an electrical chord around the neck.  As he's choking the guy to death, the doomed mobster pleads for his life with a pitiful lie.  Tony says to him, "That's the thing with us wiseguys, the hustle never ends!" Then Tony finishes him off.

MBIA is assuming the position of the doomed mobster this week.  On Tuesday we reported that MBIA had decided that a large percentage of their residential mortgage guarantees, mostly second liens, were "ineligible" and as such, the company was seriously thinking of ceasing future payments on these bonds, many in default, and recouping payments already made.  If MBIA's definition of ineligible is;

"We did no due diligence on the assets we wrapped but rather we blindly guaranteed the bonds, collected our fees and paid ourselves handsomely for most of the decade."

Then, yes the assets are ineligible.  Otherwise, in the world of business on planet Earth, MBIA will be laughed out of court.  In fact, bringing up such a lame excuse further exposes the company as either unbelievably reckless or just a bunch of buffoons.  Either way, stockholders should be suing too.

There is something else that has been bothering me for some time.  In fact, it was bothering me a lot back in early September 2008 when MBIA's cousin Ambac created a new AA facility "Connie Lee" to back new municipal insurance business.  The move essentially transferred the bulk of the firm's remaining capital to "Connie" and away from the company's unit that stood counterparty to billions of structured residential credit guarantees and default swaps.  I asked everybody I could how they were able to do this without getting their pants (or skirts) sued off by all of their counterparties.  Nobody had an answer. Then, in successive weekends, Freddie and Fannie went into receivership, Lehman went down, Merrill was taken by BofA and our bizarre death dance with AIG began.  Everybody had bigger fish to fry.

Now here we are in May 2009 and MBIA is trying to do the same "hustle" as Ambac and just about every major financial institution in the world has pressed the lawsuit "Launch" button.  Here is this morning's article from Bloomberg News Bank of America, JP Morgan Sue MBIA Over Unit's Split.

-- Bank of America Corp., JPMorgan Chase & Co., UBS AG and 15 more of the world’s largest financial companies sued MBIA Inc., saying the biggest bond insurer’s split of its guarantee business illegally cut their odds of getting paid on policies.

MBIA stripped $5 billion of assets out of its MBIA Insurance Corp. division to fund a new unit amid “an ongoing financial crisis that has made it increasingly likely that MBIA Insurance will have to pay out billions” of dollars, according to the complaint filed yesterday in New York State Supreme Court in Manhattan.

MBIA of course says the lawsuits are "without merit".  This will be interesting because many of the institutions suing are TARP banks AND I am sure that the Fed owns some nice MBIA wrapped bonds in their version of "Area 51", also known as Maiden Lane I, II, & III (That's where our Bear Stearns and AIG bonds are).  The only way MBIA gets away with this is if the government decides that as long as they are bailing everybody else out they might as well throw the bond insurers on the pile too.  In fact, I was talking with Richie about this yesterday and we thought, "Maybe this is a finely choreographed back door monoline bailout!"  Stranger things have happened! 

Hey...MBIA Is Still Around!

Wow, I seriously forgot about these guys!  Once upon a time the financial world hinged on their very survival.  Now?  Kind of like crab grass that keeps coming back every couple of weeks or months.  I will say though, these guys, along with Ambac are going to make a lot of law firms VERY rich.  I never understood how MBIA and Ambac were able to "restructure" their remaining capital structure wherebye most remaining capital was put against existing and future municipal guarantee business and taken away from the monstrous liabilities they have against their residential CDO book.  Apparently a lot of other folks don't see it either and are suing.

The restructuring was old news.  Check out what MBIA CEO Jay Brown said today, from Bloomberg News;

MBIA Inc. Chief Executive Officer Jay Brown said the largest bond insurer may be able to unwind much of its credit losses because the debt it agreed to back didn’t meet contractual promises.

Between about 66 percent and 80 percent of the Armonk, New York-based company’s losses on second-mortgage bonds and mortgage-related collateralized debt obligations, its two worst insurance categories, are tied to collateral that was “ineligible” to be included in the deals, and so its guarantee payouts may be recouped, Brown said today on a conference call.

“The rest of the book is actually performing quite well,” he said.

That's pretty funny!  I wonder how they came up with this "ineligible" characterization?  They probably just found out what a second lien is and said, "There's no way we'd guarantee THAT!"  I think when these insurance players go to insurance school, they get split into two categories.  The first are the actuaries.  They are the ones who are able to price the risk.  Then there are the bull-sh*tters or "insurance risk management".  Their job is to figure out a way to get out of ANY legitimate claim on a policy or a guarantee.  The ability to stand in the middle of a natural or financial disaster and say to people who are holding policies or guarantees that their firms clearly underwrote, "I'm sorry, but your policy doesn't cover THIS." is quite a skill. 

Time for the lawyers on both sides to get to work.  Good luck players!

"AIG Bonus Payments? Bailout Funds Used to Bailout U.S. and Foreign Banks???...Lets Go to WWW.FinancialStability.Gov !!

Wow!  So counterparties that received our money in the form of collateral postings, credit default swap tear ups (through the buying of the underlying securities), and return of cash from securities lending is finally out!  Also, we are dealing with the public schtupping that AIG is giving us in the form of $165 million in bonus payments, made yesterday, to employees in AIG's Financial Products Group because AIG was contractually obligated.  Anyway, upon hearing of this new transparency I rushed to www.financialstability.gov , Tim Geithner's cool, new website,  and here is what I found;

This site is coming soon.

On Tuesday, February 10th, Treasury Secretary Timothy Geithner outlined a comprehensive plan to restore stability to our financial system. In the address, Secretary Geithner discussed the Obama Administration’s strategy to strengthen our economy by getting credit flowing again to families and businesses, while imposing new measures and conditions to strengthen accountability, oversight and transparency in how taxpayer dollars are spent. And Secretary Geithner explained how the financial stability plan will be critical in supporting an effective and lasting economic recovery

Damn, still nothing there!  Where did all this transparency come from then?  It came from AIG!! Here it is AIG Counterparty Release.  How heinous is this??!!  To cover the stink of these outrageous bonus payments AIG releases the document that drops the dime on all the counterparties, the biggest being Goldman Sachs, to take our minds off the bonus payments! 

I'm not going to get into the whole counterparty thing.  We have an "AIG" category on the blog that has us explaining the types of trades Goldman was doing with AIG (negative basis trades....great writeup from Richie here from back in September 2008 Investigation Coming For Goldman and AIG? It Should. ) as well as our repeated calls for the government to reveal to the public just who was getting bailed out when we bailed out AIG.  If anything, when you check out the numbers, they still look light.  Additionally, what also needs to be addressed is who helped firms like Goldman "hedge" their AIG exposure through credit default swaps on AIG?  If I AIG was allowed to fail, would those counterparties be able to pay?  If not, who would be wearing the loss?

Other thoughts that strike me on the bonus payments.  AIG and Treasury say that they are contractually obligated to pay these bonuses, as contracts were signed prior to the September, November, December and March bailouts of AIG.  Larry Summers, resident White House economic Over-Lord, says,

"Every legal step possible to limit those bonus payments is being taken by Secretary Geithner and by the Federal Reserve System.  However, the government cannot just abrogate contracts."

Really?  The government just can't abrogate contracts?  I thought it had an entire branch of government that specializes in abrogating contracts.....Congress!!  Don't believe me?  Ask anyone who owns a bond collateralized by a residential mortgage loan!

Lastly in my morning rant. On the last page of the AIG release, you can see that $43.7 billion of our money went to pay off counterparties involved in AIG's securities lending business.  All the big names are there, Barclays, DB, Goldman, BofA, BNP Paribas, etc.  If you remember, securities lending is the business where a company like AIG, who holds lots of stocks and bonds, lends those stocks and bonds out to short-sellers, gets cash as collateral and then invests that cash in a risk free security that earns the lender (AIG) a spread.  Unfortunately, the window lickers at AIG took that cash and invested in AAA rated CDOs.  Ooooops!  I'm just curious about something.  What securities were all those big names borrowing?  Granted, the short selling of stocks is used for a variety of reasons and strategies.  However, much of those strategies are total or partial bets against a companies equity (they could be long bonds, short equities, etc) .  I wonder who all those entities were shorting, since there was such a furor last summer and fall about bear raids on our banks.  How interesting it would be to see how many of the above mentioned banks proprietary trading desks were involved in direct bets against our banks.  Just curious.

I Was Going to Write About MBIA Restructuring...But This is Far More Important.

I was writing a smart ass piece on MBIA's latest restructuring when I learned that NY Giant great Brad Van Pelt died of an apparent heart attack at his home.  He was 57 years old.  I'm sad.  To have been a Giant fan back when Mr. Van Pelt played was usually dissappointing.  Brad Van Pelt and punter Dave Jennings were usually the only bright spots.  My father, who was a life long Giant fan used to say to me, "Eric, I've been a Giant fan all my life so I HAVE to watch this.  Why don't you root for the Cowboys or the Steelers!"

Anyway, Mr. Van Pelt was a great one and a key bridge to the great Giant teams of the 1980's as he finished his Giant career playing with a young Lawrence Taylor.  He will be missed.

 

Wth regard to MBIA here's a little discussion I had with one of our loyal readers;

Reader:  "MBIA is going to sell a AA wrap?"

Me: "I don't even pay attention to what they do anymore."

Reader:  "They are to muni's what GM is to cars."

Enough said!

**I was just reminded that I may have dissed the great Harry Carson.  Carson started in 1976...Ah, Brian Kelly too.  Sorry boys.  I just remember the years where the Giants always seemed to be looking for a new place to play, changing their uniforms and losing...a lot.

Watch a Man Piss Down Your Leg and Tell You it's Raining!

Watch this brilliant stream of fantasy and B.S. from Ambac's CEO David Wallis as he talks to Bloomberg News!  Keep in mind Mr. Wallis was the former Chief Risk Officer!  Only a guy with a British accent could pull this off!

Ambac's David Wallis on Bloomberg TV

Somebody Stop the Fight! Ambac Downgraded From Aa3 to Baa1.

Well, somebody over at the rating companies must be reading Monkey Biz!  So long Ambac, our long financial mirage is coming to an end.  See Richie's earlier post on these clowns, and if you want to have fun, click on the "Bond Insurer" tag in the "Categories" section of the blog.  Follow these clowns all the way from AAA to D!

Oh, and by the way, whoever the Fredo was who called me out a few months ago on the blog telling me Ambac was going to "puke on my shoes when they get their AAA Connie Lee going and their stock goes to twenty."  HAH-HAH!!  Clean up in aisle two!

Lets Call a Spade a Spade

I just talked to Eric and said, "um are we the only 2 people that realize these monolines like MBIA and AMBAC are pulling some funny business?" Eric said "yep". It sure looks like it. Now if you look to the right of this page in the archives we've been railing on these monolines for over a year. Well MBIA and AMBAC both released earnings today that were LOWER then estimates by analysts. Obviously, the analysts dont read monkeybusinessblog.com cause theres no way these 2 companies would go lower then our estimates if you know what I'm saying. Now what is clear is that MBIA and AMBAC officials read this blog because they seem to respond to us every time we write about them which I must admit hasnt been often lately due to the fact that I thought they were dead.

I guess they arent dead because the stocks were able to go down another 25% or so today after these "shocking" earnings announcements. Let me spell it out for people and I welcome the MBIA and AMBAC guys to respond to this. When a person holds a bond and it pays say 50 for arguments sake, and you can sell that bond and pay someone only 10. You keep 40. Nice deal right? If you are the guy who takes the 10 and KNOWS the other guy is getting 50 you are an assclown right? Well this is the business MBIA and AMBAC chose. You know what they used as an excuse? They didnt have to put much capital aside to protect against a falling price against this asset because it was AAA. So it was like a "free 10 in their pocket" or a "riskless 10". Now that those bonds are in the crapper we all know it wasnt a free or riskless 10. But theres something else that bothers me here.

They seem to be taking their sweet time marking these "riskless assets" to the market. So they keep dropping earnings bombs every quarter hoping and praying these prices go up. But they arent yet. You know what really frosts my ass though? They are asking for our taxpayer dollars via the $700bn bailout program because they went hogwild into this market for these assets when they knew other guys were getting paid 50 for and they gladly took 10. For chrissakes, they are called MONOLINES because that means 1 line of business. Which was insuring municpal bonds. This business of excepting "the riskless 10" was diving headlong into the subprime business. A new business. I dont think them accepting just 10 on these trades was stupidity either, thats some form of arrogance or something. Now they ask us to bail them out? You know how all these actors said they would move if Obama lost? (Alec Baldwin said he would move if John Kerry lost but hes still here). Well if the Fed gives money to these assclown monolines, I might move. Maybe to Cuba where at least I know they call it communism and I can expect crazy stuff to happen. The cigars are good there too.

Ambac Wants to Tap TARP!

Get this, Ambac is working "hard" on a plan to sell troubled assets to Treasury.  They also may present a proposal to allow them to guarantee some assets with the backstop guarantee from Treasury.

HAAAAAAAAAAAAAAAAAAAAAAAAAAH-HAAAAAAAAAAAAAH-HAAAAAAAAAAAAAAAAAAAAAAAAA!!!

Are they out of their freaking minds?  The table got turned on you fredos didn't it?  A couple of months ago, they were getting guys like Merrill and Citi to tear up credit default swaps that Ambac wrote on CDOs at deep discounts because they let it be known that the banks better deal with them now before they either ran out of cash, were taken into "rehabilitation" by the Insurance Superintendent, or because they might, at any moment, move their capital to their "new" highly rated vehicle "Connie Lee".  Now, the banks have TARP and I am sure Ambac has called these guys up and said something like, "So guys, If the government takes the CDOs from you guys way above market can we tear up the CDS?  Please?"  And the bank's probably said, "Stick it!"  In fact the government should take over as the counterparty, turn Ambac upside down and shake every last nickle out of them, including what they stuffed into Connie Lee.

Ambac just woke up and realized that with;

• The government guaranteeing everything;
• New, highly capitalized monolines like Mr. Buffett entering the scene and;
• The fact that the banks have written down a lot of their exposure to the old monolines (Ambac, MBIA, etc),

They are not in a too big to fail position anymore.  Sure there may be a little problem with the GIC money that these idiots stuffed into structured garbage, but after the numbers we've been talking about lately its almost a rounding error. 

So long boys and thanks for playing.

Ambac Becomes Connie Lee and Flies The Coup!

Is it me or did Ambac have the equivalent of a "trans gender" operation, rename it's new girl self "Connie Lee" and leave all its troubles and debts behind?  Here's Bloomberg News yesterday;

"Ambac Financial Group Inc, the world's second biggest bond-insurer, rose to the highest in six months in New York trading after receiving approval to set up a municipal bond insurer named Connie Lee.  Ambac rose 22 percent after the New York-based company won permission yesterday from regulators to transfer $850 million to a new business it says may be able to garner a AAA credit rating.  "If it's properly capitalized with an AAA, I don't see why they can't get into new business." said Jim Ryan, an insurance analyst with Morningstar Inc. in Chicago."

Huh?  I'm not sure I follow this so by all means PLEASE help me!  We have always warned that the insurance regulators could take the bond insurers into "rehabilitation" and essentially stiff counterparties for the other little business Ambac got into,  structured credit.  This is why Citigroup and Merrill made a bull rush last month to tear up credit default swaps way below market price with bond insurers like Ambac before insurance regulators pulled such a move.  However, this looks like Ambac just got permission to remove the bulk of its remaining capital away from the structured credit business and set up a new muni business.  This isn't new capital, this is a transfer. I imagine that the new "Connie Lee" will reinsure the existing book of muni business at Ambac.  I could be wrong, but if they are moving out $850 million from Ambac Financial's insurance unit what capital is left to honor their guarantees of structured credit bonds and the credit default swaps they have written against similar assets?

I have not heard any outcry from the structured credit counterparties of Ambac and the move seems to be puzzling everyone.  Could things be this bad that no one cares anymore because they've all written their Ambac exposure down to zero?  I doubt it. I mean if Ambac's Moody's rating is Aa3 and they moved $850 million out to form a new triple A, what is the rating for the company that remains facing everyone in structured credit?

Any ideas, please shoot them  in.

MBIA Re-insures FGIC: A Broken Belt with Torn Suspenders!

Yesterday, New York State Insurance Superintendent Eric Dinallo announced the completion of a "competitive process" wherebye the bond insurer MBIA will re-insure approximately $184 billion municipal bonds, currently insured by another bond insurer FGIC.  MBIA will receive approximately $741 million in premiums over the the life of the bonds (I'm assuming these fees will be received over at least a dozen years).  Here's Dinallo quoted on Bloomberg News;

``They're bringing on a huge surplus of unearned premiums,'' New York State Insurance Superintendent Eric Dinallo said yesterday during a conference call announcing the agreement he brokered as part of an effort to restore confidence in the bond insurers. The agreement may boost MBIA's credit rating, he said.

This is a joke.  Like my title says, as far as the municipalities are concerned FGIC is a broken belt.  Adding a torn pair of suspenders like MBIA isn't going to keep anybody's pants up!  Municipal bonds insured by MBIA, Ambac and FGIC already trade like the insurance from these three companies doesn't exist.  Do you remember our little Auction Rate Security ("ARS") disaster that Wall Street firms just paid a $ few hundred million in fines and bought back $ billions of securities from customers at par?  Do you remember what triggered that disaster?  It was the realization that the two bond insurers mentioned above and Ambac were as good as toast.  Most of the ARS were municipal bonds.  Once the bond insurers were proved to be buck naked, nobody wanted to buy those municipal bonds anymore.

So now we have Dinallo arranging "competitive processes" to get MBIA more future premiums.  This in turn might get MBIA's credit rating stabilized.  Talk about re-arranging the deck chairs!  Isn't this like robbing from Peter to pay Paul?  If this was a competitive process I would love to see what we call "the cover-bid" (the bid that came in second) was.  They are taking cash flow away from the "weaker" FGIC, but reducing future exposure, while increasing exposure for MBIA and increasing future cashflow.  I have to hand it to Dinallo.  This is like a great game of street-corner 3-card monty!  Unfortunately, I don't think it solves anything.  I am sure that Dinallo went to Mr. Warren Buffett first to see if he would come down in price from his "magnanimous" February offer to take MBIA, Ambac and FGIC out of their municipal insurance books for 150% of the current premiums (you don't become the richest man in the world by being a nice guy) and got told to go pound sand.

Congratulations for all those who have ridden MBIA up from $3.90 to $14 over the last month.  Count your lucky stars and take your profits.  As for all the geniuses that have taken MBIA up to these heights, we say thank you as we strike our shorts and ride these clowns all the way back to $3.90!!   

 

S&P to MBIA and Ambac: I'm OK, You're OK

Yesterday, S&P ended it's rating review of MBIA and Ambac and concluded that both companies have taken positive steps to shore up their businesses.  Both companies are up big in early trading this morning.  I read this and it never ceases to amaze me that anyone with an ounce of common sense cares what one completely discredited company says about another one.  Remember the movie, "The Dream Team"?  The movie where Michael Keaton, Peter Boyle, Christopher Lloyd and others are in a booby hatch and they have to work together to survive in New York City and solve a murder?  Very funny movie.  Christopher Lloyd plays extreme obsessive-compulsive who thinks he's a doctor.  He walk around with a white lab coat and a clip board, analyzing and diagnosing the other crazy patients. 

That's what comes to mind when I think of S&P giving a diagnosis on MBIA and Ambac.  One defective unit judging the competence of another defective unit.  Anyway, the fact that the stocks are up would piss me off except that MBIA at 11.25 is a nice juicy short again.  This is what we are going to do to MBIA today!

MBIA Earnings May be the Sign of Capitulation!!

MBIA announced earnings today of $1.7 billion.  Without taking a approximate $1.5 billion gain from marking down their borrowings {deep and very audible sigh} they would have EARNED $229 million.  Now, I read that three or four times because the EARNED part kept sticking me in the eye.  Then I realized that they decided not to mark their residential mortgage exposure down for the quarter!  We just had Merrill, Citi, RBS, Barclays, AIG, Freddie Mac, Fannie Mae, Ambac and even my Aunt Tilly take writedowns this quarter, but none for MBIA.

At first I was puzzled and a bit annoyed.  Then it hit me, they don't care anymore!  Whats the point of going through an exhaustive process like valuing your exposures once a quarter when your dead in the water anyway!  To me, this is MBIA saying, "Screw it, you want to value these things, be our guests.  If Freddie Mac just said they can't even give guidance anymore on what future losses will be, why should we even bother!"  In my mind this is perhaps the beginning of the bottom, at least for these chuckleheads.

Whats really annoying me however is that the stock price is UP on the day!  I don't care if its short-covering or new-longs, whatever.  If you are buying that stock for any reason right now (which I know none of our loyal readers would) you deserve what you get.  In fact here is a little skit for what you are going to get!

Ambac Finally Worthy of Monty Pythons "Black Knight" Video Clip

I've been waiting a very long time to use this clip from Monty Python's "The Holy Grail" and today Ambac finally proved worthy (FYI, I'm saving the Richard Gere "Officer and a Gentlemen" I GOT NO PLACE ELSE TO GO!!! scene for Freddie and Fannie).  They released earnings today.  If you back out the mark to market of their liabilities, which is a standing joke amongst the financial community, they lost a whopping $1.53 per share, nearly triple Wall Street analyst estimates!  Additionally, because municipalities are refinancing debt wrapped by Ambac to get as far away from the company as possible, Ambac was allowed to take $159 million in profit as these future liabilities go away.  Unfortunately the future fees go away too, so so much for future earnings!  Ambac has no future business coming to them.

This company, along with MBIA, is just a complete disaster. The fact that the stock has nearly doubled in the last two weeks is amazing.  I know they tore up their credit default swap with Citigroup and took a $150 million gain, but its not like they can tear up any more than one or two more before they run out of cash.  Ambac wrote a check to Citi for $850 million.  They had about $1.7 billion of cash or cash-like securities (and hope that means T-Bills) as of June 30.  Do the math, they just paid out $850 million, so how much cash will they have left?  Additionally, I know the argument that someone can buy them for say $1.5 billion and effectively control the liquidation of all the CDO structures Ambac has wrapped.  However, is it really worth it?  It would probably cost an additionally $1 billion in legal costs to do the unwinds, maybe more.

These guys are toast.  Meanwhile CEO Michael Callen bravely fights on, much like "The Black Knight".  He is very excited about starting up a new AAA vehicle, "Connie Lee"!  So here's to you Mr Callen;  (sorry for the visual quality but it was the best one I could find)

Sometimes Reality Creates Strange Bedfellows: Ambac and Citi Share the Pain.

So this morning Ambac, the bond insurer, announced that it had tore up credit default swaps (CDS) with Citigroup on a $1.4 billion block of CDOs.  Ambac had marked the bonds down to approximately 29 cents on the dollar and hence, reserved $1 billion.  Citi agreed to reduce the price of tearing up the CDS to $850 million, resulting in a $150 million gain for Ambac.  Now if Citi has the bonds marked lower than $550 million, or if they sell them for less than $550 million (price of 39.25) they will take a loss on the net position.  Earlier in the week, Merrill Lynch did a similar CDS tear up with bond insurer Security Capital Assurance and recorded a net loss when they sold their bonds to Lone Star.

Now, we could look at this as some sort of a positive.  The more CDS that the bond insurers tear up with their bank counterparties, the more uncertainty is removed from the bond insurer counterparty exposure.  That's good in a feeble sort of way.  It also however, shows just how weak Citi, Merrill, Ambac and Security Capital are.  The bond insurers essentially said a few weeks ago, "You can't get blood from a stone.  Negotiate a tear up now before New York State Insurance Superintendent Eric Dinallo put us into rehabilitation (the insurance form of bankruptcy) and you possibly get NOTHING."  Meanwhile, Citi and Merrill are finally just looking to unload this stuff to the point where they are grabbing their ankles not only for the guys purchasing the bonds (like Lone Star and whoever Citi has lined up) but for their hedge providers too!  The end result for both the banks and the insurers will be similar to Rocky and Apollo Creed in "Rocky II".  Both fighters too exhausted to stand up anymore, finished!

What is going to be real interesting is what are the "healthier" banks who have CDS on with the bond insurers going to do?  At first blush, they might think that they don't need to take a loss by tearing up their CDS for less than its worth.  But then they have to think, "If Merrill just sold their AAA CDO's at 22 cents, and Citi comes in and dumps another $18 billion for a similar price, all that price discovery will force market prices down sharply.  Ambac may have made $150 million on their Citi transaction, but these huge sales could easily take prices below $20, forcing MBIA, Ambac and the rest to write down their CDS portfolios to the point where its "game over".  Also, how much cash do these guys have?  Ambac just agreed to fork over $850 million in cash to Citi.  How many more tear ups can they do where an account payable becomes a cash outflow?  There could be a mad rush to get these trades done before the bond insurers have to stop. That could drive some more sizable losses for the banks and certainly liquidity issue for the bond insurers.

It will be interesting to see how this plays out. 

Assurance Guaranty LTD Ain't So Guaranteed!

We are happy here at Monkey Business.  We are not happy that yet another bond insurer's AAA rating is fiction, or that their stock just dropped 45% today, or that famed investor Wilbur Ross, who was ready to put $1 billion into the company, must feel a bit "violated".  We are happy because one of our favorite readers, called in to tell us that after reading our little piece about Bill Ackman last week (We told Bill he was our hero but he should tone down the "hortsae anniefae et reddiefae" a bit) he was spurred to action, tore through Assurance's latest 10Q and shorted the stock!  He sold it around $18 and he bought back around $9!!

Check out these exposures:

• $2.3 billion on Prime Home Equity Lines of Credit ("HELOCs"), $2 billion of Countrywide product.  Reserves against- $100 million.
• Subprime Securities $7 billion ($6.2 billion originated 2005 to 2007).  Reserves against- $11.1 million.
• Closed End Second Liens $506 million. Reserves against- $5.1 million
• Total Shareholder Equity - $1.49 billion

We figure that Assurance is pretty light on these reserves.  Even if you accepted their 4.3% reserve on the Prime HELOCs, what about the subprime?  Less than 1% reserves?  Lets say 10%.  Thats an increase of $689 million to reserves.  The closed end seconds (fixed rate second liens) are pretty horrible.  Assurance only has 1% reserved.  That's way too low.  A lot of closed end seconds have been written down to zero!  Lets say, an additional 19% or $96 million in reserves.  If you add up those additional reserves, its $785 million against a capital position of $1.49 billion.  And we haven't really dug into the $78 billion Credit Default Swap book yet.

Are these guys as bad as MBIA and Ambac?  Probably not.  Still are they AAA?  Nope.

A Correction to Our CDO's in GICs Post from Yesterday

Yesterday, in my post "You Put WHAT into Guaranteed Investment Contracts??" I quoted, the Financial Times article "Fresh Threat to Bond Insurers", "Subprime-backed ABS and related assets account for 69% of FSA's $18 billion GIC portfolio and 28% of MBIA's $24 billion GIC portfolio.  The FT, based their story on a research piece from Morgan Stanley  "Next Stop on the Monoline Pain Train". The FT quote is taken directly from the Morgan Stanley research piece.

I received an email from MBIA yesterday, asking for a retraction, citing "erroneous information".  MBIA gave me the data that Morgan Stanley most probably pulled the information from.  I simply multiplied $24 billion by 28% ($6.7 billion) and called the balance "Subprime CDO".  MBIA's data shows that only $1.7 billion are subprime CDO's.  Fair enough. 

However, the data MBIA showed me indicated that $2 billion of the assets in the GIC portfolio were "Non-Agency Residential MBS".  86.8% of this portfolio is "AAA", subprime exposure is 1.44% and 53% is wrapped.  Morgan Stanley clearly included this bucket in "subprime-backed ABS and related assets."  I assume that this portfolio is backed by other problem asset buckets backed with  Alt-A and Option Arm, etc, collateral.  I also have to assume that the payment priority of many of these bonds is not first pay (mezzanine most probably) and even if it was, these assets trade right now at a significant discount (meaning 80 or less) to par. 

Then there is a bucket, also included by Morgan Stanley as "subprime-backed ABS and related assets", that MBIA simply labeled "ABS".  This portfolio represents 11% of the GIC assets or approximately $2.75 billion.  I asked MBIA to tell me what is in that portfolio and they have not responded.  I also asked MBIA if they have asked the Financial Times and Morgan Stanley to issue a retraction.  I have not heard back on this either.  Therefore, I am assuming that this "ABS" bucket falls into the category "Subprime-backed ABS and related assets".  Based on this information, this is how MBIA's GIC assets should have read:

• $1.7 billion Subprime CDO
• $2 billion Non-Residential RMBS
• $2.75 billion "ABS"

Unless MBIA can show me that the latter two buckets do not contain assets that trade at severe discounts, the spirit of my post stands.  The monolines put inappropriate assets into their GIC portfolio's and are subject to substantial write downs.

"You Put WHAT into Guaranteed Investment Contracts??"

I really feel for Eric Dinallo, Superintendent of the New York State Department of Insurance.  He probably figured he couldn't hear anything else that could upset him about the monolines.  I mean, they cornered the market on reckless and stupid months and months ago, what more could they possibly do?  Also, while he knew he had problems with MBIA, Ambac and their smaller brothers and sisters, at least he had good old FSA in his corner.  Still one real AAA to deal with regarding municipal debt guarantees right?

Nope!  According to the Financial Times today, the monolines guaranteed the performance of about $50 billion Guaranteed Investment Contracts (GICs).  These are short term, super-safe investments sold mostly by companies, like FSA, Ambac and MBIA, to pension plans and 401k money managers.  Normally GIC issuers try to earn an incremental spread between the slightly above risk free-rate they pay the GIC holder and the rate they (the monoline) earns on the security they invest the cash in.  Guess where all these guys put substantial sums of GIC cash?  Give up?  AAA rated subprime CDO's!  Dinallo must have just fallen out of his chair when he heard this bit of news (unless he knew about it and just wasn't telling us).

Now, when I was a young lad I worked for Bankers Trust.  I was brought in to be the "Product-Controller" for a business line called "GIC Derivatives".  Back in the early 1990's, everything at Bankers Trust was about derivatives.  The GIC Derivative group got bored with just plain old GICs and their safe but small and boring spread.  So starting in 1991 I believe, they started putting GIC cash into mortgage bonds (CMOs) backed by Freddie Mac and Fannie Mae mortgage backed securities.  These CMOs had no credit risk and the GIC Derivative group believed that their cashflows were very stable, not subject to prepayment risk.  These securities paid a much better spread to the risk free rate than boring old commercial paper or agency debt, and a better spread meant more money for Bankers Trust.  So the GIC Derivative group did millions and millions of this business (we rarely talked in Billions in those days!) and all was good.  Then in 1992, the Fed starting aggressively lowering interest rates and a mortgage refinancing (prepayments) wave occurred to the likes that had never been seen before.  And guess what?  The CMOs prepayed....a lot!  Suddenly, Bankers had all this cash invested at 5% and they owed the GIC holders 8%!  By the time I got there (I was all of 27 years old so its not like I solved any great mystery) Bankers lost probably about $50 million.  The thing is, AT LEAST BANKERS HAD THE CASH.  THEY WERE JUST EARNING A NEGATIVE SPREAD!  NO ONE WOULD HAVE BEEN DUMB ENOUGH TO TAKE CREDIT RISK.....RIGHT?

WRONG! Short and sweet, Morgan Stanley put out a research report that shows as follows:

• Ambac- $7 billion of GICs. $5.9 billion invested in subprime CDOs
• FSA - $18 billion of GICs. $12.4 billion invested in subprime CDOs
• MBIA - $24 billion of GICs. $6.7 billion invested in subprime CDO's

This is why there is such a fuss right now with MBIA and Ambac's downgrades.  They have to post collateral against their guarantee for the GICs and they are selling everything that isn't nailed down to raise the cash.  FSA, one of the few left standing, is going to take a nice hit on this too, although its parent Dexia provided FSA with a $5 billion credit line.

Like Bob Dylan wrote, "When you think you've lost everything, you find out you can always lose a little more."

Monolines Off to Re-hab?

What do you do with a dear friend that has gone off the rails with drugs and drink?  You gather the people closest to the poor friend and have an intervention.  You show them how they are ruining their life and hurting all those around them.  You convince them to go to a rehabilitation facility to clean themselves up.  Usually in these interventions the afflicted friend will admit just how bad their problems are.  For instance, here is a possible example:

Afflicted Person: "I'm sorry, I'm so sorry.  Listen guys, I'm in a lot of trouble.  I owe some people a lot of money."

Best Friend: "How much money?"

Afflicted Person: "A lot man, and these ain't the kind of people I can just stiff."

Best Friend: "Ok, first things first, how much do you owe."

Afflicted Person: "About $150,000!"

Group: "Holy sh*t!!!! Dude, you owe us at least that amount too!"

Best Friend: "Ok ok, we're gonna work this out.  Calm down everybody.  Lucky for you I can make these other people go away."

Afflicted Person: "Oh man, I told you that these are some bad mother-f**ckers!  What are you gonna do?"

Best Friend: "I'm gonna make them an offer they can't refuse!  You just get yourself clean at rehab. I'm gonna take care of everthing."

Afflicted Person: "Thank's buddy. You're always there for me man!"

Remember yesterday we commented on an article in the Financial Times, "Bond Insurers in Talks to Wipe Out $125 billion Cover on Risky Debt."?  We said it looked like the endgame for the monolines and the counterparties who have bought protection on residential mortgage bonds from the monolines.  Well today FT has another good article that essentially shows that the Monoline's CDS (credit default swaps) counterparties may be S.O.L (a technical term meaning, Sh*t-Out of-Luck).  You see, New York Insurance Superintendent Eric Dinallo is the powerful "Best Friend" in this little intervention.  All Dinallo cares about is that MBIA, Ambac, et al, can honor their credit wraps on municipal debt.  The CDO obligations really don't concern him.  Mr. Dinallo has the power to place the monolines into "rehabilitation".  This term is the one they actually use and it means Dinallo can effectively put these clowns into the equivalent of bankruptcy and tell the CDS counterparties to get to the back of the line.

I'm not sure The Street put this little factor into their big models when they were evaluating risk and producing the "Nineteen-Sigma Events", but its there and effectively it looks like it's game over.  Let the writedowns commence.

Monoline End-Game? What Would George Carlin Say?

It somehow seems fitting that on the day the GREAT George Carlin has left us, an article appears in The Financial Times, "Bond Insurers in Talks to Wipe Out $125 billion Cover on Risky Debt".  George Carlin was a one-man crusade against bullsh*t of all kinds, and in our little world of finance the bond insurers (monolines) are at the top of the bullsh*t heap!  Essentially what the F.T. article says is;

"We (bond insurers) owe you guys (banks, insurance companies, etc..) $ billions on the Credit Default Swaps (CDS) we wrote you on residential mortgage credit.  The number is clearly more than our existing capital and we know that with our latest downgrades, you guys are going to start asking for us to post   $ billions.  We don't have that kind of money and you can't get blood from a stone.  So, we can either do this in an orderly, negotiated fashion or when we declare bankruptcy, you all can try your luck getting ANY of your money from us."

That's at least my sunny take on it.  Firms like UBS, Merrill and Citi have already started to take charges against their exposure to bond insurer failure.  Most expect fresh charges for the second quarter.  I think we have finally reached the day of reckoning for this long running fraud.  The losses are going to be huge.  The same dopes that told us it's the fourth quarter and its the almost the end of the crisis are going to be the same ones that are going to say it won't be that big of a hit.  They will say that the financial community has already reserved for most of their monoline counterparty credit losses and it will only be a $10 billion event.  Dream on.  We'll be lucky if it's no greater than $50 billion.  George Carlin was once asked, "What do you think of the dope problem?"  Carlin replied, "Well, there certainly are a lot of dopes out there!"   Rest in peace George.

MBIA Posts $2.4 billion Loss

MBIA posted a Q1 loss of $2.4 billion.  The company wrote down another $3.58 billion on credit default swaps (CDS) written against subprime CDOs.  Moody's had recently raised $2.6 billion in capital.  So a nice wash here.  CEO Jay Brown had told shareholders on May 6 that the firm had adequate equity capital and did not need to raise anymore.  Some how I have a feeling they won't have to worry about raising more capital.  No one in their right mind would give it to them!  Additionally, just for giggles, MBIA has a tax deferred asset of $2.9 billion.  If you remember (or read the previous post "Hey Laing, Where's Your Suit??!!") Ambac has a similar asset.  You need lots of profits in future years (20 I believe) to carry this asset without a reserve.  Like Ambac, I don't think MBIA is going to make a cumulative $8bb in net pre-tax income in the next 20 years.  This asset needs to be written down...sharply.

With regard to valuing MBIA's exposure to CDS going forward, CEO Brown said, "This valuation task is clearly one that stretches the ability of mere mortals."  Holy crap! 

Ambac Keeps the Fun Going!

Yesterday Ambac, the monoline (or bond insurer) announced a $1.66 loss for the first quarter of 2008. We have gone off ad nauseam on the monolines here at Monkey Biz, in print and in video. They are a mirage that should have lost their AAA status a long time ago. A unholy bond between the monolines, the rating agencies and the Street (who will get mashed when MBIA and Ambac finally lose that AAA) has kept this fraud going. However, unless the Street steps in an infuses another few billion into each MBIA and Ambac, it’s game over. These guys have credit wrapped and default swapped themselves into the crapper. Time doesn’t fix bad credit trades, they just get worse.

Anyway, reading the press coverage and then listening to Ambac CEO, Michael Callen explaining the losses brought forth a treasure trove of verbal gems. Here are my favorites. I have attached some good back and forth comments I had with my clients/friends.

Here is the first jewel from the Bloomberg story:

"Just when you thought things are getting back to normal, there are these horrible numbers," said Robert Haines, an analyst at CreditSights Inc., an independent bond research firm in New York. "If trends like this continue, they are going to have to go back to the markets very soon."

The, "Just when you thought things were getting back to normal" will become the dominant phrase for the second half of 2008.

Past winners were:
• Fall/Winter of 2007 "We are seeing only the tip of the iceberg"
• First half of 2008 ‘We are in the late innings."

And then there was this. This is right there with Hitler in the bunker moving imaginary armies around while the Russians close in:

Callen said yesterday the company had no plans to raise moremoney. "Ambac has no need to raise capital at the moment because we are generating capital internally," Ambac spokeswoman Vandana Sharma said. "Ambac expects to generate $1.2 billion to $1.5 billion in the next 12 months as policies mature without claims," Sharma said.

In response to this statement, we have from one of our dear friends what may be the best line so far in 2008:

"Internal generation of capital" - the scenic route to bankruptcy!”

Then came the press conference where Mr. Callen had to explain himself. I pick these two beauties, with the appropriate smart aleck responses.

(BN) *AMBAC IS IN `FOURTH QUARTER' OF THE GAME NOW, CALLEN SAYS

Eric: Ummmm, has anyone told Callen that he's losing 37-0? They should really stop the fight.

Friend of Monkey Biz: And the game now has nine quarters...

*CALLEN REITERATES 'THERE'S NO LIQUIDITY ISSUE'

Eric: "I did not have sexual relations...with that woman...Ms.Lewinsky!"

Friend of Monkey Biz: "Hey Emperor, that’s a great red coat you have on. Love it!"

Ahh, good times!!

A Proud Day for Monkey Business!

It is a very proud day for us here at Monkey Biz. Today in the halls of The United States Congress, the Chairman of the Financial Services Committee, the Honorable Barney Frank stood up and finally called bullsh*t on four decades of fraud! If you remember, we did a nice video piece called “Monolines & The Rating Agencies…..Racketeering?”

http://www.monkeybusinessblog.com/mb/Video_Clips/Entries/2008/1/8_Monolines%2C_Rating%C2%A0agencies_%26_Racketeering.html

Have a look. We are certainly not the only ones saying that the municipalities have been getting jammed by the rating agencies and fleeced by the monolines and bond insurers…but we’d like to think that we’ve been the funniest and handsomest!

But seriously folks, at one point in the video we talk about what Moody’s calls “The Duel Rating System”. What I think I said was, “everyone knows its there and everyone just accepts it without wondering why the hell is it there in the first place?” Kind of like the law in NY that you can’t buy beer on Sunday until after noontime. This rule though, the duel rating system, costs municipalities about $2bb a year. I know we have been through this ad nauseam but its important. The best part is, for some insane reason, Moody’s came out a few months ago and said to the effect, “yeah, almost all the muni’s should be AAA, we’ve know this since we started rating them.” And then left it at that! Now, to be fair, there are a lot of smart people who have come up with arguments for the duel rating system…they are in the minority, but they are around. The problem is the rating agencies themselves have never put out a cogent argument supporting it! As we mention above, they have really argued the other side of the trade! Anyway to quote the article from Bloomberg News today;

March 12 (Bloomberg) -- U.S. Representative Barney Frank gave ratings companies a month to fix ``ridiculous'' standards that they apply to local government debt, as his House committee opened a hearing today on how the firms evaluate municipal bonds. ``I am going to say to the rating agencies and to the insurers: they have about a month to fix this,'' Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, told reporters in Washington yesterday. ``We're going to tell them they have to straighten it out.''

You can almost hear Warren Buffet (remember WEB wanted to take the muni insurance business off the hands of the beleaguered monolines last month…..because it was essentially free money!) screaming a huge Homer Simpson, “Dooooooooooooh!”

The State of California has essentially told the rating agencies and the monolines to shove it. They are issuing their debt free of monoline insurance and taking their chances on the market. I am sure most other states and cities and towns will follow suit.

Now there is one thing that worries me now that we have scored a victory for justice and truth. As ace reporter Joe Mysak from Bloomberg News pointed out the other day, there is a difference between the “ability to pay” and the “willingness to pay”. The case in point is the sad story of Jefferson County Alabama. Remember we talked about that last week? The county got themselves involved in the derivatives market (interest rate swaps) to their detriment (and the glee of the derivative dealer) and had to come up with $184mm of collateral to the Wall Street dealer because the market value of the swaps went against them. They basically told the Street to shove it too! They said they’re not raising taxes, they’re not laying off any county workers and they’re not suspending any services to pay for the mark to market of the swaps. Take that!

The way things are going in these insane times, just when the rating agencies do the right thing and abolish the duel rating system and make a lot of these guys AAA……they’ll start going belly up! Good times!

Open Wide

I just can’t talk about the latest monoline/rating agency/broker-dealer scam. I can’t because it makes me too angry. It’s like your worst enemy serving you up a big turd sandwich and then laughing at you while somebody makes you eat it. So you know what, I am going to show you what we wrote back on December 10th 2007. You could see this whole “capital infusion” to save the AAA for the monolines coming:

News Item: Dec. 10 (Bloomberg) -- MBIA Inc., seeking to avert a crippling reduction of its AAA credit rating, will receive as much as $1 billion from private equity firm Warburg Pincus LLC.

Rich: MIGHTY BIG OF THEM ON A DAY when ubs WRITEs DOWN 10BB....WHY DO I HAVE THE FEELING ABOUT 5 OTHER MAJOR FIRMS ARE GOING TO "MAKE A INVESTMENT" IN MBIA.....AND IT STILL WONT BE ENOUGH!

Eric: THIS IS FANTASTIC...THEY (THE BIG BANKS) ALL GET TOGETHER AND ASK THE RATINGS MORONS..HOW MUCH..AND THEY PUSH THE HAT ACROSS THE TABLE...5BB...AND THEN EVERYONE GOES IN FOR A YARD...AND MBIA KEEPs THEIR AAA...AND MAYBE ANOTHER 3BB FOR AMBAC....8BB BETWEEN ALL OF THEM IS BETTER THAN ANOTHER 100BB LOSS FOR EACH OF THEM IF THEY GET DOWNGRADED.

We even got the number right for Ambac! You see the story today on Bloomberg? “Goldman, Lehman May Not Have Dodged Credit Crisis” No shit…..really?? The only way they can dodge it is by getting the rating agencies off the monolines backs. You don’t think that these guys have off balance sheet beauties that come back on the balance sheet if MBIA and Ambac’s guarantee goes in the terlet on a downgrade. All we heard all of last fall and now this winter is, “Oh, Goldman was smart….they hedged, Lehman and a unmentionable European bank too!” Well, we saw how well the unmentionable European bank hedged last week with their nearly $3bb marking mistake. With regards to these other two “smarter than everybody else” firms. Who is on the other side of all their hedges? They sure as hell didn’t just short the ’06-2 BBB- ABX a few zillion times. Not possible. They would never be able to realize the all the necessary gains when they tried to cover their shorts. They did their hedges with the monoline chuckleheads…guaranteed!! And I bet that those CDS are not margined properly for mark to market losses and if MBIA or Ambac get downgraded on their way to insolvency a lot of those smart hedges are going to disappear.

This is simple arithmetic. It’s easier to give the monolines a few billion and then pray real hard that the Easter Bunny comes and makes all the CDOs guaranteed by these guys to get treated like they are “money good”, than it is to let nature take its course and take a multiple billion write down now. Well, the rosy scenario is just not going to happen. That’s why we here at Monkey Business consol ourselves by taking these opportunities to load up on “Ultra-Short Financial Proshares” SKF. 2x leveraged shorts on the financials. As superstar centerfielder for the Bad News Bears Kelly Leak said, “we go a dollar a game here.” Here at Monkey Biz we put our money where our mouths are and we have rarely been this confident in a trade. Buy those SKFs and let nature take its course!

So much for not talking about the monolines!

Monkey Business Throws Their Hat in the Ring

So our good friend Warren Buffett has decided to bid to buy the municipal bond insurance business of the monolines this morning. First off, as regular readers of this blog don't you feel you have a "leg up" on people who haven't been reading www.monkeybusinessblog.com ? Haven't we been saying for months now what monolines are and that they would be impacting the markets and therefore YOU in a big way? Didn't we say months ago that if you had $4-$5bn layin around you would be NUTS to bail out the current monoline guys like MBIA, AMBAC, and FGIC and start one yourself(as did our friend Joe Mysak at Bloomberg News who went one step further to say Warren Buffett himself should start his own monoline business! Nice work Joe.) ?!? Well here's another "leg up" that we're gonna give you that no one we bet has come to you with yet today.

The stock markets are popping up and up today. Why? Well most people say it's due to the "Oracle of Omaha" playing again the role of "savior". That's right, it looks like Mr. Buffett has decided to buy at least a piece of the troubled monoline's business line. We can see what the buyers of stock were saying this a.m.: "Whew! Much needed cash infusion!!" and "The richest guy in the world is buying into THIS market we are in too!!" or even, "This is the bottom now lets plow in!" Well let the boys at Monkey Business give you a bit of a hint and a one word statement: "HOGWASH"! We cleaned that statement up too for the innocent eyes.

Let's break it down for you nice and simple shall we? And it ain't nothin we haven't said before but here we go. The municipal bond insurance business at places like MBIA and AMBAC and FGIC (i.e. the monolines) WAS pretty much the only business they did for a long time. (As we have also said before showing our range of languages: "mono" in latin means ONE and "line" in english means LINE. ONE LINE as in one line of business!!!) For chrissakes, MBIA stands for MUNICPAL BOND INSURANCE ASSOCIATION! So that business of guaranteeing/insuring muncipal bond payments was the only business they really did and they did it well. Very well. How well? Well we've looked and we can't really find a municipality that went bust AND didn't pay their bondholders. Sure the incidents with New York City in the 70s and Orange County, California (a favorite topic of ours as you know!) in the 90s might have technically gone bankrupt but always paid their bills somehow. Well if you are an insurance company sitting there collecting premiums on the financial strength of these municipalities and NEVER have to pay out on a claim how good would you feel? Trust me, pretty good and pretty wealthy. Check out Warren Buffett's holdings in Berkshire Hathaway and you tell us if he isn't big on collecting premiums. Then if you were the monolines why wouldn't you do this collecting business as some like to say "until the cows come home"?!

That's a question that I bet many people are asking lately including the senior muckety-mucks at these monolines themselves! In any event, they "expanded" away from the easy money and into the "sexier" businesses of CDO insurance and subprime insurance. We all know how that turned (and is turning!) out. Kaboom! The stocks are down about 80% and they need capital. Yep they should've stayed in the municipal bond business. So along comes Warren Buffett with his bag of money and his "dumb" country bumpkin style (and I said that in the same tone as in Godfather I when the movie studio chief Wolz talks about Johnny Fontaine coming along "with his olive oil skin and his guinea chaaaahm") and says he's got a solution. He'll bid for the muni bond business! No disrespect to the "Oracle" but of course he will!! That's the crown jewel of the monolines that from what we can tell has NO LOSSES! This is like sitting at the track and it's the first race but you have been given tomorrow's newspaper with all the winners! You don't walk, you RUN to the betting window right?!?!? Of course, Mr. Buffett wants NOTHING to do with the CDO or subprime business at the monolines. This is what is known in the trade as "cherry picking" ladies and gents and we must say at Monkey Business we LOVE it! This is how the old man has gotten so rich! So you sit there and smile and say "well Monkey Business what are YOU gonna do about it?"

This is what we are gonna do about it. We're gonna bid for the same business too! You know how? With investments from good people like yourselves. You say what? How? This is how. Contact us at bensalzproductions@yahoo.com and we'll tell you how! If the market loves this idea so much, which as we write this the Dow is up over 200+ points, we are gonna play! We LOVE sure things and this is a SURE thing! So contact us. Have your checkbook ready and we will inform you where to send your money and we will build a war chest to cash in on this opportunity. That CDO and Subprime business, Mr. Buffett doesn't want? We don't either. That's someone else's problem. The cherry picking-free money-no losses-once-in-a-lifetime shot? We take. So make sure you get in on the ground floor here! Contact us NOW! Oh, and before everybody else figures out that the monolines might not want to sell their only business that makes them money and the entire market realizes that both Warren Buffett and Monkey Business are bidding for only the "sure thing", you might want to take this rise in the stock market to SELL. This ain't no capital infusion. This is a fleecing. Wish us luck.

Mono-A-Mono!

A wise man once said “when it comes to these credit crises, you are always longer than you think you are.” What he meant was, in a disaster such as the one we are in now, just when you think you have counted all the losses, you find out you have losses in areas that you never imagined. Today in the Financial Times on page 27, a good 6 inches below the fold (I am learning new newspaper jargon from the new season of “The Wire”!) is a story titled, “New Danger Appears on The Monoline Horizon”. This is classic. Here is the gist of what went on in the heady days of yesteryear (BCM – Before-Credit-Meltdown):

1. Bank buys AAA rated bond (And we are going to assume for a moment that it was a real AAA bond like a utility bond) bond matures in 20 years.

2. AAA Bond Super-Seniored by a wrap (guarantee of timely payment of interest and principal) from AAA rated monoline MBIA.

3. AAA Super Senior Bond pays Libor + 45 to bank

4. Simultaneously, Bank buys protection on the same bond from Ambac. Bank pays Libor + 20 to Ambac. Now you may be scratching your head as to why there can be such a difference in spread. Essentially Ambac thinks its free money because they don’t care about the underlying bond. Their AAA cousin MBIA has wrapped it. Cha-ching!

5. Since the wrapped bond is AAA because of MBIA and you have bought protection on the bond from Ambac (who is also AAA), riskless trade right??!! Like having a belt and suspenders.

6. Because trade is “riskless” Bank present values the 25bp difference over 20yrs and books profit!

The above is called a “negative basis trade”. Now, notice that we are talking about utility bonds, not the awful Subprime CDO AAA rated bonds. I say this because, to quote the F.T. article “One senior industry insider admits that billions of dollars worth of these trades were done but insists they were mostly restricted to the arena of utility and infrastructure debt.” So billions of dollars of deals, present valuing long maturities (20 to 25 years). That is a lot of wood! This is like it was back in ’97-’98 when Asia was melting down and we would have Korean bank exposure hedged…..with protection written by another Korean bank!! No correlation risk there!! Lord knows the monolines, two companies with the exact same business model and risk exposure wouldn’t both go down at the same time right??

It gets worse. We have a feeling that the CDO version of this trade was done by the billions. Maybe by firms that have so far “escaped the credit crisis unscathed.” The article goes on to say “Monoline analysts at some of the banks believe a large amount of negative basis trades in the U.S. were done on super senior CDO tranches, but admit they have no idea what proportion of total CDO business for the monolines that was.” Perfect. You know what? I bet Ackman over at Pershing Capital knows. He’s the guy that produced the 25 page letter, backed by a line by line exposure report for Monoline exposure to CDOs, showing that MBIA and Ambac had about 12bb of losses each! You know, the guy that the monolines got Elliot Spitzer to investigate a few years ago because he dared challenge the monoline’s AAA rating. And that letter backed by about 100,000 pages of documentation that he presented the day before MBIA’s earnings release last week….MBIA essentially came to the table with nothing to refute his findings except, “I’m rubber, your glue. Whatever you say bounces off me and sticks onto you.” And everyone let them off the hook!

Finally, the article caps it off by pointing out that perhaps hundreds of millions (do I hear billions anyone?) of income must be reversed out through bank earnings and….”Restating earnings is a very tricky area for investment banks – not the least because the traders involved will have long ago pocketed their bonuses.” Beautiful.

Chatter

Eric: OK, I had to read this twice and then cleanup the glass of water that I spit out of my mouth as I laughed uncontrollably. Here it is:

Jan. 17 (Bloomberg) -- New York State Insurance Superintendent Eric Dinallo is examining whether to limit the types of debt that can be guaranteed by bond insurers including MBIA Inc. and Ambac Financial Group Inc.``We're looking at the whole issue of how bond insurers should be regulated, and should there be restrictions on what they're permitted to insure,'' David Neustadt, a spokesman for the state insurance department, said today.

Rich: It says that they are in “daily contact” with the bond insurers. I thought the “closing the barn door after the horses have run out” award was nailed down by S&P and Moody’s….with the Fed’s examination of lending practices coming in a very close second. But now I think the New York State Insurance Department is really making a case here for first prize.

Our Pal Fred: It’s never good when regulators start getting involved. It usually means that the problem is beyond repair.

Eric: Merrill took a $3.1BB charge for what I assume are default swaps with ACA. Now that is just Merrill and that is just with ACA. Granted ACA was super aggressive wrapping and default swapping mortgage paper, but their portfolio is pretty small compared to MBIA, AMBAC and FGIC. What are the writedowns going to look like when those three chuckleheads go from AAA to D?

The big monolines are toast. All the time in the world and all the reinsurance on their muni business and the $1bb of capital here and the $500mm there, is not going to save them. They have wrapped and default swapped billions and billions of subprime and alt-a backed securities and those securities will default. That’s it plain and simple. And the freaking rating morons can stand around and set deadlines and threaten to downgrade them and you know what?.... It’s all hot air. These guys are dead and the Street has got a big, big problem because they are on the other side of all those default swaps.

I’m not laughing anymore.