Thursday, July 19, 2007

MBIA, Ambac Risk Trades at Junk Levels on Subprime Defaults

Isn´t it nice to see when companies like MBIA are insuring over $600 billion with under $7 billion in capital.....This at the same time when the spreads are indicating that they have some "problems".....It gives me not much comfort when they put out a report where they try to downplay there subprime exposure and are saying that their "models" have factored in the worst case ....Have heard this from the rating agencies just a few days ago....until their model went bust!

Make sure you read Fitch Discloses Its Fatally Flawed Rating Model from Mish.

Also it is not convincing when they say they only have the smartest CDO managers that are out there....I think that Bear Stearns told their hedge fund clients the same....

Beschleicht Euch nicht auch ein mulmiges Gefühl wenn Firmen wie MBIA mit unter 7 mrd$ Kapitalbasis mal eben über 600 Mrd$ an Krediten garantieren.... Das zur selben Zeit deren Risikoprofil vom Markt als sagen wir mal vornehm ausgedrückt "problematisch" eingestuft wird macht die Sache nicht gerade angenehmer.

Da hilft es auch nichts wenn Sie in einem Report den Anteil Ihres Subprimeportfolios herunterzuspielen versuchen und darauf hinweisen das Ihre "Modelle" selbst den schlimmsten Fall berücksichtigt haben....Dumm nur das wir genau das auch von den Ratingagenturen bis vor einer Woche gehört haben....bis Ihr Modell implodiert ist. Selbstverständlich behaupten zur Zeit alle die cleversten CDO Manager angeheuert zu haben um Ihr Portfolio zu managen....Dasselbe hat wohl auch Bear Stearns noch vor kurzem über Ihren Hedge Fonds Manager gesagt....

Hat tip to Mike Larson

July 18 (Bloomberg) -- The perceived risk of holding the bonds of MBIA Inc. and AMBAC Financial Group Inc., owners of the two largest AAA rated bond insurance companies, has jumped to speculative grade on worries about subprime-mortgage defaults.

Credit-default swaps based on $10 million of MBIA's bonds more than doubled in the past month to $114,000, while Ambac contracts tripled to $91,000, according to CMA Datavision in London. Those levels imply a credit rating of Ba2 for MBIA and Ba1 for Ambac, the two highest junk ratings, according to the credit-strategy group at Moody's Investors Service.

> Thanks to Mish . Here comes an eyeopening pdf report titled Who´s holding the bag ? from Pershing Square Capital Management, L.P. It should be pointed out that Pershing is short the stock.

> Ihr solltet Euch damit man die Dimension dieser offensichtlichen Schieflage vor Augen führt unbedingt den o.g. report zu MBIA von Pershing Suare Capital Management ansehen. Der Fairnesshalber sollte erwähnt sein das Pershing eine short MBIA ist

Armonk, New York-based MBIA and Ambac guarantee the repayment of bonds issued by cities and states to finance the building of schools and roads. They also insure bonds backed by consumer loans and other financial assets, including collateralized debt obligations or CDOs.

``MBIA does not expect its insured CDO portfolio to pose a risk to its ratings nor does it expect that it will represent a material risk to the company's financial condition,'' MBIA said in the report.

> From the report MBIA’s CDO Strategy, Portfolio Analysis and Subprime Exposure

> Compare this with the Pershing report. The stock and credit market has voted so far in favour of pershing....Surprise, surprise!

> Vergleicht das mit dem Pershing Report. Der Aktien und Kreditmarkt hat sein Urteil anscheinend zugunsten von Pershing bereits gefällt.....Was Wunder!

MBIA undertakes extensive cash flow and quantitative modeling for each CDO transaction using internal models and the Moody's and S&P models to confirm the rating analysis and proposed attachment points

MBIA evaluates the quality of the collateral manager through extensive on-site due diligence. MBIA considers the quality of the collateral manager as essential to the successful performance of a managed CDO

As of March 31, 2007, the Company’s total direct portfolio consists of $5.5 billion of par exposure in subprime mortgage securitizations of which $1.6 billion of that exposure was originated in 2006. All 2006 originations were guaranteed at the Triple-A level

MBIA’s $108.8 billion CDO portfolio comprised 17% of MBIA’s total insured net par of $635.2 billion at 3/31/07

In February, MBIA's 5-year credit default swaps traded at $19,000 while Ambac Financial traded at $11,000. Moody's rates MBIA and Ambac at Aa2, both two notches below their insurance companies. That's because claims against MBIA's insurance company have priority over claims against the holding company.

``In less than one percent of our observations, we find companies with CDS gaps of five or greater,'' said Michael Love, an analyst in the credit-strategy group at Moody's. ``This is highly unusual.''

> Mabye this guy from Moddy´s should ask himslef if their model is way behind the curve and needs an imminant major makeover....... I have heard that this is common these days...... ;-)

> Das mag unter Umständen daran liegen das Moody´s in Ihrer Einschätzung mal wieder meilenweit daneben liegt...... Mir ist zu Ohren gekommen das so etwas in letzter Zeit häufiger vorkommen soll... ;-)

MBIA had insured $957 billion of debt payments as of the end of the first quarter while Ambac reported $803 billion of insured debt service as of the end of 2006, according to Securities and Exchange Commission filings. Credit-default swaps were created to protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to adhere to its debt agreements.

ACA Drops
Shares of ACA Capital Holdings Inc., which owns a single-A rated bond insurance company, have fallen more than 20 percent since July 12 after the company, which also sells credit derivatives, updated information on its Web site about its subprime exposure.

>Looks my take on ACA wasn´t far off the mark....

> Sieht ganz so als wenn meine Einschätzung zu ACA doch nicht so weit hergeholt war....

A $1.5 billion private-equity fund run by New York-based Bear Stearns owned 27 percent of ACA as of November, according to Bloomberg data.

got Gold....?
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Anonymous Anonymous said...

Here is impact on earnings for insurer.

No detail
on balance sheet impact. On CDO and credit exposure seems that the par numbers held can look bigger than the real exposure (sometimes an equity exposure leads to a requirement report the instrument) and also some stuff is reinsured via CDSs.

The risks seem to be the requirement to cover defaults and the ability to generate premium or other income to cover any increases. There is also growth risk in declining demand for insurance.

Mark to market will have non-cash impact that some players fear, "will be misinterpreted by the market"

Sohn paper reports another risk that there has been overreporting of income, and payouts due to revenue realisation timing differences.

Finally those playing in CDS area have assumed some more risk though I cannot work out what this would be.

4:30 AM  
Anonymous Anonymous said...

I´ve put my toe in the water and opened a small R2000 short position.

Hoffentlich nur klein: it looks like a DJIA close over 14k is likely today.


6:08 AM  
Blogger jmf said...

Moin Eh,

only a small one. I really thought that yesterdays staccato on bad news would change sentiment.

Maybe the rise in Gold & gold shares has made me a bit euphoric and careless :-)

6:57 AM  
Anonymous Anonymous said...

Managers like mortgage-backed securities


8:10 AM  
Blogger jmf said...

Good Find!

What a joke...This just out from S&P

S&P downgrades more mortgage securities

The downgrades come because S&P said losses on such mortgage-backed securities will "significantly" exceed anything that's happened before and its own expectations.

MBIA hitting a new low today...

8:21 AM  
Anonymous Anonymous said...

Ja. Nur more bricks in the 'Wall of Worry', offensichtlich.


10:06 AM  
Blogger jmf said...

A few more weeks and they can build the "tower of babel" :-)

10:24 AM  
Anonymous Anonymous said...

Looks to me like the MGIC above is in a different insurance. Directly for the mortgage. MBIA etc are insuring the instruments made out of bundling these mortgages. MGIC payi ng out to CDOs? Shows that defauts are rising at front end though.

11:12 AM  
Blogger jmf said...

Here is the "bull case" via the Economist

A monoline meltdown?

11:29 PM  
Blogger jmf said...

Good insights from

Tom Graff/Accured Interest

I assure you, we are quite safe from your CDOs here

5:28 AM  

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